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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, 2001
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 (State of incorporation) | 33-0702770 (IRS Employer Identification No.) | |
4400 MacArthur Blvd., Suite 800, Newport Beach, CA (Address of principal executive offices) | 92660 (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: 3,010,406 shares of Common Stock as of April 27, 2001.
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 March 31, 2001 and June 30, 2000 (unaudited) | 3 | ||||
Condensed Consolidated Statements of Income for the nine months ended March 31, 2001 and 2000 (unaudited) | 4 | ||||
Condensed Consolidated Statements of Income for the three months ended March 31, 2001 and 2000 (unaudited) | 5 | ||||
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2001 and 2000 (unaudited) | 6 | ||||
Notes to Condensed Consolidated Financial Statements | 7-18 | ||||
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 19-26 | |||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 26-27 | |||
PART II. OTHER INFORMATION | |||||
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 28 | |||
SIGNATURES | 29 |
2
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands, except share and per share data)
| March 31, 2001 | June 30, 2000 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||||
CURRENT ASSETS: | ||||||||||
Cash and cash equivalents | $ | 24,670 | $ | 27,133 | ||||||
Trade accounts receivables, net | 44,645 | 40,598 | ||||||||
Other current assets | 8,220 | 9,161 | ||||||||
Total current assets | 77,535 | 76,892 | ||||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $79,128 and $62,805, respectively | 149,130 | 148,469 | ||||||||
INVESTMENTS IN PARTNERSHIPS | 1,758 | 1,782 | ||||||||
OTHER ASSETS | 7,058 | 7,799 | ||||||||
INTANGIBLE ASSETS, net | 90,219 | 93,930 | ||||||||
$ | 325,700 | $ | 328,872 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Current portion of equipment, capital leases and other notes | $ | 32,676 | $ | 29,465 | ||||||
Accounts payable and other accrued expenses | 28,628 | 26,613 | ||||||||
Total current liabilities | 61,304 | 56,078 | ||||||||
LONG-TERM LIABILITIES: | ||||||||||
Equipment, capital leases and other notes, less current portion | 199,832 | 218,767 | ||||||||
Other long-term liabilities | 3,409 | 2,540 | ||||||||
Total long-term liabilities | 203,241 | 221,307 | ||||||||
STOCKHOLDERS' EQUITY: | ||||||||||
Preferred stock, $.001 par value, 3,500,000 shares authorized: | ||||||||||
Convertible Series B preferred stock, 25,000 shares outstanding at March 31, 2001 and June 30, 2000, respectively, with a liquidation preference of $25,000 as of March 31, 2001 | 23,923 | 23,923 | ||||||||
Convertible Series C preferred stock, 27,953 shares outstanding at March 31, 2001 and June 30, 2000, respectively, with a liquidation preference of $27,953 as of March 31, 2001 | 13,173 | 13,173 | ||||||||
Common stock, $.001 par value, 25,000,000 shares authorized: | ||||||||||
3,010,406 and 2,979,293 shares outstanding at March 31, 2001 and June 30, 2000, respectively | 3 | 3 | ||||||||
Additional paid-in capital | 23,915 | 23,743 | ||||||||
Retained earnings (deficit) | 141 | (9,355 | ) | |||||||
Total stockholders' equity | 61,155 | 51,487 | ||||||||
$ | 325,700 | $ | 328,872 | |||||||
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, | |||||||
---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | ||||||
REVENUES: | ||||||||
Contract services | $ | 78,191 | $ | 75,140 | ||||
Patient services | 79,173 | 63,562 | ||||||
Other | 465 | 1,275 | ||||||
Total revenues | 157,829 | 139,977 | ||||||
COSTS OF OPERATIONS: | ||||||||
Costs of services | 81,864 | 75,663 | ||||||
Provision for doubtful accounts | 2,659 | 2,109 | ||||||
Equipment leases | 6,582 | 11,297 | ||||||
Depreciation and amortization | 30,907 | 24,256 | ||||||
Total costs of operations | 122,012 | 113,325 | ||||||
Gross profit | 35,817 | 26,652 | ||||||
CORPORATE OPERATING EXPENSES | 7,981 | 8,215 | ||||||
Income from company operations | 27,836 | 18,437 | ||||||
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS | 713 | 624 | ||||||
Operating income | 28,549 | 19,061 | ||||||
INTEREST EXPENSE, net | 17,672 | 13,548 | ||||||
Income before income taxes | 10,877 | 5,513 | ||||||
PROVISION FOR INCOME TAXES | 1,381 | 881 | ||||||
Net income | $ | 9,496 | $ | 4,632 | ||||
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: | ||||||||
Basic | $ | 1.02 | $ | 0.50 | ||||
Diluted | $ | 0.99 | $ | 0.49 | ||||
WEIGHTED AVERAGE NUMBER OF COMMON AND | ||||||||
CONVERTED PREFERRED SHARES OUTSTANDING: | ||||||||
Basic | 9,317,409 | 9,245,492 | ||||||
Diluted | 9,594,198 | 9,382,999 | ||||||
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, | |||||||
---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | ||||||
REVENUES: | ||||||||
Contract services | $ | 26,023 | $ | 25,756 | ||||
Patient services | 27,670 | 21,664 | ||||||
Other | 122 | 270 | ||||||
Total revenues | 53,815 | 47,690 | ||||||
COSTS OF OPERATIONS: | ||||||||
Costs of services | 28,218 | 25,912 | ||||||
Provision for doubtful accounts | 987 | 697 | ||||||
Equipment leases | 1,945 | 2,065 | ||||||
Depreciation and amortization | 9,971 | 9,061 | ||||||
Total costs of operations | 41,121 | 37,735 | ||||||
Gross profit | 12,694 | 9,955 | ||||||
CORPORATE OPERATING EXPENSES | 2,704 | 2,776 | ||||||
Income from company operations | 9,990 | 7,179 | ||||||
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS | 288 | 221 | ||||||
Operating income | 10,278 | 7,400 | ||||||
INTEREST EXPENSE, net | 5,765 | 5,189 | ||||||
Income before income taxes | 4,513 | 2,211 | ||||||
PROVISION FOR INCOME TAXES | 745 | 221 | ||||||
Net income | $ | 3,768 | $ | 1,990 | ||||
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: | ||||||||
Basic | $ | 0.40 | $ | 0.21 | ||||
Diluted | $ | 0.38 | $ | 0.21 | ||||
WEIGHTED AVERAGE NUMBER OF COMMON AND | ||||||||
CONVERTED PREFERRED SHARES OUTSTANDING: | ||||||||
Basic | 9,322,895 | 9,285,453 | ||||||
Diluted | 9,799,271 | 9,466,817 | ||||||
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, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | ||||||||
OPERATING ACTIVITIES: | ||||||||||
Net income | $ | 9,496 | $ | 4,632 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 30,907 | 24,256 | ||||||||
Amortization of deferred gain on debt restructure | — | (14 | ) | |||||||
Cash provided by (used in) changes in operating assets and liabilities: | ||||||||||
Trade accounts receivables | (4,047 | ) | (8,247 | ) | ||||||
Other current assets | 941 | (666 | ) | |||||||
Accounts payable and other accrued expenses | 2,015 | 1,480 | ||||||||
Net cash provided by operating activities | 39,312 | 21,441 | ||||||||
INVESTING ACTIVITIES: | ||||||||||
Acquisitions of Centers, Fixed and Mobile Facilities | — | (8,321 | ) | |||||||
Additions to property and equipment | (19,377 | ) | (13,624 | ) | ||||||
Other | (311 | ) | (272 | ) | ||||||
Net cash used in investing activities | (19,688 | ) | (22,217 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||
Proceeds from stock options and warrants exercised | 172 | 169 | ||||||||
Principal payments of debt and capital lease obligations | (23,128 | ) | (12,387 | ) | ||||||
Proceeds from issuance of debt | — | 12,700 | ||||||||
Other | 869 | (32 | ) | |||||||
Net cash provided by (used in) financing activities | (22,087 | ) | 450 | |||||||
DECREASE IN CASH AND CASH EQUIVALENTS | (2,463 | ) | (326 | ) | ||||||
Cash, beginning of period | 27,133 | 14,294 | ||||||||
Cash, end of period | $ | 24,670 | $ | 13,968 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
Interest paid | $ | 14,872 | $ | 10,431 | ||||||
Income taxes paid | $ | 284 | $ | 369 | ||||||
Equipment additions under capital leases | $ | 7,404 | $ | 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. (Company) was incorporated in Delaware in February 1996. The Company's predecessors, InSight Health Corp. (formerly American Health Services Corp.) (IHC), and Maxum Health Corp. (MHC), became wholly owned subsidiaries of the Company on June 26, 1996, pursuant to an Agreement and Plan of Merger among the Company, IHC and MHC.
The Company provides diagnostic imaging, treatment and related management services in 28 states throughout the United States. The Company's services are provided through a network of 78 mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 39 fixed-site MRI facilities (Fixed Facilities), 27 multi-modality imaging centers (Centers), four mobile lithotripsy facilities, two mobile positron emission therapy (PET) facilities, one Leksell Stereotactic Gamma Knife treatment center, one PET Fixed Facility and one radiation oncology center. An additional radiation oncology center is operated by the Company as part of one of its Centers. The Company's operations are located throughout the United States, with a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio).
At its Centers, the Company offers other services in addition to MRI including computed tomography (CT), diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear medicine, bone densitometry, nuclear cardiology, and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services, marketing, radiology management services, and billing and collection services.
2. INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all of the information and disclosures required by accounting principles generally accepted in the United States for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included as part of the Company's Annual Report on Form 10-K for the period ended June 30, 2000 filed with the Securities and Exchange Commission (SEC) on September 7, 2000. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for fair presentation of results for the period have been included. The results of operations for the nine months ended March 31, 2001 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 50 percent controlled entity which is consolidated (amounts in thousands):
| March 31, 2001 | June 30, 2000 | |||||
---|---|---|---|---|---|---|---|
| (unaudited) | ||||||
Condensed Balance Sheet Data: | |||||||
Current assets | $ | 1,529 | $ | 1,490 | |||
Total assets | 1,769 | 1,706 | |||||
Current liabilities | 659 | 623 | |||||
Minority interest equity | 454 | 441 |
| Nine Months Ended March 31, | Three Months Ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | |||||||||
| (unaudited) | (unaudited) | |||||||||||
Condensed Statement of Income Data: | |||||||||||||
Net revenues | $ | 4,275 | $ | 4,084 | $ | 1,433 | $ | 1,312 | |||||
Expenses | 2,879 | 2,738 | 971 | 986 | |||||||||
Provision for center profit distribution | 698 | 673 | 231 | 163 | |||||||||
Net income | $ | 698 | $ | 673 | $ | 231 | $ | 163 | |||||
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 March 31, | Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||
| (unaudited) | (unaudited) | ||||||
Average common stock outstanding | 2,994,753 | 2,922,836 | 3,000,239 | 2,962,797 | ||||
Effect of preferred stock | 6,322,656 | 6,322,656 | 6,322,656 | 6,322,656 | ||||
Denominator for basic EPS | 9,317,409 | 9,245,492 | 9,322,895 | 9,285,453 | ||||
Dilutive effect of stock options and warrants | 276,789 | 137,507 | 476,376 | 181,364 | ||||
Denominator for diluted EPS | 9,594,198 | 9,382,999 | 9,799,271 | 9,466,817 | ||||
8
5. NEW PRONOUNCEMENTS
In the first quarter of fiscal 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. The adoption of SFAS 133 on July 1, 2000 did not have a material impact on the Company's financial condition or results of operations.
In 1997, the Company entered into an interest rate swap with a notional amount of $40 million, for the purpose of fixing the interest rate of a corresponding amount of $40 million of floating rate debt. This swap had a three year term and was extendable for an additional three years at the option of the bank. Under SFAS 133, extendable swaps do not meet the criteria for hedge accounting and changes in fair value are recognized currently in earnings. During the nine months ended March 31, 2001, the Company recorded additional interest expense of approximately $0.7 million due to changes in the fair value of the swap. In March 2001, the swap was extended for an additional three years by the bank and the Company expects the swap to qualify for hedge accounting through its maturity.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. While SAB No. 101 provides a framework by which to recognize revenue in the financial statements, the Company believes that adherence to this SAB will not have a material impact on the Company's financial statements. Adoption of SAB No. 101 is required beginning in the fourth quarter of fiscal 2001.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modification to outstanding awards and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The requirements of FIN 44 will not have a material impact on the Company's financial conditions or results of operations.
6. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the 95/8% senior subordinated notes, issued by the Company (the Parent Company), 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
9
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.
10
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
MARCH 31, 2001
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||||||||||
Current assets: | |||||||||||||||||
Cash and cash equivalents | $ | — | $ | 21,311 | $ | 3,359 | $ | — | $ | 24,670 | |||||||
Trade accounts receivables, net | — | 32,378 | 12,267 | — | 44,645 | ||||||||||||
Other current assets | — | 8,117 | 103 | — | 8,220 | ||||||||||||
Intercompany accounts receivable | 226,032 | 29,613 | — | (255,645 | ) | — | |||||||||||
Total current assets | 226,032 | 91,419 | 15,729 | (255,645 | ) | 77,535 | |||||||||||
Property and equipment, net | — | 123,385 | 25,745 | — | 149,130 | ||||||||||||
Investments in partnerships | — | 1,758 | — | — | 1,758 | ||||||||||||
Investments in consolidated subsidiaries | 10,384 | 10,383 | — | (20,767 | ) | — | |||||||||||
Other assets | — | 7,058 | — | — | 7,058 | ||||||||||||
Intangible assets, net | — | 85,224 | 4,995 | — | 90,219 | ||||||||||||
$ | 236,416 | $ | 319,227 | $ | 46,469 | $ | (276,412 | ) | $ | 325,700 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
Current liabilities: | |||||||||||||||||
Current portion of equipment, capital leases and other notes | $ | 20,206 | $ | 11,711 | $ | 759 | $ | — | $ | 32,676 | |||||||
Accounts payable and other accrued expenses | — | 27,495 | 1,133 | — | 28,628 | ||||||||||||
Intercompany accounts payable | — | 226,032 | 29,613 | (255,645 | ) | — | |||||||||||
Total current liabilities | 20,206 | 265,238 | 31,505 | (255,645 | ) | 61,304 | |||||||||||
Equipment, capital leases and other notes, less current portion | 155,055 | 42,449 | 2,328 | — | 199,832 | ||||||||||||
Other long-term liabilities | — | 1,156 | 2,253 | — | 3,409 | ||||||||||||
Stockholders' equity | 61,155 | 10,384 | 10,383 | (20,767 | ) | 61,155 | |||||||||||
$ | 236,416 | $ | 319,227 | $ | 46,469 | $ | (276,412 | ) | $ | 325,700 | |||||||
11
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
JUNE 30, 2000
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||||||||||
Current assets: | |||||||||||||||||
Cash and cash equivalents | $ | — | $ | 25,375 | $ | 1,758 | $ | — | $ | 27,133 | |||||||
Trade accounts receivables, net | — | 32,841 | 7,757 | — | 40,598 | ||||||||||||
Other current assets | — | 8,954 | 207 | — | 9,161 | ||||||||||||
Intercompany accounts receivable | 253,181 | 24,776 | — | (277,957 | ) | — | |||||||||||
Total current assets | 253,181 | 91,946 | 9,722 | (277,957 | ) | 76,892 | |||||||||||
Property and equipment, net | — | 129,499 | 18,970 | — | 148,469 | ||||||||||||
Investments in partnerships | — | 1,782 | — | — | 1,782 | ||||||||||||
Investments in consolidated subsidiaries | (12,639 | ) | 3,284 | — | 9,355 | — | |||||||||||
Other assets | — | 7,799 | — | — | 7,799 | ||||||||||||
Intangible assets, net | — | 92,478 | 1,452 | — | 93,930 | ||||||||||||
$ | 240,542 | $ | 326,788 | $ | 30,144 | $ | (268,602 | ) | $ | 328,872 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
Current liabilities: | |||||||||||||||||
Current portion of equipment, capital leases and other notes | $ | 18,393 | $ | 10,809 | $ | 263 | $ | — | $ | 29,465 | |||||||
Accounts payable and other accrued expenses | — | 25,712 | 901 | — | 26,613 | ||||||||||||
Intercompany accounts payable | — | 253,181 | 24,776 | (277,957 | ) | — | |||||||||||
Total current liabilities | 18,393 | 289,702 | 25,940 | (277,957 | ) | 56,078 | |||||||||||
Equipment, capital leases and other notes, less current portion | 170,662 | 47,257 | 848 | — | 218,767 | ||||||||||||
Other long-term liabilities | — | 2,468 | 72 | — | 2,540 | ||||||||||||
Stockholders' equity (deficit) | 51,487 | (12,639 | ) | 3,284 | 9,355 | 51,487 | |||||||||||
$ | 240,542 | $ | 326,788 | $ | 30,144 | $ | (268,602 | ) | $ | 328,872 | |||||||
12
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2001
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues | $ | — | $ | 121,245 | $ | 36,584 | $ | — | $ | 157,829 | ||||||
Costs of operations | — | 94,039 | 27,973 | — | 122,012 | |||||||||||
Gross profit | — | 27,206 | 8,611 | — | 35,817 | |||||||||||
Corporate operating expenses | — | 7,981 | — | — | 7,981 | |||||||||||
Income from company operations | — | 19,225 | 8,611 | — | 27,836 | |||||||||||
Equity in earnings of unconsolidated partnerships | — | 713 | — | — | 713 | |||||||||||
Operating income | — | 19,938 | 8,611 | — | 28,549 | |||||||||||
Interest expense, net | — | 15,669 | 2,003 | — | 17,672 | |||||||||||
Income before income taxes | — | 4,269 | 6,608 | — | 10,877 | |||||||||||
Provision for income taxes | — | 1,381 | — | — | 1,381 | |||||||||||
Income before equity in income of consolidated subsidiaries | — | 2,888 | 6,608 | — | 9,496 | |||||||||||
Equity in income of consolidated subsidiaries | 9,496 | 6,608 | — | (16,104 | ) | — | ||||||||||
Net income | $ | 9,496 | $ | 9,496 | $ | 6,608 | $ | (16,104 | ) | $ | 9,496 | |||||
13
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 | |||||
14
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues | $ | — | $ | 41,046 | $ | 12,769 | $ | — | $ | 53,815 | ||||||
Costs of operations | — | 31,528 | 9,593 | — | 41,121 | |||||||||||
Gross profit | — | 9,518 | 3,176 | — | 12,694 | |||||||||||
Corporate operating expenses | — | 2,704 | — | — | 2,704 | |||||||||||
Income from company operations | — | 6,814 | 3,176 | — | 9,990 | |||||||||||
Equity in earnings of unconsolidated partnerships | — | 288 | — | — | 288 | |||||||||||
Operating income | — | 7,102 | 3,176 | — | 10,278 | |||||||||||
Interest expense, net | — | 5,314 | 451 | — | 5,765 | |||||||||||
Income before income taxes | — | 1,788 | 2,725 | — | 4,513 | |||||||||||
Provision for income taxes | — | 745 | — | — | 745 | |||||||||||
Income before equity in income of consolidated subsidiaries | — | 1,043 | 2,725 | — | 3,768 | |||||||||||
Equity in income of consolidated subsidiaries | 3,768 | 2,725 | — | (6,493 | ) | — | ||||||||||
Net income | $ | 3,768 | $ | 3,768 | $ | 2,725 | $ | (6,493 | ) | $ | 3,768 | |||||
15
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 | |||||
16
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2001
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
OPERATING ACTIVITIES: | ||||||||||||||||||
Net income | $ | 9,496 | $ | 9,496 | $ | 6,608 | $ | (16,104 | ) | $ | 9,496 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||
Depreciation and amortization | — | 26,171 | 4,736 | — | 30,907 | |||||||||||||
Equity in income of consolidated subsidiaries | (9,496 | ) | (6,608 | ) | — | 16,104 | — | |||||||||||
Cash provided by (used in) changes in operating assets and liabilities: | ||||||||||||||||||
Trade accounts receivables | — | 463 | (4,510 | ) | — | (4,047 | ) | |||||||||||
Intercompany receivables, net | 13,622 | (18,950 | ) | 5,328 | — | — | ||||||||||||
Other current assets | — | 837 | 104 | — | 941 | |||||||||||||
Accounts payable and other accrued expenses | — | 1,783 | 232 | — | 2,015 | |||||||||||||
Net cash provided by operating activities | 13,622 | 13,192 | 12,498 | — | 39,312 | |||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||||
Additions to property and equipment | — | (10,044 | ) | (9,333 | ) | — | (19,377 | ) | ||||||||||
Other | — | 3,680 | (3,991 | ) | — | (311 | ) | |||||||||||
Net cash used in investing activities | — | (6,364 | ) | (13,324 | ) | — | (19,688 | ) | ||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||
Proceeds from stock options and warrants exercised | 172 | — | — | — | 172 | |||||||||||||
Principal payments of debt and capital lease obligations | (13,794 | ) | (9,580 | ) | 246 | — | (23,128 | ) | ||||||||||
Other | — | (1,312 | ) | 2,181 | — | 869 | ||||||||||||
Net cash provided by (used in) financing activities | (13,622 | ) | (10,892 | ) | 2,427 | — | (22,087 | ) | ||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | — | (4,064 | ) | 1,601 | — | (2,463 | ) | |||||||||||
Cash, beginning of period | — | 25,375 | 1,758 | — | 27,133 | |||||||||||||
Cash, end of period | $ | — | $ | 21,311 | $ | 3,359 | $ | — | $ | 24,670 | ||||||||
17
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Amounts in thousands)
| PARENT COMPANY ONLY | GUARANTOR SUBSIDIARIES | NON-GUARANTOR SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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, Fixed and Mobile Facilities | — | (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 and warrants 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, beginning of period | — | 12,709 | 1,585 | — | 14,294 | ||||||||||||||
Cash, end of period | $ | — | $ | 11,586 | $ | 2,382 | $ | — | $ | 13,968 | |||||||||
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this report that are not purely historical or which might be considered an opinion or projection concerning the Company or its business, whether express or implied, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include statements regarding the Company's expectations, intentions, plans or strategies regarding the future. All forward-looking statements included in this report are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those described or implied in such forward-looking statements because of certain factors which could affect the Company. Such forward-looking statements should be evaluated in light of the following factors: availability of financing; limitations and delays in reimbursement by third party payors; contract renewals and financial stability of customers; technology changes; governmental regulations; conditions within the health care environment; adverse utilization trends for certain diagnostic imaging procedures; aggressive competition; general economic factors; successful integration of acquisitions; and the risk factors described in the Company's periodic filings with the Securities and Exchange Commission (SEC) on Forms 10-K, 10-Q and 8-K (if any) and the factors described under "Risk Factors" in the Company's Registration Statement on Form S-4, filed with the SEC on August 4, 1998, and any amendments thereto.
ACQUISITIONS
The Company believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through consolidation. The Company's strategy is to further develop and expand regional diagnostic imaging networks that emphasize quality of care, produce cost-effective diagnostic information and provide superior service and convenience to its customers. The strategy of the Company is focused on the following components: (i) to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing regional diagnostic imaging networks through geographically disciplined acquisitions; (ii) to develop or acquire additional regional networks in strategic locations where the Company can offer a broad range of services to its customers and realize increased economies of scale; (iii) to continue to market current diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume; (iv) to strengthen the regional diagnostic imaging networks by focusing on managed care customers; and (v) to implement a variety of new products and services designed to further leverage its core business strengths, including: Open MRI systems and the radiology co-source product which involves the joint ownership and management of the physical and technical operations of a single or multi-modality facility on a hospital campus. The Company believes that long-term viability is contingent upon its ability to successfully execute its business strategy.
In fiscal 2000, the Company completed two acquisitions as follows: two Fixed Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90% interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The aggregate purchase price for these two acquisitions was approximately $24.5 million.
In fiscal 2000, the Company opened the following: its second radiology co-source outpatient Fixed Facility in Granada Hills, California; its third radiology co-source outpatient Center in Henderson, Nevada; and an Open MRI Fixed Facility in Pleasanton, California. These were financed through both capital leases with General Electric Company (GE) and internally generated funds. In fiscal 2000, the Company closed an Open MRI Fixed Facility in Atlanta, Georgia.
19
In fiscal 2001, the Company opened its fourth radiology co-source Fixed Facility in Marina del Rey, California, which was financed with a capital lease from GE, and a PET Fixed Facility in Louisville, Kentucky, which was financed with outside financing.
In addition to the Company's acquisition strategy described above, in February 2001, the Company engaged UBS Warburg LLC as its exclusive financial advisor to assist the Company in exploring strategic alternatives to enhance shareholder value, including a possible sale, merger or recapitalization of the Company, which process is currently ongoing. No assurance can be given that any strategic alternative will be available to, or completed by, the Company. During this process, the Company has continued to pursue additional acquisition financing to support its on-going business strategy described above.
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 period, competitive pressures and major restructurings within the health care industry. This adverse effect on revenues and cash flow is expected to continue.
The Company intends to continue to pursue acquisition opportunities at the same time as it explores its other strategic alternatives. The Company believes that the expansion of its business through such acquisitions is a key factor in improving profitability. Generally, acquisition opportunities are aimed at increasing revenues and operating income, and maximizing utilization of existing capacity. Incremental operating income resulting from future acquisitions will vary depending on geographic location, whether facilities are Mobile or Fixed, the range of services provided and the Company's ability to integrate the acquired businesses into its existing infrastructure. Since 1996, the Company has completed twelve acquisitions. No assurance can be given, however, that the Company will be able to identify suitable acquisition candidates and thereafter complete such acquisitions on terms acceptable to the Company. In addition, the Company's acquisition facility has expired, and until alternate financing sources can be arranged, the Company will have to utilize its own internally generated funds to complete future acquisitions, as discussed below.
The Company has outstanding $100 million of 95/8% 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 term loan which matures in June 2004, (ii) a $25 million working capital facility which expires in June 2003, and (iii) an acquisition facility which matures in June 2004 (Bank Financing). Borrowings under the Bank Financing bear interest at LIBOR plus 1.75%. The Company is required to pay an annual unused facility fee of 0.375 percent, payable quarterly, on unborrowed amounts under the working capital facility. At March 31, 2001, there were approximately $29.4 million and $45.9 million in borrowings under the term loan and the acquisition facility, respectively. At March 31, 2001, there was no borrowings under the working capital facility. The Company did not completely utilize the acquisition facility prior to its expiration and until alternate financing sources can be arranged, the Company will have to utilize its own internally generated funds to complete future acquisitions. As of March 31, 2001, the Company had cash on hand of approximately $24.7 million, which it may utilize to consummate
20
such acquisitions. As of April 27, 2001, the Company had borrowing availability of $25 million under the working capital facility.
Net cash provided by operating activities was approximately $39.3 million for the nine months ended March 31, 2001. Cash provided by operating activities resulted primarily from net income before depreciation and amortization (approximately $40.4 million) and an increase in accounts payable and other accrued expenses (approximately $2.0 million), offset by an increase in trade accounts receivables (approximately $4.0 million). The increase in trade accounts receivables is due primarily to revenues generated by the Company's acquisitions which were completed in fiscal 2000.
Net cash used in investing activities was approximately $19.7 million for the nine months ended March 31, 2001. Cash used in investing activities resulted primarily from the Company purchasing or upgrading diagnostic imaging equipment at its existing facilities (approximately $19.4 million).
Net cash used in financing activities was approximately $22.1 million for the nine months ended March 31, 2001, resulting primarily from principal payments of debt and capital lease obligations (approximately $23.1 million).
The Company has committed to purchase or lease in connection with the development of new Fixed and Mobile Facilities and replacement of diagnostic imaging equipment at Centers, Fixed and Mobile Facilities, at an aggregate cost of approximately $12.8 million, seven diagnostic imaging systems for delivery through July 31, 2001. The Company expects to use either internally generated funds or leases from GE and others to finance the purchase of such equipment. The Company may purchase, lease or upgrade other diagnostic imaging systems as opportunities arise to place new equipment into service when new contract services agreements are signed, existing agreements are renewed, acquisitions are completed, or new imaging centers are developed in accordance with the Company's business strategy.
Effective December 1, 1999, the Company purchased 38 pieces of diagnostic imaging equipment from GE by converting operating leases to capital leases. The capital leases bear interest at 9% per annum, have 48 to 72 month terms and contain a $1.00 buyout at the end of each lease. The total purchase price was approximately $45 million. For the nine months ended March 31, 2001, equipment lease expense was reduced by approximately $9.0 million, and depreciation and interest combined was increased by approximately the same amount. The Company believes, on an annualized basis, equipment lease expense will be reduced by approximately $12 million, and depreciation and interest will be increased by approximately the same amount. In the future, the Company intends to finance purchases of diagnostic imaging equipment primarily with capital leases or internally generated funds rather than entering into operating leases; although the Company may choose to enter into operating leases for certain diagnostic imaging equipment.
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 March 31, 2002 to fund anticipated capital expenditures and make required payments of principal and interest on its debt, including payments due on the Notes and obligations under the Bank Financing. In addition, the Company continually evaluates potential acquisitions and expects to fund such acquisitions from its available sources of liquidity, as discussed above. The Company's acquisition strategy may require sources of capital in addition to that currently available to the Company. The Company expects, subject to market conditions and the results of the strategic alternatives review described above, to obtain additional acquisition financing in the fourth quarter of fiscal 2001 or first quarter of fiscal 2002. 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
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000
REVENUES: Revenues increased approximately 12.7% from approximately $140.0 million for the nine months ended March 31, 2000, to approximately $157.8 million for the nine months ended March 31, 2001. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $9.2 million) and an increase in contract services, patient services and other revenues (approximately $12.9 million) at existing facilities, as a result of refocused sales efforts and incentive initiatives implemented at existing facilities, offset by the assignment in the third quarter of fiscal 2000 of certain managed care contracts to an outside third party (approximately $4.3 million).
Contract services revenues increased approximately 4.1% from approximately $75.1 million for the nine months ended March 31, 2000, to approximately $78.2 million for the nine months ended March 31, 2001. The increase was due to the addition of three Mobile Facilities and a combination of higher utilization and more fixed monthly fee contracts at the Company's existing mobile customer base (approximately $7.4 million), offset by the assignment in the third quarter of fiscal 2000 of certain managed care contracts to an outside third party (approximately $4.3 million).
Contract services revenues, primarily earned by its Mobile Facilities, represented approximately 50% of total revenues for the nine months ended March 31, 2001. 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. As a result of the new Outpatient Prospective Payment System (OPPS) for outpatient services, the Company's contract services revenues could be adversely affected.
Effective August 1, 2000, Medicare will pay hospitals for outpatient services based on ambulatory payment classification (APC) groups rather than on a hospital's costs. Each APC has been assigned a payment weight by the Health Care Financing Administration. Under the new OPPS, the payment due a hospital for performing an outpatient service will be an amount based on the APC weight, a dollar based conversion factor, a geographic adjustment factor to account for area labor cost differences and any other adjustments applicable to the hospital or case. Because the new OPPS may initially have a severe adverse economic effect on hospitals, Congress enacted additional legislation in the Balanced Budget Refinement Act of 1999 (BBRA) to ease such effect for a specific period of time (through 2003). Under the BBRA, hospitals may receive additional payments for new technologies, transitional pass-through for innovative medical devices, drugs and biologics, outlier adjustments and transitional payment corridors.
The Company believes that the impact of the new OPPS on hospital payments for diagnostic imaging services—especially for MRI and CT services—may cause hospitals to consider restructuring their outpatient diagnostic imaging services as freestanding centers which are unaffected by the new
22
OPPS. This may provide the Company with additional opportunities for its radiology co-source product which involves the joint ownership and management of single and multi-modality imaging centers with hospitals. Given the infancy and complexity of the new OPPS it is difficult to determine whether hospitals will be receiving less from Medicare (after they take advantage of the additional payments that may be available under the BBRA) and to what extent they will attempt to renegotiate existing contractual arrangements. However, a reduction in contractual rates for several customers could have a material impact on the Company's contract services revenues.
Patient services revenues increased approximately 24.5% from approximately $63.6 million for the nine months ended March 31, 2000, to approximately $79.2 million for the nine months ended March 31, 2001. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $9.2 million) and an increase in revenues at existing facilities (approximately $6.4 million). The increase at existing facilities was due to higher utilization (approximately 8%), partially offset by a nominal decrease in reimbursement from third party payors (less than 1%).
Management believes that any future increases in revenues at existing facilities can only be achieved by higher utilization and not by increases in procedure prices; however, slower start-ups of new operations, excess capacity of diagnostic imaging equipment, increased competition, and the expansion of managed care may impact utilization and make it difficult for the Company to achieve revenue increases in the future, absent the execution of provider agreements with managed care companies and other payors, and the execution of the Company's business strategy, particularly acquisitions. The Company's operations are principally dependent on its ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels, and a significant decline in referrals could have a material impact on the Company's revenues.
COSTS OF OPERATIONS: Costs of operations increased approximately 7.7% from approximately $113.3 million for the nine months ended March 31, 2000, to approximately $122.0 million for the nine months ended March 31, 2001. This increase was due primarily to additional costs related to the acquisitions and opened Fixed Facilities discussed above (approximately $6.1 million) and at existing facilities (approximately $7.1 million), primarily salary and benefits and depreciation, offset by reduced equipment leases, supply costs, consulting and marketing costs, and the elimination of costs resulting from the assignment in the third quarter of fiscal 2000 of certain managed care contracts to an outside third party (approximately $4.5 million). The decrease in equipment lease costs and the increase in depreciation is primarily the result of the buy-out of operating leases discussed above and the Company purchasing new diagnostic imaging equipment rather than entering into operating leases.
Costs of operations, as a percentage of total revenues, decreased from approximately 81.0% for the nine months ended March 31, 2000, to approximately 77.3% for the nine months ended March 31, 2001. The percentage decrease is due primarily to reduced costs in equipment leases, equipment maintenance, occupancy, consulting and communications costs, offset by higher depreciation and amortization and salary and benefits. The Company is continuing its effort to improve operating efficiencies through cost reduction initiatives, which are focused primarily on costs for marketing, supplies, salary and benefits and diagnostic imaging equipment costs, including lease, depreciation and maintenance.
23
CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased approximately 2.4%, from approximately $8.2 million for the nine months ended March 31, 2000, to approximately $8.0 million for the nine months ended March 31, 2001. The decrease was due primarily to reduced salary and benefits associated with the Company's acquisition and development activities, consulting and travel costs, offset by additional information systems costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 5.9% for the nine months ended March 31, 2000, to approximately 5.1% for the nine months ended March 31, 2001.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 31.1% from approximately $13.5 million for the nine months ended March 31, 2000, to approximately $17.7 million for the nine months ended March 31, 2001. This increase was due primarily to additional debt related to (i) the acquisitions discussed above, (ii) the buy-out of operating leases discussed above, (iii) the Company upgrading its existing diagnostic imaging equipment, and (iv) a charge of approximately $0.7 million related to the Company's interest rate swap discussed below, offset by reduced interest as a result of amortization of long-term debt.
PROVISION FOR INCOME TAXES: For the nine months ended March 31, 2001, the effective tax rate decreased to approximately 13% from approximately 16% for the nine months ended March 31, 2000, primarily as a result of recognizing the benefits from prior 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.
EBITDA: Earnings before interest, taxes, depreciation and amortization (EBITDA) increased approximately 37.4% from approximately $43.3 million for the nine months ended March 31, 2000, to approximately $59.5 million for the nine months ended March 31, 2001. This increase was primarily due to higher revenues at existing facilities as a result of the revenue enhancing efforts described above, lower costs of services as a result of the cost reduction initiatives described above, and decreased equipment lease expense as a result of the buy-out of operating leases discussed above.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.99 for the nine months ended March 31, 2001, compared to net income per common and converted preferred share of $0.49 for the same period in 2000. 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, 2001 COMPARED TO MARCH 31, 2000
REVENUES: Revenues increased approximately 12.8% from approximately $47.7 million for the three months ended March 31, 2000, to approximately $53.8 million for the three months ended March 31, 2001. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $2.5 million) and an increase in contract services, patient services and other revenues (approximately $4.9 million) at existing facilities, as a result of refocused sales efforts and incentive initiatives implemented at existing facilities, offset by the assignment in the third quarter of fiscal 2000 of certain managed care contracts to an outside third party (approximately $1.3 million).
Contract services revenues increased approximately 0.8% from approximately $25.8 million for the three months ended March 31, 2000, to approximately $26.0 million for the three months ended March 31, 2001. The increase was due to the addition of three Mobile Facilities, a combination of higher utilization and more fixed monthly fee contracts at the Company's existing mobile customer base
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(approximately $1.5 million), offset by the assignment in the third quarter of fiscal 2000 of certain managed care contracts to an outside third party (approximately $1.3 million).
Patient services revenues increased approximately 27.6% from approximately $21.7 million for the three months ended March 31, 2000, to approximately $27.7 million for the three months ended March 31, 2001. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $2.5 million) and an increase in revenues at existing facilities (approximately $3.5 million). The increase at existing facilities was due to higher utilization (approximately 8%) and a nominal increase in reimbursement from third party payors (less than 1%).
COSTS OF OPERATIONS: Costs of operations increased approximately 9.0% from approximately $37.7 million for the three months ended March 31, 2000, to approximately $41.1 million for the three months ended March 31, 2001. This increase was due primarily to additional costs related to the acquisitions and opened Fixed Facilities discussed above (approximately $1.8 million) and at existing facilities (approximately $3.0 million), primarily salary and benefits and depreciation, offset by reduced equipment leases, supply costs, consulting and marketing costs, and the elimination of costs resulting from the assignment in the third quarter of fiscal 2000 of certain managed care contracts to an outside third party (approximately $1.4 million.) The decrease in equipment lease costs and the increase in depreciation is primarily the result of the Company purchasing new diagnostic imaging equipment rather than entering into operating leases.
Costs of operations, as a percentage of total revenues, decreased from approximately 79.1% for the three months ended March 31, 2000, to approximately 76.4% for the three months ended March 31, 2001. The percentage decrease is due primarily to reduced costs in equipment leases, equipment maintenance, occupancy, consulting and depreciation costs, offset by higher salary and benefits primarily as a result of salary increases for technologists and the incentive initiatives implemented at existing facilities. The Company is continuing its effort to improve operating efficiencies through cost reduction initiatives, which are focused primarily on costs for marketing, supplies, salary and benefits, and diagnostic imaging equipment costs, including lease, depreciation and maintenance.
CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased approximately 3.6%, from approximately $2.8 million for the three months ended March 31, 2000, to approximately $2.7 million for the three months ended March 31, 2001. The decrease was due primarily to reduced salary and benefits associated with the Company's acquisition and development activities, consulting, travel and marketing costs, offset by additional information systems costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 5.8% for the three months ended March 31, 2000, to approximately 5.0% for the three months ended March 31, 2001.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 11.5% from approximately $5.2 million for the three months ended March 31, 2000, to approximately $5.8 million for the three months ended March 31, 2001. This increase was due primarily to additional debt related to (i) the acquisitions discussed above, (ii) the Company upgrading its existing diagnostic imaging equipment, and (iii) a charge of approximately $0.7 million related to the Company's interest rate swap discussed below, offset by reduced interest as a result of amortization of long-term debt.
PROVISION FOR INCOME TAXES: For the three months ended March 31, 2001, the effective tax rate increased to approximately 17% from approximately 10% for the three months ended March 31, 2000, primarily as a result of recognizing the benefits from prior 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
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effects of benefits from the Company's net operating loss carryforwards. This review may result in an increase or decrease in the effective tax rate during the fiscal year.
EBITDA: Earnings before interest, taxes, depreciation and amortization (EBITDA) increased approximately 22.4% from approximately $16.5 million for the three months ended March 31, 2000, to approximately $20.2 million for the three months ended March 31, 2001. This increase was primarily due to higher revenues at existing facilities as a result of the revenue enhancing efforts described above, lower costs of services as a result of the cost reduction initiatives described above.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.38 for the three months ended March 31, 2001, compared to net income per common and converted preferred share of $0.21 for the same period in 2000. 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 the first quarter of fiscal 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. The adoption of SFAS 133 on July 1, 2000 did not have a material impact on the Company's financial condition or results of operations.
In 1997, the Company entered into an interest rate swap with a notional amount of $40 million, for the purpose of fixing the interest rate of a corresponding amount of $40 million of floating rate debt. This swap had a three year term and was extendable for an additional three years at the option of the bank. Under SFAS 133, extendable swaps do not meet the criteria for hedge accounting and changes in fair value are recognized currently in earnings. During the nine months ended March 31, 2001, the Company recorded additional interest expense of approximately $0.7 million due to changes in the fair value of the swap. In March 2001, the swap was extended for an additional three years by the bank and the Company expects the swap to qualify for hedge accounting through its maturity.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. While SAB No. 101 provides a framework by which to recognize revenue in the financial statements, the Company believes that adherence to this SAB will not have a material impact on the Company's financial statements. Adoption of SAB No. 101 is required beginning in the fourth quarter of fiscal 2001.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modification to outstanding awards and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to
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repricings and the definition of an employee which apply to awards issued after December 15, 1998. The requirements of FIN 44 will not have a material impact on the Company's financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure relates primarily to interest rates, where the Company will periodically use interest rate swaps to hedge interest rates on long-term debt under its Bank Financing. The Company does not engage in activities using complex or highly leveraged instruments.
At March 31, 2001, the Company had outstanding long-term debt of approximately $75.3 million, which has floating rate terms. The Company had outstanding an interest rate swap, converting $36.8 million of its floating rate debt to fixed rate debt.
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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 with the SEC by the Company for the quarter ended March 31, 2001. |
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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 3, 2001 |
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INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES INDEX
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited) MARCH 31, 2001 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited) JUNE 30, 2000 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited) FOR THE NINE MONTHS ENDED MARCH 31, 2001 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited) FOR THE NINE MONTHS ENDED MARCH 31, 2000 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2000 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED MARCH 31, 2001 (Amounts in thousands)
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED MARCH 31, 2000 (Amounts in thousands)
- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SIGNATURES