Attached files
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EX-31.1 - EX-31.1 - INSIGHT HEALTH SERVICES HOLDINGS CORP | a55148exv31w1.htm |
EX-32.2 - EX-32.2 - INSIGHT HEALTH SERVICES HOLDINGS CORP | a55148exv32w2.htm |
EX-31.2 - EX-31.2 - INSIGHT HEALTH SERVICES HOLDINGS CORP | a55148exv31w2.htm |
EX-32.1 - EX-32.1 - INSIGHT HEALTH SERVICES HOLDINGS CORP | a55148exv32w1.htm |
EX-10.15 - EX-10.15 - INSIGHT HEALTH SERVICES HOLDINGS CORP | a55148exv10w15.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
OR
o | 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 333-75984-12
INSIGHT HEALTH SERVICES HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
04-3570028 (I.R.S. Employer Identification No.) |
26250 Enterprise Court, Suite 100, Lake Forest, CA 92630
(Address of principal executive offices) (Zip code)
(Address of principal executive offices) (Zip code)
(949) 282-6000
(Registrants telephone number including area code)
(Registrants telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(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 o No þ
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 8,644,444 shares of common stock as of February 10, 2010.
The
number of pages in this Form 10-Q is 68.
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
INDEX
PAGE NUMBER | ||||
PART I. FINANCIAL INFORMATION |
||||
ITEM 1. FINANCIAL STATEMENTS |
3 | |||
Condensed Consolidated Balance Sheets as of December 31, 2009
and June 30, 2009 (unaudited) |
3 | |||
Condensed Consolidated Statements of Operations and
Comprehensive Losses for the six months ended December 31,
2009 and 2008 (unaudited) |
4 | |||
Condensed Consolidated Statements of Operations and
Comprehensive Losses for the three months ended December 31,
2009 and 2008 (unaudited) |
5 | |||
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 2009 and 2008 (unaudited) |
6 | |||
Notes to Condensed Consolidated Financial Statements (unaudited) |
7-28 | |||
In accordance with SEC Regulation S-X Rule 3-10, the condensed consolidated financial
statements of InSight Health Services Holdings Corp. (Company) are included herein and
separate financial statements of InSight Health Services Corp. (InSight), the Companys
wholly owned subsidiary, and InSights subsidiary guarantors are not included.
Condensed financial data for InSight and its subsidiary guarantors is included in Note
16 to the condensed consolidated financial statements. |
||||
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
29-53 | |||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
53 | |||
ITEM 4T. CONTROLS AND PROCEDURES |
54 | |||
PART II. OTHER INFORMATION |
||||
ITEM 1. LEGAL PROCEEDINGS |
55 | |||
ITEM 1A. RISK FACTORS |
55-64 | |||
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
65 | |||
ITEM 6. EXHIBITS |
66 | |||
SIGNATURES |
67 | |||
EXHIBIT INDEX |
68 |
2
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands, except share data)
December 31, | June 30, | |||||||
2009 | 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 14,517 | $ | 19,640 | ||||
Trade accounts receivables, net of allowance for contractual adjustments,
bad debt, and professional fees of $19,218 and $22,977, respectively |
23,971 | 25,594 | ||||||
Other current assets |
9,381 | 9,988 | ||||||
Total current assets |
47,869 | 55,222 | ||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$99,747 and $79,554 respectively |
75,575 | 79,837 | ||||||
ASSETS HELD FOR SALE |
| 2,700 | ||||||
CASH, restricted |
2,186 | 6,488 | ||||||
INVESTMENTS IN PARTNERSHIPS |
6,228 | 6,791 | ||||||
OTHER ASSETS |
394 | 208 | ||||||
GOODWILL AND OTHER INTANGIBLE ASSETS, net |
22,080 | 24,878 | ||||||
$ | 154,332 | $ | 176,124 | |||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
CURRENT LIABILITIES: |
||||||||
Current portion of notes payable |
$ | 272 | $ | 242 | ||||
Current portion of capital lease obligations |
1,074 | 1,468 | ||||||
Accounts payable and other accrued expenses |
26,109 | 36,037 | ||||||
Total current liabilities |
27,455 | 37,747 | ||||||
LONG-TERM LIABILITIES: |
||||||||
Notes payable, less current portion |
283,144 | 279,726 | ||||||
Capital lease obligations, less current portion |
2,076 | 2,589 | ||||||
Other long-term liabilities |
1,456 | 1,408 | ||||||
Deferred income taxes |
6,013 | 6,792 | ||||||
Total long-term liabilities |
292,689 | 290,515 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 14) |
||||||||
STOCKHOLDERS DEFICIT: |
||||||||
Common stock, $.001 par value, 10,000,000 shares authorized, 8,644,444
shares issued and outstanding |
9 | 9 | ||||||
Additional paid-in capital |
37,573 | 37,536 | ||||||
Accumulated other comprehensive loss |
(1,450 | ) | (2,528 | ) | ||||
Accumulated deficit |
(204,087 | ) | (188,939 | ) | ||||
Total stockholders equity (deficit) attributable to InSight Health
Services Holdings Corp. |
(167,955 | ) | (153,922 | ) | ||||
Noncontrolling interest |
2,143 | 1,784 | ||||||
Total stockholders deficit |
(165,812 | ) | (152,138 | ) | ||||
$ | 154,332 | $ | 176,124 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSSES
AND COMPREHENSIVE LOSSES
(Unaudited)
(Amounts in thousands, except per share data)
Six Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
REVENUES: |
||||||||
Contract services |
$ | 48,953 | $ | 60,593 | ||||
Patient services |
47,692 | 59,570 | ||||||
Other Operations |
1,108 | 1,168 | ||||||
Total revenues |
97,753 | 121,331 | ||||||
COSTS OF OPERATIONS: |
||||||||
Costs of services |
64,185 | 81,832 | ||||||
Provision for doubtful accounts |
2,183 | 2,336 | ||||||
Equipment leases |
5,158 | 5,716 | ||||||
Depreciation and amortization |
17,476 | 24,438 | ||||||
Total costs of operations |
89,002 | 114,322 | ||||||
CORPORATE OPERATING EXPENSES |
(9,800 | ) | (11,127 | ) | ||||
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |
1,172 | 1,108 | ||||||
INTEREST EXPENSE, net |
(13,583 | ) | (15,949 | ) | ||||
GAIN ON SALES OF CENTERS |
| 6,988 | ||||||
GAIN ON PURCHASE OF NOTES PAYABLE |
| 1,246 | ||||||
IMPAIRMENT OF OTHER LONG-LIVED ASSETS |
(1,949 | ) | (4,600 | ) | ||||
Loss before income taxes |
(15,409 | ) | (15,325 | ) | ||||
BENEFIT FOR INCOME TAXES |
(646 | ) | (1,692 | ) | ||||
Net loss |
(14,763 | ) | (13,633 | ) | ||||
Less: net income attributable to noncontrolling interests |
385 | 370 | ||||||
Net loss attributable to InSight Health Services Holdings Corp. |
$ | (15,148 | ) | $ | (14,003 | ) | ||
COMPREHENSIVE LOSS: |
||||||||
Net loss attributable to InSight Health Services Holdings Corp. |
$ | (15,148 | ) | $ | (14,003 | ) | ||
Unrealized income (loss) attributable to change in fair value of
interest rate contract |
1,078 | (3,604 | ) | |||||
Comprehensive loss attributable to InSight Health Services
Holdings Corp. |
$ | (14,070 | ) | $ | (17,607 | ) | ||
Basic and diluted loss per common share attributable to InSight Health
Services Holdings Corp. |
$ | (1.75 | ) | $ | (1.62 | ) | ||
Weighted average number of basic and diluted common shares
outstanding |
8,644 | 8,644 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSSES
AND COMPREHENSIVE LOSSES
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
REVENUES: |
||||||||
Contract services |
$ | 23,933 | $ | 29,660 | ||||
Patient services |
23,092 | 28,454 | ||||||
Other Operations |
587 | 632 | ||||||
Total revenues |
47,612 | 58,746 | ||||||
COSTS OF OPERATIONS: |
||||||||
Costs of services |
31,935 | 40,504 | ||||||
Provision for doubtful accounts |
1,073 | 1,294 | ||||||
Equipment leases |
2,597 | 2,829 | ||||||
Depreciation and amortization |
8,005 | 11,847 | ||||||
Total costs of operations |
43,610 | 56,474 | ||||||
CORPORATE OPERATING EXPENSES |
(4,994 | ) | (5,229 | ) | ||||
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |
560 | 496 | ||||||
INTEREST EXPENSE, net |
(6,739 | ) | (8,081 | ) | ||||
GAIN ON SALES OF CENTERS |
| 6,548 | ||||||
IMPAIRMENT OF OTHER LONG-LIVED ASSETS |
(1,949 | ) | (4,600 | ) | ||||
Loss before income taxes |
(9,120 | ) | (8,594 | ) | ||||
BENEFIT FOR INCOME TAXES |
(683 | ) | (1,927 | ) | ||||
Net loss |
(8,437 | ) | (6,667 | ) | ||||
Less: net income attributable to noncontrolling interests |
119 | 106 | ||||||
Net loss attributable to InSight Health Services Holdings Corp. |
$ | (8,556 | ) | $ | (6,773 | ) | ||
COMPREHENSIVE LOSS: |
||||||||
Net loss attributable to InSight Health Services Holdings Corp. |
$ | (8,556 | ) | $ | (6,773 | ) | ||
Unrealized income (loss) attributable to change in fair value of
interest rate contract |
990 | (3,201 | ) | |||||
Comprehensive loss attributable to InSight Health Services
Holdings Corp. |
$ | (7,566 | ) | $ | (9,974 | ) | ||
Basic and diluted loss per common share attributable to InSight Health
Services Holdings Corp. |
$ | (0.99 | ) | $ | (0.78 | ) | ||
Weighted average number of basic and diluted common shares
outstanding |
8,644 | 8,644 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
Six Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (14,763 | ) | $ | (13,633 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
17,476 | 24,438 | ||||||
Amortization of bond discount |
2,862 | 2,647 | ||||||
Share-based compensation |
37 | 36 | ||||||
Equity in earnings of unconsolidated partnerships |
(1,172 | ) | (1,108 | ) | ||||
Distributions from unconsolidated partnerships |
1,734 | 1,437 | ||||||
Gain on sales of centers |
| (6,988 | ) | |||||
Gain on sales of equipment |
(537 | ) | (618 | ) | ||||
Gain on purchase of notes payable |
| (1,246 | ) | |||||
Impairment of intangible assets |
1,949 | 4,600 | ||||||
Deferred income taxes |
(779 | ) | (2,117 | ) | ||||
Cash (used in) provided by changes in operating assets and liabilities: |
| |||||||
Trade accounts receivables, net |
1,623 | 5,451 | ||||||
Other current assets |
419 | (474 | ) | |||||
Accounts payable and other accrued expenses |
(7,582 | ) | (3,566 | ) | ||||
Net cash provided by operating activities |
1,267 | 8,859 | ||||||
INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of centers |
2,721 | 18,078 | ||||||
Proceeds from sales of equipment |
865 | | ||||||
Additions to property and equipment |
(13,931 | ) | (5,473 | ) | ||||
Decrease (increase) in restricted cash |
4,302 | (18,772 | ) | |||||
Other |
| 1,984 | ||||||
Net cash used in investing activities |
(6,043 | ) | (4,183 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Principal payments of notes payable and capital lease obligations |
(1,404 | ) | (1,220 | ) | ||||
Purchase of notes payable |
| (1,129 | ) | |||||
Proceeds from issuance of debt obligations |
1,083 | | ||||||
Other |
(26 | ) | (1,736 | ) | ||||
Net cash used in financing activities |
(347 | ) | (4,085 | ) | ||||
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS: |
(5,123 | ) | 591 | |||||
Cash, beginning of period |
19,640 | 21,002 | ||||||
Cash, end of period |
$ | 14,517 | $ | 21,593 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Interest paid |
$ | 10,743 | $ | 13,106 | ||||
Income taxes paid |
636 | 138 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. NATURE OF BUSINESS
All references to we, us, our, our company or the Company in this quarterly report on
Form 10-Q, or Form 10-Q, mean InSight Health Services Holdings Corp., a Delaware corporation, and
all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All
references to Holdings mean InSight Health Services Holdings Corp. by itself. All references to
InSight mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary
of Holdings, by itself. Through InSight and its subsidiaries, we provide diagnostic imaging
services in more than 30 states throughout the United States. Our operations are primarily
concentrated in California, Arizona, New England, the Carolinas, Florida, and the Mid-Atlantic
states. Our services are provided through a network of 91 mobile magnetic resonance imaging, or
MRI, facilities, one mobile computed tomography, or CT, facility, and 14 mobile positron emission
tomography and computed tomography, or PET/CT, facilities (collectively, mobile
facilities) and 35 fixed-site MRI centers and 28 multi-modality fixed-site centers (collectively,
fixed-site centers). At our multi-modality fixed-site centers, we typically offer other services in
addition to MRI, including PET/CT, CT, x-ray, mammography, ultrasound, nuclear medicine and bone
densitometry services.
We have three reportable segments: contract services, patient services and other operations. In our
contract services segment we generate revenue principally from 102 mobile facilities and 19
fixed-site centers. In our patient services segment we generate revenues principally from 44
fixed-site centers and 4 mobile facilities. Other operations generate revenues primarily from
agreements with customers to provide management services, which could include field operations,
billing and collections and accounting and other office services. We refer to this revenue as
generated from our Insight Imaging Enterprise Solutions business. See additional information
regarding our segments in Note 9 Segment Information below.
2. LIQUIDITY AND CAPITAL RESOURCES
We reported net losses attributable to Holdings of $15.1 million, $19.8 million, $169.2 million and
$99.0 for six months ended December 31, 2009, the year ended June 30, 2009, the eleven months ended
June 30, 2008 and the year ended 2007, respectively. We have implemented steps in response to these
losses, including a core market strategy and various initiatives. We have attempted to implement,
and will continue to develop and implement, various revenue enhancement, revenue cycle management
and cost reduction initiatives. Revenue enhancement initiatives have focused and will continue to
focus on our sales and marketing efforts to maintain or improve our procedural volumes and
contractual rates, and our Insight Imaging Enterprise Solutions initiative. Revenue cycle
management initiatives have focused and will continue to focus on collections at point of service
for patients with commercial insurance, technology improvements to create greater efficiency in the
gathering of patient and claim information when a procedure is scheduled or completed, and our
initiative with Dell Perot Systems. Cost reduction initiatives have focused and will continue to
focus on streamlining our organizational structure and expenses including enhancing and leveraging
our technology to create greater efficiencies, and leveraging relationships with strategic vendors.
While we have experienced some improvements through our revenue cycle management and cost reduction
initiatives, our revenue enhancement initiatives have produced minimal improvements to date.
Moreover, future revenue enhancement initiatives will face significant challenges because of the
continued overcapacity in the diagnostic imaging industry, reimbursement reductions and the
countrys economic condition, including higher unemployment.
We can give no assurance that these steps will be adequate to improve our financial performance.
Unless our financial performance significantly improves, we can give no assurance that we will be
able to refinance the floating rate notes, which mature in November 2011, on commercially
reasonable terms, if at all.
7
3. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared in accordance with
the instructions to Form 10-Q, and therefore do not include all information and note disclosures
necessary for a fair presentation of consolidated financial position, results of operations and
cash flows in conformity with United States generally accepted accounting principles. These
financial statements should be read in conjunction with the consolidated financial statements and
related footnotes included as part of our annual report on Form 10-K for the fiscal year ended June
30, 2009 filed with the Securities and Exchange Commission, or SEC. In the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for a fair statement of results
for the period have been included. The results of operations for the six months ended December 31,
2009 are not necessarily indicative of the results to be achieved for the full fiscal year.
4. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Our condensed consolidated financial statements include our accounts and those of all controlled
subsidiaries. All significant intercompany transactions and balances have been eliminated. Equity
investments in which the Company exercises significant influence but does not control, and is not
the primary beneficiary are accounted for using the equity method. Investments in which the Company
does not exercise significant influence over the investee are accounted for under the cost method.
On July 1, 2009 we adopted the provisions of Accounting Standards Codification (ASC) Topic 810
Consolidation (ASC 810), which establishes the accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. As a result of
the adoption of ASC 810, we are presenting noncontrolling interest as a component of stockholders
deficit rather than a liability, at December 31, 2009, and the corresponding reclassification as of
June 30, 2009. In addition, ASC 810 required the presentation of net income attributable to
noncontrolling interest, rather than minority interest expense for the six months and three months
ended December 31, 2009 and 2008.
Certain reclassifications have been made to previously reported amounts to conform to the current
period presentation of non-controlling interest and segment reporting (see Note 9).
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Identified intangible assets consist of our goodwill, trademark, certificates of need, wholesale
contracts and customer relationships. The intangible assets, excluding the wholesale contracts and
customer relationships, are indefinite-lived assets and are not amortized. Wholesale contracts and
customer relationships are definite-lived intangible assets and are amortized over five and thirty
years, respectively. In accordance with ASC Topic 350 Intangibles Goodwill and Other, the
indefinite-lived intangible asset balances are not being amortized, but instead are subject to an
annual assessment of impairment by applying a fair-value based test.
We evaluate the carrying value of indefinite-lived intangible assets, in the second quarter of each
fiscal year. Additionally, we review the carrying amount of indefinite-lived assets whenever events
and circumstances indicate that the carrying amount of indefinite-lived assets may not be
recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or
anticipated declines in revenue or gross profit and adverse legal or regulatory developments.
Impairment losses, if any, are reflected in the condensed consolidated statements of operations and
comprehensive losses. We evaluate our indefinite-lived intangible assets each reporting period to
determine if there has been any change that would not justify an indefinite life of the related
intangible assets.
We completed our evaluation of the carrying value of our indefinite-lived intangible assets as of
December 31, 2009. Our evaluation of the carrying value of intangible assets compares the fair
value of the assets with their corresponding carrying value. The fair value of intangible assets
is determined primarily using an income approach (see Note 13). Based on our annual evaluation of
the carrying value of our indefinite-lived intangible assets, we concluded that impairments had
occurred and we recorded a non-cash impairment charge of $1.9 million in our contract services
reporting unit related to our trademark ($0.8 million) and our certificates of need ($0.9 million)
and our patient services reporting unit related to our certificates of need ($0.2 million). This
impairment charge primarily resulted from a decline in our mobile business within our contract
services reporting unit.
8
We assess the ongoing recoverability of our other intangible assets subject to amortization in
accordance with ASC Topic 360 Property, Plant and Equipment, whenever events and circumstances
indicate that the carrying amount of our other intangible assets may not be recoverable, by
determining whether the long-lived asset can be recovered over the remaining amortization period
through projected undiscounted future cash flows. If projected future cash flows indicate that the
unamortized long-lived asset will not be recovered, an adjustment is made to reduce the asset to an
amount consistent with projected future cash flows discounted at the market interest rate. Cash
flow projections, although subject to a degree of uncertainty, are based on trends of historical
performance and managements estimate of future performance, giving consideration to existing and
anticipated competitive and economic conditions.
A reconciliation of goodwill and other intangible assets is as follows (amounts in thousands)
(unaudited):
December 31, 2009 | June 30, 2009 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Value | Amortization | Value | Amortization | |||||||||||||
Amortized intangible assets : |
||||||||||||||||
Wholesale contracts |
$ | 7,800 | $ | 3,770 | $ | 7,800 | $ | 2,990 | ||||||||
Customer relationships |
2,800 | 69 | 2,800 | | ||||||||||||
Total amortized intangible assets |
10,600 | 3,839 | 10,600 | 2,990 | ||||||||||||
Unamortized goodwill and intangible assets : |
||||||||||||||||
Goodwill |
1,403 | | 1,403 | | ||||||||||||
Trademark |
4,400 | | 5,200 | | ||||||||||||
Certificates of need |
9,516 | | 10,665 | | ||||||||||||
Total unamortized intangible assets |
15,319 | | 17,268 | | ||||||||||||
Total goodwill and other intangible assets |
$ | 25,919 | $ | 3,839 | $ | 27,868 | $ | 2,990 | ||||||||
Amortization of intangible assets was approximately $0.8 million for the six months ended
December 31, 2009 and 2008; and approximately $0.4 million for the three months ended December 31,
2009 and 2008.
Estimated remaining amortization expense for the six months ending June 30, 2010 and each of the
fiscal years ending June 30, are as follows (amounts in thousands) (unaudited):
2010 |
$ | 826 | ||
2011 |
1,651 | |||
2012 |
1,651 | |||
2013 |
221 | |||
2014 |
92 | |||
Thereafter |
2,320 | |||
Total |
$ | 6,761 | ||
6. NOTES PAYABLE
As of December 31, 2009, we had total indebtedness of approximately $297.9 million in aggregate
principal amount, which excludes an unamortized discount of approximately $11.3 million.
As of December 31, 2009, we had outstanding, through InSight, $293.5 million of aggregate principal
amount of floating rate notes. The floating rate notes mature in November 2011 and bear interest at
three-month LIBOR plus 5.25% per annum, payable quarterly. As of December 31, 2009, the weighted
average interest rate on the floating
rate notes was 5.53%. If prior to the maturity of the floating rate notes, we elect to redeem the
floating rate notes or are otherwise required to make a prepayment with respect to the floating
rate notes for which a redemption price is not otherwise specified in the indenture, regardless of
whether such prepayment is made voluntarily or mandatorily, as a result of acceleration upon the
occurrence of an event of default or otherwise, we are required to pay 102% of
9
the principal amount
of the floating rate notes plus accrued and unpaid interest. An open-market purchase of floating
rate notes would not require a prepayment price at the foregoing rates. In addition, the indenture
provides that if there is a change of control, we will be required to make an offer to purchase all
outstanding floating rate notes at a price equal to 101% of their principal amount plus accrued and
unpaid interest. The indenture provides that a change of control includes, among other things, if a
person or group becomes directly or indirectly the beneficial owner of 35% or more of Holdings
common stock. The fair value of the floating rate notes as of December 31, 2009, based on active
market quotes, was approximately $158.5 million.
Holdings and InSights wholly owned subsidiaries unconditionally guarantee all of InSights
obligations under the indenture for the floating rate notes. The floating rate notes are secured by
a first priority lien on substantially all of InSights and the guarantors existing and future
tangible and intangible property including, without limitation, equipment, certain real property,
certain contracts and intellectual property and a cash account related to the foregoing but are not
secured by a lien on their accounts receivables and related assets, cash accounts related to
receivables and certain other assets. In addition, the floating rate notes are secured by a
portion of InSights stock and the stock or other equity interests of InSights subsidiaries.
Through certain of InSights wholly owned subsidiaries, we have an asset-based revolving credit
facility of up to $30.0 million, which matures in June 2011, with the lenders named therein and
Bank of America, N.A., as collateral and administrative agent. The credit facility is scheduled to
terminate in June 2011. As of December 31, 2009, we had approximately $11.1 million of
availability under the credit facility, based on our borrowing base. Holdings and InSight
unconditionally guarantee all obligations of InSights subsidiaries that are borrowers under the
credit facility. All obligations under the credit facility and the obligations of Holdings and
InSight under the guarantees are secured, subject to certain exceptions, by a first priority
security interest in all of Holdings, InSights and the borrowers: (i) accounts; (ii)
instruments, chattel paper (including, without limitation, electronic chattel paper), documents,
letter-of-credit rights and supporting obligations relating to any account; (iii) general
intangibles that relate to any account; (iv) monies in the possession or under the control of the
lenders under the credit facility; (v) products and cash and non-cash proceeds of the foregoing;
(vi) deposit accounts established for the collection of proceeds from the assets described above;
and (vii) books and records pertaining to any of the foregoing. Borrowings under the credit
facility bear interest at LIBOR plus 2.50% per annum or, at our option, the prime rate. The
applicable margin is currently 2.50% per annum; however, the applicable margin will be adjusted in
accordance with a pricing grid based on our fixed charge coverage ratio, and will range from 2.00%
to 2.50% per annum. In addition to paying interest on outstanding loans under the credit facility,
we are required to pay a commitment fee to the lenders in respect of unutilized commitments
thereunder at a rate equal to 0.50% per annum, subject to reduction based on a performance grid
tied to our fixed charge coverage ratio, as well as customary letter-of-credit fees and fees of
Bank of America, N.A.
There are no financial covenants included in the credit facility, except a minimum fixed charge
coverage ratio test which will be triggered if our liquidity, as defined in the credit facility,
falls below $7.5 million. At December 31, 2009, there were no borrowings outstanding under the
credit facility; however, there were letters of credit of approximately $1.3 million outstanding
under the credit facility. The credit facility agreement also contains customary borrowing
conditions, including a material adverse effect provision. If we were to experience a material
adverse effect, as defined by our credit facility agreement, we would be unable to borrow under the
credit facility. As a result of our current fixed charge coverage ratio, we would only be able to
borrow up to $3.6 million of the $11.1 million of availability under the borrowing base due to a
restriction in the future if our liquidity, as defined in the credit facility agreement, falls
below $7.5 million.
The agreements governing our credit facility and floating rate notes contain restrictions on, among
other things, our ability to incur additional liens and indebtedness, engage in mergers,
consolidations and asset sales, make dividend payments, prepay other indebtedness, make investments
and engage in transactions with affiliates.
7. SHARE-BASED COMPENSATION
On April 14, 2008, the board of directors of Holdings adopted the 2008 Director Stock Option Plan
(Director Plan) and the 2008 Employee Stock Option Plan (Employee Plan). The Director Plan permits
the issuance of up to 192,096 shares of Holdings common stock to Holdings directors, and the
Employee Plan permits the issuance of up to 768,000 shares of Holdings common stock to employees and key non-employees of Holdings. Each
of the plans was approved at Holdings 2008 Annual Meeting of Stockholders.
10
On April 14, 2008, each of the Companys non-employee directors was granted options under the
Director Plan to purchase (i) 16,008 shares of Holdings common stock at an exercise price of $1.01
per share and (ii) 16,008 shares of Holdings common stock at an exercise price of $1.16 per share.
Each set of options becomes exercisable in increments of 1/3rd (5,336 per set) on December 31,
2008, December 31, 2009 and December 31, 2010. As of December 31, 2009, options to purchase
192,096 shares of Holdings common stock were outstanding under this plan.
On August 19, 2008, we granted options under the Employee Plan to purchase 447,000 shares of our
common stock to certain of our officers at an exercise price of $0.36 per share. On November 11,
2008, we granted options under the Employee Plan to purchase 140,000 shares of our common stock to
certain other officers at an exercise price of $0.15 per share. In November 2009, we entered into
a separation agreement with one of our officers, which resulted in the cancellation of options to
purchase 70,000 shares of common stock. On December 17, 2009, we granted options under the Employee
Plan to purchase 95,000 shares of our common stock to certain other officers at an exercise price
of $0.14 per share. The options granted under the Employee Plan expire ten years from the date of
grant, and will vest and become exercisable if, and only if, a refinancing event (as defined in the
option agreements) is achieved prior to the expiration of the options. As of December 31, 2009,
options to purchase 612,000 shares of Holdings common stock were outstanding under the Employee
Plan.
A summary of the status of options for shares of Holdings common stock at December 31, 2009 and
changes during the period is presented below (unaudited):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Weighted | Average | Remaining | ||||||||||||||
Number of | Average | Grant Date | Contractual | |||||||||||||
Options | Exercise Price | Fair Value | Term (years) | |||||||||||||
Outstanding, June 30, 2009 |
779,096 | $ | 0.50 | $ | 0.48 | 8.95 | ||||||||||
Granted |
| | | |||||||||||||
Outstanding, September 30, 2009 |
779,096 | $ | 0.50 | $ | 0.48 | 8.73 | ||||||||||
Granted |
95,000 | 0.14 | 0.14 | 10.00 | ||||||||||||
Canceled |
(70,000 | ) | 0.15 | 0.05 | 8.92 | |||||||||||
Outstanding, December 31, 2009 |
804,096 | $ | 0.49 | $ | 0.47 | 8.68 | ||||||||||
Exercisable at June 30, 2009 |
64,032 | $ | 1.09 | |||||||||||||
Exercisable at September 30, 2009 |
64,032 | $ | 1.09 | |||||||||||||
Exercisable at December 31, 2009 |
128,064 | $ | 1.09 |
11
Of the options outstanding at December 31, 2009, the characteristics are as follows
(unaudited):
Exercise Price | Weighted Average | Options | Total Options | Remaining Contractual | ||||||||||||||||
Range | Exercise Price | Exercisable | Outstanding | Life | ||||||||||||||||
$ | 0.14 | $ | 0.14 | | 95,000 | 10 years | ||||||||||||||
0.15 | 0.15 | | 70,000 | 8.92 years | ||||||||||||||||
0.36 | 0.36 | | 447,000 | 8.67 years | ||||||||||||||||
1.01 | 1.01 | 64,032 | 96,048 | 8.33 years | ||||||||||||||||
1.16 | 1.16 | 64,032 | 96,048 | 8.33 years | ||||||||||||||||
128,064 | 804,096 | |||||||||||||||||||
We account for share-based compensation under ASC Topic 718 Compensation Stock Compensation
(ASC 718). We recognized approximately $0.1 million of compensation expense related to stock
options under the Director Plan in the condensed consolidated statements of operations and
comprehensive losses for each of the six months ended December 31, 2009 and 2008. Because vesting
of options granted under the Employee Plan is solely based on a defined refinancing event, management
assessed whether a financing event, under the provisions of ASC 718, is considered probable.
Management determined a refinancing event, as defined, is currently not considered probable, and therefore, no
share-based compensation expense has been recognized in the consolidated statement of operations
and comprehensive losses related to the employee plan.
ASC 718 requires the use of a valuation model to calculate the fair value of share-based awards.
We have elected to use the Black-Scholes option pricing model, which incorporates various
assumptions including volatility, estimated life and interest rates. The estimated life of an
award is based on historical experience and on the terms and conditions of the stock awards granted
to employees. The average risk-free rate is based on the ten-year U.S. Treasury security rate in
effect as of the grant date. The fair value of each non-employee director option grant issued was
estimated on the date of grant or issuance using the Black-Scholes pricing model. The assumptions
used for grants and issuances have not changed.
8. INCOME TAXES
As of December 31, 2009, we had federal net operating loss, or NOL, carryforwards of $139.5 million
and various state NOL carryforwards. These NOL carryforwards expire between 2010 and 2029. On
August 1, 2007 a confirmed plan of reorganization and cancellation of indebtedness for Holdings and
InSight became effective. Future utilization of NOL carryforwards will be limited by Internal
Revenue Code section 382 and related provisions as a result of the change in control that occurred.
The rules under Internal Revenue Code Section 382 in connection with reorganization and
cancellation of indebtedness allow for companies to make an election as to how to compute the
annual limitation.
A valuation allowance is provided against net deferred tax assets when it is more likely than not
that the net deferred tax asset will not be realized. Based upon (1) our losses in recent years,
(2) impairment charges recorded in fiscal years 2010, 2009, 2008 and 2007 and (3) the available evidence,
management determined that it is more likely than not that the net deferred tax assets will not be
realized. Consequently, we have a full valuation allowance against such net deferred tax assets. In
determining the net asset subject to a valuation allowance, we excluded the deferred tax liability
related to our indefinite-lived other intangible assets that is not expected to reverse in the
foreseeable future resulting in a net deferred tax liability of $6 million after application of the
valuation allowance as of December 31, 2009. The valuation allowance may be reduced in the future
if we forecast and realize future taxable income or other tax planning strategies are implemented.
Future reversals of this valuation allowance recorded will be recorded as an income tax benefit.
On July 1, 2007, we adopted ASC 740 Income Taxes formerly the Financial Accounting Standards
Board (FASB) Interpretation No. 48 an interpretation of FASB Statement No. 109 (ASC 740). ASC
740 clarifies the accounting for uncertainty in income taxes recognized in a companys financial
statements. ASC 740 prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax
12
position taken or expected to be taken in the tax return. The liability for income taxes
associated with uncertain tax positions was $1.4 million as of December 31, 2009 and June 30, 2009
and is included in other long-term liabilities. This amount, if not required, would favorably
affect our effective tax rate. We recognize interest and penalties, if any, related to uncertain
tax positions in the provision for income taxes. We do not believe that any material change in the
liability for unrecognized tax benefits is likely within the next twelve months. As of December
31, 2009, all material federal and state income tax matters have been concluded through June 30,
2004.
9. SEGMENT INFORMATION
Effective July 1, 2009, we redefined the business segments based on how our chief operating
decision maker views the businesses and assesses the performance of our business managers. We now
have three reportable segments: contract services, patient services and other operations, which are
business units defined primarily by the type of service provided. Contract services consist of
centers (primarily mobile units) which generate revenues from fee-for-service arrangements and
fixed-fee contracts billed directly to our healthcare provider customers, such as hospitals, which
we refer to as wholesale operations. We internally handle the billing and collections for our
contract services at relatively low cost, and we do not bear the direct risk of collections from
third party-payors or patients. Patient services consist of centers (mainly fixed-sites) that
primarily generate revenues from services billed, on a fee-for-service basis, directly to patients
or third-party payors, such as Medicare, Medicaid and health maintenance organizations, which we
refer to as our retail operations. We have primarily outsourced the billing and collections for
our patient services to Dell Perot Systems, and we bear the direct risk of collections from
third-party payors and patients. Other operations generate revenues primarily
from agreements with customers to provide management services, which could include field
operations, billing and collections and accounting and other office services. We refer to this
revenue as generated from our Insight Imaging Enterprise Solutions business.
We allocate corporate overhead, depreciation related to our
billing system and income taxes to other operations.
We manage cash flows and assets on a consolidated
basis, and not by segment.
13
The following tables summarize our operating results by segment (amounts in thousands) (unaudited):
Six months ended December 31, 2009:
Contract | Patient | Other | ||||||||||||||
Services | Services | Operations | Consolidated | |||||||||||||
Total revenues |
$ | 48,953 | $ | 47,692 | $ | 1,108 | $ | 97,753 | ||||||||
Equipment Leases |
4,100 | 1,058 | | 5,158 | ||||||||||||
Depreciation and amortization |
9,963 | 6,243 | 1,270 | 17,476 | ||||||||||||
Total costs of operations |
41,204 | 46,149 | 1,649 | 89,002 | ||||||||||||
Corporate operating expenses |
| | (9,800 | ) | (9,800 | ) | ||||||||||
Equity in earnings of unconsolidated partnerships |
294 | 878 | | 1,172 | ||||||||||||
Interest expense, net |
(363 | ) | (295 | ) | (12,925 | ) | (13,583 | ) | ||||||||
Impairment of intangible assets |
(1,717 | ) | (232 | ) | | (1,949 | ) | |||||||||
Income (loss) before income taxes |
5,963 | 1,894 | (23,266 | ) | (15,409 | ) | ||||||||||
Net change in property and equipment |
4,829 | 4,253 | 1,437 | 10,519 |
Six months ended December 31, 2008:
Contract | Patient | Other | ||||||||||||||
Services | Services | Operations | Consolidated | |||||||||||||
Total Revenues |
$ | 60,593 | $ | 59,570 | $ | 1,168 | $ | 121,331 | ||||||||
Equipment leases |
4,926 | 790 | | 5,716 | ||||||||||||
Depreciation and amortization |
12,945 | 9,615 | 1,878 | 24,438 | ||||||||||||
Total costs of operations |
50,304 | 61,811 | 2,207 | 114,322 | ||||||||||||
Corporate operating expenses |
| | (11,127 | ) | (11,127 | ) | ||||||||||
Equity in earnings of unconsolidated partnerships |
311 | 797 | | 1,108 | ||||||||||||
Interest expense, net |
(797 | ) | (731 | ) | (14,421 | ) | (15,949 | ) | ||||||||
Gain on sales of centers |
| | 6,988 | 6,988 | ||||||||||||
Gain on purchase of notes payable |
| | 1,246 | 1,246 | ||||||||||||
Impairment of intangible assets |
(4,600 | ) | | | (4,600 | ) | ||||||||||
Income (loss) before income taxes |
5,203 | (2,175 | ) | (18,353 | ) | (15,325 | ) | |||||||||
Net change in property and equipment |
7,803 | (14,299 | ) | 1,528 | (4,968 | ) |
14
Three months ended December 31, 2009:
Contract | Patient | Other | ||||||||||||||
Services | Services | Operations | Consolidated | |||||||||||||
Total revenues |
$ | 23,933 | $ | 23,092 | $ | 587 | $ | 47,612 | ||||||||
Equipment Leases |
2,091 | 506 | | 2,597 | ||||||||||||
Depreciation and amortization |
4,735 | 2,665 | 605 | 8,005 | ||||||||||||
Total costs of operations |
20,319 | 22,375 | 916 | 43,610 | ||||||||||||
Corporate operating expenses |
| | (4,994 | ) | (4,994 | ) | ||||||||||
Equity in earnings of unconsolidated partnerships |
143 | 417 | | 560 | ||||||||||||
Interest expense, net |
(170 | ) | (128 | ) | (6,441 | ) | (6,739 | ) | ||||||||
Impairment of intangible assets |
(1,717 | ) | (232 | ) | | (1,949 | ) | |||||||||
Income (loss) before income taxes |
1,870 | 774 | (11,764 | ) | (9,120 | ) | ||||||||||
Net change in property and equipment |
1,521 | 2,380 | 711 | 4,612 |
Three months ended December 31, 2008:
Contract | Patient | Other | ||||||||||||||
Services | Services | Operations | Consolidated | |||||||||||||
Total revenues |
$ | 29,660 | $ | 28,454 | $ | 632 | $ | 58,746 | ||||||||
Equipment leases |
2,422 | 407 | | 2,829 | ||||||||||||
Depreciation and amortization |
6,780 | 4,152 | 915 | 11,847 | ||||||||||||
Total costs of operations |
25,157 | 30,409 | 908 | 56,474 | ||||||||||||
Corporate operating expenses |
| | (5,229 | ) | (5,229 | ) | ||||||||||
Equity in earnings of unconsolidated partnerships |
145 | 351 | | 496 | ||||||||||||
Interest expense, net |
(366 | ) | (341 | ) | (7,374 | ) | (8,081 | ) | ||||||||
Gain on sales of centers |
| | 6,548 | 6,548 | ||||||||||||
Impairment of intangible assets |
(4,600 | ) | | | (4,600 | ) | ||||||||||
Income (loss) before income taxes |
(318 | ) | (1,945 | ) | (6,331 | ) | (8,594 | ) | ||||||||
Net change in property and equipment |
341 | (7,234 | ) | 305 | (6,588 | ) |
15
10. NEW ACCOUNTING PRONOUNCEMENTS
FASB ASC Topic 805 Business Combinations formerly SFAS 141(R) (ASC 805) establishes principles
and requirements for recognizing and measuring identifiable assets and goodwill acquired,
liabilities assumed and any noncontrolling interest in an acquisition, at their fair value as of
the acquisition date. ASC 805 is effective for fiscal years beginning after December 15, 2008. We
expect ASC 805 will have an impact on accounting for business combinations, but the effect is
generally dependent upon acquisitions at that time. The adoption of ASC 805 did not have a material
impact on our consolidated financial statements for the six months ended December 31, 2009.
ASC 805 formerly FSP No. FAS 141(R)-1 is effective for contingent assets or contingent liabilities
acquired in business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. The adoption of this
standard did not have a material impact on our consolidated financial statements for the six months
ended December 31, 2009.
FASB ASC Topic 810 Consolidation formerly SFAS 160 (ASC 810) establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. ASC 810 is effective for fiscal years beginning after December 15, 2008. On July 1,
2009 we adopted ASC 810. As of December 31, 2009, ASC 810 only effected our reporting requirements
and therefore had no impact on our consolidated financial position, results of operations or cash
flows. The adoption of ASC 810 could have a material impact on our consolidated financial
statements and results of operations in the future if we were to acquire a non-controlling interest
in an entity or change our interest in one of our joint ventures. We do not believe it will have a
material adverse effect on our financial position or cash flows.
FASB ASC Topic 815 Derivatives and Hedging formerly SFAS 161 (ASC 815) requires enhanced
disclosures about how and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under this topic, and how derivative instruments and related
hedged items affect an entitys financial position, financial performance and cash flows. We
adopted ASC 815 on January 1, 2009. As ASC 815 only requires enhanced disclosures, it had no impact
on our consolidated financial statements.
FASB ASC Topic 855 Subsequent Events formerly SFAS 165 (ASC 855) enhances the current guidance
on accounting and disclosure requirements for subsequent events. This statement requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date, that is, whether that date represents the date the financial statements were issued or
were available to be issued. ASC 855 is effective for interim periods and annual financial periods
ending after June 15, 2009. We adopted ASC 855 on June 30, 2009; however the adoption did not have
a material impact on our results of operations, cash flows or financial position. We have evaluated
subsequent events through February 12, 2010, and determined no additional disclosures are required.
FASB ASC 2009-17 Amendments to FASB Interpretation No. 46(R) formerly SFAS No. 167 (ASC
2009-17) enhances the current guidance on disclosure requirements for companies with financial
interest in a variable interest entity. This statement amends Interpretation 46(R) to replace the
quantitative-based risks and rewards calculation for determining which enterprise, if any, has a
controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entitys economic performance and (a) the obligation to absorb
losses of the entity or (b) the right to receive benefits from the entity. This statement requires
an additional reconsideration event when determining whether an entity is a variable interest
entity when any changes in facts and circumstances occur such that the holders of the equity
investment at risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly impact the entitys
economic performance. It also requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity. This statement amends Interpretation 46(R) to require
additional disclosures about an enterprises involvement in variable interest entities. ASC 2009-17
is effective for fiscal years beginning after November 15, 2009 and as such has not yet been
incorporated into the codification, with early application prohibited. We are currently evaluating
the impact of the adoption of ASC 2009-17 on our consolidated financial statements.
FASB ASC Topic 105 Generally Accepted Accounting Principles formerly SFAS 168 (ASC 105) is the
single source of authoritative Generally Accepted Accounting Principles (GAAP) in the United
States. The previous
16
GAAP hierarchy consisted of four levels of authoritative accounting and reporting guidance levels.
The ASC 105 eliminated this hierarchy and replaced the previous GAAP with just two levels of
literature: authoritative and non-authoritative. ASC 105 was effective as of July 1, 2009.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05 to provide guidance on
measuring the fair value of liabilities. The ASU provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following techniques:
(i) | a valuation technique that uses the quoted price of the identical liability when traded as an asset; or, quoted prices for similar liabilities, or similar liabilities when traded as assets, or | ||
(ii) | another valuation technique consistent with the principles of ASC Topic 820 Fair Value Measurements and Disclosures, such as an income approach or market approach. |
Additionally, when estimating the fair value of a liability, a reporting entity is not required to
make an adjustment relating to the existence of a restriction that prevents the transfer of the
liability. This ASU also clarifies that both a quoted price in an active market for the identical
liability at the measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments are required, are Level 1 fair value measurements
under ASC Topic 820. This ASU is effective for the quarter beginning October 1, 2009. We are
currently evaluating the impact of the adoption of the ASU on our consolidated financial
statements.
In September 2009, the FASB issued ASU 2009-13, which eliminates the criterion for objective and
reliable evidence of fair value for the undelivered products or services. Instead, revenue
arrangements with multiple deliverables should be divided into separate units of accounting
provided the deliverables meet certain criteria. ASU 2009-13 provides a hierarchy for estimating
the selling price for each of the deliverables. ASU 2009-13 eliminates the use of the residual
method of allocation and requires that arrangement consideration be allocated at the inception of
the arrangement to all deliverables based on their relative selling price. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 Early adoption is permitted. We are currently assessing the
impact of this accounting standards update on our consolidated financial position and results of
operation.
11. HEDGING ACTIVITIES
We account for hedging activities in accordance with ASC Topic 815 Derivatives and Hedging, and
we formally document our hedge relationships, including identification of the hedging instruments
and the hedged items, as well as our risk management objectives and strategies for undertaking the
hedge. We also formally assessed, both at inception and at least quarterly thereafter, whether the
derivative instruments that are used in hedging transactions are highly effective in offsetting the
changes in either the fair value or cash flows of the hedged item.
We have an interest rate hedging agreement with Bank of America, N.A. The agreement effectively
provides us with an interest rate collar. The notional amount to which the agreement applies is
$190 million, and it provides for a LIBOR cap of 3.25% and a LIBOR floor of 2.59% on that amount.
Our obligations under the agreement were secured on a pari passu basis by the same collateral that
secures our credit facility, and the agreement was cross-defaulted to our credit facility. The
agreement ended on February 1, 2010 We designated this contract as a highly effective cash flow
hedge of the floating rate notes under ASC Topic 815 Derivatives and Hedging formerly SFAS 133
(ASC 815). Accordingly, the value of the contract is marked-to-market quarterly, with changes in
the fair value of the contract included as a separate component of other comprehensive income
(loss). As of December 31, 2009, the contract had a liability fair value of $1.1 million due to
LIBOR falling below the 2.59% floor, which has been recorded in Other Accrued Liabilities.
In August 2009, we entered into an interest rate cap agreement with Bank of America, N.A. with a
notional amount of $190 million that has been designated as a cash flow hedge of future interest
payments associated with the floating rate notes. Under the terms of this agreement, we receive a
three-month LIBOR cap of 3% effective February 1, 2010 through January 31, 2011, and pay a fee of
approximately $0.5 million over the contract period.
17
The contract exposes us to credit risk in the event that the counterparty to the contract does not
or cannot meet its obligations; however, Bank of America, N.A. is a major financial institution and
we expect that it will perform its obligations under the contract. The net effect of the hedge is
to cap interest payments for $190 million of our debt at a rate of 8.25%, because our floating rate
notes incur interest at three-month LIBOR plus 5.25%. The value of the interest rate cap contract
is marked-to-market quarterly, with effective changes in the fair value of the contract included in
other comprehensive income (loss). As of December 31, 2009, the interest rate cap contract had a
net asset value of $0.2 million, which has been recorded in Other Assets.
12. (LOSS) INCOME PER COMMON SHARE
We report basic and diluted earnings per share, or EPS, for our common stock. Basic EPS is computed
by dividing reported earnings by the weighted average number of common shares outstanding during
the respective period. Diluted EPS is computed by adding to the weighted average number of common
shares the dilutive effect of stock options. There were no adjustments to net income (loss) (the
numerator) for purposes of computing EPS. Due to the net losses reported for the three and six
months ended December 31, 2009 and December 31, 2008 the calculation of diluted EPS is the same as
basic EPS.
13. FAIR VALUE MEASUREMENTS
We adopted ASC Topic 820 Fair Value Measurements and Disclosures formerly SFAS 157 (ASC 820) on
August 1, 2007, the date a confirmed plan of reorganization and cancellation of debt of Holdings
and InSight became effective. ASC 820, among other things, defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure for each major asset and
liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820
clarifies that fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for considering such
assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in
measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active
markets; (Level 2) inputs other than the quoted prices in active markets that are observable either
directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of three valuation
techniques noted in ASC 820. The three valuation techniques are identified in the tables below.
Where more than one technique is noted, individual assets or liabilities were valued using one or
more of the noted techniques. The valuation techniques are as follows:
(a) | Market approach prices and other relevant information generated by market conditions involving identical or comparable assets or liabilities; |
(b) | Cost approach amounts that would be required to replace the service capacity of assets (replacement cost); and |
(c) | Income approach techniques to convert future amounts to single present amounts based on market expectations (including present value techniques, option-pricing and excess earnings models). |
Assets and liabilities measured at fair value on a recurring basis consist of interest rate collar
and cap contracts (amounts in thousands) (unaudited):
Fair Value Measurements Using | ||||||||||||||||||||
Quoted price | Significant | Significant | ||||||||||||||||||
in active | other | other | ||||||||||||||||||
markets for | observable | unobservable | ||||||||||||||||||
December 31, | identical assets | inputs | inputs | Valuation | ||||||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | Technique | ||||||||||||||||
Interest rate collar liability position |
$ | (1,094 | ) | $ | | $ | (1,094 | ) | $ | | (c | ) | ||||||||
Interest rate cap asset position |
$ | 173 | $ | | $ | 173 | $ | | (c | ) |
18
Assets and liabilities measured at fair value in connection with our annual evaluation of
indefinite-lived intangible assets during the second quarter of fiscal 2010 (amounts in thousands):
Fair Value Measurements Using | ||||||||||||||||||||
Quoted price | Significant | Significant | ||||||||||||||||||
in active | other | other | ||||||||||||||||||
markets for | observable | unobservable | ||||||||||||||||||
December 31, | identical assets | inputs | inputs | Valuation | ||||||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) (1) | Technique | ||||||||||||||||
Indefinite-lived intangible assets |
$ | 13,916 | $ | | $ | | $ | 13,916 | (c | ) | ||||||||||
Goodwill |
$ | 1,403 | $ | | $ | | $ | 1,403 | (c | ) |
(1) | These valuations were based on the present value of future cash flows for specific assets derived from our projections of future revenues, cash flows and market conditions. These cash flows were then discounted to their present value using a rate of return that considers the relative risk of not realizing the estimated annual cash flows and time value of money (Note 5). |
14. COMMITMENTS AND CONTINGENCIES
On January 5, 2010, Holdings, InSight and InSight Health Corp., a wholly owned subsidiary of
InSight, were served with a complaint filed in the Los Angeles County Superior Court alleging
claims on behalf of current and former employees. In Kevin Harold and Denise Langhoff, on their
own behalf and on behalf of others similar situated v. InSight Health Services Holdings Corp., et
al., the plaintiffs allege violations of Californias wage, overtime, meal period, break time and
business practice laws and regulations. Plaintiffs seek recovery of unspecified economic damages,
statutory penalties, punitive damages, interest, attorneys fees and costs of suit. We are
currently evaluating the allegations of the complaint and are unable to predict the likely timing
or outcome of this lawsuit. In the meantime we intend to vigorously defend this lawsuit.
We are engaged from time to time in the defense of other lawsuits arising out of the ordinary
course and conduct of our business and have insurance policies covering certain potential insurable
losses where such coverage is cost-effective. We believe that the outcome of any such other lawsuit
will not have a material adverse impact on our financial condition and results of operations.
15. RECONCILIATION OF TOTAL STOCKHOLDERS EQUITY
The following tables summarize the changes in consolidated stockholders equity, including
noncontrolling interest, in accordance with ASC 805 for the six months ended December 31 2009, and
2008 (amounts in thousands, except share data) (unaudited):
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | InSight | Total | |||||||||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | Health Services | Noncontrolling | Stockholders | ||||||||||||||||||||||||||
Shares | Amount | Capital | Gain (Loss) | Deficit | Holdings Corp. | Interest | Equity | |||||||||||||||||||||||||
BALANCE AT JUNE 30, 2009 |
8,644,444 | $ | 9 | $ | 37,536 | $ | (2,528 | ) | $ | (188,939 | ) | $ | (153,922 | ) | $ | 1,784 | $ | (152,138 | ) | |||||||||||||
Net income (loss) |
| | | | (15,148 | ) | (15,148 | ) | 385 | (14,763 | ) | |||||||||||||||||||||
Share-based compensation |
| | 37 | | | 37 | | 37 | ||||||||||||||||||||||||
Net distributions |
| | | | | | (26 | ) | (26 | ) | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Unrealized income attributable to change
in fair value of interest rate contracts |
| | | 1,078 | | 1,078 | | 1,078 | ||||||||||||||||||||||||
Comprehensive loss |
(14,070 | ) | ||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2009 |
8,644,444 | $ | 9 | $ | 37,573 | $ | (1,450 | ) | $ | (204,087 | ) | $ | (167,955 | ) | $ | 2,143 | $ | (165,812 | ) | |||||||||||||
19
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | InSight | Total | |||||||||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | Health Services | Noncontrolling | Stockholders | ||||||||||||||||||||||||||
Shares | Amount | Capital | Gain (Loss) | Deficit | Holdings Corp. | Interest | Equity | |||||||||||||||||||||||||
BALANCE AT JUNE 30, 2008 |
8,644,444 | $ | 9 | $ | 37,463 | $ | 1,001 | $ | (169,185 | ) | $ | (130,712 | ) | $ | 3,105 | $ | (127,607 | ) | ||||||||||||||
Net loss |
| | | | (14,003 | ) | (14,003 | ) | 370 | (13,633 | ) | |||||||||||||||||||||
Share-based compensation |
| | 36 | | | 36 | | 36 | ||||||||||||||||||||||||
Net distributions |
| | | | | | (1,736 | ) | (1,736 | ) | ||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Unrealized income attributable to change
in fair value of interest rate contract |
| | | (3,604 | ) | | (3,604 | ) | | (3,604 | ) | |||||||||||||||||||||
Comprehensive loss |
(17,607 | ) | ||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2008 |
8,644,444 | $ | 9 | $ | 37,499 | $ | (2,603 | ) | $ | (183,188 | ) | $ | (148,283 | ) | $ | 1,739 | $ | (146,544 | ) | |||||||||||||
20
16.
SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Holdings and all of InSights wholly owned subsidiaries, or guarantor subsidiaries, guarantee
InSights payment obligations under the floating rate notes (Note 6). These guarantees are full,
unconditional and joint and several. The following condensed consolidating financial information
has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 Financial statements of
guarantors and issuers of guaranteed securities registered or being registered. We account for our
investment in InSight and its subsidiaries under the equity method of accounting. Dividends from
InSight to Holdings are restricted under the agreements governing our material indebtedness. This
information is not intended to present the financial position, results of operations and cash flows
of the individual companies or groups of companies in accordance with accounting principles
generally accepted in the United States.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE
SHEET (Unaudited)
December 31, 2009
(Amounts in thousands)
December 31, 2009
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 11,884 | $ | 2,633 | $ | | $ | 14,517 | ||||||||||||
Trade accounts receivables, net |
| | 21,688 | 2,283 | | 23,971 | ||||||||||||||||||
Other current assets |
| | 9,193 | 188 | | 9,381 | ||||||||||||||||||
Intercompany accounts receivable |
37,581 | 282,200 | 2,808 | | (322,589 | ) | | |||||||||||||||||
Total current assets |
37,581 | 282,200 | 45,573 | 5,104 | (322,589 | ) | 47,869 | |||||||||||||||||
Property and equipment, net |
| | 69,894 | 5,681 | | 75,575 | ||||||||||||||||||
Cash, restricted |
| | 2,186 | | | 2,186 | ||||||||||||||||||
Investments in partnerships |
| | 6,228 | | | 6,228 | ||||||||||||||||||
Investments in consolidated subsidiaries |
(205,536 | ) | (205,536 | ) | 5,300 | | 405,772 | | ||||||||||||||||
Other assets |
| | 394 | | | 394 | ||||||||||||||||||
Other intangible assets, net |
| | 18,434 | 3,646 | | 22,080 | ||||||||||||||||||
$ | (167,955 | ) | $ | 76,664 | $ | 148,009 | $ | 14,431 | $ | 83,183 | $ | 154,332 | ||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current portion of notes payable and capital lease
obligations |
$ | | $ | | $ | 340 | $ | 1,006 | $ | | $ | 1,346 | ||||||||||||
Accounts payable and other accrued expenses |
| | 25,503 | 606 | | 26,109 | ||||||||||||||||||
Intercompany accounts payable |
| | 319,783 | 2,806 | (322,589 | ) | | |||||||||||||||||
Total current liabilities |
| | 345,626 | 4,418 | (322,589 | ) | 27,455 | |||||||||||||||||
Notes payable and capital lease obligations, less current portion |
| 282,200 | 450 | 2,570 | | 285,220 | ||||||||||||||||||
Other long-term liabilities |
| | 7,469 | | | 7,469 | ||||||||||||||||||
Total stockholders equity (deficit) attributable to InSight Health
Services Holdings Corp |
(167,955 | ) | (205,536 | ) | (205,536 | ) | 5,300 | 405,772 | (167,955 | ) | ||||||||||||||
Noncontrolling interest |
| | | 2,143 | | 2,143 | ||||||||||||||||||
Total stockholders equity (deficit) |
(167,955 | ) | (205,536 | ) | (205,536 | ) | 7,443 | 405,772 | (165,812 | ) | ||||||||||||||
$ | (167,955 | ) | $ | 76,664 | $ | 148,009 | $ | 14,431 | $ | 83,183 | $ | 154,332 | ||||||||||||
21
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
JUNE 30, 2009
(Amounts in thousands)
JUNE 30, 2009
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 17,443 | $ | 2,197 | $ | | $ | 19,640 | ||||||||||||
Trade accounts receivables, net |
| | 23,429 | 2,165 | | 25,594 | ||||||||||||||||||
Other current assets |
| | 9,766 | 222 | | 9,988 | ||||||||||||||||||
Intercompany accounts receivable |
37,544 | 291,403 | 3,101 | | (332,048 | ) | | |||||||||||||||||
Total current assets |
37,544 | 291,403 | 53,739 | 4,584 | (332,048 | ) | 55,222 | |||||||||||||||||
Assets held for sale |
2,700 | 2,700 | ||||||||||||||||||||||
Property and equipment, net |
| | 74,820 | 5,017 | | 79,837 | ||||||||||||||||||
Cash, restricted |
| | 6,488 | | | 6,488 | ||||||||||||||||||
Investments in partnerships |
| | 6,791 | | | 6,791 | ||||||||||||||||||
Investments in consolidated subsidiaries |
(191,466 | ) | (203,532 | ) | 4,308 | | 390,690 | | ||||||||||||||||
Other assets |
| | 208 | | | 208 | ||||||||||||||||||
Goodwill and other intangible assets, net |
| | 21,233 | 3,645 | | 24,878 | ||||||||||||||||||
$ | (153,922 | ) | $ | 87,871 | $ | 170,287 | $ | 13,246 | $ | 58,642 | $ | 176,124 | ||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current portion of notes payable and capital lease
obligations |
$ | | $ | | $ | 732 | $ | 978 | $ | | $ | 1,710 | ||||||||||||
Accounts payable and other accrued expenses |
| | 35,380 | 657 | | 36,037 | ||||||||||||||||||
Intercompany accounts payable |
| | 328,948 | 3,100 | (332,048 | ) | | |||||||||||||||||
Total current liabilities |
| | 365,060 | 4,735 | (332,048 | ) | 37,747 | |||||||||||||||||
Notes payable and capital lease obligations, less current portion |
| 279,337 | 559 | 2,419 | | 282,315 | ||||||||||||||||||
Other long-term liabilities |
| | 8,200 | | | 8,200 | ||||||||||||||||||
Total stockholders equity (deficit) attributable to InSight Health
Services Holdings Corp |
(153,922 | ) | (191,466 | ) | (203,532 | ) | 4,308 | 390,690 | (153,922 | ) | ||||||||||||||
Noncontrolling interest |
| | | 1,784 | | 1,784 | ||||||||||||||||||
Total stockholders equity (deficit) |
(153,922 | ) | (191,466 | ) | (203,532 | ) | 6,092 | 390,690 | (152,138 | ) | ||||||||||||||
$ | (153,922 | ) | $ | 87,871 | $ | 170,287 | $ | 13,246 | $ | 58,642 | $ | 176,124 | ||||||||||||
22
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2009
(Amounts in thousands)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2009
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||||||||||
Total revenues |
$ | | $ | | $ | 88,685 | $ | 9,068 | $ | | $ | 97,753 | ||||||||||||
Costs of services |
| | 58,741 | 5,444 | 64,185 | |||||||||||||||||||
Provision for doubtful accounts |
| | 1,889 | 294 | 2,183 | |||||||||||||||||||
Equipment leases |
| | 4,774 | 384 | 5,158 | |||||||||||||||||||
Depreciation and amortization |
| 16,289 | 1,187 | 17,476 | ||||||||||||||||||||
Costs of operations |
| | 81,693 | 7,309 | | 89,002 | ||||||||||||||||||
Corporate operating expenses |
(37 | ) | | (9,763 | ) | | | (9,800 | ) | |||||||||||||||
Equity in earnings of unconsolidated
partnerships |
| | 1,172 | | | 1,172 | ||||||||||||||||||
Interest expense, net |
| | (13,438 | ) | (145 | ) | | (13,583 | ) | |||||||||||||||
Impairment of intangible assets |
| | (1,949 | ) | | | (1,949 | ) | ||||||||||||||||
Income (loss) before income taxes |
(37 | ) | | (16,986 | ) | 1,614 | | (15,409 | ) | |||||||||||||||
Benefit for income taxes |
| | (646 | ) | | | (646 | ) | ||||||||||||||||
Income (loss) before equity in loss of
consolidated subsidiaries |
(37 | ) | | (16,340 | ) | 1,614 | | (14,763 | ) | |||||||||||||||
Equity in loss of consolidated subsidiaries |
(15,111 | ) | (15,111 | ) | 1,229 | | 28,993 | | ||||||||||||||||
Net income (loss) |
(15,148 | ) | (15,111 | ) | (15,111 | ) | 1,614 | 28,993 | (14,763 | ) | ||||||||||||||
Less: net income attributable to
noncontrolling interests |
| | | 385 | | 385 | ||||||||||||||||||
Net income (loss) attributable to InSight Health
Services Corp. |
$ | (15,148 | ) | $ | (15,111 | ) | $ | (15,111 | ) | $ | 1,229 | $ | 28,993 | $ | (15,148 | ) | ||||||||
23
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2008
(Amounts in thousands)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2008
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||||||||||
Total revenues |
| | 106,648 | 14,683 | | 121,331 | ||||||||||||||||||
Costs of services |
| | 71,113 | 10,719 | 81,832 | |||||||||||||||||||
Provision for
doubtful accounts |
| | 1,760 | 576 | 2,336 | |||||||||||||||||||
Equipment leases |
| | 5,086 | 630 | 5,716 | |||||||||||||||||||
Depreciation and
amortization |
| | 21,750 | 2,688 | | 24,438 | ||||||||||||||||||
Costs of operations |
| | 99,709 | 14,613 | | 114,322 | ||||||||||||||||||
Corporate operating expenses |
(36 | ) | | (11,091 | ) | | | (11,127 | ) | |||||||||||||||
Equity in earnings of
unconsolidated
partnerships |
| | 1,108 | | | 1,108 | ||||||||||||||||||
Interest expense, net |
| | (15,669 | ) | (280 | ) | | (15,949 | ) | |||||||||||||||
Gain on sales of
centers |
| | 6,988 | | | 6,988 | ||||||||||||||||||
Gain on purchase
of notes payable |
| 1,246 | | | | 1,246 | ||||||||||||||||||
Impairment of
intangible assets |
| | (4,600 | ) | | | (4,600 | ) | ||||||||||||||||
Income (loss)
before income
taxes |
(36 | ) | 1,246 | (16,325 | ) | (210 | ) | | (15,325 | ) | ||||||||||||||
Benefit for income taxes |
| | (1,692 | ) | | | (1,692 | ) | ||||||||||||||||
Income (loss)
before equity in loss
of consolidated
subsidiaries |
(36 | ) | 1,246 | (14,633 | ) | (210 | ) | | (13,633 | ) | ||||||||||||||
Equity in loss of consolidated
subsidiaries |
(13,967 | ) | (15,213 | ) | (580 | ) | | 29,760 | | |||||||||||||||
Net (loss) income |
(14,003 | ) | (13,967 | ) | (15,213 | ) | (210 | ) | 29,760 | (13,633 | ) | |||||||||||||
Less: net income
attributable to
noncontrolling
interests |
| | | 370 | | 370 | ||||||||||||||||||
Net loss
attributable to
InSight Health
Services Corp. |
$ | (14,003 | ) | $ | (13,967 | ) | $ | (15,213 | ) | $ | (580 | ) | $ | 29,760 | $ | (14,003 | ) | |||||||
24
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2009
(Amounts in thousands)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2009
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||||||||||
Total revenues |
$ | | $ | | $ | 43,239 | $ | 4,373 | $ | | $ | 47,612 | ||||||||||||
Costs of services |
| | 29,254 | 2,681 | | 31,935 | ||||||||||||||||||
Provision for doubtful accounts |
| | 936 | 137 | | 1,073 | ||||||||||||||||||
Equipment leases |
| | 2,407 | 190 | | 2,597 | ||||||||||||||||||
Depreciation and amortization |
| | 7,369 | 636 | | 8,005 | ||||||||||||||||||
Costs of operations |
| | 39,966 | 3,644 | | 43,610 | ||||||||||||||||||
Corporate operating expenses |
(19 | ) | | (4,975 | ) | | | (4,994 | ) | |||||||||||||||
Equity in earnings of unconsolidated
partnerships |
| | 560 | | | 560 | ||||||||||||||||||
Interest expense, net |
| | (6,664 | ) | (75 | ) | | (6,739 | ) | |||||||||||||||
Impairment of intangible assets |
| | (1,949 | ) | | | (1,949 | ) | ||||||||||||||||
Income (loss) before income taxes |
(19 | ) | | (9,755 | ) | 654 | | (9,120 | ) | |||||||||||||||
Benefit for income taxes |
| | (683 | ) | | | (683 | ) | ||||||||||||||||
Income (loss) before equity in loss of
consolidated subsidiaries |
(19 | ) | | (9,072 | ) | 654 | | (8,437 | ) | |||||||||||||||
Equity in loss of consolidated subsidiaries |
(8,537 | ) | (8,537 | ) | 535 | | 16,539 | | ||||||||||||||||
Net income (loss) |
(8,556 | ) | (8,537 | ) | (8,537 | ) | 654 | 16,539 | (8,437 | ) | ||||||||||||||
Less: net income attributable to
noncontrolling interests |
| | | 119 | | 119 | ||||||||||||||||||
Net income (loss) attributable to InSight Health
Services Corp. |
$ | (8,556 | ) | $ | (8,537 | ) | $ | (8,537 | ) | $ | 535 | $ | 16,539 | $ | (8,556 | ) | ||||||||
25
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2008
(Amounts in thousands)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2008
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATION | CONSOLIDATED | |||||||||||||||||||
Total revenues |
| | 52,033 | 6,713 | | 58,746 | ||||||||||||||||||
Costs of services |
| | 35,923 | 4,581 | 40,504 | |||||||||||||||||||
Provision for doubtful accounts |
| | 936 | 358 | 1,294 | |||||||||||||||||||
Equipment leases |
| | 2,549 | 280 | 2,829 | |||||||||||||||||||
Depreciation and amortization |
| | 10,566 | 1,281 | | 11,847 | ||||||||||||||||||
Costs of operations |
| | 49,974 | 6,500 | | 56,474 | ||||||||||||||||||
Corporate operating expenses |
(17 | ) | | (5,212 | ) | | | (5,229 | ) | |||||||||||||||
Equity in earnings of unconsolidated
partnerships |
| | 496 | | | 496 | ||||||||||||||||||
Interest expense, net |
| | (7,955 | ) | (126 | ) | | (8,081 | ) | |||||||||||||||
Gain on sales of centers |
| | 6,548 | | | 6,548 | ||||||||||||||||||
Impairment of intangible assets |
| | (4,600 | ) | | | (4,600 | ) | ||||||||||||||||
Income (loss) before income taxes |
(17 | ) | | (8,664 | ) | 87 | | (8,594 | ) | |||||||||||||||
Benefit for income taxes |
| | (1,927 | ) | | | (1,927 | ) | ||||||||||||||||
Income (loss) before equity in loss of
consolidated subsidiaries |
(17 | ) | | (6,737 | ) | 87 | | (6,667 | ) | |||||||||||||||
Equity in loss of consolidated subsidiaries |
(6,756 | ) | (6,756 | ) | (19 | ) | | 13,531 | | |||||||||||||||
Net (loss) income |
(6,773 | ) | (6,756 | ) | (6,756 | ) | 87 | 13,531 | (6,667 | ) | ||||||||||||||
Less: net income attributable to
noncontrolling interests |
| | | 106 | | 106 | ||||||||||||||||||
Net loss attributable to InSight Health
Services Corp. |
$ | (6,773 | ) | $ | (6,756 | ) | $ | (6,756 | ) | $ | (19 | ) | $ | 13,531 | $ | (6,773 | ) | |||||||
26
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2009
(Amounts in thousands)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2009
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | |||||||||||||||||||
OPERATING ACTIVITIES: |
||||||||||||||||||||||||
Net (loss) income |
$ | (15,148 | ) | $ | (15,111 | ) | $ | (15,111 | ) | $ | 1,614 | $ | 28,993 | $ | (14,763 | ) | ||||||||
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
||||||||||||||||||||||||
Depreciation and amortization |
| | 16,289 | 1,187 | | 17,476 | ||||||||||||||||||
Amortization of bond discount |
| | 2,862 | | | 2,862 | ||||||||||||||||||
Share-based compensation |
37 | | | | | 37 | ||||||||||||||||||
Equity in earnings of unconsolidated partnerships |
| | (1,172 | ) | | | (1,172 | ) | ||||||||||||||||
Distributions from unconsolidated partnerships |
| | 1,734 | | | 1,734 | ||||||||||||||||||
Gain on sales of equipment |
| | (537 | ) | | | (537 | ) | ||||||||||||||||
Impairment of intangible assets |
| | 1,949 | | | 1,949 | ||||||||||||||||||
Equity in (loss) income of consolidated subsidiaries |
15,111 | 15,111 | (1,229 | ) | | (28,993 | ) | | ||||||||||||||||
Deferred income taxes |
| | (779 | ) | | | (779 | ) | ||||||||||||||||
Changes in operating assets and liabilities: |
| |||||||||||||||||||||||
Trade accounts receivables, net |
| | 1,741 | (118 | ) | | 1,623 | |||||||||||||||||
Intercompany receivables, net |
| | 531 | (531 | ) | | | |||||||||||||||||
Other current assets |
| | 385 | 34 | | 419 | ||||||||||||||||||
Accounts payable and other accrued expenses |
| | (7,531 | ) | (51 | ) | | (7,582 | ) | |||||||||||||||
Net cash provided by (used in) operating activities |
| | (868 | ) | 2,135 | | 1,267 | |||||||||||||||||
INVESTING ACTIVITIES: |
||||||||||||||||||||||||
Proceeds from sales of centers |
| | 2,721 | | | 2,721 | ||||||||||||||||||
Proceeds from sales of equipment |
| | 865 | | | 865 | ||||||||||||||||||
Additions to property and equipment |
| | (12,080 | ) | (1,851 | ) | | (13,931 | ) | |||||||||||||||
Decrease (increase) in restricted cash |
| | 4,302 | | | 4,302 | ||||||||||||||||||
Net cash used in investing activities |
| | (4,192 | ) | (1,851 | ) | | (6,043 | ) | |||||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||||||||
Principal payments of notes payable and capital
lease obligations |
| | (499 | ) | (905 | ) | | (1,404 | ) | |||||||||||||||
Proceeds from issuance of debt
obligations |
| | | 1,083 | | 1,083 | ||||||||||||||||||
Other |
| | | (26 | ) | | (26 | ) | ||||||||||||||||
Net cash provided by (used in) financing activities |
| | (499 | ) | 152 | | (347 | ) | ||||||||||||||||
DECREASE IN CASH AND CASH EQUIVALENTS |
| | (5,559 | ) | 436 | | (5,123 | ) | ||||||||||||||||
Cash, beginning of period |
| | 17,443 | 2,197 | | 19,640 | ||||||||||||||||||
Cash, end of period |
$ | | $ | | $ | 11,884 | $ | 2,633 | $ | | $ | 14,517 | ||||||||||||
27
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2008
(Amounts in thousands)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2008
(Amounts in thousands)
GUARANTOR | NON-GUARANTOR | |||||||||||||||||||||||
HOLDINGS | INSIGHT | SUBSIDIARIES | SUBSIDIARIES | ELIMINATIONS | CONSOLIDATED | |||||||||||||||||||
OPERATING ACTIVITIES: |
||||||||||||||||||||||||
Net (loss) income |
$ | (14,003 | ) | $ | (13,967 | ) | $ | (15,213 | ) | $ | (210 | ) | $ | 29,760 | $ | (13,633 | ) | |||||||
Adjustments to reconcile net (loss) income to net cash provided by
operating activities: |
||||||||||||||||||||||||
Depreciation and amortization |
| | 21,750 | 2,688 | | 24,438 | ||||||||||||||||||
Amortization of bond discount |
| | 2,647 | | | 2,647 | ||||||||||||||||||
Share-based compensation |
36 | | | | | 36 | ||||||||||||||||||
Equity in earnings of unconsolidated partnerships |
| | (1,108 | ) | | | (1,108 | ) | ||||||||||||||||
Distributions from unconsolidated partnerships |
| | 1,437 | | | 1,437 | ||||||||||||||||||
Gain on sales of centers |
| | (4,153 | ) | (2,835 | ) | | (6,988 | ) | |||||||||||||||
Gain on sales of equipment |
| | (618 | ) | | | (618 | ) | ||||||||||||||||
Gain on purchase of notes payable |
| (1,246 | ) | | | | (1,246 | ) | ||||||||||||||||
Impairment of intangible assets |
4,600 | 4,600 | ||||||||||||||||||||||
Deferred income taxes |
| | (2,117 | ) | | | (2,117 | ) | ||||||||||||||||
Equity in loss of consolidated subsidiaries |
13,967 | 15,213 | 580 | | (29,760 | ) | | |||||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||||||
Trade accounts receivables, net |
| | 3,889 | 1,562 | | 5,451 | ||||||||||||||||||
Intercompany receivables, net |
| | 10,022 | (10,022 | ) | | | |||||||||||||||||
Other current assets |
| | (262 | ) | (212 | ) | | (474 | ) | |||||||||||||||
Accounts payable and other accrued expenses |
| | (2,658 | ) | (908 | ) | | (3,566 | ) | |||||||||||||||
Net cash provided by (used in) operating activities |
| | 18,796 | (9,937 | ) | | 8,859 | |||||||||||||||||
INVESTING ACTIVITIES: |
||||||||||||||||||||||||
Proceeds from sales of centers |
| | 9,000 | 9,078 | | 18,078 | ||||||||||||||||||
Additions to property and equipment |
| | (4,406 | ) | (1,067 | ) | | (5,473 | ) | |||||||||||||||
Increase in restricted cash |
| | (18,772 | ) | | | (18,772 | ) | ||||||||||||||||
Other |
| | 192 | 1,792 | | 1,984 | ||||||||||||||||||
Net cash provided by (used in) investing activities |
| | (13,986 | ) | 9,803 | | (4,183 | ) | ||||||||||||||||
FINANCING ACTIVITIES: |
||||||||||||||||||||||||
Proceeds from issuance of debt
obligations |
| | (277 | ) | (943 | ) | | (1,220 | ) | |||||||||||||||
Purchase of notes payable |
| | (1,129 | ) | | | (1,129 | ) | ||||||||||||||||
Other |
| | (1,736 | ) | | | (1,736 | ) | ||||||||||||||||
Net cash used in financing activities |
| | (3,142 | ) | (943 | ) | | (4,085 | ) | |||||||||||||||
DECREASE IN CASH AND CASH EQUIVALENTS |
| | 1,668 | (1,077 | ) | | 591 | |||||||||||||||||
Cash, beginning of period |
| | 17,934 | 3,068 | | 21,002 | ||||||||||||||||||
Cash, end of period |
$ | | $ | | $ | 19,602 | $ | 1,991 | $ | | $ | 21,593 | ||||||||||||
28
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
All references to we, us, our, our company or the Company in this Form 10-Q mean InSight
Health Services Holdings Corp., a Delaware corporation incorporated in 2001, and all entities and
subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to
Holdings mean InSight Health Services Holdings Corp. by itself. All references to InSight mean
InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by
itself.
This quarterly report on Form 10-Q, or Form 10-Q, includes forward-looking statements.
Forward-looking statements include statements concerning our plans, objectives, goals, strategies,
future events, future revenues or performance, capital projects, financing needs, debt purchases,
plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths
and weaknesses, business strategy and the trends that we anticipate in the industry and economies
in which we operate and other information that is not historical information. When used in this
Form 10-Q the words estimates, expects, anticipates, projects, plans, intends,
believes, and variations of such words or similar expressions are intended to identify
forward-looking statements. All forward-looking statements, including, without limitation, our
examination of historical operating trends, are based upon our current expectations and various
assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe
there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs
and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this Form 10-Q. Important factors that
could cause our actual results to differ materially from the forward-looking statements made in
this Form 10-Q are described herein, including the factors described in Part II, Item 1A. Risk
Factors and the following:
| our ability to successfully implement our core market strategy; | ||
| overcapacity and competition in our markets; | ||
| reductions, limitations and delays in reimbursement by third-party payors; | ||
| contract renewals and financial stability of customers; | ||
| changes in the nature of commercial health insurance arrangements, so that individuals bear greater financial responsibility through high deductible plans, co-insurance and co-payments; | ||
| conditions within the healthcare environment; | ||
| the potential for rapid and significant changes in technology and their effect on our operations; | ||
| operating, legal, governmental and regulatory risks; | ||
| conditions within the capital markets, including liquidity and interest rates; and | ||
| economic (including financial and employment markets), political and competitive forces affecting our business, and the countrys economic condition as a whole. |
If any of these risks or uncertainties materializes, or if any of our underlying assumptions is
incorrect, our actual results may differ significantly from the results that we express in or imply
by any of our forward-looking statements. We disclaim any intention or obligation to update or
revise forward-looking statements to reflect future events or circumstances.
29
Overview
We are a provider of retail and wholesale diagnostic imaging services. Our services are noninvasive
procedures that generate representations of internal anatomy on film or digital media, which are
used by physicians for the diagnosis and assessment of diseases and disorders.
We serve a diverse portfolio of customers, including healthcare providers, such as hospitals and
physicians, and payors, such as managed care organizations, Medicare, Medicaid and insurance
companies. We operate in more than 30 states including the following targeted regional markets:
California, Arizona, New England, the Carolinas, Florida and the Mid-Atlantic states. While we
generated approximately 67% of our total revenues from MRI services during fiscal 2009, we provide
a comprehensive offering of diagnostic imaging services, including PET/CT, CT, mammography, bone
densitometry, ultrasound and x-ray.
As of December 31, 2009, our network consists of 63 fixed-site centers and 106 mobile facilities.
This combination allows us to provide a full range of imaging services to better meet the varying
needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with
hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups
access to imaging technologies when they lack either the resources or patient volume to provide
their own imaging services or require incremental capacity. We do not engage in the practice of
medicine, instead we contract with radiologists to provide professional services, including
supervision, interpretation and quality assurance.
We have three reportable segments; contract services, patient services and other operations. Please
see below for a discussion of our segments. In our contract services segment we generate revenue
principally from 102 mobile units and 19 fixed sites. In our patient services segment we generate
revenues principally from 44 fixed site centers and 4 mobile units. In our other operations
segment, we generate revenues principally from agreements with customers to provide management
services and technical solutions.
The diagnostic imaging industry has grown, and we believe will continue to grow, because of (1) an
aging population, (2) the increasing acceptance of diagnostic imaging, particularly PET/CT and (3)
expanding applications of CT, MRI and PET/CT technologies. Notwithstanding the growth in the industry,
as a result of the various factors that affect our industry generally and our business
specifically, we have experienced declines in Adjusted EBITDA as compared to prior year periods
(see our definition of Adjusted EBITDA and reconciliation of net cash provided by operating
activities to Adjusted EBITDA in the subsection Financial Condition, Liquidity and Capital
Resources below). Our Adjusted EBITDA for the three and six months ended December 31, 2009
declined approximately 19.7% and 18.3%, respectively, as compared to our Adjusted EBITDA for the
prior year periods. Our Adjusted EBITDA declined approximately 1.2% and 33.1% for fiscal 2009 and
2008, respectively, as compared to prior fiscal years. We have had a negative historical trend of
declining Adjusted EBITDA for the past five fiscal years, which may continue and be exacerbated by
negative effects of the countrys economic condition, increased competition in our contract
services segment and the reimbursement reductions discussed in the subsection Reimbursement
below.
We have implemented the following steps in an attempt to reverse the negative trend in Adjusted
EBITDA:
Core Market Strategy. We have pursued a strategy based on core markets. We believe this strategy
will allow us more operating efficiencies and synergies than are available in a nationwide
strategy. A core market is based on many factors, including, without limitation, demographic and
population trends, utilization and reimbursement rates, existing and potential market share, the
potential for profitability and return on assets, competition within the surrounding area,
regulatory restrictions, such as certificates of need, and potential for alignment with
radiologists, hospitals or payors. This strategy has resulted in us exiting some markets while
increasing our presence in others or establishing new markets through acquisitions and
dispositions. In implementing our core market strategy, we have taken the following actions:
| During fiscal 2009, we sold eight fixed-site centers (six in California, one in Illinois and one in Tennessee), and equity interests in three joint ventures that operated five fixed-site centers (four in New York and one in California). In addition, we closed three fixed-site centers (two in California and one in Arizona) during fiscal 2009. |
30
| During fiscal 2009, we acquired two fixed-site centers in Massachusetts and two fixed-site centers in Arizona. | ||
| In July 2009, we sold two fixed-site centers in Pennsylvania. |
As a result of implementing our core market strategy, we have reduced our cost of services as a
percentage of revenues from 67.4% for the six months ended December 31, 2008 to 65.7% for the six
months ended December 31, 2009 and from 68.9% for the quarter ended December 31, 2008 to 67.1% for
the quarter ended December 31, 2009. The decrease is primarily due to disposing of low margin
fixed site centers, which had an average cost of services as a percentage of revenues of
approximately 74% and 77% for the six and three months ended December 31, 2008 respectively.
Additionally, while revenues have been adversely affected due to the negative trends discussed
below, as a percentage of revenues our Adjusted EBITDA has remained consistent for the six month
periods ended December 31, 2008 and 2009 and the three month periods ended December 31, 2008 and
2009.
We are continuously evaluating opportunities for the acquisition and disposition of certain
businesses. There can be no assurance that we can complete sales and/or purchases of these
businesses on terms favorable to us in a timely manner to replace the loss of Adjusted EBITDA
related to the businesses we sell.
Initiatives. We have attempted to implement, and will continue to develop and implement, various
revenue enhancement, revenue cycle management and cost reduction initiatives:
| Revenue enhancement initiatives have focused and will focus on our sales and marketing efforts to maintain or improve our procedural volumes and contractual rates, and our Insight Imaging Enterprise Solutions initiative discussed below. | ||
| Revenue cycle management initiatives have focused and will continue to focus on collections at point of service, technology improvements to create greater efficiency in the gathering of patient and claim information when a procedure is scheduled or completed, and the initiative with Dell Perot Systems discussed below. | ||
| Cost reduction initiatives have focused and will continue to focus on streamlining our organizational structure and expenses including enhancing and leveraging our technology to create greater efficiencies, and leveraging relationships with strategic vendors. |
While we have experienced some improvements through our revenue cycle management and cost reduction
initiatives, our revenue enhancement initiatives have produced minimal improvements to date and our
revenues have continued to decline. Moreover, future revenue enhancement initiatives will face
significant challenges because of the continued overcapacity in the diagnostic imaging industry,
reimbursement reductions and the countrys economic condition, including higher unemployment.
In February 2009, we entered into a seven-year agreement with Dell Perot Systems (formerly Perot
Systems Corporation) to provide enhanced revenue cycle services and assist in the implementation of
upgraded technology and IT services, which will provide new technology to manage our back-office
billing and accounts receivable collections functions. As a result of this agreement we terminated
certain employees and transitioned certain other employees to Dell Perot Systems. We implemented
the revenue cycle services in June 2009 and we expect to implement the new upgraded technology and
IT services as of the beginning of fiscal year 2011. We estimate start-up costs of this initiative
to be approximately $3.5 million (including $3.0 million of
capital expenditures), of which $2.4
million (including $2.3 million of capital expenditure) has been incurred as of December 31, 2009.
In addition to our traditional offerings of equipment and management services, we believe that we
have the ability to offer packaged technology solutions to hospitals and other medical imaging
services providers. Besides our traditional offerings, these customers would have the ability to
choose from a broad spectrum of systems and services, including, but not limited to, image
archiving and Picture Archiving Communication System (PACS) services, patient registration portals,
radiology information systems, revenue cycle management services, and financial and operational
tools. We launched this offering of solutions in fiscal 2010 under the name Insight
31
Imaging Enterprise Solutions and we recently extended a contract with an existing customer and
entered into a contract with a new customer.
Segments
Effective July 1, 2009, we redefined the business segments based on how our chief operating
decision maker views the business and assesses the performance of our business managers. We now
have three reportable segments: contract services, patient services and other operations, which are
business units defined primarily by the type of service provided:
Contract Services: Contract services consist of centers (primarily mobile units) which generate
revenues from fee-for-service arrangements and fixed-fee contracts billed directly to our
healthcare provider customers, such as hospitals, which we refer to as wholesale operations. We
internally handle the billing and collections for our contract services at relatively low cost, and
we do not bear the direct risk of collections from third-party payors or patients. Revenues from
our wholesale operations have been and will continue to be driven by the growth in the diagnostic
imaging industry and are dependent on our ability to:
| establish new wholesale customers within our core markets; | ||
| structure efficient wholesale routes that maximize equipment utilization and reduce vehicle operations costs; | ||
| timely collect payments from our wholesale customers, some of which face financial liquidity and stability concerns; and | ||
| renew existing contracts with our wholesale customers. |
Patient Services: Patient services consist of centers (mainly fixed-sites) that primarily generate
revenues from services billed, on a fee-for-service basis, directly to patients or third-party
payors, such as Medicare, Medicaid and health maintenance organizations, which we refer to as our
retail operations. We have primarily outsourced the billing and collections for our patient
services to Dell Perot Systems, and we bear the direct risk of collections from third-party payors
and patients. Revenues from our retail operations have been and will continue to be driven by the
growth in the diagnostic imaging industry and are dependent on our ability to:
| attract and maintain patient referrals from physician groups and hospitals; | ||
| maximize procedural volume, which includes ensuring that a patient attends his or her scheduled procedure; | ||
| appropriately bill and collect directly from patients their share of the procedure charge (i.e., co-payment, co-insurance and/or deductible); | ||
| maintain our existing contracts and enter into new ones with managed care organizations and commercial insurance carriers; and | ||
| acquire or develop new retail centers. |
Other Operations: Other operations generate revenues primarily from agreements with customers to
provide management services, which could include field staffing, billing and collections, technical
solutions, accounting and other office services. We refer to these operations as our Insight
Imaging Enterprise Solutions operations. We allocate corporate overhead, depreciation related to
our billing system and income taxes to other operations. We manage cash flows and assets on a
consolidated basis, and not by segment.
Negative Trends
Our operations have been and will continue to be adversely affected by the following negative
trends:
| overcapacity in the diagnostic imaging industry; | ||
| reductions in reimbursement from certain third-party payors including Medicare; |
32
| reductions in compensation paid by our wholesale customers; | ||
| shifting of health care costs from private insurers and employers to patients, who may elect to delay or forego medical procedures; | ||
| limited capital to invest in our business; | ||
| lower revenues due to our aging equipment in both of our operating segments; | ||
| competition from other wholesale and retail providers; | ||
| competition from equipment manufacturers; | ||
| loss of revenues from former referral sources that invested in their own diagnostic imaging equipment; and | ||
| loss of revenues from former wholesale customers that invested in their own diagnostic imaging equipment. |
Recently there has been an increase in the amount of
available equipment for lease within the industry. This increase in availability within the industry has caused
a decline in demand for our contract services mobile systems, which has resulted in (1) a lower than
normal success rate in replacing lost revenues, (2) lower contractual reimbursement as compared to
prior periods and (3) an increase in the number of our idle mobile systems.
Reimbursement
Medicare. The Medicare program provides reimbursement for hospitalization, physician, diagnostic
and certain other services to eligible persons 65 years of age and over and certain other
individuals. Providers are paid by the federal government in accordance with regulations
promulgated by the Department of Health and Human Services and generally accept the payment with
nominal deductible and co-insurance amounts required to be paid by the service recipient, as
payment in full. Hospital inpatient services are reimbursed under a prospective payment system.
Hospitals receive a specific prospective payment for inpatient treatment services based upon the
diagnosis of the patient.
Under Medicares prospective payment system for hospital outpatient services, or OPPS, a hospital
is paid for outpatient services on a rate per service basis that varies according to the ambulatory
payment classification group, or APC, to which the service is assigned rather than on a hospitals
costs. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates
that are determined in accordance with the promulgated methodology.
In recent years, CMS modified the OPPS with the effect of reducing the reimbursement received by
hospitals for certain outpatient radiological services, including PET/CT, and CMS continues to
examine imaging with a view toward potential further reductions. Because unfavorable reimbursement
policies constrict the profit margins of the mobile customers we bill directly, we have and may
continue to lower our fees to retain existing PET/CT customers and attract new ones. Although CMS
continues to expand reimbursement for new applications of PET/CT, broader applications are unlikely
to significantly offset the anticipated overall reductions in PET/CT reimbursement. Any
modifications under OPPS further reducing reimbursement to hospitals may adversely impact our
financial condition and results of operations since hospitals will seek to offset such
modifications.
Services provided in non-hospital based freestanding facilities, such as independent diagnostic
treatment facilities, are paid under the Medicare Physician Fee Schedule, or MPFS. Several years
ago, CMS reduced the reimbursement for certain diagnostic procedures performed together on the same
day. They did so by modifying Medicare to pay 100% of the technical component of the higher priced
procedure and 75% for the technical component of each additional procedure for procedures involving
contiguous body parts within a family of codes when performed in the same session. CMS anticipated
further reducing the technical component of each additional procedure for procedures involving
contiguous body parts from 75% to 50%. However, it has yet to implement this additional reduction,
and CMS has not yet stated whether it will implement such additional reduction.
33
CMS has also published proposed regulations for hospital outpatient services that would implement
the same multi procedure reimbursement methodology set forth under the MPFS; however it has delayed
the implementation of this reimbursement methodology for an indefinite period of time. As a result
Medicare continues to pay 100% of the technical component of each procedure for hospital outpatient
services. If CMS implements this reimbursement methodology, it would adversely impact our
financial condition and results of operations since our hospital customers would seek to offset
their reduced reimbursement through lower rates with us.
We have experienced significant reimbursement reductions for radiology services provided to
Medicare beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA. The
DRA, which became effective in 2007, set reimbursement for the technical component for imaging
services (excluding diagnostic and screening mammography) in non-hospital based freestanding
facilities at the lesser of OPPS or the MPFS.
Medicare reimbursement rates under the MPFS are calculated in accordance with a statutory formula.
As a result, for calendar years 2007, 2008 and 2009, CMS published regulations decreasing the fee
schedule rates by 5.0%, 10.1% and 5.4%, respectively. In each instance, Congress enacted
legislation preventing the decreases from taking effect. We anticipate that CMS will continue to
release regulations for decreases in fee schedule rates under the MPFS until the statutory formula
is changed through enactment of new legislation. We do not know if Congress will continue to enact
legislation to prevent future decreases under the statutory formula, but if Congress failed to act,
there could be significant decreases to the MPFS. In fact, CMS (under the Final Rule cited below)
announced a 21.2% decrease under the MPFS for calendar year 2010. The effective date of the
proposed 21.2% decrease was postponed to March 1, 2010 under legislation passed in December 2009,
and Congress is currently proposing additional legislation for further delays. However, if the
21.2% or similar decrease in the fee schedule rates under the MPFS becomes effective March 1, 2010
(as is currently mandated) it will have a significant adverse effect on our financial condition and
results of operations.
On October 30, 2009, CMS released a display copy of the final rule (the Final Rule) which updates
the payment policies and rates for the MPFS, for calendar year 2010. In addition to other changes
to the physician payment formulae, the MPFS reduces payment rates for services using equipment
costing more than $1 million by increasing the usage assumptions from the current 50% usage rate to
a 90% usage rate. This reduction primarily impacts radiology and other diagnostic tests. Federal
legislative proposals have been introduced that would result in lower usage assumptions and, if
enacted, would supersede CMSs regulatory changes. Further with respect to its 2010 changes, CMS
will also reduce payment for services primarily involving the technical component rather than the
physician work component, including the services we provide, by adjusting downward malpractice
payments for these services. The reductions primarily impact radiology and other diagnostic tests.
The changes to the MPFS will be transitioned over a four-year period such that beginning in 2013,
CMS will fully implement the revised payment rates. Thus, even if the announced 21.2% decrease
mentioned above is not implemented (as certain members of Congress and the Obama administration are
currently pledging), this change to the MPFS, could have an adverse effect on our financial
condition and results of operations. For our fiscal year ended June 30, 2009, Medicare revenues
represented $22.2 million, or approximately 10.0% of our total revenues for such period. If the
Final Rule had been fully phased in during our fiscal year ended June 30, 2009, we estimate that
our total revenues would have been reduced by approximately $2.6 million, or 1.1%. We expect that
for our fiscal year ending June 30, 2010, the initial phase of the Final Rule will reduce our total
revenues by less than one percent. The impact of the new MPFS will increase over the four-year
transition period unless mitigated by future legislation (either currently proposed or pledged by
Congress and the Obama administration). The foregoing estimate does not reflect potential
reductions if any of the following were implemented (a) the 21.2% decrease under the MPFS, or (b)
any comparable reductions by third-party payors other than Medicare.
In addition to reimbursement cuts, the new MPFS confirms that suppliers of technical component
advanced imaging services must be accredited by January 1, 2012. Our mobile facilities are
currently accredited by The Joint Commission, which has been designated by CMS as an authorized
accrediting body. We do not know the impact the accreditation requirements will have on our
financial condition or results of operations.
The Obama administration and the 111th Congress have made significant proposals affecting the
healthcare industry, including proposals that affect the imaging industry. We are unable to predict
whether any of their proposals will be implemented or in what form, whether any additional or
similar changes to statutes or regulations (including interpretations), will occur in the future,
or what effect any legislation or regulation would have on our
34
business. We do believe, however, that there will likely be changes to reimbursement for services
provided to Medicare patients, and the federal government will likely have greater involvement in
the healthcare industry than in prior years, and such reimbursement changes and greater involvement
may adversely affect our financial condition and results of operations.
All of the congressional and regulatory actions described above reflect industry-wide
cost-containment pressures that we believe will continue to affect healthcare providers for the
foreseeable future.
Medicaid. The Medicaid program is a jointly-funded federal and state program providing coverage for
low-income persons. In addition to federally-mandated basic services, the services offered and
reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned
after the Medicare program; however, an increasing number of states have established or are
establishing payment methodologies intended to provide healthcare services to Medicaid patients
through managed care arrangements.
Managed Care and Private Insurance. Health Maintenance Organizations, Preferred Provider
Organizations, or PPOs, and other managed care organizations attempt to control the cost of
healthcare services by a variety of measures, including imposing lower payment rates,
preauthorization requirements, limiting services and mandating less costly treatment alternatives.
Managed care contracting is competitive and reimbursement schedules are at or below Medicare
reimbursement levels. However, some managed care organizations have reduced or otherwise limited,
and we believe that other managed care organizations may reduce or otherwise limit, reimbursement
in response to reductions in government reimbursement. These reductions have had, and any future
reductions could have, an adverse impact on our financial condition and results of operations.
These reductions have been, and any future reductions may be, similar to the reimbursement
reductions proposed by CMS, Congress and the
Obama Administration. The development and expansion of HMOs, PPOs and other managed care
organizations within our core markets could have a negative impact on utilization of our services
in certain markets and/or affect the revenues per procedure which we can collect, since such
organizations will exert greater control over patients access to diagnostic imaging services, the
selection of the provider of such services and the reimbursement thereof.
Some states have adopted or expanded laws or regulations restricting the assumption of financial
risk by healthcare providers which contract with health plans. While we are not currently subject
to such regulation, we or our customers may in the future be restricted in our ability to assume
financial risk, or may be subjected to reporting requirements if we do so. Any such restrictions or
reporting requirements could negatively affect our contracting relationships with health plans.
Private health insurance programs generally have authorized payment for our services on
satisfactory terms. However, we believe that private health insurance programs may also reduce or
otherwise limit reimbursement in response to reductions in government reimbursement, which could
have an adverse impact on our financial condition and results of operations.
Several significant third-party payors implemented the reduction for multiple images on contiguous
body parts (as currently in effect under CMS regulations) and additional payors may propose to
implement this reduction as well. If the government implements a discount on the technical
component discount on imaging of contiguous body parts third-party payors may follow this practice
and implement a similar reduction. Such reduction would further negatively affect our financial
condition and results of operations.
Furthermore, certain third-party payors have proposed and implemented initiatives which have the
effect of substantially decreasing reimbursement rates for diagnostic imaging services provided at
non-hospital facilities, and payors are continuing to monitor reimbursement for diagnostic imaging
services. A third-party payor has instituted a requirement of participation that requires
freestanding imaging center providers to offer multi-modality imaging services and not simply offer
one type of diagnostic imaging service. Other third-party payors have instituted specific
credentialing requirements on imaging center providers and physicians performing interpretations
and providing supervision. Similar initiatives enacted in the future by a significant number of
additional third-party payors may have a significant adverse impact on our financial condition and
results of operations.
35
Revenues
We earn revenues by providing services to patients, hospitals and other healthcare providers. Our
patient services revenue is billed, on a fee-for-service basis, directly to patients or third-party
payors such as managed care organizations, Medicare, Medicaid, commercial insurance carriers and
workers compensation funds, collectively, payors. Patient services revenues also include balances
due from patients, which are primarily collected at the time the procedure is performed. We refer
to our patient services revenues as our retail operations. With respect to our retail operations
we bear the direct risk of collections from third-party payors and patients. Our charge for a
procedure is comprised of charges for both the technical and professional components of the
service. Patient services revenues are presented net of (1) related contractual adjustments, which
represent the difference between our charge for a procedure and what we will ultimately receive
from the payors, and (2) payments due to radiologists for interpreting the results of the
diagnostic imaging procedures.
Historically and through fiscal 2009, our billing system did not generate contractual adjustments.
Consequently, contractual adjustments had been manual estimates based upon an analysis of
historical experience of contractual payments from payors and the outstanding accounts receivables
from payors. In July 2009, we completed the implementation of a new report that extracts data from
our billing system and automatically generates the contractual adjustments based on actual
contractual rates with our payors in effect at the time the service is provided to the patient.
Contractual adjustments are written-off against contractual rates with our payors in effect when
the service was provided to the patient.
We report payments to radiologists on a net basis because (1) we are not the primary obligor for
the provision of professional services, (2) the radiologists receive contractually agreed upon
percentage of collections and (3) the radiologists bear the risk of non-collection. In the past we
had arrangements with certain radiologists pursuant to which we paid the radiologists directly for
their professional services at an agreed upon contractual rate. With respect to these
arrangements, the professional component was included in our revenues, and our payments to the
radiologists are included in costs of services. In fiscal year 2010, we no longer have these types
of arrangements.
Our collection policy is to obtain all required insurance information at the time a procedure is
scheduled, and to submit an invoice to the payor immediately after a procedure is completed. Most
third-party payors require preauthorization before an MRI, CT or PET/CT procedure is performed on a
patient.
We refer to our revenues from hospitals, physician groups and other healthcare providers as
contract services revenues or our wholesale operations. Contract services or wholesale revenues
are primarily generated from fee-for-service arrangements, fixed-fee contracts and management fees
billed to the hospital, physician group or other healthcare provider. Contract service revenues
are generally billed to our customers on a monthly basis. Contract services revenues are
recognized when the service is provided. Revenues collected in advance are recorded as unearned
revenue. Revenues are affected by the timing or holidays, patient and referring physicians
vacation schedules and inclement weather.
The provision for doubtful accounts is reflected as an operating expense and represents our
estimate of amounts that are legally owed to us but will be uncollectible from patients, payors,
hospitals, physician groups and other healthcare providers. The provision for doubtful accounts
includes amounts to be written off with respect to specific accounts involving customers that are
financially unstable or materially fail to comply with the payment terms of their contracts and
other accounts based on our historical collection experience, including payor mix and the aging of
patient accounts receivables balances. Estimates of uncollectible amounts are revised each period,
and changes are recorded in the period they become known. Receivables deemed to be uncollectible,
either through a customer default on payment terms or after reasonable collection efforts have been
exhausted, are fully written-off against their corresponding asset account, with a reduction to the
allowance for doubtful accounts to the extent such an allowance was previously recorded. Our
historical write-offs for uncollectible accounts are not concentrated in a specific payor class.
36
The following illustrates our payor mix based on revenues for the six months ended December 31,
2009 and 2008:
Six months ended | ||||||||
December 31, | ||||||||
Percentage of Total Revenues | 2009 | 2008 | ||||||
Hospitals, physician groups and other healthcare providers (1)(2) |
51 | % | 47 | % | ||||
Managed care and insurance |
34 | % | 37 | % | ||||
Medicare / Medicaid |
11 | % | 12 | % | ||||
Other, including workers compensation and self-pay patients |
4 | % | 4 | % |
(1) | We have one healthcare provider that accounted for approximately 6.0% of our total revenues during the six months ended December 31, 2009. No other single hospital, physician group or other healthcare provider accounted for more than 5% of our total revenues. | |
(2) | These payors principally represent our contract services or wholesale operations. |
The aging of our gross and net trade accounts receivables as of December 31, 2009 is as follows
(amounts in thousands):
120 days | ||||||||||||||||||||||||
Current | 30 days | 60 days | 90 days | and older | Total | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Hospitals, physician groups and other
healthcare providers |
$ | 7,775 | $ | 3,286 | $ | 1,248 | $ | 503 | $ | 528 | $ | 13,340 | ||||||||||||
Managed care and insurance |
10,955 | 3,215 | 1,707 | 1,245 | 4,211 | 21,333 | ||||||||||||||||||
Medicare/Medicaid |
2,781 | 746 | 405 | 273 | 1,202 | 5,407 | ||||||||||||||||||
Other, including workers compensation |
752 | 552 | 337 | 277 | 921 | 2,839 | ||||||||||||||||||
Other, including self paid patients |
83 | 63 | 54 | 48 | 22 | 270 | ||||||||||||||||||
Trade accounts receivables |
22,346 | 7,862 | 3,751 | 2,346 | 6,884 | 43,189 | ||||||||||||||||||
Less: Allowances for professional fees |
(2,402 | ) | (752 | ) | (402 | ) | (291 | ) | (1,023 | ) | (4,870 | ) | ||||||||||||
Allowances for contractual adjustments |
(6,763 | ) | (1,999 | ) | (1,040 | ) | (79 | ) | (161 | ) | (10,042 | ) | ||||||||||||
Allowances for doubtful accounts |
(163 | ) | (49 | ) | (25 | ) | (1,357 | ) | (2,712 | ) | (4,306 | ) | ||||||||||||
Trade accounts receivables, net December 31, 2009 |
$ | 13,018 | $ | 5,062 | $ | 2,284 | $ | 619 | $ | 2,988 | $ | 23,971 | ||||||||||||
54 | % | 21 | % | 10 | % | 3 | % | 12 | % | 100 | % |
Our days sales outstanding, for trade accounts receivables on a net basis was approximately 42
days at December 31, 2009 and 43 days at June 30, 2009.
Operating Expenses
We operate in a capital intensive industry that requires significant amounts of capital to fund
operations. As a result, a high percentage of our total operating expenses are fixed. Our fixed
costs include depreciation and amortization, debt service, lease payments, salaries and benefit
obligations, equipment maintenance expenses, insurance and vehicle operations costs. Because a
large portion of our operating expenses are fixed, any increase in our procedure volume or
reimbursement rates disproportionately increases our operating cash flow. Conversely, any decrease
in our procedure volume or reimbursement rates disproportionately decreases our operating cash
flow. Our variable costs, which comprise only a small portion of our total operating expenses,
include billing fees related to patient services, bad debt expense and the cost of service supplies
such as film, contrast media and radiopharmaceuticals.
37
Results of Operations
The following table sets forth the results of operations for the three and six months ended
December 31, 2009 and 2008.
Six Months Ended | Three Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(unaudited) | ||||||||||||||||
REVENUES: |
||||||||||||||||
Contract services |
$ | 48,953 | $ | 60,593 | $ | 23,933 | $ | 29,660 | ||||||||
Patient services |
47,692 | 59,570 | 23,092 | 28,454 | ||||||||||||
Other |
1,108 | 1,168 | 587 | 632 | ||||||||||||
Total revenues |
97,753 | 121,331 | 47,612 | 58,746 | ||||||||||||
COSTS OF OPERATIONS: |
||||||||||||||||
Costs of services |
64,185 | 81,832 | 31,935 | 40,504 | ||||||||||||
Provision for doubtful accounts |
2,183 | 2,336 | 1,073 | 1,294 | ||||||||||||
Equipment leases |
5,158 | 5,716 | 2,597 | 2,829 | ||||||||||||
Depreciation and amortization |
17,476 | 24,438 | 8,005 | 11,847 | ||||||||||||
Total costs of operations |
89,002 | 114,322 | 43,610 | 56,474 | ||||||||||||
CORPORATE OPERATING EXPENSES |
(9,800 | ) | (11,127 | ) | (4,994 | ) | (5,229 | ) | ||||||||
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |
1,172 | 1,108 | 560 | 496 | ||||||||||||
INTEREST EXPENSE, net |
(13,583 | ) | (15,949 | ) | (6,739 | ) | (8,081 | ) | ||||||||
GAIN ON SALES OF CENTERS |
| 6,988 | | 6,548 | ||||||||||||
GAIN ON PURCHASE OF NOTES PAYABLE |
| 1,246 | | | ||||||||||||
IMPAIRMENT OF OTHER LONG-LIVED ASSETS |
(1,949 | ) | (4,600 | ) | (1,949 | ) | (4,600 | ) | ||||||||
Loss before income taxes |
(15,409 | ) | (15,325 | ) | (9,120 | ) | (8,594 | ) | ||||||||
BENEFIT FOR INCOME TAXES |
(646 | ) | (1,692 | ) | (683 | ) | (1,927 | ) | ||||||||
Net loss |
(14,763 | ) | (13,633 | ) | (8,437 | ) | (6,667 | ) | ||||||||
Less: net income attributable to noncontrolling interests |
385 | 370 | 119 | 106 | ||||||||||||
Net loss attributable to InSight Health Services Holdings Corp. |
$ | (15,148 | ) | $ | (14,003 | ) | $ | (8,556 | ) | $ | (6,773 | ) | ||||
38
The following table sets forth certain historical financial data expressed as a percentage of
revenues for each of the periods indicated:
Six Months Ended | Three Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(unaudited) | ||||||||||||||||
REVENUES: |
||||||||||||||||
Contract services |
50.1 | % | 49.9 | % | 50.3 | % | 50.5 | % | ||||||||
Patient services |
48.8 | % | 49.1 | % | 48.5 | % | 48.4 | % | ||||||||
Other |
1.1 | % | 1.0 | % | 1.2 | % | 1.1 | % | ||||||||
Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
COSTS OF OPERATIONS: |
||||||||||||||||
Costs of services |
65.7 | % | 67.4 | % | 67.1 | % | 68.9 | % | ||||||||
Provision for doubtful accounts |
2.2 | % | 1.9 | % | 2.3 | % | 2.2 | % | ||||||||
Equipment leases |
5.3 | % | 4.7 | % | 5.5 | % | 4.8 | % | ||||||||
Depreciation and amortization |
17.9 | % | 20.1 | % | 16.8 | % | 20.2 | % | ||||||||
Total costs of operations |
91.0 | % | 94.2 | % | 91.6 | % | 96.1 | % | ||||||||
CORPORATE OPERATING EXPENSES |
-10.0 | % | -9.2 | % | -10.5 | % | -8.9 | % | ||||||||
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |
1.2 | % | 0.9 | % | 1.2 | % | 0.8 | % | ||||||||
INTEREST EXPENSE, net |
-13.9 | % | -13.1 | % | -14.2 | % | -13.8 | % | ||||||||
GAIN ON SALES OF CENTERS |
0.0 | % | 5.8 | % | 0.0 | % | 11.1 | % | ||||||||
GAIN ON PURCHASE OF NOTES PAYABLE |
0.0 | % | 1.0 | % | 0.0 | % | 0.0 | % | ||||||||
IMPAIRMENT OF OTHER LONG-LIVED ASSETS |
-2.0 | % | -3.8 | % | -4.1 | % | -7.8 | % | ||||||||
Loss before income taxes |
-15.8 | % | -12.6 | % | -19.2 | % | -14.6 | % | ||||||||
BENEFIT FOR INCOME TAXES |
-0.7 | % | -1.4 | % | -1.4 | % | -3.3 | % | ||||||||
Net loss |
-15.1 | % | -11.2 | % | -17.7 | % | -11.3 | % | ||||||||
Less: net income attributable to noncontrolling interests |
0.4 | % | 0.3 | % | 0.2 | % | 0.2 | % | ||||||||
Net loss attributable to InSight Health Services Holdings Corp. |
-15.5 | % | -11.5 | % | -18.0 | % | -11.5 | % | ||||||||
39
The following table sets forth certain historical financial data by segment for the periods
indicated (amounts in thousands except percentages):
Six Months Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2009 | 2008 | Variance | Variance % | |||||||||||||
(unaudited) | ||||||||||||||||
Revenues |
||||||||||||||||
Patient services (1) |
$ | 47,692 | $ | 59,570 | $ | (11,878 | ) | -20 | % | |||||||
Contract services |
48,953 | 60,593 | (11,640 | ) | -19 | % | ||||||||||
Other operations |
1,108 | 1,168 | (60 | ) | -5 | % | ||||||||||
Total |
$ | 97,753 | $ | 121,331 | $ | (23,578 | ) | -19 | % | |||||||
Costs of Operations |
||||||||||||||||
Patient services (2) |
$ | 46,149 | $ | 61,811 | $ | (15,662 | ) | -25 | % | |||||||
Contract services |
41,204 | 50,304 | (9,100 | ) | -18 | % | ||||||||||
Other operations |
1,649 | 2,207 | (558 | ) | -25 | % | ||||||||||
Total |
$ | 89,002 | $ | 114,322 | $ | (25,320 | ) | -22 | % | |||||||
Costs of Operations as a Percentage of Revenues |
||||||||||||||||
Patient services |
97 | % | 104 | % | ||||||||||||
Contract services |
84 | % | 83 | % | ||||||||||||
Other operations |
149 | % | 189 | % | ||||||||||||
Total |
91 | % | 94 | % | ||||||||||||
(1) | Patient services revenues for the six months ended December 31, 2008 include $11.8 million related to patient services centers that were sold or closed in fiscal 2009 and 2010 and were in operation in the first six months of 2009, but were not in operation for the entire six months of 2010. Patient services revenues for the six months ended December 31, 2009 include $3.2 million in revenues from acquired patient services centers that were not in operation in the first quarter of 2009. | |
(2) | Patient services cost of operations for the six months ended December 31, 2008, include $10.1 million related patient services centers that were sold or closed in fiscal 2009 and 2010 and were in operation in the first six months of 2009, but were not in operation for the entire six months of 2010. Patient services costs of operations for the six months ended December 31, 2009 include $1.7 million in costs from acquired patient services centers that were not in operation in the first six months of 2009. |
Six Months Ended December 31, 2009 and 2008
Revenues: Net of dispositions and acquisitions, revenues decreased 10.6% from $105.0 million for
the six months ended December 31, 2008, to $93.9 million for the six months ended December 31,
2009. This decrease was due to lower contract services revenues ($7.8 million) and lower revenues
from patient services centers ($3.3 million). Revenues from other operations remained consistent
for both periods.
Our patient services revenues, net of acquisitions and dispositions, decreased by 6.9% from $47.1
million for the six months ended December 31, 2008, to $43.8 million for the six months ended
December 31, 2009. This decrease was primarily a result of a decrease in scan volumes.
Our contract services revenues decreased 19.2% from $60.6 million for the six months ended December
31, 2008, to $49.0 million for the six months ended December 31, 2009. This decrease was due
partially to the closure of a fixed-site center related to a large health care provider contract
($3.8 million). Additionally, we experienced a reduction in the number of active contracts and
reductions in reimbursement from our contract services customers for all modalities. The reductions
in reimbursement are primarily the result of competition from other contract services providers and
fewer mobile units in service. Our aging mobile fleet also contributed to the decline in revenues
as did the continued propensity for customers to take their business in-house.
40
We believe we may continue to experience declining revenues due to the negative trends discussed
above, which may be intensified by the negative effects of the countrys economic condition,
including higher unemployment and fewer individuals with healthcare insurance and reductions in
third-party payor reimbursement.
Costs of services: As a percentage of revenues, costs of services decreased 1.7% to 65.7% for the
six months ended December 31, 2009 as compared to 67.4% for the same period in 2008. The decrease
is attributable partially to lower costs, net of acquisitions and dispositions, in our contract
services ($3.9 million) and lower costs, net of acquisitions and dispositions, in our patient
services ($3.9 million) coupled with the disposition of certain of our patient services centers,
which had costs of services as a percentage of revenues of approximately 74%.
As a percentage of revenues, costs of services at our patient services centers decreased 5.4% to
77.2% for the six months ended December 31, 2009 from 82.6% for the same period in the prior year.
The decrease is partially the result of the disposition of patient services centers with costs of
services as a percentage of revenue of over 85% and the acquisition of centers with a costs of
services as a percentage of revenues of 54.7%. Total costs of services in our patient services
segment decreased. Our dispositions eliminated $10.1 million of costs from the six month ended
December 31, 2008 to the current six month period, which was partially offset by acquisitions ($1.7
million). Additionally we also reduced the cost of services for our existing patient services
centers by 3.0% as a percentage of revenues ($3.9 million). The decrease in costs of services for
our existing patient services centers was due primarily to decreased salary related expenses ($1.5
million), reading fees ($1.0 million), billing fees ($0.7 million), equipment maintenance ($0.4
million).
As a percentage of revenues our contract services costs of services increased 1.9% to 55.4% for the
six months ended December 31, 2009 from 53.5% for the same period in the prior year. Costs of
services in our contract services operations decreased $5.3 million for the six months ended
December 31, 2009 as compared to the same period in the prior year. The decrease was due partially
to the closure of a fixed site center related to a large health care provider contract ($1.4
million). The decrease in costs of services for our existing contract services operations was a
result of our cost reduction initiatives. Notable variances included a decrease in salary related
expenses ($2.3 million), a decrease in our mobile fleet related costs ($1.6 million), and decreases
in supplies, insurance and taxes and license fees ($0.4 million), partially offset by a decrease in
gain on sale of medical equipment ($0.3 million)
Provision for doubtful accounts: The provision for doubtful accounts decreased by $0.2 million for
the six months ended December 31, 2009 as compared to the prior year. Net of acquisitions and
dispositions, our provisions for doubtful accounts increased $0.1 million to $2.1 million for the
six months ended December 31, 2009 as compared to $2.0 million in the same period in the prior
year, related primarily to contract services operations.
Equipment leases: Equipment leases decreased $0.6 million for the six months ended December 31,
2009 as compared to the same period in the prior year. Equipment leases, net of acquisitions and
dispositions, decreased $0.4 million, from $5.4 million to $5.0 million for the six months ended
December 31, 2009 and 2008, respectively.
Depreciation and amortization: Depreciation and amortization expense decreased $7.0 million for
the six months ended December 31, 2009 to $17.5 million from $24.5 million for the same period in
the prior year. Net of acquisitions and dispositions, depreciation and amortization decreased $4.5
million for the six months ended December 31, 2009 as compared to same period in the prior year.
The decrease can be primarily attributed to the age of our equipment resulting in more fully
depreciated equipment during the six months ended December 31, 2009 than the prior year period,
partially offset by purchases of new property and equipment.
Corporate Operating Expenses: Corporate operating expenses decreased $1.3 million, or 11.9%, to
$9.8 million for the six months ended December 31, 2009 from $11.1 million for the six months ended
December 31, 2008. As a percentage of revenues corporate operating expenses increased to 10.0% for
the six months ended December 31, 2009 from 9.2% for the same period in the prior year due to
declines in revenues. Our cost reduction initiatives primarily contributed to decreases in salary
related expenses ($0.4 million), office related expenses ($0.3 million) and legal, accounting and
consulting expenses ($0.3 million).
Interest Expense, net: Interest expense, net decreased $2.4 million from $16.0 million for the six
months ended December 31, 2008, to $13.6 million for the six months ended December 31, 2009. The
decrease was due primarily to lower interest rates ($2.6 million) on the floating rate notes
coupled with lower debt balances resulting from our
41
purchase of $21.5 million of floating rate
notes partially offset by increased amortization of the bond discount ($0.2 million).
Gain on Sales of Centers: During the six months ended December 31, 2008, we sold three fixed-site
centers in California, one fixed-site center in Illinois and one fixed-site center in Tennessee and
our equity interest in three
joint ventures in New York and California that operated six fixed-site centers. We received $18.1
million, net of cash sold, from the sales and recorded a gain of $7.0 million.
Gain on Purchase of Notes Payable: During the six months ended December 31, 2008, we purchased $2.5
million in principal amount of our floating rate notes for $1.1 million. We realized a gain of $1.2
million, after the write-off of unamortized discount of $0.2 million.
Impairment of Other Long-lived Assets: Impairment of other long-lived assets decreased $2.7
million from $4.6 million for the six months ended December 31, 2008 to $1.9 million for the six
months ended December 31, 2009. Based on our annual evaluation of the carrying value of our
indefinite-lived intangible assets as of December 31, 2009, we concluded that impairments had
occurred and we recorded a non-cash impairment charge of $1.9 million in our contract services
reporting unit related to our trademark ($0.8 million) and our certificates of need ($0.9 million)
and our patient services reporting unit related to our certificates of need ($0.2 million). This
impairment charge primarily resulted from a decline in our mobile business within our contract
services reporting unit.
Loss before income taxes: Loss before income taxes increased from $15.3 million for the six months
ended December 31, 2008, to $15.4 million for the six months ended December 31, 2009. An analysis
of the change in loss before income taxes is as follows (amounts in thousands) (unaudited):
Consolidated | ||||
Loss before income taxes |
||||
Six Months ended December 31, 2008 |
$ | (15,325 | ) | |
Decrease in existing centers revenues |
(11,132 | ) | ||
Decrease in existing centers costs of services |
7,829 | |||
Decrease in existing centers equipment leases |
386 | |||
Decrease in existing centers depreciation and amortization |
4,503 | |||
Decrease in existing centers interest expense |
2,201 | |||
Increase in existing centers provision for doubtful accounts |
(108 | ) | ||
Impact of
centers sold, closed or acquired |
429 | |||
Decrease in corporate operating expenses |
1,327 | |||
Increase in equity in earnings of unconsolidated partnerships |
64 | |||
Gain on sales of centers |
(6,988 | ) | ||
Gain on purchase of floating rate notes |
(1,246 | ) | ||
Decrease in impairment of other long-lived assets |
2,651 | |||
Loss before income taxes |
||||
Six Months ended December 31, 2009 |
$ | (15,409 | ) | |
Benefit for Income Taxes: For the six months ended December 31, 2009, we recorded a benefit
for income taxes of $0.6 million as compared to a benefit for income taxes of $1.7 million for the
six months ended December 31, 2008. The benefit for income taxes is related to a decrease in our
deferred tax liability of approximately $0.7 million due to the impairment of our indefinite-live
intangible assets, offset partially by a provision primarily related to state income taxes.
42
Three Months Ended December 31, 2009 and 2008
Three Months Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2009 | 2008 | Variance | Variance % | |||||||||||||
(unaudited) | ||||||||||||||||
Revenues |
||||||||||||||||
Patient services (1) |
$ | 23,092 | $ | 28,454 | $ | (5,362 | ) | -19 | % | |||||||
Contract services |
23,933 | 29,660 | (5,727 | ) | -19 | % | ||||||||||
Other operations |
587 | 632 | (45 | ) | -7 | % | ||||||||||
Total |
$ | 47,612 | $ | 58,746 | $ | (11,134 | ) | -19 | % | |||||||
Costs of Operations |
||||||||||||||||
Patient services (2) |
$ | 22,375 | $ | 30,409 | $ | (8,034 | ) | -26 | % | |||||||
Contract services |
20,319 | 25,157 | (4,838 | ) | -19 | % | ||||||||||
Other operations |
916 | 908 | 8 | 1 | % | |||||||||||
Total |
$ | 43,610 | $ | 56,474 | $ | (12,864 | ) | -23 | % | |||||||
Costs of Operations as a Percentage of Revenues |
||||||||||||||||
Patient services |
97 | % | 107 | % | ||||||||||||
Contract services |
85 | % | 85 | % | ||||||||||||
Other operations |
156 | % | 144 | % | ||||||||||||
Total |
92 | % | 96 | % | ||||||||||||
(1) | Patient services revenues for the three months ended December 31, 2008 include $5.0 million related to patient services centers sold or closed in fiscal 2009 and 2010 that were in operation in the first three months of 2009, but were not in operation for the entire three months ended December 31, 2009. Patient services revenues for the three months ended December 31, 2009 include $1.4 million in revenues from acquired patient services centers that were not in operation in the three months ended December 31, 2008. | |
(2) | Patient services cost of operations for the three months ended December 31, 2008, include $4.6 million related patient services that were sold or closed in fiscal 2009 and 2010 that were in operation in the first three months of 2009, but were not in operation for the entire three months ended December 31, 2009. Patient services costs of operations for the three months ended December 31, 2009 include $0.7 million in costs from acquired patient services centers that were not in operation in the three months ended December 31, 2008. |
Revenues: Net of dispositions and acquisitions, revenues decreased 11.1% from $51.5 million for the
three months ended December 31, 2008, to $45.8 million for the three months ended December 31,
2009. This decrease was due to lower existing contract services revenues ($3.9 million) and lower
existing patient services centers revenues ($1.8 million). Revenues from other operations remained
consistent for both periods.
Patient services revenues, net of acquisitions and dispositions, decreased by 7.9% from $23.0
million for the three months ended December 31, 2008, to $21.2 million for the three months ended
December 31, 2009. The decrease was partially a result of lower scan volumes ($1.2 million) coupled
with lower fees per scan ($0.6 million).
Our contract services revenues decreased 19.3% from $29.7 million for the three months ended
December 31, 2008, to $23.9 million for the three months ended December 31, 2009. This decrease
was due partially to the closure of a fixed site center related to a large health care provider
contract ($1.8 million). Additionally, we experienced a reduction in the number of active contracts
and reductions in reimbursement from our contract services customers for all modalities. The
reductions in reimbursement are primarily the result of competition from other contract services
providers and fewer mobile units in service. Our aging mobile fleet also contributed to the
decline in revenues as did the continued propensity for customers to take their business in-house.
We believe we may continue to experience declining revenues due to the negative trends discussed
above, which may be intensified by the negative effects of the economic condition, including higher
unemployment and fewer individuals with healthcare insurance and any reductions in third-party
payor reimbursement.
43
Costs of services: As a percentage of revenues, costs of services decreased 1.9% to 67.1% for the
three months ended December 31, 2009 as compared to 69.0% for the same period in 2008. The decrease
is attributable to lower costs, net of acquisitions and dispositions in our contract services ($1.8
million) and lower costs, net of acquisitions and dispositions in our patient services ($2.5
million) coupled with the disposition of certain of our patient services centers, which had costs
of services as a percentage of revenues of approximately 93%.
As a percentage of revenues, costs of services at our patient services centers decreased 7.6% to
79.0% for the three months ended December 31, 2009 from 86.6% for the same period in the prior
year. Costs of services in the patient services segment decreased $6.4 million for the quarter
ended December 31, 2009 as compared to the same quarter in the prior year. The decrease is
partially the result of the disposition of patient services centers ($4.6 million) offset partially
by acquisitions ($0.7 million). Additionally, cost of services for our existing patient services
centers decreased 4.3% as a percentage of revenues ($2.5 million). The decrease in costs of
services for our existing patient services centers was due primarily to decreased billing fees
($1.9 million) and reading fees ($0.5 million).
As a percentage of revenues our contract services costs of services increased 2.6% to 56.4% for the
three months ended December 31, 2009 from 53.8% for the same period in the prior year. Costs of
services in our contract services operations decreased $2.5 million for the three months ended
December 31, 2009 as compared to the same period in the prior year. The decrease was due partially
to the closure of a fixed-site center related to a large health care provide contract. The decrease
in costs of services for our existing contract services operations was a result of our cost
reduction initiatives. Notable variances included a decrease in salary related expenses ($1.2
million) and a decrease in our mobile fleet related costs ($0.6 million).
Provision for doubtful accounts: The provision for doubtful accounts decreased by $0.2 million for
the three months ended December 31, 2009 as compared to the prior year. Net of acquisitions and
dispositions, our provisions for doubtful accounts remained consistent.
Equipment leases: Equipment leases decreased $0.2 million for the quarter ended December 31, 2009
as compared to the same period in the prior year due to the disposition of certain centers.
Equipment leases, net of acquisitions and dispositions, remained consistent.
Depreciation and amortization: Depreciation and amortization expense decreased $3.8 million for
the quarter ended December 31, 2009 to $8.0 million from $11.8 million for the same period in the
prior year. Net of acquisitions and dispositions, depreciation and amortization decreased $2.8
million in the quarter ended December 31, 2009 as compared to same period in the prior year. The
decrease in revenue can be primarily attributed to the age of our equipment resulting in more fully
depreciated equipment during the quarter ended December 31, 2009 than the prior year period,
partially offset by purchases of new property and equipment.
Corporate Operating Expenses: Corporate operating expenses decreased $0.2 million, or 4.5%, to $5.0
million for the quarter ended December 31, 2009 from $5.2 million for the quarter ended December
31, 2008. As a percentage of revenues corporate operating expenses increased to 10.5% for the
three months ended December 31, 2009 from 8.9% for the same period in the prior year due to the decline in
revenues. The reduction in expenses was a result primarily of our cost reduction initiatives which
contributed to decreased salary related expenses ($0.1 million) and office related expenses ($0.1
million).
Interest Expense, net: Interest expense, net decreased $1.3 million from $8.1 million for the
quarter ended December 31, 2008, to $6.7 million for the quarter ended December 31, 2009. The
decrease was due primarily to lower interest rates ($2.6 million) on the floating rate notes
coupled with lower debt balances resulting from our purchase of $21.5 million of floating rate
notes partially offset by increased amortization of the bond discount ($0.1 million).
Gain on Sales of Centers: During the three months ended December 31, 2008, we sold one fixed-site
center in Tennessee and one fixed-site center in Illinois and our equity interest in two joint
ventures in New York and California that operated four fixed-site centers. We received $16.5
million, net of cash sold of $0.4 million, from the sales and recorded a gain of $6.5 million.
Impairment of Other Long-lived Assets: Impairment of other long-lived assets decreased $2.7
million from $4.6 million for the quarter ended December 31, 2008 to $1.9 million for the quarter
ended December 31, 2009. We
44
completed our evaluation of the carrying value of our indefinite-lived intangible assets as of
December 31, 2009. Based on our annual evaluation of the carrying value of our indefinite-lived
intangible assets as of December 31, 2009, we concluded that impairments had occurred and we
recorded a non-cash impairment charge of $1.9 million in our contract services reporting unit
related to our trademark ($0.8 million) and our certificates of need ($0.9 million) and our patient
services reporting unit related to our certificates of need ($0.2 million). This impairment charge
primarily resulted from a decline in our mobile business within our contract services reporting
unit.
Loss before income taxes: Loss before income taxes increased 6.1% from $8.6 million for the quarter
ended December 31, 2008, to $9.1 million for the quarter ended December 31, 2009. An analysis of
the change in loss before income taxes is as follows (amounts in thousands):
Consolidated | ||||
Loss before income taxes |
||||
Three Months ended December 31, 2008 |
$ | (8,595 | ) | |
Decrease in existing centers revenues |
(5,708 | ) | ||
Decrease in existing centers costs of services |
3,961 | |||
Decrease in existing centers equipment leases |
105 | |||
Decrease in existing centers depreciation and amortization |
2,772 | |||
Decrease in existing centers interest expense |
1,267 | |||
Increase in existing centers provision for doubtful accounts |
87 | |||
Impact of centers sold, closed or acquired |
589 | |||
Decrease in corporate operating expenses |
235 | |||
Increase in equity in earnings of unconsolidated partnerships |
64 | |||
Gain on sales of centers |
(6,548 | ) | ||
Gain on purchase of floating rate notes |
| |||
Decrease in impairment of other long-lived assets |
2,651 | |||
Loss before income taxes |
||||
Three Months ended December 31, 2009 |
$ | (9,120 | ) | |
Benefit for Income Taxes: For the quarter ended December 31, 2009, we recorded a benefit for
income taxes of $0.7 million as compared to a benefit for income taxes of $1.9 million for the
quarter ended December 31, 2008. The benefit for income taxes is related to a decrease in our
deferred tax liability of $0.7 million due to the impairment of our indefinite-live intangible
assets, offset partially by a provision primarily related to state income taxes.
Financial Condition, Liquidity and Capital Resources
We have historically funded our operations and capital project requirements from net cash provided
by operating activities and capital and operating leases. We expect to fund future working capital
and capital project requirements from cash on hand, sales of fixed-site centers and mobile
facilities, net cash provided by operating activities and our credit facility.
To the extent available, we will also use capital and operating leases, but the current conditions
in the capital markets and our high level of leverage have limited our ability to obtain attractive
lease financing. Our operating cash flows have been negatively impacted by the sales and closures
of certain centers and the negative trends we have experienced with each of our segments. If our
operating cash flows continue to be negatively impacted by these and other factors and we are
unable to offset them with cost savings and other initiatives, it will result in:
| a reduction in our borrowing base, and therefore a decline in the amounts available under our credit facility; | ||
| difficulty funding our capital projects; | ||
| more stringent financing from equipment manufacturers and other financing resources; and | ||
| an inability to refinance our floating rate note due in November 2011. |
Liquidity: We have a substantial amount of debt, which requires significant interest and principal
payments. As of December 31, 2009, we had total indebtedness of $297.9
45
million in aggregate
principal amount, including $293.5 million of floating rate notes. We believe that cash on hand,
future net cash provided by operating and investing activities and our credit facility will be
adequate to meet our operating cash and debt service requirements for at least the next twelve
months.
We reported net losses attributable to Holdings of $15.1 million, $19.8 million, $169.2 million and
$99.0 for six months ended December 31, 2009, the year ended June 30, 2009, the eleven months ended
June 30, 2008 and the year ended June 30, 2007, respectively. We have implemented steps in
response to these losses, including, a core market strategy and various initiatives. We have
attempted to implement, and will continue to develop and implement, various revenue enhancement,
revenue cycle management and cost reduction initiatives:
| Revenue enhancement initiatives have focused and will continue to focus on our sales and marketing efforts to maintain or improve our procedural volumes and contractual rates, and our Insight Imaging Enterprise Solutions initiative. | ||
| Revenue cycle management initiatives have focused and will continue to focus on collections at point of service, technology improvements to create greater efficiency in the gathering of patient and claim information when a procedure is scheduled or completed, and our initiative with Dell Perot Systems. | ||
| Cost reduction initiatives have focused and will continue to focus on streamlining our organizational structure and expenses including enhancing and leveraging our technology to create greater efficiencies, and leveraging relationships with strategic vendors. |
While we have experienced some improvements through our revenue cycle management and cost reduction
initiatives, our revenue enhancement initiatives have produced minimal improvements to date.
Moreover, future revenue enhancement initiatives will face significant challenges because of the
continued overcapacity in the diagnostic imaging industry, reimbursement reductions and the
countrys economic condition, including higher unemployment. We can give no assurance that these
steps will be adequate to improve our financial performance. Unless our financial performance
significantly improves, we can give no assurance that we will be able to refinance the floating
rate notes, which mature in November 2011, on commercially reasonable terms, if at all.
Our short-term liquidity needs relate primarily to:
| interest payments relating to the floating rate notes and credit facility; | ||
| capital projects; | ||
| working capital requirements; | ||
| potential acquisitions; and | ||
| potential purchases of portions of the floating rate notes. |
Our long-term liquidity needs relate primarily to the maturity of the floating rate notes in
November 2011.
As mentioned above, we may from time to time, in one or more open market or privately negotiated
transactions, purchase a portion of our outstanding floating rate notes. Any such purchases shall
be in accordance with the terms of agreements governing our material indebtedness.
Cash, cash equivalents and restricted cash as of December 31, 2009 were $16.7 million (including
$2.2 million that was subject to the lien for the benefit of the floating rate note holders, and
may only be used for wholly owned capital projects or under certain circumstances the purchase of
floating rate notes). Our primary source of liquidity is typically cash provided by operating
activities. Our ability to generate cash flows from operating activities is based upon several
factors including the following:
| the procedure volume of patients for our retail and wholesale operations; | ||
| the reimbursement we receive for our services; |
46
| the demand for our wholesale operations; | ||
| our ability to control expenses; | ||
| our ability to collect our trade accounts receivables from third-party payors, hospitals, physician groups, other healthcare providers and patients; and | ||
| our ability to implement steps to improve our financial performance. |
A summary of cash flows is as follows (amounts in thousands) (unaudited):
Six Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Net cash (used in) provided by operating activities |
$ | 1,267 | $ | 8,859 | ||||
Net cash used in investing activities |
(6,043 | ) | (4,183 | ) | ||||
Net cash used in financing activities |
(347 | ) | (4,085 | ) | ||||
Increase (decrease) in cash and cash equivalents |
$ | (5,123 | ) | $ | 591 | |||
Net cash
provided by operating activities was $1.3 million for the six months ended December
31, 2009 and resulted primarily from our Adjusted EBITDA ($17.2 million) (see reconciliation below)
less cash paid for interest ($10.7 million) and changes in
certain assets and liabilities ($5.5 million) offset by the effect of non-controlling interest ($0.4 million). The changes in certain
assets and liabilities primarily consist of a decrease in accounts payable and other accrued
expenses mainly related to the timing of payment of short-term
obligations ($3.0 million), payments for tax liabilities ($1.0 million), and accrued compensation and related benefits ($3.6
million) due primarily to the timing of our payroll periods, partially offset by a decrease in
other current assets ($0.4 million) and accounts receivables, net ($1.6 million).
Net cash
used in investing activities was $6.0 million for the six months ended December 31, 2009
and resulted primarily from our purchase or upgrade of diagnostic imaging equipment and
construction projects at certain of our centers ($13.9 million), partially offset by proceeds from
the sales of certain centers ($2.7 million) and equipment sales ($0.9 million) and decrease in
restricted cash ($4.3 million).
Net cash used in financing activities was $0.3 million for the six months ended December 31, 2009
and resulted from principal payments on notes payable and capital lease obligations, offset
partially by borrowings for debt obligations.
We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and
amortization, excluding impairment of tangible and intangible assets, gain on sales of centers, and
gain on purchase of notes payable. Adjusted EBITDA has been included because we believe that it is
a useful tool for us and our investors to measure our ability to provide cash flows to meet debt
service, capital projects and working capital requirements. Adjusted EBITDA should not be
considered an alternative to, or more meaningful than, income from company operations or other
traditional indicators of operating performance and cash flow from operating activities determined
in accordance with accounting principles generally accepted in the United States. We present the
discussion of Adjusted EBITDA because covenants in the agreements governing our material
indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of
liquidity and the ability to meet debt service requirements, it is not necessarily comparable to
other similarly titled captions of other companies due to differences in methods of calculations.
Our reconciliation of net cash provided by operating activities to Adjusted EBITDA is as follows
(amounts in thousands) (unaudited):
47
Six Months Ended | Three Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net cash provided by operating activities |
$ | 1,267 | $ | 8,859 | $ | (1,074 | ) | $ | 6,106 | |||||||
Benefit for income taxes |
(646 | ) | (1,692 | ) | (683 | ) | (1,927 | ) | ||||||||
Interest expense, net |
13,583 | 15,949 | 6,739 | 8,081 | ||||||||||||
Amortization of bond discount |
(2,862 | ) | (2,647 | ) | (1,450 | ) | (1,336 | ) | ||||||||
Share-based compensation |
(37 | ) | (36 | ) | (19 | ) | (18 | ) | ||||||||
Equity in earnings of unconsolidated partnerships |
1,172 | 1,108 | 560 | 496 | ||||||||||||
Distributions from unconsolidated partnerships |
(1,734 | ) | (1,437 | ) | (838 | ) | (924 | ) | ||||||||
Gain on sales of equipment |
537 | 618 | 76 | 122 | ||||||||||||
Net change in operating assets and liabilities |
5,540 | (1,411 | ) | 3,483 | (3,391 | ) | ||||||||||
Effect of non-controlling interests |
(385 | ) | (370 | ) | (119 | ) | (106 | ) | ||||||||
Net change in deferred income taxes |
779 | 2,117 | 779 | 2,177 | ||||||||||||
Adjusted EBITDA |
$ | 17,214 | $ | 21,058 | $ | 7,454 | $ | 9,280 | ||||||||
Our reconciliation of income (loss) before income taxes to Adjusted EBITDA by segment for the
six months ended December 31, 2009 and 2008 is as follows (amounts in thousands):
Contract Services | Patient Services | Other Operations | Consolidated | |||||||||||||
Six months ended December 31, 2009 |
||||||||||||||||
Income (loss) before income taxes |
$ | 5,963 | $ | 1,894 | $ | (23,266 | ) | $ | (15,409 | ) | ||||||
Interest expense, net |
363 | 295 | 12,925 | 13,583 | ||||||||||||
Depreciation and amortization |
9,963 | 6,243 | 1,270 | 17,476 | ||||||||||||
Effect of noncontrolling interests |
| (385 | ) | | (385 | ) | ||||||||||
Impairment of other long-lived assets |
1,717 | 232 | | 1,949 | ||||||||||||
Adjusted EBITDA |
$ | 18,006 | $ | 8,279 | $ | (9,071 | ) | $ | 17,214 | |||||||
Six months ended December 31, 2008 |
||||||||||||||||
Income (loss) before income taxes |
$ | 5,203 | $ | (2,175 | ) | $ | (18,353 | ) | $ | (15,325 | ) | |||||
Interest expense, net |
797 | 731 | 14,421 | 15,949 | ||||||||||||
Depreciation and amortization |
12,945 | 9,615 | 1,878 | 24,438 | ||||||||||||
Effect of noncontrolling interests |
(370 | ) | | (370 | ) | |||||||||||
Gain on sale of centers |
| | (6,988 | ) | (6,988 | ) | ||||||||||
Gain on purchase of notes payable |
| | (1,246 | ) | (1,246 | ) | ||||||||||
Impairment of other long-lived assets |
4,600 | | | 4,600 | ||||||||||||
Adjusted EBITDA |
$ | 23,545 | $ | 7,801 | $ | (10,288 | ) | $ | 21,058 | |||||||
Adjusted EBITDA decreased 18.3% for the six months ended December 31, 2009 compared to the six
months ended December 31, 2008. This decrease was due primarily to reductions in Adjusted EBITDA
from our contract services ($5.5 million) offset by an increase in Adjusted EBITDA from our patient
services ($0.5 million) and a decrease in the negative Adjusted EBITDA in our other operations
($1.2 million). The decrease in the negative Adjusted EBITDA from our other operations is due to
reductions in costs mainly attributable to our cost reduction initiatives discussed previously,
including a $1.3 million decrease in corporate operating expenses.
Adjusted EBITDA from our patient services operations increased 6.1% from $7.8 million for the six
months ended December 31, 2008, to $8.3 million for the six months ended December 31, 2009. This
increase was due primarily to the Adjusted EBITDA at the centers we acquired ($1.3 million) and an
increase in existing same store Adjusted EBITDA ($0.4 million) partially offset by Adjusted EBITDA
at the centers we sold or closed ($1.2 million).
Adjusted EBITDA from our contract services operations decreased 23.5% from $23.5 million for the
six months ended December 31, 2008, to $18.0 million for the six months ended December 31, 2009.
This decrease was due to Adjusted EBITDA lost due to the closure of a center serving a large health
care provider ($2.2 million) and the reduction in revenues discussed above, partially offset by the
reduction in costs additionally discussed above.
Our reconciliation of income (loss) before income taxes to Adjusted EBITDA by segment for the three
months ended December 31, 2009 and 2008 is as follows (amounts in thousands):
48
Contract Services | Patient Services | Other Operations | Consolidated | |||||||||||||
Three months ended December 31, 2009 |
||||||||||||||||
Income (loss) before income taxes |
$ | 1,870 | $ | 774 | $ | (11,764 | ) | $ | (9,120 | ) | ||||||
Interest expense, net |
170 | 128 | 6,441 | 6,739 | ||||||||||||
Depreciation and amortization |
4,735 | 2,665 | 605 | 8,005 | ||||||||||||
Effect of noncontrolling interests |
| (119 | ) | | (119 | ) | ||||||||||
Impairment of other long-lived assets |
1,717 | 232 | | 1,949 | ||||||||||||
Adjusted EBITDA |
$ | 8,492 | $ | 3,680 | $ | (4,718 | ) | $ | 7,454 | |||||||
Three months ended December 31, 2008 |
||||||||||||||||
Income (loss) before income taxes |
$ | (318 | ) | $ | (1,945 | ) | $ | (6,332 | ) | $ | (8,594 | ) | ||||
Interest expense, net |
366 | 341 | 7,375 | 8,081 | ||||||||||||
Depreciation and amortization |
6,780 | 4,152 | 915 | 11,847 | ||||||||||||
Effect of noncontrolling interests |
| (106 | ) | | (106 | ) | ||||||||||
Gain on sale of centers |
| | (6,548 | ) | (6,548 | ) | ||||||||||
Impairment of other long-lived assets |
4,600 | | | 4,600 | ||||||||||||
Adjusted EBITDA |
$ | 11,428 | $ | 2,442 | $ | (4,590 | ) | $ | 9,280 | |||||||
Adjusted EBITDA decreased 19.7% for the three months ended December 31, 2009 compared to the
three months ended December 31, 2008. This decrease was due primarily to reductions in Adjusted
EBITDA from our contract services ($2.9 million) and an increase in negative Adjusted EBITDA from
our other operations ($0.1 million) offset by an increase in Adjusted EBITDA from our patient
services ($1.2 million).
Adjusted EBITDA from our patient services operations increased 50.7% from $2.4 million for the
three months ended December 31, 2008, to $3.7 million for the three months ended December 31, 2009.
This increase was due primarily to increased Adjusted EBITDA from our existing patient services
centers ($0.7 million) and acquisitions ($0.7 million) offset partially by the elimination of
Adjusted EBITDA at the centers we sold or closed ($0.1 million).
Adjusted EBITDA from our contract services operations decreased 25.7% from $11.4 million for the
three months ended December 31, 2008, to $8.5 million for the three months ended December 31, 2009.
This decrease was due primarily to the elimination of Adjusted EBITDA from the closure of a center
serving a large health care provider ($1.1 million) coupled with the reduction in revenues
discussed above, partially offset by the reduction in costs additionally discussed above.
Capital Projects: As of December 31, 2009, we have committed to capital projects of approximately
$5.9 million through December 2010. We expect to use either internally generated funds, operating
leases, cash on hand, including restricted cash, and the proceeds from the sale of fixed-site
centers to finance the acquisition of such equipment. We 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 fixed-site centers and mobile facilities are developed in accordance with our
core market strategy. If we are unable to generate sufficient cash from our operations or obtain
additional funds through bank financing, the issuance of equity or debt securities, or operating
leases, we may be unable to maintain a competitive equipment base. As a result, we may not be able
to maintain our competitive position in our core markets or expand our business.
Floating Rate Notes and Credit Facility: As of December 31, 2009, we had outstanding, through
InSight, $293.5 million of aggregate principal amount of floating rate notes. The floating rate
notes mature in November 2011 and bear interest at LIBOR plus 5.25% per annum, payable quarterly.
As of December 31, 2009, the weighted average interest rate on the floating rate notes was 5.53%.
If prior to the maturity of the floating rate notes, we elect to redeem the floating rate notes or
are otherwise required to make a prepayment with respect to the floating rate notes
49
for which a
redemption price is not otherwise specified in the indenture, regardless of whether such prepayment
is made voluntarily or mandatorily, as a result of acceleration upon the occurrence of an event of
default or otherwise, we are required to pay 102% of the principal amount plus accrued and unpaid
interest. An open-market purchase of floating rate notes would not require a prepayment price at
the foregoing rates. In addition, the indenture provides that if there is a change of control, we
will be required to make an offer to purchase all outstanding floating rate notes at a price equal
to 101% of their principal amount plus accrued and unpaid interest. The indenture provides that a
change of control includes, among other things, if a person or group becomes directly or indirectly
the beneficial owner of 35% or more of Holdings common stock. The fair value of the floating rate
notes as of December 31, 2009 was approximately $158.5 million.
Holdings and InSights wholly owned subsidiaries unconditionally guarantee all of InSights
obligations under the indenture for the floating rate notes. The floating rate notes are secured by
a first priority lien on substantially all of InSights and the guarantors existing and future
tangible and intangible property including, without limitation, equipment, certain real property,
certain contracts and intellectual property and a cash account related to the foregoing, but are
not secured by a lien on their accounts receivables and related assets, cash accounts related to
receivables and certain other assets. In addition, the floating rate notes are secured by a portion
of InSights stock and the stock or other equity interests of InSights subsidiaries.
Through certain of InSights wholly owned subsidiaries we have an asset-based revolving credit
facility of up to $30 million, which matures in June 2011, with the lenders named therein and Bank
of America, N.A. as collateral and administrative agent. The credit facility is scheduled to
terminate in June 2011. As of December 31, 2009, we had approximately $11.1 million of
availability under the credit facility, based on our borrowing base. At December 31, 2009, there
were no outstanding borrowings under the credit facility; however, there were letters of credit of
approximately $1.3 million outstanding under the credit facility. As a result of our current fixed
charge coverage ratio, we would only be able to borrow up to $3.6 million of the $11.1 million of
availability under the borrowing base due to a restriction in the future if our liquidity, as
defined in the credit facility agreement, falls below $7.5 million.
Holdings and InSight unconditionally guarantee all obligations of InSights subsidiaries that are
borrowers under the credit facility. All obligations under the credit facility and the obligations
of Holdings and InSight under the guarantees are secured, subject to certain exceptions, by a first
priority security interest in all of Holdings, InSights and the borrowers: (i) accounts; (ii)
instruments, chattel paper (including, without limitation, electronic chattel paper), documents,
letter-of-credit rights and supporting obligations relating to any account; (iii) general
intangibles that relate to any account; (iv) monies in the possession or under the control of the
lenders under the credit facility; (v) products and cash and non-cash proceeds of the foregoing;
(vi) deposit accounts established for the collection of proceeds from the assets described above;
and (vii) books and records pertaining to any of the foregoing.
Borrowings
under the credit facility bear interest at a per annum rate equal to LIBOR plus 2.50%,
or, at our option, the base rate (which is the Bank of America, N.A. prime rate); however, the
applicable margin will be adjusted in accordance with a pricing grid based on our fixed charge
coverage ratio, and will range from 2.00% to 2.50% per annum. In addition to paying interest on
outstanding loans under the credit facility, we are required to pay a commitment fee to the lenders
in respect of unutilized commitments thereunder at a rate equal to 0.50% per annum, subject to
reduction based on a performance grid tied to our fixed charge coverage ratio, as well as customary
letter-of-credit fees and fees of Bank of America, N.A. There are no financial covenants included
in the credit facility, except a minimum fixed charge coverage ratio test which will be triggered
if our liquidity, as defined in the credit facility, falls below $7.5 million.
The agreements governing our credit facility and floating rate notes contain restrictions on among
other things, our ability to incur additional liens and indebtedness, engage in mergers,
consolidations and asset sales, make dividend payments, prepay other indebtedness, make investments
and engage in transactions with affiliates.
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NEW ACCOUNTING PRONOUNCEMENTS
FASB ASC Topic 805 Business Combinations formerly SFAS 141(R) (ASC 805) establishes principles
and requirements for recognizing and measuring identifiable assets and goodwill acquired,
liabilities assumed and any noncontrolling interest in an acquisition, at their fair value as of
the acquisition date. ASC 805 is effective for fiscal years beginning after December 15, 2008.
The adoption of ASC 805 did not have a material adverse effect on our financial position or cash
flows.
ASC 805 formerly FSP No. FAS 141(R)-1 is effective for contingent assets or contingent liabilities
acquired in business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. The adoption of this
standard did not have a material impact on our consolidated financial statements for the six months
ended December 31, 2009.
FASB ASC Topic 810 Consolidation formerly SFAS 160 (ASC 810) establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. ASC 810 is effective for fiscal years beginning after December 15, 2008. On July 1,
2009 we adopted ASC 810. As of
December 31, 2009, ASC 810 only effected our reporting requirements and therefore had no impact on
our consolidated financial position, results of operations or cash flows. We do not believe it will
have a material adverse effect on our financial position or cash flows.
FASB ASC Topic 815 Derivatives and Hedging formerly SFAS 161 (ASC 815) requires enhanced
disclosures about how and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under this topic, and how derivative instruments and related
hedged items affect an entitys financial position, financial performance and cash flows. We
adopted ASC 815 on January 1, 2009. As ASC 815 only requires enhanced disclosures, it had no
impact on our consolidated financial statements.
FASB ASC Topic 855 Subsequent Events formerly SFAS 165 (ASC 855) enhances the current guidance
on accounting and disclosure requirements for subsequent events. This statement requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date, that is, whether that date represents the date the financial statements were issued or
were available to be issued. ASC 855 is effective for interim periods and annual financial periods
ending after June 15, 2009. We adopted ASC 855 on June 30, 2009; however the adoption did not have
a material impact on our results of operations, cash flows or financial position. We have evaluated
subsequent events through February 12, 2010 and determined no additional disclosures are required.
FASB ASC 2009-17 Amendments to FASB Interpretation No. 46(R) formerly SFAS No. 167 (ASC
2009-17) enhances the current guidance on disclosure requirements for companies with financial
interest in a variable interest entity. This statement amends Interpretation 46(R) to replace the
quantitative-based risks and rewards calculation for determining which enterprise, if any, has a
controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entitys economic performance and (a) the obligation to absorb
losses of the entity or (b) the right to receive benefits from the entity. This statement requires
an additional reconsideration event when determining whether an entity is a variable interest
entity when any changes in facts and circumstances occur such that the holders of the equity
investment at risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly impact the entitys
economic performance. It also requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity. This statement amends Interpretation 46(R) to require
additional disclosures about an enterprises involvement in variable interest entities. SFAS 167
is effective for fiscal years beginning after November 15, 2009 and as such has not yet been
incorporated into the codification, with early application prohibited. We are currently evaluating
the impact of the adoption of SFAS 167 on our consolidated financial statements.
FASB ASC Topic 105 Generally Accepted Accounting Principles formerly SFAS 168 (ASC 105) is the
single source of authoritative Generally Accepted Accounting Principles (GAAP) in the United
States. The previous GAAP hierarchy consisted of four levels of authoritative accounting and
reporting guidance levels. The ASC 105 eliminated this hierarchy and replaced the previous GAAP
with just two levels of literature: authoritative and non-authoritative. The ASC 105 was effective
as of July 1, 2009.
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In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05 to provide guidance on
measuring the fair value of liabilities. The ASU provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following techniques:
(i) | a valuation technique that uses the quoted price of the identical liability when traded as an asset; or, quoted prices for similar liabilities, or similar liabilities when traded as assets, or | ||
(ii) | another valuation technique consistent with the principles of ASC Topic 820 Fair Value Measurements and Disclosures, such as an income approach or market approach. |
Additionally, when estimating the fair value of a liability, a reporting entity is not required to
make an adjustment relating to the existence of a restriction that prevents the transfer of the
liability. This ASU also clarifies that both a quoted price in an active market for the identical
liability at the measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments are required, are Level 1 fair
value measurements under ASC Topic 820. This ASU became effective for the beginning with this
quarter and did not have a material effect on our financial position or cash flows.
In September 2009, the FASB issued ASU 2009-13, which eliminates the criterion for objective and
reliable evidence of fair value for the undelivered products or services. Instead, revenue
arrangements with multiple deliverables should be divided into separate units of accounting
provided the deliverables meet certain criteria. ASU 2009-13 provides a hierarchy for estimating
the selling price for each of the deliverables. ASU 2009-13 eliminates the use of the residual
method of allocation and requires that arrangement consideration be allocated at the inception of
the arrangement to all deliverables based on their relative selling price. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. We are currently assessing the
impact of this accounting standards update on our consolidated financial position and results of
operation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements discussion and analysis of financial condition and results of operations, as well as
disclosures included elsewhere in this Form 10-Q are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these consolidated financial statements requires management
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingencies. We believe the critical accounting policies that
most impact the consolidated financial statements are described below. A summary of our
significant accounting policies can be found in the notes to our consolidated financial statements,
which are included in our annual report on Form 10-K for the period ended June 30, 2009 filed with
the Securities and Exchange Commission.
Revenue Recognition: Revenues from contract services and from patient services are recognized when
services are provided. Patient services revenues are presented net of (1) related contractual
adjustments, which represent the difference between our charge for a procedure and what we will
ultimately receive from private health insurance programs, Medicare, Medicaid and other federal
healthcare programs, and (2) payments due to radiologists. We report payments made to radiologists
on a net basis because (i) we are not the primary obligor for the provision of professional
services, (ii) the radiologists receive contractual percentages of collections and (iii) the
radiologists bear the risk of non-collection. Revenues collected in advance are recorded as unearned revenue. Other operations
revenues are recognized as the services are provided based on the contract.
Intangible Assets: Identified intangible assets consist primarily of our goodwill, trademark,
certificates of need, customer relationships and wholesale contracts. The intangible assets,
excluding the wholesale contracts and customer relationships, are indefinite-lived assets and are
not amortized. Wholesale contracts and customer relationships are definite-lived assets and are
amortized over the expected term of the respective contracts and relationships, respectively. In
accordance with ASC Topic 350 (ASC 350) formerly SFAS No. 142 Goodwill
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and Other Intangible
Assets, the goodwill and indefinite-lived intangible asset balances are not being amortized, but
instead are subject to an annual assessment of impairment by applying a fair-value based test.
We evaluate the carrying value of goodwill and other indefinite-lived intangible assets in the
second quarter of each fiscal year. Additionally, we review the carrying amount of goodwill and
other indefinite-lived intangible assets whenever events and circumstances indicate that their
respective carrying amounts may not be recoverable. Impairment indicators include, among other
conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit and
adverse legal or regulatory developments. As of December 31, 2009, we had goodwill of $1.4 million
associated with the acquisition of two fixed-site centers in the Boston-metropolitan area of
Massachusetts, which was allocated to our patient services operations. In evaluating goodwill, we
complete the two-step impairment test as required by ASC 350. In the first of a two-step impairment
test, we determine the fair value of these reporting units using a discounted cash flow valuation
model, market multiple model or appraised values, as appropriate. ASC 350 requires us to compare
the fair value for the reporting unit to its carrying value on an annual basis to determine if
there is potential impairment. If the fair value of a reporting unit exceeds its carrying value,
goodwill of the reporting unit is considered not impaired and no further testing is required. If
the fair value does not exceed the carrying value, the second step of the impairment test is
performed to measure the amount of impairment
loss, if any. The second step compares the implied fair value of the goodwill with the carrying
amount of that goodwill. Impairment losses, if any, are reflected in the consolidated statements of
operations. We completed our annual impairment testing of our goodwill during this quarter and
determined that our goodwill was not impaired.
We additionally completed our evaluation of the carrying value of our indefinite-lived intangible
assets as of December 31, 2009. Based on our annual evaluation of the carrying value of our
indefinite-lived intangible assets (other than our goodwill), we concluded that impairments had
occurred and we recorded a non-cash impairment charge of $1.9 million in our contract services
reporting unit related to our trademark ($0.8 million) and our certificates of need ($0.9 million)
and our patient services reporting unit related to our certificates of need ($0.2 million). This
impairment charge primarily resulted from a decline in our mobile business within our contract
services reporting unit.
We assess the ongoing recoverability of our intangible assets subject to amortization in accordance
with SFAS No. 144 which has been incorporated into ASC Topic 360, Property, Plant and Equipment
by determining whether the long-lived asset can be recovered over the remaining amortization period
through projected undiscounted future cash flows. If projected future cash flows indicate that the
long-lived asset balances will not be recovered, an adjustment is made to reduce the asset to an
amount consistent with projected future cash flows discounted at the market interest rate. Cash
flow projections, although subject to a degree of uncertainty, are based on trends of historical
performance and managements estimate of future performance, giving consideration to existing and
anticipated competitive and economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services in the United States and receive payment for our services exclusively in
United States dollars. Accordingly, our business is unlikely to be affected by factors such as
changes in foreign market conditions or foreign currency exchange rates.
Our market risk exposure relates primarily to interest rates relating to the floating rate notes
and our credit facility. As a result, we will periodically use interest rate swaps, caps and
collars to hedge variable interest rates on long-term debt. We believe there was not a material
quantitative change in our market risk exposure during the quarter ended December 31, 2009, as
compared to prior periods. At December 31, 2009, approximately 99% of our indebtedness was
variable rate indebtedness; however, as a result of the interest rate collar contract discussed
below our exposure on variable rate indebtedness was reduced by $190 million, to approximately
34.7% of our total indebtedness as of December 31, 2009. We do not engage in activities using
complex or highly leveraged instruments.
Interest Rate Risk
In order to modify and manage the interest characteristics of our outstanding indebtedness and
limit the effects of interest rates on our operations, we may use a variety of financial
instruments, including interest rate hedges, caps, floors and other interest rate exchange
contracts. The use of these types of instruments to hedge our exposure to
53
changes in interest
rates carries additional risks such as counter-party credit risk and legal enforceability of
hedging contracts. We do not enter into any transactions for speculative or trading purposes.
We have an interest rate hedging agreement with Bank of America, N.A. The agreement effectively
provides us with an interest rate collar. The notional amount to which the agreement applies is
$190 million, and it provides for a LIBOR cap of 3.25% and a LIBOR floor of 2.59% on that amount.
Our obligations under the agreement were secured on a pari passu basis by the same collateral that
secures our credit facility, and the agreement was cross-defaulted to our credit facility. This
agreement expired on February 1, 2010. We designated this contract as a highly effective cash flow
hedge of the floating rate notes under ASC 815. Accordingly, the value of the contract is
marked-to-market quarterly, with changes in the intrinsic value of the contract included as a
separate component of other comprehensive income (loss). As of December 31, 2009, the contract had
a liability fair value of approximately $1.1 million.
In August 2009, we entered into an interest rate cap agreement with Bank of America, N.A. with a
notional amount of $190 million and a three-month LIBOR cap of 3% effective between February 1,
2010 and January 31, 2011. The terms of the agreement call for us to pay a fee of approximately
$0.5 million over the contract period. The contract exposes us to credit risk in the event that
the counterparty to the contract does not or cannot meet its
obligations; however, Bank of America, N.A. is a major financial institution and we expect that it
will perform its obligations under the contract. We designated this contract as a highly effective
cash flow hedge of the floating rate notes under ASC 815. Accordingly, the value of the contract is
marked-to-market quarterly, with effective changes in the intrinsic value of the contract included
as a separate component of other comprehensive income (loss). The net effect of the hedge is to cap
interest payments for $190 million of our debt at a rate of 8.25%, because our floating rate notes
incur interest at three-month LIBOR plus 5.25%. As of December 31, 2009, the contract had a net
asset fair value of $0.2 million.
Our future earnings and cash flows and some of our fair values relating to financial instruments
are dependent upon prevailing market rates of interest, such as LIBOR. Based on interest rates and
outstanding balances as of December 31, 2009, a 1% increase in interest rates on our $293.5 million
of floating rate debt would affect annual future earnings and cash flows by approximately $1.0
million. Since the interest on our floating rates notes is based on LIBOR, and LIBOR was less than
1% as of December 31, 2009, if LIBOR were to drop to zero, our annual future earnings and cash
flows would be affected by approximately $0.3 million. This calculation does not consider the
effects of the interest rate cap agreement (since its term has not yet started). The weighted
average interest rate on the floating debt as of December 31, 2009, including the effects of the
interest rate hedging agreement was 7.03%.
These amounts are determined by considering the impact of hypothetical interest rates on our
borrowing cost. These analyses do not consider the effects of the reduced level of overall economic
activity that could exist in that environment. Further, in the event of a change of this
magnitude, we would consider taking actions to further mitigate our exposure to any such change.
Due to the uncertainty of the specific actions that would be taken and their possible effects,
however, this sensitivity analysis assumes no changes in our capital structure.
Inflation Risk
We do not believe that inflation has had a material adverse impact on our business or operating
results during the periods presented. We cannot assure you, however, that our business will not be
affected by inflation in the future.
ITEM 4T. CONTROLS AND PROCEDURES
Our management has evaluated, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report pursuant to Rule 15d-15 under the
Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2009, our disclosure controls and
procedures are effective in timely alerting them to material information relating to us (including
our consolidated subsidiaries) required to be included in our periodic Securities and Exchange
Commission filings. There were no changes in the Companys internal control over financial
reporting that occurred during the six months ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 5, 2010, Holdings, InSight and InSight Health Corp., a wholly owned subsidiary of
InSight, were served with a complaint filed in the Los Angeles County Superior Court alleging
claims on behalf of current and former employees. In Kevin Harold and Denise Langhoff, on their
own behalf and on behalf of others similar situated v. InSight Health Services Holdings Corp., et
al., the plaintiffs allege violations of Californias wage, overtime, meal period, break time and
business practice laws and regulations. Plaintiffs seek recovery of unspecified economic damages,
statutory penalties, punitive damages, interest, attorneys fees and costs of suit. We are
currently evaluating the allegations of the complaint and are unable to predict the likely timing
or outcome of this lawsuit. In the meantime we intend to vigorously defend this lawsuit.
We are engaged from time to time in the defense of other lawsuits arising out of the ordinary
course and conduct of our business and have insurance policies covering certain potential insurable
losses where such coverage is cost-effective. We believe that the outcome of any such other lawsuit
will not have a material adverse impact on our financial condition and results of operations
ITEM 1A. RISK FACTORS
RISKS RELATING TO OUR INDEBTEDNESS
Our substantial indebtedness could adversely affect our financial condition.
We have a substantial amount of debt, which requires significant interest and principal payments.
As of December 31, 2009, we had total indebtedness of approximately $297.9 million in aggregate
principal amount. In addition, subject to the restrictions contained in the indenture governing
the floating rate notes and in our other debt instruments, we may be able to incur additional
indebtedness from time to time to finance working capital, capital projects, investments or
acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could
intensify. Specifically, our high level of debt could have important consequences, including the
following:
| making it more difficult for us to satisfy our obligations with respect to the floating rate notes and our other debt; | ||
| limiting our ability to obtain additional financing to fund future working capital, capital projects, acquisitions or other general corporate requirements; | ||
| requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes; | ||
| increasing our vulnerability to general adverse economic and industry conditions; | ||
| limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; | ||
| placing us at a competitive disadvantage compared to our competitors that have stronger capital structures, more flexibility in operating their businesses and greater access to capital; and | ||
| increasing our cost of borrowing. |
We may be unable to service our debt.
Our ability to make scheduled payments on or to refinance our obligations with respect to our debt,
including, but not limited to, the floating rate notes, will depend on our financial and operating
performance, which will be affected
55
by general economic, financial, competitive, business and other factors beyond our control. We
cannot assure you that our business will generate sufficient cash flow from operations or that
future borrowings will be available to us in an amount sufficient to enable us to service our debt,
including, but not limited to, the floating rate notes, or to fund our other liquidity needs.
If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to
sell certain of our assets, restructure or refinance all or a portion of our debt on or before
maturity, including, but not limited to, the floating rate notes. The floating rate notes mature
in November 2011 and unless our financial performance significantly improves, we can give no
assurance that we will be able to restructure or refinance any of our debt on commercially
reasonable terms, if at all, which could cause us to default on our debt obligations and impair our
liquidity.
Our operations may be restricted by the terms of our debt, which could adversely affect us and
increase our credit risk.
The agreements governing our material indebtedness include a number of significant restrictive
covenants. These covenants could adversely affect us, and adversely affect investors, by limiting
our ability to plan for or react to market conditions or to meet our capital needs. These
covenants, among other things, restrict our ability to:
| incur more debt; | ||
| create liens; | ||
| pay dividends and make distributions or repurchase stock; | ||
| make certain investments; | ||
| merge, consolidate or transfer or sell assets; and | ||
| engage in transactions with affiliates. |
A breach of a covenant or other provision in any debt instrument governing our current or future
indebtedness could result in a default under that instrument and, due to cross-default and
cross-acceleration provisions, could result in a default under our other debt instruments. Upon
the occurrence of an event of default under our debt instruments, the lenders may be able to elect
to declare all amounts outstanding to be immediately due and payable and terminate all commitments
to extend further credit. If we are unable to repay those amounts, the lenders could proceed
against the collateral granted to them, if any, to secure the indebtedness. If the lenders under
our current or future indebtedness accelerate the payment of the indebtedness, we can give no
assurance that our assets or cash flow would be sufficient to repay in full our outstanding
indebtedness. Substantially all of our assets, other than those assets consisting of accounts
receivables and related assets or cash accounts related to receivables, which secure our credit
facility, and a portion of InSights stock and the stock of its subsidiaries, are subject to the
liens in favor of the holders of the floating rate notes. This may further limit our flexibility in
obtaining secured or unsecured financing in the future.
We may not have sufficient funds to purchase all outstanding floating rate notes and our other debt
upon a change of control.
Upon a change of control, we will be required to make an offer to purchase all outstanding
floating rate notes at a price equal to 101% of their principal amount plus accrued and unpaid
interest. Under the terms of the indenture for the floating rate notes, a change of control
includes, among things, if a person or group becomes directly or indirectly the beneficial owner of
35% or more of Holdings common stock. We believe that as of September 15, 2009, one person holds
beneficial ownership in excess of 20% of Holdings common stock and another holds beneficial
ownership in excess of 10% of Holdings common stock. Because of the low trading price of our
common stock, $0.17 closing price on December 31, 2009, a person or group may be able to acquire
35% or more of Holdings common stock for a relatively small amount of money. We cannot assure you
that we will have or will be able to borrow sufficient funds at the time of any change of control
to make any required purchases of such notes or
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our other debt. If we failed to make a change of control offer and to purchase all of the
tendered notes, it would constitute an event of default under the indenture for the floating rate
notes, and potentially, other debt. Any future credit arrangements or other debt agreements to
which we become party may contain similar agreements.
If there is a default under the agreements governing our material indebtedness, the value of our
assets may not be sufficient to repay our creditors.
Our property and equipment (other than land, building and leasehold improvements and assets
securing our capital lease obligations), which make up a significant portion of our tangible
assets, had a net book value as of December 31, 2009 of
approximately $62.5 million. The book value
of these assets should not be relied on as a measure of realizable value for such assets. The
realizable value of our assets may be greater or lower than such net book value. The value of our
assets in the event of liquidation will depend upon market, credit and economic conditions, the
availability of buyers and similar factors. A sale of these assets in a bankruptcy or similar
proceeding would likely be made under duress, which would reduce the amounts that could be
recovered. Furthermore, such a sale could occur when other companies in our industry also are
distressed, which might increase the supply of similar assets and therefore reduce the amounts that
could be recovered. Our intangible assets had a net book value as of December 31, 2009 of
approximately $22 million. As a result, in the event of a default under the agreements governing
our material indebtedness or any bankruptcy or dissolution of our company, the realizable value of
these assets will likely be substantially lower and may be insufficient to satisfy the claims of
our creditors.
The condition of our assets will likely deteriorate during any period of financial distress
preceding a sale of our assets. In addition, a material amount of our assets consist of illiquid
assets that may have to be sold at a substantial discount in an insolvency situation.
Accordingly, the proceeds of any such sale of our assets may not be sufficient to satisfy, and may
be substantially less than, amounts due to our creditors.
We may be unable to obtain necessary capital to finance certain projects or refinance our existing
indebtedness because of conditions in the financial markets and economic conditions generally.
Our ability to obtain necessary capital is affected by conditions in the financial markets and
economic conditions generally. Slowing growth, contraction of credit, increasing energy prices,
declines in business or investor confidence or risk tolerance, increases in inflation, higher
unemployment, outbreaks of hostilities or other geopolitical instability, corporate, political or
other scandals that reduce investor confidence in capital markets and natural disasters, among
other things, can affect the financial markets and economic conditions generally. If we are unable
to obtain sufficient capital at commercially reasonable rates, we may be unable to fund certain
capital projects or refinance our existing indebtedness, including the floating rate notes, which
may erode our competitive positions in various markets.
Increases in interest rates could adversely affect our financial condition and results of
operations.
An increase in prevailing interest rates would have an immediate effect on the interest rates
charged on our variable rate indebtedness, which rise and fall upon changes in interest rates. At
December 31, 2009, approximately 99% of our indebtedness was variable rate indebtedness. We had an
interest rate collar contract that expired in February 2010, with a notional amount of $190 million
with a LIBOR cap of 3.25% and a LIBOR floor of 2.59%. As a result of this contract our exposure on
variable rate indebtedness was reduced by $190 million, or to approximately 35% as of December 31,
2009. We have also entered into an interest rate cap agreement with a notional amount of $190
million and a LIBOR cap of 3% effective between February 1, 2010 and January 31, 2011. Increases
in interest rates could also impact the refinancing of our existing indebtedness, including the
floating rate notes. Moreover, the increased interest expense would adversely affect our cash flow
and our ability to service our indebtedness. As a protection against rising interest rates, we may
enter into agreements such as interest rate swaps, caps, floors and other interest rate exchange
contracts. These agreements, however, subject us to the risk that the other parties to the
agreements may not perform their obligations thereunder or that the agreements could be
unenforceable.
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RISKS RELATING TO OUR BUSINESS
Changes in the rates or methods of third-party reimbursements for our services could result in
reduced demand for our services or create downward pricing pressure, which would result in a
decline in our revenues and adversely affect our financial condition and results of operations.
For fiscal 2009, we derived approximately 54% of our revenues from direct billings to patients and
third-party payors such as Medicare, Medicaid, managed care and private health insurance companies.
Certain third-party payors have proposed and implemented changes in the methods and rates of
reimbursement that have had the effect of substantially decreasing reimbursement for diagnostic
imaging services that we provide. In addition, if certain proposals from CMS and Congress become
effective there could be significant decreases in reimbursement for services provided to Medicare
patients. Managed care contracting is competitive and reimbursement schedules are at or below
Medicare reimbursement levels. However, some managed care organizations have reduced or otherwise
limited, and we believe that other managed care organizations may reduce or otherwise limit,
reimbursement in response to reductions in government reimbursement. These reductions have had,
and any future reductions could have, an adverse impact on our financial condition and results of
operations. These reductions have been, and any future reductions may be, similar to the
reimbursement reductions proposed by CMS, Congress and the Obama Administration. See our
discussion regarding reimbursement changes in Managements Discussion and Analysis of
Financial Condition and Results of Operations Reimbursement.
Moreover, our healthcare provider customers, which provided approximately 46% of our revenues
during fiscal 2009, generally rely on reimbursement from third-party payors. To the extent our
healthcare provider customers reimbursement from third-party payors is reduced, it will likely
have an adverse impact on the rates they pay us as they would seek to offset such decreased
reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing,
so that individuals bear greater financial responsibility through high deductible plans,
co-insurance and higher co-payments, which may result in patients delaying or foregoing medical
procedures.
We expect that any further changes to the rates or methods of reimbursement for our services,
whether directly through billings to third-party payors or indirectly through our healthcare
provider customers, will result in a further decline in our revenues and adversely affect our
financial condition and results of operations. See our discussion regarding reimbursement changes
in Managements Discussion and Analysis of Financial Condition and Results of Operations
Reimbursement.
Negative trends could continue to adversely affect our financial condition and results of
operations.
As a result of the various factors that affect our industry generally and our business
specifically, we have experienced declines in Adjusted EBITDA as compared to prior year periods
(see our definition of Adjusted EBITDA and reconciliation of net cash provided by operating
activities to Adjusted EBITDA in Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Condition, Liquidity and Capital Resources). Our Adjusted
EBITDA for the three and six months ended December 31, 2009 declined approximately 19.7% and 18.3%,
respectively, as compared to our Adjusted EBITDA for the prior year periods. Our Adjusted EBITDA
declined approximately 1.2% and 33.1% for fiscal 2009 and 2008, respectively, as compared to prior
fiscal years. We have had a negative historical trend of declining Adjusted EBITDA for the past
five fiscal years, which may continue and be exacerbated by negative effects of the economic
condition and the reimbursement reductions discussed in the subsection entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations Reimbursement.
If we are unable to renew our existing customer contracts on favorable terms or at all, our
financial condition and results of operations would be adversely affected.
Our financial condition and results of operations depend on our ability to sustain and grow our
revenues from existing customers. Our revenues would decline if we are unable to renew our existing
customer contracts on favorable terms. For our mobile facilities, we generally enter into contracts
with hospitals having one to five year terms. A significant number of our mobile contracts will
expire each year. To the extent we do not renew a customer contract it is not always possible to
immediately obtain replacement customers. Historically, many replacement customers have been
smaller, with lower procedural volumes. Recently there has been an increase in the amount of
available equipment for lease within the industry. This increase in availability within the industry has caused
a
58
decline in demand for our contract services mobile systems, which has resulted in (1) a lower than
normal success rate in replacing lost revenues, (2) lower contractual reimbursement as compared to
prior periods and (3) an increase in the number of our idle mobile systems. In addition attractive
gross margins have caused hospitals and physician groups who have utilized mobile services from our
company and our competitors to purchase and operate their own equipment. Although reimbursement
reductions may dissuade physician groups from operating their own equipment, we expect that some
high volume customer accounts will continue to elect not to renew their contracts with us and
instead acquire their own diagnostic imaging equipment. As a result of the age of our imaging
equipment, we may not be able to renew contracts of existing customers or attract new customers on
favorable terms. This would adversely affect our financial condition and results of operations.
We have experienced, and will continue to experience, competition from hospitals, physician groups
and other diagnostic imaging companies and this competition could adversely affect our financial
condition and results of operations.
The healthcare industry in general and the market for diagnostic imaging services in particular, is
highly competitive and fragmented, with only a few national providers. We compete principally on
the basis of our service reputation, equipment, breadth of managed care contracts and convenient
locations. Our operations must compete with hospitals, physician groups and certain other
independent organizations, including equipment manufacturers and leasing companies that own and
operate imaging equipment. We have encountered and we will continue to encounter competition from
hospitals and physician groups that purchase their own diagnostic imaging equipment. Some of our
direct competitors may have access to greater financial resources than we do. If we are unable to
successfully compete, our customer base would decline and our financial condition and results of
operations would be adversely affected.
Our failure to effectively integrate acquisitions and establish joint venture arrangements through
partnerships with hospitals and other healthcare providers could impair our business.
As part of our core market strategy, we have pursued, and may continue to pursue, selective
acquisitions and arrangements through partnerships and joint ventures with hospitals and other
healthcare providers. Acquisitions and joint ventures require substantial capital which may exceed
the funds available to us from internally generated funds and our available financing arrangements.
We may not be able to raise any necessary additional funds through bank or equipment vendor
financing or through the issuance of equity or debt securities on terms acceptable to us, if at
all.
Additionally, acquisitions involve the integration of acquired operations with our operations.
Integration involves a number of risks, including:
| demands on management related to the increase in our size after an acquisition; | ||
| the diversion of our managements attention from daily operations to the integration of operations; | ||
| integration of information systems; | ||
| risks associated with unanticipated events or liabilities; | ||
| difficulties in the assimilation and retention of employees; | ||
| potential adverse effects on operating results; | ||
| challenges in retaining customers and referral sources; and | ||
| amortization or write-offs of acquired intangible assets. |
If we do not successfully identify, complete and integrate our acquisitions, we may not realize
anticipated operating advantages, economies of scale and cost savings. Also, we may not be able to
maintain the levels of operating
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efficiency that the acquired companies would have achieved or might have achieved separately.
Successful integration of acquisitions will depend upon our ability to manage their operations and
to eliminate excess costs.
Our efforts to implement initiatives to enhance revenues and reduce costs may not be adequate or
successful.
We have attempted to implement, and will continue to develop and implement, various revenue
enhancement, revenue cycle management and cost reduction initiatives. Revenue enhancement
initiatives have focused and will focus on our sales and marketing efforts to maintain or improve
our procedural volumes and contractual rates, and our Insight Imaging Enterprise Solutions
initiative. Revenue cycle management initiatives have focused and will continue to focus on
collections at point of service for patients with commercial insurance, technology improvements to
create greater efficiency in the gathering of patient and claim information when a procedure is
scheduled or completed, and our initiative with Dell Perot Systems. Cost reduction initiatives
have focused and will continue to focus on streamlining our organizational structure and expenses
including enhancing and leveraging our technology to create greater efficiencies, and leveraging
relationships with strategic vendors. While we have experienced some improvements through our
revenue cycle management and cost reduction initiatives, our revenue enhancement initiatives have
produced minimal improvements to date. Moreover, future revenue enhancement initiatives will face
significant challenges because of the continued overcapacity in the diagnostic imaging industry,
reimbursement reductions and the effects of the countrys economic condition, including higher
unemployment. The adequacy and ultimate success of our initiatives cannot be assured.
Consolidation in the imaging industry could adversely affect our financial condition and results of
operations.
We compete with several national and regional providers of diagnostic imaging services, as well as
local providers. As a result of the reimbursement reductions by Medicare and other third-party
payors, some of these competitors may consolidate their operations in order to obtain certain cost
structure advantages and improve equipment utilization. Certain of our competitors have certain
advantages over us including larger financial and business resources, economies of scale, breadth
of service offerings, and favored relationships with equipment vendors, hospital systems, leading
radiologists and third-party payors. We may be forced to exit certain markets, reduce our prices
or provide state-of-the-art equipment in order to retain and attract customers. These pressures
could adversely affect our financial condition and results of operations.
Failure to attract and retain qualified employees and contracted radiologists could hinder our
business strategy and negatively impact our financial condition and results of operations.
Our future success depends on our continuing ability to identify, hire or contract with, develop,
motivate and retain highly skilled persons for all areas of our organization, including senior
executives and contracted radiologists. Competition in our industry for qualified employees is
intense. There is a very high demand for qualified technologists, particularly MRI, PET and PET/CT
technologists, and we may not be able to hire and retain a sufficient number of technologists.
Failure to attract and retain qualified employees and contracted radiologists could hinder our
business strategy and negatively impact our financial condition and results of operations.
Managed care organizations may limit healthcare providers from using our services, causing us to
lose procedural volume.
Our fixed-site centers are dependent on our ability to attract referrals from physicians and other
healthcare providers representing a variety of specialties. Our eligibility to provide services in
response to a referral is often dependent on the existence of a contractual arrangement with the
referred patients managed care organization. Despite having a large number of contracts with
managed care organizations, healthcare providers may be inhibited from referring patients to us in
cases where the patient is not associated with one of the managed care organizations with which we
have contracted. A significant decline in referrals would have a material adverse effect on our
financial condition and results of operations.
Technological change in our industry could reduce the demand for our services and our ability to
maintain a competitive position.
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We operate in a competitive, capital intensive, high fixed-cost industry. The development of new
technologies or refinements of existing ones have made and continue to make our existing systems
technologically or economically obsolete, or reduce the need for our systems. Competition among
manufacturers has resulted in and likely will continue to result in technological advances in the
speed and imaging capacity of new systems. Consequently, the obsolescence of our systems may be
accelerated. Other than ultra-high field MRI systems and 256-slice CT systems, we are aware of no
substantial technological changes; however, should such changes occur, we may not be able to
acquire the new or improved systems. In the future, to the extent we are unable to generate
sufficient cash from our operations or obtain additional funds through bank or equipment vendor
financing, the issuance of equity or debt securities, and operating leases, we may be unable to
maintain a competitive equipment base. In addition, advancing technology may enable hospitals,
physicians or other diagnostic imaging service providers to perform procedures without the
assistance of diagnostic imaging service providers such as ourselves. As a result of the age of
our imaging equipment, we may not be able to maintain our competitive position in our core markets
or expand our business.
Because a high percentage of our operating expenses are fixed, a relatively small decrease in
revenues could have a significant negative impact on our financial condition and results of
operations.
A high percentage of our expenses are fixed, meaning they do not vary significantly with the
increase or decrease in revenues. Such expenses include, but are not limited to, debt service,
lease payments, depreciation and amortization, salaries and benefit obligations, equipment
maintenance expenses, insurance and vehicle operations costs. As a result, a relatively small
reduction in the prices we charge for our services or procedural volume could have a
disproportionate negative effect on our financial condition and results of operations.
We may be subject to professional liability risks which could be costly and negatively impact our
financial condition and results of operations.
We have not experienced any material losses due to claims for malpractice. However, claims for
malpractice have been asserted against us in the past and any future claims, if successful, could
entail significant defense costs and could result in substantial damage awards to the claimants,
which may exceed the limits of any applicable insurance coverage. Successful malpractice claims
asserted against us, to the extent not covered by our liability insurance, could have a material
adverse effect on our financial condition and results of operations. In addition to claims for
malpractice, there are other professional liability risks to which we are exposed through our
operation of diagnostic imaging systems, including liabilities associated with the improper use or
malfunction of our diagnostic imaging equipment.
To protect against possible professional liability from malpractice claims, we maintain
professional liability insurance in amounts that we believe are appropriate in light of the risks
and industry practice. However, if we are unable to maintain insurance in the future at an
acceptable cost or at all or if our insurance does not fully cover us in the event a successful
claim was made against us, we could incur substantial losses. Any successful malpractice or other
professional liability claim made against us not fully covered by insurance could be costly to
defend against, result in a substantial damage award against us and divert the attention of our
management from our operations, which could have a material adverse effect on our financial
condition and results of operations.
Our PET/CT service and some of our other imaging services require the use of radioactive materials,
which could subject us to regulation, related costs and delays and potential liabilities for
injuries or violations of environmental, health and safety laws.
Our PET/CT services and some of our other imaging services require the use of radioactive materials
to produce images. While this radioactive material has a short half-life, meaning it quickly breaks
down into non-radioactive substances, storage, use and disposal of these materials present the risk
of accidental environmental contamination and physical injury. We are subject to federal, state
and local regulations governing storage, handling and disposal of these materials and waste
products. Although we believe that our safety procedures for storing, handling and disposing of
these hazardous materials comply with the standards prescribed by law and regulation, we cannot
completely eliminate the risk of accidental contamination or injury from those hazardous materials.
In the event of an accident, we would be held liable for any resulting damages, and any liability
could exceed the limits of or fall outside the coverage of our insurance. In addition, we may not
be able to maintain insurance on acceptable terms, or
61
at all. We could incur significant costs in order to comply with current or future environmental,
health and safety laws and regulations which would adversely affect our financial condition and
results of operations.
We may not receive payment from some of our healthcare provider customers because of their
financial circumstances.
Some of our healthcare provider customers do not have significant financial resources, liquidity or
access to capital. If these customers experience financial difficulties they may be unable to pay
us for the equipment and services that we provide. We have experienced, and expect to continue to
experience, write-offs of accounts receivables from healthcare provider customers that become
insolvent, file for bankruptcy or are otherwise unable to pay amounts owed to us. A significant
deterioration in general or local economic conditions could have a material adverse affect on the
financial health of certain of our healthcare provider customers. As a result, we may have to
increase the amounts of accounts receivables that we write-off, which would adversely affect our
financial condition and results of operations.
We may be unable to generate revenue when our equipment is not operational.
Timely, effective service is essential to maintaining our reputation and utilization rates on our
imaging equipment. Our warranties and maintenance contracts do not compensate us for the loss of
revenue when our systems are not fully operational. Equipment manufacturers may not be able to
perform repairs or supply needed parts in a timely manner. Thus, if we experience more equipment
malfunctions than anticipated or if we are unable to promptly obtain the service necessary to keep
our equipment functioning effectively, our financial condition and results of operations would be
adversely affected.
Natural disasters and harsh weather conditions could adversely affect our business and operations.
Our corporate headquarters, including our information technology center, and a material number of
our fixed-site centers are located in California, which has a high risk for natural disasters,
including earthquakes and wildfires. Depending upon its severity, a natural disaster could severely
damage our facilities or our information technology system, interrupt our business or prevent
potential patients from traveling to our centers, each of which would adversely affect our
financial condition and results of operations. We currently do not maintain a secondary disaster
recovery facility for our information technology system. In addition, while we presently carry
earthquake and business interruption insurance in amounts we believe are appropriate in light of
the risks, the amount of our earthquake insurance coverage may not be sufficient to cover losses
from earthquakes. We may discontinue some or all of this insurance coverage on some or all of our
centers in the future if the cost of premiums exceeds the value of the coverage discounted for the
risk of loss. If we experience a loss which is uninsured or which exceeds policy limits, we could
lose the capital invested in the damaged centers as well as the anticipated future cash flows from
those centers.
To the extent severe weather patterns affect the regions in which we operate (e.g., hurricanes and
snow storms), potential patients may find it difficult to travel to
our centers or mobile facilities or their referring physicians office, and we may have
difficulty moving our mobile facilities along their scheduled routes. As a result, we would
experience a decrease in procedural volume during that period. Accordingly, harsh weather
conditions could adversely impact our financial condition and results of operations.
High fuel costs would adversely affect our financial condition and results of operations.
Fuel costs constitute a significant portion of our mobile operating expenses. Historically, fuel
costs have been subject to wide price fluctuations based on geopolitical issues and supply and
demand. Fuel availability is also affected by demand for home heating oil, diesel, gasoline and
other petroleum products. Because of the effect of these events on the price and availability of
fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty. In
the event of a fuel supply shortage or further increases in fuel prices, we may need to curtail
certain mobile routes or redeploy our mobile facilities. There have been significant fluctuations
in fuel costs and any further increases to already high fuel costs would adversely affect our
financial condition and results of operations.
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If we fail to comply with various licensure, certification and accreditation standards we may be
subject to loss of licensure, certification or accreditation which would adversely affect our
financial condition and results of operations.
All of the states in which we operate require that technologists who operate our CT and PET/CT
systems be licensed or certified. Also, each of our fixed-site centers must continue to meet
various requirements in order to receive payments from Medicare. In addition, our mobile
facilities are currently accredited by The Joint Commission, an independent, non-profit
organization that accredits various types of healthcare providers, such as hospitals, nursing
homes, outpatient ambulatory care centers and diagnostic imaging providers. If we were to lose
such accreditation for our mobile facilities, it could adversely affect our results of operations
and financial condition because some of our customer contracts require accreditation by The Joint
Commission and one of our primary competitors has such accreditation.
Managed care providers prefer to contract with accredited organizations. Any lapse in our
licenses, certifications or accreditations, or those of our technologists, or the failure of any of
our fixed-site centers to satisfy the necessary requirements under Medicare could adversely affect
our financial condition and results of operations.
RISKS RELATING TO GOVERNMENT REGULATION OF OUR BUSINESS
Complying with federal and state regulations pertaining to our business is an expensive and
time-consuming process, and any failure to comply could result in substantial penalties and
adversely affect our ability to operate our business and our financial condition and results of
operations.
We are directly or indirectly through our customers subject to extensive regulation by both the
federal government and the states in which we conduct our business, including:
| the federal False Claims Act; | ||
| the federal Medicare and Medicaid Anti-kickback Law, and state anti-kickback prohibitions; | ||
| the federal Civil Money Penalty law; | ||
| the Health Insurance Portability and Accountability Act of 1996 and other state and federal legislation dealing with patient privacy; | ||
| the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law; | ||
| state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians; | ||
| Food and Drug Administration requirements; | ||
| state licensing and certification requirements, including certificates of need; and | ||
| federal and state laws governing the diagnostic imaging equipment used in our business concerning patient safety, equipment operating specifications and radiation exposure levels. |
If our operations are found to be in violation of any applicable laws and regulations, we may be
subject to the applicable penalty associated with the violation, including civil and criminal
penalties, damages, fines, exclusion from Medicare, Medicaid or other governmental programs and the
curtailment of our operations. Any penalties, damages, fines or curtailment of our operations,
individually or in the aggregate, could adversely affect our ability to operate our business and
our financial condition and results of operations. The risks of our being found in violation of
these laws and regulations is increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and their provisions are open to a variety
of interpretations. Any action brought against us for violation of these laws or regulations, even
if we successfully defend against it, could cause us to incur significant legal expenses and divert
our managements attention from the operation of our business. Moreover, if we are unsuccessful in
defending against such action, the imposition of certain penalties would adversely affect our
financial condition and results of operations. If we were excluded from Medicare, Medicaid or
other governmental programs, not only would we lose the revenues associated with such payors, but
we anticipate that our other customers and partners would terminate their contracts or
relationships with us.
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The regulatory and political framework is uncertain and evolving.
Healthcare laws and regulations may change significantly in the future. We continuously monitor
these developments and modify our operations from time to time as the regulatory environment
changes. However, we may not be able to adapt our operations to address new regulations, which
could adversely affect our financial condition and results of operations. In addition, although we
believe that we are operating in compliance with applicable federal and state laws, neither our
current or anticipated business operations nor the operations of our contracted radiology groups
have been the subject of judicial or regulatory interpretation. A review of our business by courts
or regulatory authorities may result in a determination that could adversely affect or restrict our
operations.
The Obama administration and the 111th Congress have made significant proposals affecting the
healthcare industry, including proposals that affect the imaging industry. We are unable to
predict whether any of their proposals will be implemented or in what form, whether any additional
or similar changes to statutes or regulations (including interpretations), will occur in the
future, or what effect any legislation or regulation would have on our business. We do believe,
however, that there will likely be changes to reimbursement for services provided to Medicare
patients, and the federal government will likely have greater involvement in the healthcare
industry than in prior years, and such reimbursement changes and greater involvement may adversely
affect our financial condition and results of operations.
RISKS RELATED TO RELATIONSHIPS WITH STOCKHOLDERS, AFFILIATES AND RELATED PARTIES
A small number of stockholders control a significant portion of Holdings common stock.
A significant portion of Holdings outstanding common stock is held by a small number of holders.
We believe that as of September 15, 2009, one person holds beneficial ownership in excess of 20% of
Holdings common stock and another holds beneficial ownership in excess of 10% of Holdings common
stock. As a result, these stockholders will have significant voting power with respect to the
ability to:
| authorize additional shares of Holdings capital stock; | ||
| amend Holdings certificate of incorporation or bylaws; | ||
| elect Holdings directors; or | ||
| effect or reject a merger, sale of assets or other fundamental transaction. |
The extent of ownership by these stockholders may also discourage a potential acquirer from making
an offer to acquire us. This could reduce the value of Holdings common stock.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) | The 2009 Annual Meeting of Stockholders of Holdings was held on October 29, 2009. | |
(b) | The following persons were elected directors at the 2009 Annual Meeting of Stockholders, and will serve until the next annual meeting and until their successors have been duly qualified and elected: Wayne B. Lowell, Louis E. Hallman, III, Eugene Linden, Richard Nevins, James A. Ovenden, Keith E. Rechner, and Steven G. Segal. | |
(c) | Votes cast or withheld for the election of directors at the meeting were as follows: |
Proposal No. 1 Election of Directors:
FOR | WITHHELD | |||||||
Wayne B. Lowell |
6,063,173 | 44,600 | ||||||
Louis E. Hallman, III |
5,466,573 | 641,200 | ||||||
Eugene Linden |
5,466,573 | 641,200 | ||||||
Richard Nevins |
6,061,173 | 46,600 | ||||||
James A. Ovenden |
6,029,533 | 78,240 | ||||||
Keith E. Rechner |
6,063,173 | 44,600 | ||||||
Steven G. Segal |
6,063,173 | 44,600 |
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ITEM 6. EXHIBITS
10.15 | Separation Agreement dated November 18, 2009, by and among Holdings, InSight and Steven M. King, filed herewith. | |
31.1 | Certification of Louis E. Hallman, III, Holdings Chief Executive Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith. | |
31.2 | Certification of Keith S. Kelson, Holdings Chief Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith. | |
32.1 | Certification of Louis E. Hallman, III, Holdings Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
32.2 | Certification of Keith S. Kelson, Holdings Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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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.
Date:
February 16, 2010
INSIGHT HEALTH SERVICES HOLDINGS CORP. (Registrant) |
||||
By: | /s/ Louis E. Hallman, III | |||
Louis E. Hallman, III | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
By: | /s/ Keith S. Kelson | |||
Keith S. Kelson | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
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EXHIBIT INDEX
EXHIBIT NUMBER | DESCRIPTION | |
10.15
|
Separation Agreement dated November 18, 2009, by and among Holdings, InSight and Steven M. King, filed herewith. | |
31.1
|
Certification of Louis E. Hallman, III, Holdings Chief Executive Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith. | |
31.2
|
Certification of Keith S. Kelson, Holdings Chief Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith. | |
32.1
|
Certification of Louis E. Hallman, III, Holdings Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
32.2
|
Certification of Keith S. Kelson, Holdings Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
68