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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------------- ----------------
Commission file number 0-28622
INSIGHT HEALTH SERVICES CORP.
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(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
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(Address of principal executive offices) (Zip code)
(949) 476-0733
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(Registrant's telephone number including area code)
N/A
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(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: 2,995,406 shares of Common
Stock as of January 26, 2001.
The number of pages in this Form 10-Q is 26.
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 2000
and June 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Income
for the six months ended December 31, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Income
for the three months ended December 31, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18-24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
2
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, June 30,
2000 2000
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,147 $ 27,133
Trade accounts receivables, net 44,694 40,598
Other current assets 9,902 9,161
----------------- -----------------
Total current assets 69,743 76,892
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $73,786 and $62,805, respectively 156,854 148,469
INVESTMENTS IN PARTNERSHIPS 1,647 1,782
OTHER ASSETS 7,287 7,799
INTANGIBLE ASSETS, net 91,575 93,930
----------------- -----------------
$ 327,106 $ 328,872
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other notes $ 31,927 $ 29,465
Accounts payable and other accrued expenses 23,779 26,613
----------------- -----------------
Total current liabilities 55,706 56,078
----------------- -----------------
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current portion 211,135 218,767
Other long-term liabilities 2,961 2,540
----------------- -----------------
Total long-term liabilities 214,096 221,307
----------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
December 31, 2000 and June 30, 2000, respectively, with a liquidation
preference of $25,000 as of December 31, 2000 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
December 31, 2000 and June 30, 2000, respectively, with a liquidation
preference of $27,953 as of December 31, 2000 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized:
2,995,406 and 2,979,293 shares outstanding at December 31, 2000
and June 30, 2000, respectively 3 3
Additional paid-in capital 23,832 23,743
Accumulated deficit (3,627) (9,355)
----------------- -----------------
Total stockholders' equity 57,304 51,487
----------------- -----------------
$ 327,106 $ 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)
Six Months Ended
December 31,
-------------------------------------
2000 1999
----------------- -----------------
REVENUES:
Contract services $ 52,168 $ 49,384
Patient services 51,503 41,898
Other 343 1,005
----------------- -----------------
Total revenues 104,014 92,287
----------------- -----------------
COSTS OF OPERATIONS:
Costs of services 53,646 49,751
Provision for doubtful accounts 1,672 1,412
Equipment leases 4,637 9,232
Depreciation and amortization 20,936 15,195
----------------- -----------------
Total costs of operations 80,891 75,590
----------------- -----------------
Gross profit 23,123 16,697
CORPORATE OPERATING EXPENSES 5,277 5,439
----------------- -----------------
Income from company operations 17,846 11,258
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 425 403
----------------- -----------------
Operating income 18,271 11,661
INTEREST EXPENSE, net 11,907 8,359
----------------- -----------------
Income before income taxes 6,364 3,302
PROVISION FOR INCOME TAXES 636 660
----------------- -----------------
Net income $ 5,728 $ 2,642
================= =================
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.61 $ 0.29
================= =================
Diluted $ 0.60 $ 0.28
================= =================
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,314,725 9,227,438
================= =================
Diluted 9,528,571 9,380,227
================= =================
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
December 31,
-------------------------------------
2000 1999
----------------- -----------------
REVENUES:
Contract services $ 25,889 $ 24,795
Patient services 25,792 21,078
Other 113 248
----------------- -----------------
Total revenues 51,794 46,121
----------------- -----------------
COSTS OF OPERATIONS:
Costs of services 26,562 25,054
Provision for doubtful accounts 839 662
Equipment leases 2,345 4,146
Depreciation and amortization 10,596 7,632
----------------- -----------------
Total costs of operations 40,342 37,494
----------------- -----------------
Gross profit 11,452 8,627
CORPORATE OPERATING EXPENSES 2,575 2,804
----------------- -----------------
Income from company operations 8,877 5,823
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 299 225
----------------- -----------------
Operating income 9,176 6,048
INTEREST EXPENSE, net 5,875 4,396
----------------- -----------------
Income before income taxes 3,301 1,652
PROVISION FOR INCOME TAXES 330 330
----------------- -----------------
Net income $ 2,971 $ 1,322
================= =================
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.32 $ 0.14
================= =================
Diluted $ 0.31 $ 0.14
================= =================
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 9,317,532 9,252,946
================= =================
Diluted 9,551,802 9,401,721
================= =================
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,
-------------------------------------
2000 1999
----------------- -----------------
OPERATING ACTIVITIES:
Net income $ 5,728 $ 2,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,936 15,195
Amortization of deferred gain on debt restructure - (14)
Cash used in changes in operating assets and liabilities:
Trade accounts receivables (4,096) (4,292)
Other current assets (741) (806)
Accounts payable and other accrued expenses (2,834) (2,463)
----------------- -----------------
Net cash provided by operatingt activities 18,993 10,262
----------------- -----------------
INVESTING ACTIVITIES:
Acquisition of Centers, Fixed and Mobile Facilities - (1,433)
Additions to property and equipment (18,642) (10,707)
Other (273) (147)
----------------- -----------------
Net cash used in investing activities (18,915) (12,287)
----------------- -----------------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 89 88
Principal payments of debt and capital lease obligations (15,074) (7,513)
Proceeds from issuance of debt 2,500 5,000
Other 421 (159)
----------------- -----------------
Net cash used in financing activities (12,064) (2,584)
----------------- -----------------
DECREASE IN CASH AND CASH EQUIVALENTS (11,986) (4,609)
Cash, beginning of period 27,133 14,294
----------------- -----------------
Cash, end of period $ 15,147 $ 9,685
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 11,000 $ 7,843
================= =================
Income taxes paid $ 199 $ 252
================= =================
Equipment additions under capital leases $ 7,404 $ 52,160
================= =================
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 29 states throughout the United States. The Company's services are
provided through a network of 81 mobile magnetic resonance imaging (MRI)
facilities (Mobile Facilities), 40 fixed-site MRI facilities (Fixed Facilities),
26 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 six months ended December 31, 2000 are not
necessarily indicative of the results to be achieved for the full fiscal year.
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
3. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company's investment interests in
partnerships or limited liability companies (Partnerships) are accounted for
under the equity method of accounting for ownership of 50% or less when the
Company does not exercise significant control over the operations of the
Partnerships and does not have primary responsibility for the Partnerships'
long-term debt. The Company's investment interests in Partnerships are
consolidated for ownership of 50% or greater owned entities when the Company
exercises significant control over the operations and is primarily responsible
for the associated long-term debt.
7
Set forth below is the summarized combined financial data of the Company's 50
percent controlled entity which is consolidated (amounts in thousands):
December 31, June 30,
2000 2000
----------------- -----------------
(unaudited)
Condensed Combined Balance Sheet Data:
Current assets $ 1,359 $ 1,490
Total assets 1,615 1,706
Current liabilities 495 623
Minority interest equity 459 441
Six Months Ended Three Months Ended
December 31, December 31,
------------------------------------- -----------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- ---------------
(unaudited) (unaudited)
Condensed Combined Statement of Income Data:
Net revenues $ 2,842 $ 2,772 $ 1,378 $ 1,355
Expenses 1,908 1,752 908 893
Provision for center profit distribution 467 510 235 231
----------------- ----------------- ----------------- ----------------
Net income $ 467 $ 510 $ 235 $ 231
================= ================= ================= ================
The provision for center profit distribution shown above represents the minority
interest in the income of this combined 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:
Six Months Ended Three Months Ended
December 31, December 31,
------------------------------------ ------------------------------------
2000 1999 2000 1999
----------------- ---------------- ----------------- ----------------
(unaudited) (unaudited)
Average common stock outstanding 2,992,069 2,904,782 2,994,876 2,930,290
Effect of preferred stock 6,322,656 6,322,656 6,322,656 6,322,656
----------------- ---------------- ----------------- ----------------
Denominator for basic EPS 9,314,725 9,227,438 9,317,532 9,252,946
Dilutive effect of stock options and warrants 213,846 152,789 234,270 148,775
----------------- ---------------- ----------------- ----------------
9,528,571 9,380,227 9,551,802 9,401,721
================= ================ ================= ================
8
5. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the 9 5/8% 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 financial information sets forth, on an unconsolidated
basis, balance sheets, statements of income, and statements of cash flows
information for the Company (Parent Company Only), for the Guarantor
Subsidiaries and for the Company's other subsidiaries (the Non-Guarantor
Subsidiaries). The supplemental financial information reflects the investments
of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting.
9
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
Current assets:
Cash and cash equivalents $ -- $ 13,539 $ 1,608 $ -- $ 15,147
Trade accounts receivables, net -- 34,797 9,897 -- 44,694
Other current assets -- 9,649 253 -- 9,902
Intercompany accounts receivables 248,289 24,674 -- (272,963) --
--------- --------- --------- --------- ---------
Total current assets 248,289 82,659 11,758 (272,963) 69,743
Property and equipment, net -- 136,603 20,251 -- 156,854
Investments in partnerships -- 1,647 -- -- 1,647
Investments in consolidated subsidiaries (8,626) 4,999 -- 3,627 --
Other assets -- 7,287 -- -- 7,287
Intangible assets, net -- 90,185 1,390 -- 91,575
--------- --------- --------- --------- ---------
$ 239,663 $ 323,380 $ 33,399 $(269,336) $ 327,106
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other notes $ 19,601 $ 11,838 $ 488 $ -- $ 31,927
Accounts payable and other accrued expenses -- 22,856 923 -- 23,779
Intercompany accounts payable -- 248,289 24,674 (272,963) --
--------- --------- --------- --------- ---------
Total current liabilities 19,601 282,983 26,085 (272,963) 55,706
Equipment, capital leases and other notes, less current portion 162,758 46,264 2,113 -- 211,135
Other long-term liabilities -- 2,759 202 -- 2,961
Stockholders' equity (deficit) 57,304 (8,626) 4,999 3,627 57,304
--------- --------- --------- --------- ---------
$ 239,663 $ 323,380 $ 33,399 $(269,336) $ 327,106
========= ========= ========= ========= =========
10
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 GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES 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 receivables 253,181 24,776 -- (277,957) --
--------- --------- --------- --------- ---------
Total current assets 253,181 91,946 9,722 (277,957) 76,892
Property and equipment, net -- 129,499 18,970 -- 148,469
Investments in partnerships -- 1,782 -- -- 1,782
Investments in consolidated subsidiaries (12,639) 3,284 -- 9,355 --
Other assets -- 7,799 -- -- 7,799
Intangible assets, net -- 92,478 1,452 -- 93,930
--------- --------- --------- --------- ---------
$ 240,542 $ 326,788 $ 30,144 $(268,602) $ 328,872
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases and other notes $ 18,393 $ 10,809 $ 263 $ -- $ 29,465
Accounts payable and other accrued expenses -- 25,712 901 -- 26,613
Intercompany accounts payable -- 253,181 24,776 (277,957) --
--------- --------- --------- --------- ---------
Total current liabilities 18,393 289,702 25,940 (277,957) 56,078
Equipment, capital leases and other notes, less current portion 170,662 47,257 848 -- 218,767
Other long-term liabilities -- 2,468 72 -- 2,540
Stockholders' equity (deficit) 51,487 (12,639) 3,284 9,355 51,487
--------- --------- --------- --------- ---------
$ 240,542 $ 326,788 $ 30,144 $(268,602) $ 328,872
========= ========= ========= ========= =========
11
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ------------ ------------- ----------- ------------
Revenues $ -- $ 84,709 $ 19,305 $ -- $ 104,014
Costs of operations -- 65,865 15,026 -- 80,891
--------- --------- --------- --------- ---------
Gross profit -- 18,844 4,279 -- 23,123
Corporate operating expenses -- 5,277 -- -- 5,277
--------- --------- --------- --------- ---------
Income from company operations -- 13,567 4,279 -- 17,846
Equity in earnings of unconsolidated partnerships -- 425 -- -- 425
--------- --------- --------- --------- ---------
Operating income -- 13,992 4,279 -- 18,271
Interest expense, net -- 10,758 1,149 -- 11,907
--------- --------- --------- --------- ---------
Income before income taxes -- 3,234 3,130 -- 6,364
Provision for income taxes -- 636 -- -- 636
--------- --------- --------- --------- ---------
Income before equity in income of
consolidated subsidiaries -- 2,598 3,130 -- 5,728
Equity in income of consolidated subsidiaries 5,728 3,130 -- (8,858) --
--------- --------- --------- --------- ---------
Net income $ 5,728 $ 5,728 $ 3,130 $ (8,858) $ 5,728
========= ========= ========= ========= =========
12
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ------------ ------------- ----------- ------------
Revenues $ -- $ 82,700 $ 9,587 $ -- $ 92,287
Costs of operations -- 67,525 8,065 -- 75,590
--------- --------- --------- --------- ---------
Gross profit -- 15,175 1,522 -- 16,697
Corporate operating expenses -- 5,439 -- -- 5,439
--------- --------- --------- --------- ---------
Income from company operations -- 9,736 1,522 -- 11,258
Equity in earnings of unconsolidated partnerships -- 403 -- -- 403
--------- --------- --------- --------- ---------
Operating income -- 10,139 1,522 -- 11,661
Interest expense, net -- 7,810 549 -- 8,359
--------- --------- --------- --------- ---------
Income before income taxes -- 2,329 973 -- 3,302
Provision for income taxes -- 660 -- -- 660
--------- --------- --------- --------- ---------
Income before equity in income of
consolidated subsidiaries -- 1,669 973 -- 2,642
Equity in income of consolidated subsidiaries 2,642 973 -- (3,615) --
--------- --------- --------- --------- ---------
Net income $ 2,642 $ 2,642 $ 973 $ (3,615) $ 2,642
========= ========= ========= ========= =========
13
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ------------ ------------- ----------- ------------
Revenues $ -- $ 42,271 $ 9,523 $ -- $ 51,794
Costs of operations -- 32,837 7,505 -- 40,342
--------- --------- --------- --------- ---------
Gross profit -- 9,434 2,018 -- 11,452
Corporate operating expenses -- 2,575 -- -- 2,575
--------- --------- --------- --------- ---------
Income from company operations -- 6,859 2,018 -- 8,877
Equity in earnings of unconsolidated partnerships -- 299 -- -- 299
--------- --------- --------- --------- ---------
Operating income -- 7,158 2,018 -- 9,176
Interest expense, net -- 5,291 584 -- 5,875
--------- --------- --------- --------- ---------
Income before income taxes -- 1,867 1,434 -- 3,301
Provision for income taxes -- 330 -- -- 330
--------- --------- --------- --------- ---------
Income before equity in income of
consolidated subsidiaries -- 1,537 1,434 -- 2,971
Equity in income of consolidated subsidiaries 2,971 1,434 -- (4,405) --
--------- --------- --------- --------- ---------
Net income $ 2,971 $ 2,971 $ 1,434 $ (4,405) $ 2,971
========= ========= ========= ========= =========
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 DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ------------ ------------- ----------- ------------
Revenues $ -- $ 41,391 $ 4,730 $ -- $ 46,121
Costs of operations -- 33,464 4,030 -- 37,494
--------- --------- --------- --------- ---------
Gross profit -- 7,927 700 -- 8,627
Corporate operating expenses -- 2,804 -- -- 2,804
--------- --------- --------- --------- ---------
Income from company operations -- 5,123 700 -- 5,823
Equity in earnings of unconsolidated partnerships -- 225 -- -- 225
--------- --------- --------- --------- ---------
Operating income -- 5,348 700 -- 6,048
Interest expense, net -- 4,121 275 -- 4,396
--------- --------- --------- --------- ---------
Income before income taxes -- 1,227 425 -- 1,652
Provision for income taxes -- 330 -- -- 330
--------- --------- --------- --------- ---------
Income before equity in income of
consolidated subsidiaries -- 897 425 -- 1,322
Equity in income of consolidated subsidiaries 1,322 425 -- (1,747) --
--------- --------- --------- --------- ---------
Net income $ 1,322 $ 1,322 $ 425 $ (1,747) $ 1,322
========= ========= ========= ========= =========
15
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES:
Net income $ 5,728 $ 5,728 $ 3,130 $ (8,858) $ 5,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization -- 18,362 2,574 -- 20,936
Equity in income of consolidated subsidiaries (5,728) (3,130) -- 8,858 --
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables -- (1,956) (2,140) -- (4,096)
Intercompany receivables, net 6,607 (5,090) (1,517) -- --
Other current assets -- (695) (46) -- (741)
Accounts payable and other accrued expenses -- (2,856) 22 -- (2,834)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 6,607 10,363 2,023 -- 18,993
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment -- (16,703) (1,939) -- (18,642)
Other -- (149) (124) -- (273)
--------- --------- --------- --------- ---------
Net cash used in investing activities -- (16,852) (2,063) -- (18,915)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 89 -- -- -- 89
Principal payments of debt and capital lease obligations (9,196) (5,638) (240) -- (15,074)
Proceeds from issuance of debt 2,500 -- -- -- 2,500
Other -- 291 130 -- 421
--------- --------- --------- --------- ---------
Net cash used in financing activities (6,607) (5,347) (110) -- (12,064)
--------- --------- --------- --------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS -- (11,836) (150) -- (11,986)
Cash, beginning of period -- 25,375 1,758 -- 27,133
--------- --------- --------- --------- ---------
Cash, end of period $ -- $ 13,539 $ 1,608 $ -- $ 15,147
========= ========= ========= ========= =========
16
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------- ------------
OPERATING ACTIVITIES:
Net income $ 2,642 $ 2,642 $ 973 $ (3,615) $ 2,642
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization -- 13,807 1,388 -- 15,195
Amortization of deferred gain on debt restructure -- (14) -- -- (14)
Equity in income of consolidated subsidiaries (2,642) (973) -- 3,615 --
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables -- (4,371) 79 -- (4,292)
Intercompany receivables, net (117) 968 (851) -- --
Other current assets -- (883) 77 -- (806)
Accounts payable and other accrued expenses -- (2,509) 46 -- (2,463)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities (117) 8,667 1,712 -- 10,262
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Acquisitions of Centers, Fixed and Mobile Facilities -- (1,433) -- -- (1,433)
Additions to property and equipment -- (10,206) (501) -- (10,707)
Other -- (147) -- -- (147)
--------- --------- --------- --------- ---------
Net cash used in investing activities -- (11,786) (501) -- (12,287)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from stock options exercised 88 -- -- -- 88
Principal payments of debt and capital lease obligations (4,971) (2,430) (112) -- (7,513)
Proceeds from issuance of debt 5,000 -- -- -- 5,000
Other -- -- (159) -- (159)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 117 (2,430) (271) -- (2,584)
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (5,549) 940 -- (4,609)
Cash, beginning of period -- 12,709 1,585 -- 14,294
--------- --------- --------- --------- ---------
Cash, end of period $ -- $ 7,160 $ 2,525 $ -- $ 9,685
========= ========= ========= ========= =========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this report that are not purely historical or which
might be considered an opinion or projection concerning the Company or its
business, whether express or implied, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include statements regarding the Company's expectations,
intentions, plans or strategies regarding the future. All forward-looking
statements included in this report are based upon information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. It is important to note that the Company's
actual results could differ materially from those described or implied in such
forward-looking statements because of certain factors which could affect the
Company. Such forward-looking statements should be evaluated in light of the
following factors: availability of financing; limitations and delays in
reimbursement by third party payors; contract renewals and financial stability
of customers; technology changes; governmental regulations; conditions within
the health care environment; adverse utilization trends for certain diagnostic
imaging procedures; aggressive competition; general economic factors; successful
integration of acquisitions; and the risk factors described in the Company's
periodic filings with the Securities and Exchange Commission (SEC) on Forms
10-K, 10-Q and 8-K (if any) and the factors described under "Risk Factors" in
the Company's Registration Statement on Form S-4, filed with the SEC on August
4, 1998, and any amendments thereto.
ACQUISITIONS
The Company believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through
consolidation. The Company's strategy is to further develop and expand regional
diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The strategy of the Company is focused on the
following components: (i) to further participate in the consolidation occurring
in the diagnostic imaging industry by continuing to build its market presence in
its existing regional diagnostic imaging networks through geographically
disciplined acquisitions; (ii) to develop or acquire additional regional
networks in strategic locations where the Company can offer a broad range of
services to its customers and realize increased economies of scale; (iii) to
continue to market current diagnostic imaging applications through its existing
facilities to optimize and increase overall procedure volume; (iv) to strengthen
the regional diagnostic imaging networks by focusing on managed care customers;
and (v) to implement a variety of new products and services designed to further
leverage its core business strengths, including: Open MRI systems and the
radiology co-source product which involves the joint ownership and management of
the physical and technical operations of a single or multi-modality facility on
a hospital campus. The Company believes that long-term viability is contingent
upon its ability to successfully execute its business strategy.
In fiscal 2000, the Company completed two acquisitions as follows: two Fixed
Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90%
interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The
aggregate purchase price for these two acquisitions was approximately $24.5
million.
In fiscal 2000, the Company opened the following: its second radiology co-source
outpatient Fixed Facility in Granada Hills, California; its third radiology
co-source outpatient Center in Henderson, Nevada; and an Open MRI Fixed Facility
in Pleasanton, California. These were financed through both capital leases with
General Electric Company (GE) and internally generated funds. In fiscal 2000,
the Company closed an Open MRI Fixed Facility in Atlanta, Georgia.
In fiscal 2001, the Company opened its fourth radiology co-source Fixed Facility
in Marina del Rey, California, which was financed with a capital lease from GE
and a PET Fixed Facility in Louisville, Kentucky, which was financed with
outside financing.
In addition to the Company's acquisition strategy described above, the Company
recently announced that it has 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. No assurance can be given that any strategic alternative will be
available to, or completed by, the Company. During
18
this process, the Company also intends to continue 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 9 5/8% senior subordinated notes
(Notes). The Notes mature in June 2008, with interest payable semi-annually and
are redeemable at the option of the Company, in whole or in part, on or after
June 15, 2003. The Notes are unsecured senior subordinated obligations of the
Company and are subordinated in right of payment to all existing and future
indebtedness, as defined in the indenture, of the Company, including borrowings
under the bank financing described below. The terms of the Notes contain certain
restrictions on the Company's ability to take certain actions without first
obtaining consent of the noteholders.
The Company also has the following credit facilities with Bank of America, N.A.:
(i) a $50 million term loan which matures in June 2004, (ii) a $25 million
working capital facility which expires in June 2003, and (iii) a $75 million
acquisition facility which matures in June 2004, the availability of which
expired on June 12, 2000 (Bank Financing). Borrowings under the Bank Financing
bear interest at LIBOR plus 1.75%. The Company is required to pay an annual
unused facility fee of 0.375 percent, payable quarterly, on unborrowed amounts
under the working capital facility. At December 31, 2000, there were
approximately $31.2 million, $48.6 million and $2.5 million in borrowings under
the term loan, the acquisition facility, and the working capital facility,
respectively. The borrowings under the working capital facility were repaid
subsequent to December 31, 2000. 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 December 31, 2000, the
Company had cash on hand of approximately $15.1 million, which it may utilize to
consummate such acquisitions. As of January 26, 2001, the Company had borrowing
availability of approximately $25 million under the working capital facility.
Net cash provided by operating activities was approximately $19.0 million for
the six months ended December 31, 2000. Cash provided by operating activities
resulted primarily from net income before depreciation and amortization
(approximately $26.7 million), offset by an increase in trade accounts
receivables (approximately $4.1 million) and a decrease in accounts payable and
other accrued expenses (approximately $2.8 million). The increase in trade
accounts receivables is due primarily to revenues generated by the Company's
acquisitions in fiscal 2000.
Net cash used in investing activities was approximately $18.9 million for the
six months ended December 31, 2000. Cash used in investing activities resulted
primarily from the Company purchasing or upgrading diagnostic imaging equipment
at its existing facilities (approximately $18.6 million).
19
Net cash used in financing activities was approximately $12.1 million for the
six months ended December 31, 2000, resulting primarily from principal payments
of debt and capital lease obligations (approximately $15.1 million), offset by
net borrowings on the Company's working capital facility (approximately $2.5
million).
The Company has committed to purchase or lease in connection with the
development of new Mobile Facilities and replacement of diagnostic imaging
equipment at Centers, Fixed and Mobile Facilities, at an aggregate cost of
approximately $6.2 million, four diagnostic imaging systems for delivery through
April 30, 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 six months ended December 31, 2000, equipment
lease expense was reduced by approximately $6.0 million, and depreciation and
interest combined was increased by approximately the same amount. The Company
believes, on an annualized basis, equipment lease expense will be reduced by
approximately $12 million, and depreciation and interest will be increased by
approximately the same amount. During the six months ended December 31, 2000,
the Company also purchased four pieces of diagnostic imaging equipment which
were financed through capital leases with GE. The total purchase price was
approximately $7.4 million.
The Company believes that, based on current levels of operations and anticipated
growth, its cash from operations, together with other available sources of
liquidity, including borrowings available under the Bank Financing, will be
sufficient through December 31, 2001 to fund anticipated capital expenditures
and make required payments of principal and interest on its debt, including
payments due on the Notes and obligations under the Bank Financing. In addition,
the Company continually evaluates potential acquisitions and expects to fund
such acquisitions from its available sources of liquidity, as discussed above.
The Company's acquisition strategy may require sources of capital in addition to
that currently available to the Company. The Company expects, subject to market
conditions and the results of the strategic alternatives review described above,
to obtain additional acquisition financing in the third or fourth quarter of
fiscal 2001. No assurance can be given that the Company will be able to raise
any such necessary additional funds on terms acceptable to the Company or at
all.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999
REVENUES: Revenues increased approximately 12.7% from approximately $92.3
million for the six months ended December 31, 1999, to approximately $104.0
million for the six months ended December 31, 2000. This increase was due
primarily to the acquisitions and opened Fixed Facilities discussed above
(approximately $6.6 million) and an increase in contract services, patient
services and other revenues (approximately $5.1 million) at existing facilities,
as a result of refocused sales efforts and incentive initiatives implemented at
the existing facilities.
Contract services revenues increased approximately 5.7% from approximately $49.4
million for the six months ended December 31, 1999, to approximately $52.2
million for the six months ended December 31, 2000. This increase was due to the
addition of three Mobile Facilities and a combination of higher utilization and
more fixed monthly fee contracts at the Company's existing mobile customer base.
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 50% of total revenues for the six months ended
December 31, 2000. Each year approximately one-quarter to one-third of the
contract services agreements are subject to renewal. It is expected that some
high volume customer accounts will elect not to renew their agreements and
instead will purchase or lease their own diagnostic imaging equipment and some
customers may choose an alternative services provider. In the past where
agreements have not been renewed,
20
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 implementation of the new Outpatient
Prospective Payment System (OPPS) for outpatient services, the Company's
contract services revenues could be adversely affected.
Effective August 1, 2000, Medicare will pay hospitals for outpatient services
based on ambulatory payment classification (APC) groups rather than on a
hospital's costs. Each APC has been assigned a payment weight by the Health Care
Financing Administration. Under the new OPPS, the payment due a hospital for
performing an outpatient service will be an amount based on the APC weight, a
dollar based conversion factor, a geographic adjustment factor to account for
area labor cost differences and any other adjustments applicable to the hospital
or case. Because the new OPPS may initially have a severe adverse economic
effect on hospitals, Congress enacted additional legislation in the Balanced
Budget Refinement Act of 1999 (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 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 22.9% from approximately $41.9
million for the six months ended December 31, 1999, to approximately $51.5
million for the six months ended December 31, 2000. This increase was due
primarily to the acquisitions and opened Fixed Facilities discussed above
(approximately $6.6 million) and an increase in revenues at existing facilities
(approximately $3.0 million). The increase at existing facilities was due to
higher utilization (approximately 8%), partially offset by nominal changes in
reimbursement from third party payors (approximately 1%).
Management believes that any future increases in revenues at existing facilities
can be achieved primarily 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.
21
COSTS OF OPERATIONS: Costs of operations increased approximately 7.0% from
approximately $75.6 million for the six months ended December 31, 1999, to
approximately $80.9 million for the six months ended December 31, 2000. This
increase was due primarily to costs related to the acquisitions and opened Fixed
Facilities discussed above (approximately $4.2 million) and an increase in costs
at existing facilities (approximately $1.1 million), primarily salary and
benefits, depreciation and amortization, and supply costs, offset by reduced
equipment leases, occupancy, consulting and marketing costs. 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 81.9% for the six months ended December 31, 1999, to approximately
77.8% for the six months ended December 31, 2000. The percentage decrease is due
primarily to reduced costs in equipment leases, equipment maintenance, occupancy
and travel costs, offset by higher depreciation and amortization 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
occupancy, marketing, supplies, salary and benefits and diagnostic imaging
equipment costs, including lease, depreciation and maintenance.
CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased
approximately 1.9%, from approximately $5.4 million for the six months ended
December 31, 1999, to approximately $5.3 million for the six months ended
December 31, 2000. This decrease was due primarily to reduced salary and
benefits associated with the Company's acquisition and development activities,
and reduced legal, 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 six months ended December 31, 1999, to
approximately 5.1% for the six months ended December 31, 2000.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 41.7% from
approximately $8.4 million for the six months ended December 31, 1999, to
approximately $11.9 million for the six months ended December 31, 2000. This
increase was due primarily to additional debt related to (i) the acquisitions
discussed above, (ii) the buy-out of operating leases discussed above, 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: For the six months ended December 31, 2000, the
effective tax rate decreased to approximately 10% from approximately 20% for the
six months ended December 31, 1999, 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 business development and the effects of benefits from the Company's net
operating loss carryforwards. This review may result in an increase or decrease
in the effective tax rate during the fiscal year.
EBITDA: Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased approximately 45.7% from approximately $26.9 million for the six
months ended December 31, 1999, to approximately $39.2 million for the six
months ended December 31, 2000. This increase was primarily due to higher
revenues at existing facilities as a result of the revenue enhancing efforts
described above, lower costs of services as a result of the cost reduction
initiatives described above, and decreased equipment lease expense as a result
of the buy-out of operating leases discussed above.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.60 for the six months ended
December 31, 2000, compared to net income per common and converted preferred
share of $0.28 for the same period in 1999. The increase in net income per
common and converted preferred share is the result of increased income from
company operations, an increase in earnings of unconsolidated partnerships, and
a decrease in provision for income taxes, offset by increased interest expense.
22
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999
REVENUES: Revenues increased approximately 12.4% from approximately $46.1
million for the three months ended December 31, 1999, to approximately $51.8
million for the three months ended December 31, 2000. This increase was due
primarily to the acquisitions and opened Fixed Facilities discussed above
(approximately $3.3 million) and an increase in contract services, patient
services and other revenues (approximately $2.4 million) at existing facilities,
as a result of refocused sales efforts and incentive initiatives implemented at
the existing facilities.
Contract services revenues increased approximately 4.4% from approximately $24.8
million for the three months ended December 31, 1999, to approximately $25.9
million for the three months ended December 31, 2000. This increase was due to
the addition of three Mobile Facilities and a combination of higher utilization
and more fixed monthly fee contracts at the Company's existing mobile customer
base.
Patient services revenues increased approximately 22.3% from approximately $21.1
million for the three months ended December 31, 1999, to approximately $25.8
million for the three months ended December 31, 2000. This increase was due
primarily to the acquisitions and opened Fixed Facilities discussed above
(approximately $3.3 million) and an increase in revenues at existing facilities
(approximately $1.4 million). The increase at existing facilities was due to
higher utilization (approximately 8%), partially offset by nominal changes in
reimbursement from third party payors (approximately 1%).
COSTS OF OPERATIONS: Costs of operations increased approximately 7.5% from
approximately $37.5 million for the three months ended December 31, 1999, to
approximately $40.3 million for the three months ended December 31, 2000. This
increase was due primarily to costs related to the acquisitions and opened Fixed
Facilities discussed above (approximately $2.2 million) and an increase in costs
at existing facilities (approximately $0.6 million), primarily salary and
benefits and depreciation and amortization, offset by reduced equipment leases,
occupancy and consulting costs. The decrease in equipment leases 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 81.3% for the three months ended December 31, 1999, to
approximately 77.9% for the three months ended December 31, 2000. The percentage
decrease is due primarily to reduced costs in equipment leases, equipment
maintenance and occupancy costs, offset by higher depreciation and amortization
and salary and benefits.
CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased
approximately 7.1%, from approximately $2.8 million for the three months ended
December 31, 1999, to approximately $2.6 million for the three months ended
December 31, 2000. This decrease was due primarily to reduced salary and
benefits associated with the Company's acquisition and development activities,
and reduced legal, consulting and travel costs, offset by additional information
systems costs. Corporate operating expenses, as a percentage of total revenues,
decreased from approximately 6.1% for the three months ended December 31, 1999,
to approximately 5.0% for the three months ended December 31, 2000.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 34.1% from
approximately $4.4 million for the three months ended December 31, 1999, to
approximately $5.9 million for the three months ended December 31, 2000. This
increase was due primarily to additional debt related to (i) the acquisitions
discussed above, (ii) the buy-out of operating leases discussed above 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: For the three months ended December 31, 2000, the
effective tax rate decreased to approximately 10% from approximately 20% for the
three months ended December 31, 1999, 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
23
completed and new business development and the effects of benefits from the
Company's net operating loss carryforwards. This review may result in an
increase or decrease in the effective tax rate during the fiscal year.
EBITDA: Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased approximately 44.5% from approximately $13.7 million for the three
months ended December 31, 1999, to approximately $19.8 million for the three
months ended December 31, 2000. This increase was primarily due to higher
revenues at existing facilities as a result of the revenue enhancing efforts
described above, lower costs of services as a result of the cost reduction
initiatives described above, and decreased equipment lease expense as a result
of the buy-out of operating leases discussed above.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.31 for the three months ended
December 31, 2000, compared to net income per common and converted preferred
share of $0.14 for the same period in 1999. The increase in net income per
common and converted preferred share is the result of increased income from
company operations and increase in earnings of unconsolidated partnerships,
offset by increased interest expense.
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 did not have a
material impact on the Company's financial condition or results of operations.
On December 3, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure relates primarily to interest rates, where
the Company will periodically use interest rate swaps to hedge interest rates on
long-term debt under its Bank Financing. The Company does not engage in
activities using complex or highly leveraged instruments.
At December 31, 2000, the Company had long-term debt of approximately $82.3
million, which has floating rate terms. The Company also had outstanding an
interest rate swap, converting $37.0 million of its floating rate debt to fixed
rate debt. The impact of the interest rate swap is not material to the Company's
results of operations.
24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On December 5, 2000, the Company held its annual
meeting of stockholders at which the single matter to
be acted upon was the election of Steven T. Plochocki
as a Class I director, to serve for a three year
term.
(b) Inapplicable.
(c) 2,489,846 shares of common stock were voted in favor
of Mr. Plochocki and 6,320 shares were withheld.
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 December 31,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSIGHT HEALTH SERVICES CORP.
/S/ Steven T. Plochocki
------------------------------------
Steven T. Plochocki
President and Chief Executive Officer
/S/ Thomas V. Croal
------------------------------------
Thomas V. Croal
Executive Vice President and
Chief Financial Officer
February 2, 2001
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