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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-28622
INSIGHT HEALTH SERVICES CORP.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 33-0702770
(State or other jurisdiction (I.R.S Employer
of incorporation or Identification
organization) No.)
</TABLE>
4400 MACARTHUR BLVD., SUITE 800, NEWPORT BEACH, CA 92660
(Address of principal executive offices) (Zip Code)
(714) 476-0733
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 25, 1996 (based on the closing price on the NASDAQ
Small Cap Market on that date) was $11,353,866.
The number of shares outstanding of the Registrant's Common Stock as of
September 25, 1996 was 2,710,240.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
MERGER
InSight Health Services Corp. ("InSight" or the "Company") is a Delaware
corporation formed on February 23, 1996 in connection with the Agreement and
Plan of Merger, dated as of February 26, 1996 (the "Merger Agreement"), among
American Health Services Corp., a Delaware corporation ("AHS"), Maxum Health
Corp., a Delaware corporation ("MHC" or "Maxum"), InSight and two wholly
owned subsidiaries of InSight, AHSC Acquisition Company, a Delaware
corporation ("AHSC Acquisition"), and MXHC Acquisition Company, a Delaware
corporation ("MXHC Acquisition"). Each of AHS and MHC were publicly held
providers of diagnostic imaging, treatment and related management services.
Pursuant to the terms of the Merger Agreement, (i) AHSC Acquisition merged
with and into AHS and MXHC Acquisition merged with and into Maxum
(collectively, the "Merger"), (ii) each outstanding share of common stock,
par value $.03 per share, of AHS ("AHS Common Stock") was converted into the
right to receive one-tenth of a share of common stock, par value $.001 per
share, of InSight ("InSight Common Stock"), (iii) each outstanding share of
Series B Senior Convertible Preferred Stock, par value $.03 per share, of AHS
("AHS Series B Preferred Stock") which was convertible into 100 shares of AHS
Common Stock was converted into the right to receive 10 shares of InSight
Common Stock, (iv) each outstanding share of Series C Preferred Stock, par
value $.03 per share, of AHS (the "AHS Series C Preferred Stock"), which was
issued immediately prior to the consummation of the Merger, was converted
into the right to receive 1.25088 shares of Series A Preferred Stock, par
value $.001 per share, of InSight (the "InSight Series A Preferred Stock"),
(v) each outstanding share of common stock, par value $.01 per share, of
Maxum ("Maxum Common Stock") was converted into the right to receive .598 of
a share of InSight Common Stock, (vi) each outstanding share of Series B
Preferred Stock, par value $.01 per share, of Maxum (the "Maxum Series B
Preferred Stock"), which was issued immediately prior to the consummation of
the Merger, was converted into the right to receive 83.392 shares of InSight
Series A Preferred Stock, and (vii) each outstanding option, warrant or other
right to purchase AHS Common Stock and Maxum Common Stock was converted into
the right to acquire, on the same terms and conditions, shares of InSight
Common Stock, with the number of shares and exercise price applicable to such
option, warrant or other right adjusted based on the applicable exchange
ratio for the underlying AHS Common Stock or Maxum Common Stock.
On June 25, 1996, the stockholders of both MHC and AHS approved the
Merger. On June 26, 1996, MHC and AHS became wholly owned subsidiaries of
InSight, and the stockholders of MHC and AHS became stockholders of InSight.
MHC and AHS were organized in 1989 and 1982, respectively.
The principal executive offices of InSight are located at 4400 MacArthur
Blvd., Suite 800, Newport Beach, California 92660, and its telephone number
is (714) 476-0733.
CENTERS IN OPERATION
As a result of the Merger, InSight provides diagnostic imaging, treatment
and related management services in 30 states throughout the United States.
InSight's services are provided through a network of 39 mobile magnetic
resonance imaging ("MRI") facilities ("Mobile Facilities"), 14 fixed-site MRI
facilities ("Fixed Facilities"), eight (8) multi-modality imaging centers
("Centers"), two (2) Leksell Stereotactic Gamma Unit treatment centers ("Gamma
Knife"), and one radiation oncology center. An additional radiation oncology
center is operated by the Company as part of one of its Centers. The Company's
operations are located throughout the United States, with a substantial presence
in southern California, primarily Los Angeles county, and northern Texas,
primarily the Dallas-Ft. Worth metroplex.
At its Centers, InSight offers other services in addition to MRI including
diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear
medicine, nuclear cardiology, computed tomography ("CT") and cardiovascular
services. The Company offers additional services through a variety of
arrangements including equipment rental, technologist services and
training/applications, marketing, radiology management services, patient
scheduling, utilization review and billing and collection services.
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DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY
During approximately the last 20 years, there has been a major effort
undertaken by the medical and scientific communities to develop cost-effective
diagnostic imaging technologies and to minimize the risks associated with the
application of such technologies. The major categories of diagnostic imaging
systems currently offered in the medical marketplace are conventional x-ray, CT
scanners, digital ultrasound systems, computer-based nuclear gamma cameras,
radiography/fluoroscopy systems and MRI systems, each of which (other than
conventional x-ray) represents the marriage of computer technology and various
medical imaging modalities. Patients exposed to x-rays and to gamma rays
employed in nuclear medicine receive potentially harmful ionizing radiation.
Much of the thrust of product development during the period has been to reduce
the hazards associated with conventional x-ray and nuclear medicine techniques
and to develop new, virtually harmless imaging technologies such as ultrasound
and MRI.
X-RAY. X-ray is the most common energy source used in imaging the body
and is now employed in the three following imaging modalities: (i) conventional
x-ray systems, the oldest method of imaging, are typically used to image bones
and contrast-enhanced vasculature and organs and constitute the largest number
of installed systems; (ii) CT scanners utilize computers to produce cross-
sectional images of particular organs or areas of the body; and (iii) digital
x-ray systems add computer image processing capability to conventional x-ray
systems.
ULTRASOUND. Ultrasound systems emit, detect and process high frequency
sound waves to generate images of soft tissues and internal body organs. The
sound waves used in ultrasound do not involve ionizing radiation and are not
known to cause any harmful effects to the patient.
NUCLEAR MEDICINE. Nuclear medicine gamma cameras, which are based upon
the detection of gamma radiation generated by radioactive pharmaceuticals
injected or inhaled into the body, are used to provide information about organ
function as opposed to anatomical structure.
MRI TECHNOLOGY. InSight believes that the introduction of MRI
technology into the health care marketplace marked a significant advance in
diagnostic medicine. Magnetic resonance is a technique that utilizes low
energy radiowaves to manipulate protons (usually hydrogen) in the body. MRI
systems place patients in a magnetic field. Once in the magnetic field, the
protons in a patient's body will tend to align with the magnetic field.
Radio frequency ("RF") waves, produced by a radio antenna coil which
surrounds the body part to be imaged, are "pulsed" against the magnetic
field. The RF energy is then turned off, and the protons are observed for
different types of behavior, movement or "relaxation." Different tissues
have different relaxation times, depending on the amount of hydrogen or water
in each proton. The data on each proton's behavior is collected digitally by
the system's computer and then reconstructed into cross-sectional images in
three dimensional planes of orientation. The resulting image reproduces soft
tissue anatomy (as found in the brain, spinal cord and interior ligaments of
body joints such as the knee) with superior clarity, not available by any
other currently existing imaging modality. A typical MRI examination takes
from 30 to 90 minutes. MRI systems are typically priced in the range of $0.9
million to $2 million each, depending upon the system configuration, magnet
design and field strength.
There are no known hazards to the general population from magnetic and RF
fields of the intensity to which a patient is exposed in a clinical MRI system.
Equipment literature nonetheless recommends that, until further information is
available, pregnant women should be scanned only under limited circumstances.
Furthermore, MRI magnets may disrupt the operation of cardiac pacemakers and may
react with ferrous clips utilized in various surgical procedures, so that
individuals with such devices may be excluded from examination with MRI systems,
and access to the area surrounding the MRI facility may also be controlled to
avoid these possible hazards. Additionally, some MRI examinations require
injection of a paramagnetic contrast material. Although it is extremely unusual,
some patients may develop a significant adverse reaction to this contrast
material; however, chances of fatalities as a result of such reaction are
remote.
Because the signals used to produce magnetic resonance images contain
both chemical and structural information, InSight believes this technique has
greater potential for many important diagnostic applications than any other
imaging technology currently in use. While existing MRI systems demonstrate
excellent portrayals of anatomical structures within the human body, of even
greater significance is the fact that MRI is also sensitive to subtle
differences between tissues. Thus, MRI offers not only the opportunity for
highly effective classical diagnosis, but also the potential for future
monitoring of chemical processes within the body.
Recent technological advances in software and gradient coil technology
for MRI systems have allowed equipment with lower magnetic field strength and
open architecture design to offer significantly improved image quality. These
systems use permanent electromagnetic technology rather than
superconductivity magnets, substantially lowering both siting and service
costs. The open design allows for studies not normally possible in
conventional MRI systems, including claustrophobic patients, extremely large
patients (from 300 to 400 pounds) and for musculoskeletal exams which require
the patient to move or flex, such as kinematic knee studies. Manufacturers
are marketing these open MRI systems at costs below most state Certificate of
Need ("CON") requirements. The reduced equipment costs, combined with lower
siting and service expense, may make MRI technology feasible at some rural
hospitals and other new market locations where patient volume and
reimbursement do not financially justify the expense of a conventional MRI
system.
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CT. CT technology consists of a doughnut-shaped gantry structure into
which a patient, resting on a remotely controlled couch assembly, is positioned
to scan the anatomical region of interest. The scanning process is performed by
the rotation of a high output x-ray tube around the patient. The x-ray tube
emits a thin fan-shaped beam of x-rays that passes through the patient and is
absorbed by an array of x-ray detectors located on the opposite side of the
patient from the x-ray tube. The detected x-rays are then converted into digital
measurements of x-ray intensity directly proportional to the density of the
portion of the patient through which the beam passes. These digital measurements
of x-ray intensity are then processed by a specialized image reconstruction
computer system into a cross-sectional image of the anatomical region of
interest. The patient is then indexed on the couch and another scan performed
and then another, creating a "stack" of cross-sectional images constituting
the complete diagnostic imaging procedure.
Typical scanning times for a single cross-sectional image are in the one
second to six second range. A complete CT examination takes from 15 minutes to
45 minutes, depending on the complexity of the examination and number of
individual cross-sectional images required. The current selling prices of CT
systems fall in the range of $0.3 million to $1.5 million depending upon the
specific performance characteristics of the systems. Based on the fact that CT
systems have been commercially marketed for approximately 20 years, InSight
believes that CT is a relatively mature technology and, therefore, not subject
to significant risk of obsolescence.
Certain CT examinations require the injection of an iodine-based contrast
material, allowing for better visualization of the anatomy. Although it is very
unusual, some patients may develop a significant adverse reaction to this
contrast material. Fatalities as a result of such reaction have occurred but are
rare. In an effort to scan only appropriate patients, all patients are required
to answer a questionnaire which helps to identify those patients who may suffer
an adverse reaction to this contrast material.
GAMMA KNIFE The Leksell Stereotactic Gamma Unit is a state-of-the-art
radiosurgical device used to treat intracranial neoplasma and vascular anomalies
which are inaccessible or unsuitable for conventional invasive surgery. The
Gamma Knife was designed to provide neurosurgeons and radiation therapists with
the ability to perform radiosurgery, using high energy gamma rays, instead of
conventional invasive techniques (open surgery), thereby generally eliminating
the risk of infection and intracerebral bleeding.
The Gamma Knife delivers a single high dose of ionizing radiation
emanating from 201 Cobalt 60 sources positioned about a hemispherical, precision
machined cavity. Each individual beam is focused on a common target producing an
intense concentration of radiation at the target site, destroying the lesion
while spreading the entry radiation dose uniformly and harmlessly over the
patient's skull. The mechanical precision of the Gamma Knife at the target site
is 1/10 of one millimeter (0.1 mm), making the Gamma Knife an ideal treatment
device for treating small or medium-sized lesions in critical locations within
the brain. However, based upon the type, size and/or location of such lesions,
not all patients are candidates for radiosurgery. The mechanical precision of
the Gamma Knife is coupled with an extremely sharp fall-off in the radiation
intensity surrounding the target, resulting in a highly localized treatment
effect, sparing surrounding tissue.
The Gamma Knife treatment requires no open surgical intervention, no
lengthy hospital stay and no risk of post-surgical bleeding or infection. When
compared to the average length of stay and costs associated with conventional
surgery, the Gamma Knife greatly reduces the cost of neurosurgical treatment.
Typical treatment time is approximately 10 to 15 minutes per area of interest
("isocenter"). A key feature of the Gamma Knife is its ability to perform
treatments that require multiple isocenters. In addition, other applications for
the Gamma Knife are currently being developed. Investigative work is being
conducted to treat patients for chronic pain and motion disorders such as
Parkinson's disease, epilepsy and trigeminal neuralgia. These new applications
represent a significant new market for the Gamma Knife upon clinical acceptance.
The current selling price of a Gamma Knife system is approximately $3 million.
STRATEGY AND MARKETING
InSight believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through the
consolidation of duplicative infrastructures.
InSight's primary objective is to provide diagnostic imaging,
treatment and related management services to hospitals, physicians and their
patients. The Company does not engage in the practice of medicine. Subject
to its ability to obtain financing on terms reasonably acceptable to the
Company, the strategy of InSight is focused on three interrelated
initiatives: (i) the consolidation of the highly fragmented, diagnostic
imaging
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industry through the acquisition of organizations which either strategically
fit into its regional networking strategy or provide significant cost savings
through the consolidation of duplicative infrastructures, (ii) development of
regional networks of radiology providers and physicians designed to provide
the highest quality and most cost-effective unit of diagnostic information to
the broadest population in a given market and (iii) new business initiatives
focused on broadening its range of services to managed care organizations,
hospitals and physician management companies to include radiology management
services; information management services; billing and collections;
technologist services and training applications; marketing; equipment rental
and continued evaluation of opportunities with emerging technologies. InSight
believes that long-term viability is contingent upon its ability to
successfully participate in this industry consolidation. InSight views the
Merger of MHC and AHS as reflective of the industry consolidation. While its
capital resources are limited, InSight will continue to consider and pursue
acquisition opportunities. In September 1996, InSight completed the
acquisition of an open MRI facility in Northern California.
Certain statements contained in this report are forward-looking
statements that involve a number of risks and uncertainties. The factors that
could cause actual results to differ materially include the following:
availability of financing; limitations and delays in reimbursement by
third-party payors; contract renewals and financial stability of customers;
technology changes; governmental regulation; conditions within the health
care environment; adverse utilization trends for certain diagnostic imaging
procedures; aggressive competition; general economic factors; InSight's
inability to carry out its business strategy due to rising purchase prices of
imaging centers and companies; and the risk factors listed from time to time
in InSight's filings with the Securities and Exchange Commission ("SEC").
GOVERNMENT REGULATION
The health care industry is highly regulated and changes in laws and
regulations can be significant. Changes in the law or new interpretation of
existing laws can have a material effect on permissible activities of InSight,
the relative costs associated with doing business and the amount of
reimbursement by government and other third-party payors. The federal government
and all states in which InSight currently operates regulate various aspects of
the Company's business. Failure to comply with these laws could adversely affect
InSight's ability to receive reimbursement for its services and subject the
Company and its officers to penalties.
Some states require hospitals and certain other health care facilities
to obtain a CON prior to the acquisition of major medical equipment such as
an MRI or Gamma Knife system. InSight believes that it will not be required
to obtain CONs in most of the states in which it intends to operate since
most states no longer require non-hospital providers to obtain CONs and those
states that do, offer exemptions for which the Company may qualify; however,
in those states where a CON is required, InSight has complied or will comply
with such requirements.
Beginning in late 1983, prospective payment regulations became effective
under the federal Medicare program. The Medicare program provides reimbursement
for hospitalization, physician, diagnostic and certain other services to
eligible persons 65 years of age and over and others considered disabled.
Providers of service are paid by the federal government in accordance with
regulations promulgated by the United States Department of Health and Human
Services and accept said payment, with nominal co-insurance amounts required to
be paid by the service recipient, as payment in full. In general, these
regulations provide for a specific overall fee which hospitals may charge for
inpatient treatment services based upon the diagnosis of the patient. Because
InSight mainly provides services to patients on an outpatient basis, the
prospective payment regulations do not materially affect the Company's business.
Although outpatient services are presently exempt from prospective payment
reimbursement, Congress has instructed the Prospective Payment Assessment
Commission to study alternative methods for reimbursing hospitals for outpatient
services, including prospective payment methods, and the Medicare program has
adopted fee scales for some diagnostic services. Such congressional activity
reflects industry-wide cost containment pressures which InSight believes will
affect all health care providers for the foreseeable future.
Private health insurance programs generally have authorized the payment
for diagnostic imaging and Gamma Knife procedures on satisfactory terms and the
Health Care Financing Administration ("HCFA") has authorized reimbursement
under the federal Medicare program for all diagnostic imaging and Gamma Knife
services currently being provided by the Company. However, if Medicare
reimbursement is reduced, InSight believes that private health insurance
programs will also reduce reimbursement in response to reductions in government
reimbursement which could have an adverse impact on the Company's business.
The Medicaid program is a combined federal and state program providing
coverage for low income persons. The specific services offered and reimbursement
methods vary from state to state. In many states, Medicaid reimbursement is
patterned after the Medicare program. Changes in Medicaid program reimbursement
are not expected to have a material adverse impact on the Company's business.
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InSight is subject to state and federal laws prohibiting payments for
patient referrals and regulating reimbursement procedures and practices under
Medicare, Medicaid and other governmental health care programs. The Medicare
and Medicaid Patient and Program Protection Act of 1987 (the "1987 Act")
prohibits financial arrangements designed to induce patient referrals to
providers of services which are paid for by Medicare or Medicaid. Courts
have, to date, interpreted these laws to apply to a broad range of financial
relationships. Several states also have statutes prohibiting arrangements
with health care providers which, while similar in many respects to the 1987
Act, vary from state to state, are often vague and have infrequently been
interpreted by courts or regulatory agencies. Due to the potentially broad
proscriptions contained in these federal and state laws, there can be no
assurance that all of InSight's business practices would be construed to
comply with these laws in all respects. However, in the situations where
InSight contracts with health care providers who may be in a position to
refer to patients the Company's operations, the Company exercises care in an
effort to structure its activities and arrangements to comply with applicable
federal and state laws. InSight maintains an internal regulatory compliance
review program and retains special counsel, as necessary, to monitor
compliance with such laws and regulations.
The U.S. Food and Drug Administration ("FDA") has issued the requisite
premarket approval for all of the MRI, CT and Gamma Knife systems utilized by
InSight. The Company does not believe that any further FDA approval is
required in connection with equipment currently in operation or proposed to
be operated.
The radiologists with whom InSight may enter into agreements to provide
professional services are subject to licensing and related regulations by the
states. As a result, the Company requires its radiologists to have and maintain
appropriate licensure. InSight does not believe that such laws and regulations
will either prohibit or require licensure approval of its business operations,
although no assurances can be made that such laws and regulations will not be
interpreted to extend such prohibitions or requirements to InSight's operations.
MANAGED CARE
Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs") attempt to control the cost of health care services.
InSight believes that the development and expansion of HMOs, PPOs and other
managed care organizations will have a negative impact on utilization of InSight
services in certain markets and/or affect the revenue per procedure which the
Company can collect, since they will exert greater control over patients' access
to diagnostic imaging services, the selection of the provider of such services
and the reimbursement thereof. InSight also expects that the excess capacity of
equipment in the United States may negatively impact operations because of the
competition among health care providers for contracts with all types of managed
care organizations. As a result of such competition, the length of term of any
contracts which InSight may obtain and the payment to the Company for such
services may also be negatively impacted. InSight nonetheless believes that
as long as it is able to negotiate provider agreements with the managed care
companies and other payors to provide productive and cost-efficient services
with measurable outcomes, InSight's business as a whole should not be
negatively impacted. See "Customers and Fees".
LIABILITY INSURANCE
InSight does not provide medical services, although it has obtained
professional liability insurance as well as general liability insurance. In
addition, the radiologists or other health care professionals with whom the
Company contracts are required by such contracts to carry adequate medical
malpractice insurance. InSight believes that its insurance is adequate for its
business of providing diagnostic imaging, treatment and related management
services.
COMPETITION
The health care industry in general, and the market for diagnostic
imaging services in particular, are highly competitive. InSight's operations
must compete with groups of radiologists, established hospitals and certain
other independent organizations, including equipment manufacturers and leasing
companies, that own and operate imaging equipment. InSight will continue to
encounter substantial competition from hospitals and independent organizations.
Certain hospitals, particularly the larger hospitals, may be expected to
directly acquire and operate imaging and treatment equipment on-site as part of
their overall inpatient servicing capability. In the past, however, the
reluctance of hospitals to purchase imaging and treatment equipment encouraged
the entry of start-up ventures and more established business operations into
the diagnostic and treatment services business. As a result, there is
significant excess capacity in the
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diagnostic imaging business in the United States which negatively affects
utilization and reimbursement. Many of these competitors have substantially
greater resources than InSight; however, the Company competes principally on the
basis of its reputation for productive and cost-effective quality services.
CUSTOMERS AND FEES
InSight's revenues are primarily generated from contract services and
patient services. Contract services revenues are generally earned from
services billed to a hospital or other health care provider which include:
(i) fee-for-service arrangements in which revenues are based upon a
contractual rate per procedure, (ii) equipment rental in which revenues are
generally based upon a fixed monthly rental, and (iii) management fees.
Contract services revenues are primarily earned through Mobile Facilities and
certain Fixed Facilities. Patient services revenues are services billed
directly to patients or third party payors (generally managed care
organizations and commercial insurance carriers), and are primarily earned
through Centers and certain Fixed Facilities.
InSight's operations are principally dependent on its ability (either
directly or indirectly through its hospital customers) to attract referrals
from physicians and other health care providers representing a variety of
specialties. The Company's eligibility to provide service in response to a
referral is often dependent on the existence of a contractual arrangement
with the referred patient's insurance carrier (primarily if the insurance is
provided by a managed care organization). Managed care contracting has
become very competitive and reimbursement schedules are nearing Medicare
reimbursement levels. A decline in referrals and/or reimbursement rates
would adversely affect InSight's revenues and profits. See "Managed Care".
InSight's fee-for-service revenues, primarily earned by its Mobile
Facilities, are expected to represent approximately 43% of total annual
revenues. Each year approximately one-quarter to one-third of the service
agreements, which produce the Company's fee-for-service revenues, come up for
renewal. It is expected that some high volume accounts will elect not to renew
their contracts. If such contracts are not replaced with new accounts or with
the expansion of services on existing accounts, InSight's revenues and profits
would be adversely affected.
No single source accounts for more than 10% of InSight's revenues.
The Company, through a subsidiary, has six individual contracts with the
county of Los Angeles (the "County") covering six separate sites. In the
aggregate, these sites earn revenues which represent approximately 10% of
InSight's annual revenues. From time to time, the County has experienced
financial difficulties. If such difficulties caused the County to curtail or
terminate InSight's services, the Company's business would be adversely
affected.
SUPPLY OF DIAGNOSTIC IMAGING AND GAMMA KNIFE SYSTEMS
InSight continues to evaluate the mix of its MRI equipment in response to
changes in technology and to the surplus capacity in the marketplace. The
overall technological competitiveness of InSight's equipment continues to
improve through upgrades, disposal and/or trade-in of older equipment and
execution of leases for new equipment. Subsequent to June 30, 1996, InSight
returned four older Mobile Facilities to its primary creditor.
Several substantial companies are presently engaged in the manufacture of
MRI, CT and other diagnostic imaging equipment, including GE Medical, Hitachi
Medical Systems, Picker International, Philips Medical Systems, Siemens Medical
Systems, Inc. and Toshiba Medical Systems. InSight maintains good working
relationships with many of the major manufacturers to better ensure an adequacy
of supply as well as access to those types of diagnostic imaging systems which
appear most appropriate for the specific diagnostic or treatment center to be
established. Currently only one company, Elekta Instruments, Inc., a subsidiary
of AB Elekta headquartered in Stockholm, Sweden ("Elekta"), is engaged in the
business of manufacturing the Gamma Knife.
EMPLOYEES
As of September 25, 1996, InSight had approximately 669 full-time and 107
part-time employees. None of the Company's employees are covered by a
collective bargaining agreement. Management believes its employee relations to
be satisfactory.
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ITEM 2. PROPERTIES
The following table includes the primary properties utilized by InSight
as of September 25, 1996:
<TABLE>
<CAPTION>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
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<S> <C> <C>
OWNED:
Berwyn Magnetic Resonance Center 3,800 Berwyn, Illinois
Northern Indiana Oncology Center 3,500 Valparaiso, Indiana
Garfield Imaging Center 4,500 Monterey Park, California
LAC/USC Imaging Sciences Center 8,500 Los Angeles, California
Diagnostic Outpatient Center 3,800 Hobart, Indiana
Harbor/UCLA Diagnostic Imaging Center 15,000 Torrance, California
LEASED:
InSight Corporate Headquarters 12,300 Newport Beach, California
MHC former Corporate Headquarters 10,300(a) Dallas, Texas
Maxum Diagnostic Center - Forest Lane 14,100 Dallas, Texas
Maxum Diagnostic Center - Eighth Avenue 10,000 Ft. Worth, Texas
Maxum Diagnostic Center - Preston Road 5,800 Dallas/Plano, Texas
Ocean Medical Imaging Center 8,700 Tom's River, New Jersey
Northwest Magnetic Imaging Center 2,400 Seattle, Washington
Northwest Gamma Knife Center 3,400 Seattle, Washington
Washington Magnetic Resonance Center 4,100 Whittier, California
Central Maine Imaging Center 7,250 Lewiston, Maine
Training/Applications/Fleet Services 20,000 Winston-Salem, North Carolina
</TABLE>
(a) Lease expires March 31, 1997, by which time substantially all activities
will have been transferred to InSight's corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
MAXUM STOCKHOLDER LITIGATION
In May and June 1993, MHC was named a defendant in two lawsuits filed
on behalf of a purported class of stockholders in the U.S. District Court for
the Southern District of New York (the "Court"). Also named as defendants
were the underwriting firms that led MHC's initial public offering in
September 1991, a former stockholder and senior creditor of MHC, and certain
executives and members of MHC's Board of Directors. These two actions were
consolidated into one action. In February 1994, the plaintiffs filed a
second consolidated amended complaint, which superseded the previously filed
complaints. The plaintiffs alleged that misstatements and omissions were
made by MHC and the other defendants in connection with MHC's initial public
offering and in subsequent public disclosures from September 19, 1991 until
March 1, 1993 when MHC announced that it would write down assets and
establish reserves related to the restructuring of its mobile MRI business.
The plaintiffs sought monetary damages under various provisions of the federal
securities laws and state law in an unspecified amount, as well as other
relief. In March 1994, MHC and all other defendants moved to dismiss the
second amended complaint for, among other things, failure to state a claim.
In November 1994, the Court granted the motions to dismiss and gave the
plaintiffs permission to file a third amended complaint. In January 1995,
the plaintiffs served their third consolidated amended complaint. At
approximately the same time, the plaintiffs agreed to dismiss without
prejudice their claims against the two underwriter defendants. In June 1995,
MHC and the other defendants moved to dismiss the third amended complaint for
failure to state a claim and failure to plead fraud with particularity.
On February 23, 1996, while the motions to dismiss were still under
consideration by the Court, the defendants, plaintiffs and other interested
parties (acting through their respective counsel) entered into a Stipulation of
Settlement
7
<PAGE>
pursuant to which, subject to certain conditions, the action would be
settled and all claims dismissed on the merits. In anticipation of this
settlement, MHC recorded a charge of $1.5 million in the fourth quarter of 1995.
MHC had arranged to borrow approximately $1.9 million to finance the litigation
settlement.
On April 8, 1996, the Court entered an order that, among other things,
approved the proposed settlement on a preliminary basis, set May 27, 1996 as the
deadline for interested persons to object to the settlement and to opt-out of
the settlement, and scheduled a hearing on June 21, 1996 to determine, among
other things, whether to grant final approval to the settlement.
The Final Judgment of Dismissal became final on July 26, 1996. Pursuant
to the parties' Stipulation of Settlement, and as a result of all conditions to
effectiveness having been met, including MHC's having financing available to it
for its contribution, the settlement became effective on July 27, 1996. On July
29, 1996, MHC and other parties collectively paid to the plaintiffs in the class
action the balance of the agreed upon settlement amount, including accrued
interest, thereby completing the remaining obligations of MHC.
AHS SAN JUAN HEALTH CENTRE LITIGATION
In September 1992, a complaint was filed in the United States District
Court for the District of Puerto Rico by PRF, Inc. d/b/a San Juan Health Centre,
Inc., Drs. Pablo Rodriguez Millan and Rafael Rodriquez Sepulveda and their
spouses against Philips Credit Corporation ("Philips"), AHS, Clarke J.
Underwood, Margaret van Gilse d/b/a Berkshire Consulting Group, et al (Case No.
92-2266). The complaint alleged against all defendants violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), mail fraud, wire
fraud, misrepresentation and fraud, infliction of emotional distress and
tortious misconduct upon Drs. Millan and Sepulveda and their spouses, and loss
of consortium by Dr. Millan. The complaint alleged against AHS breach of
management agreement, breach of voting trust agreement and breach of fiduciary
duty, tortious interference with contractual relations, and breach of fiduciary
duty to Drs. Millan and Sepulveda and their spouses. The complaint sought
compensatory damages in excess of $400,000,000, punitive damages, costs,
injunctive relief and attorneys' fees. Mr. Underwood and Ms. van Gilse are
former officers/employees of AHS.
San Juan Health Centre ("SJHC"), a freestanding health care clinic,
was created by Drs. Millan and Sepulveda and Mr. Amezquita, who are the three
shareholders of PRF, Inc., the surviving entity of a merger of PRF, Inc. and
San Juan Health Centre, Inc. ("SJ Inc."). Prior to AHS's involvement with
SJHC, Philips was a large creditor of PRF, Inc., having made sizable loans
for medical equipment purchases and operations. Philips was at the time and,
until February 1993, continued to be AHS's primary lender. In January 1990,
in connection with Philips making another large loan to PRF, Inc. and SJ
Inc., Philips requested AHS to manage SJHC, which it agreed to do. In
connection with the loan, PRF, Inc. and SJ Inc. entered into a management
agreement with AHS on January 12, 1990, with a two-year term, pursuant to
which AHS was to provide SJHC with general management services. In October
1991, PRF, Inc. notified AHS that it would not be extending the management
agreement beyond the initial two-year term. As of January 1992, AHS was no
longer the manager of SJHC. Berkshire Consulting Group became the manager of
SJHC. Also, in connection with the loan, on January 13, 1990, Drs. Millan
and Sepulveda placed their PRF, Inc. and SJ Inc. stock into a voting trust.
In the voting trust agreement, AHS was named the trustee of the voting trust
with broad powers with respect to the stock. AHS resigned as trustee on June
24, 1992.
In July 1993, one of the plaintiffs, PRF, Inc., filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court, District of Puerto Rico (Case No. 93-03880 SEK). In the context of
this proceeding, all of the claims of PRF, Inc. have been resolved. The
defendants subsequently moved to dismiss the individual and conjugal
partnership claims on the basis that they were derivative of the resolved
claims of PRF, Inc. On March 11, 1996, the District Court issued an Opinion
and Order and Partial Judgment dismissing with prejudice all claims brought
by the individual plaintiffs and conjugal partnership plaintiffs based on
alleged violations of the RICO statute, mail fraud, wire fraud,
misrepresentation and fraud, intentional infliction of emotional distress,
tortious misconduct, and loss of consortium. As a result of the entry of
the Partial Judgment and issuance of the Opinion and Order, only three counts
remained--a claim against AHS for alleged breach of a voting trust agreement,
and breach of fiduciary duty claims, as separate claims by the conjugal
partnerships and the husband and wife who make up each conjugal partnership.
On May 15, 1996, a Further Judgment was entered finally resolving the
remaining claims against AHS. The Company made a payment of $50,000 to
settle the remaining claims.
In addition to the foregoing matters, InSight is engaged in the defense
of lawsuits arising out of the ordinary course and conduct of its business and
has insurance policies covering such potential insurable losses where such
coverage is cost-effective. InSight believes that the outcome of any such
lawsuits will not have a material adverse impact on the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Special stockholders meetings for each of MHC and AHS were held on
June 25, 1996 to approve the merger. All the information required to be
reported herein, including the results of the voting, has been reported in the
Company's Transition Report for the transition period from January 1, 1996,
to June 26, 1996 which was filed with the SEC on August 12, 1996.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
InSight's Common Stock began trading on the national over-the-counter
market and quoted on the NASDAQ Small Cap Market under the symbol "IHSC" on July
17, 1996.
The following table sets forth the high and low bids as quoted on the
NASDAQ Small Cap Market for InSight's Common Stock for the months
indicated:
MONTH ENDED LOW HIGH
----------- --- ----
July 31, 1996 5 7 1/2
August 31, 1996 4 3/4 7
September 30, 1996 5 3/4 6 3/4
The prices (rounded to the nearest 1/8 or nearest 1/32 where applicable)
represent quotations between dealers without adjustment for mark-up, markdown or
commission, and may not necessarily represent actual transactions.
The Company has never paid a cash dividend on its Common Stock and does
not expect to do so in the foreseeable future. The Company's loan agreements
with its primary lender contain restrictions on its ability to pay dividends
on its Common Stock.
As of September 25, 1996, the Company's records indicate that there were
in excess of 1,100 beneficial holders of the Common Stock and approximately 225
stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
On June 26, 1996, pursuant to the Merger Agreement each of MHC and AHS
became a wholly owned subsidiary of InSight. The Merger was accounted for using
the purchase method of accounting in accordance with generally accepted
accounting principles. MHC has been treated as the acquirer for accounting
purposes, based upon relative revenues, book values and other factors. THE
SELECTED CONSOLIDATED FINANCIAL DATA REPRESENTS HISTORICAL DATA OF MHC ONLY,
EXCEPT FOR THE BALANCE SHEET DATA AS OF JUNE 30, 1996. HISTORICAL DATA OF AHS
IS NOT INCLUDED (SEE NOTE 15 TO THE CONSOLIDATED FINANCIAL STATEMENTS). The
selected consolidated financial data presented as of and for the six months
ended June 30, 1996 and for the years ended December 31, 1995, 1994,
1993, 1992 and 1991 has been derived from the Company's audited consolidated
financial statements and should be read in conjunction with such consolidated
financial statements and related notes as of and for the six months ended June
30, 1996 and for the years ended December 31, 1995, 1994 and 1993 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this report. The selected consolidated
financial data presented for the six months ended June 30, 1995 is unaudited
and has been included herein for comparison purposes.
9
<PAGE>
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
1996 1995 (6) 1995 (4) 1994 1993 1992 1991
---------- ---------- ------------ --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 26,460 $ 24,434 $ 50,609 $ 45,868 $ 45,075 $ 45,135 $ 34,388
Costs of operations (1) 25,564 22,986 48,178 45,239 46,556 45,329 25,328
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss) 896 1,448 2,431 629 (1,481) (194) 9,060
Corporate operating expenses 3,983 1,915 3,972 4,240 5,244 6,747 6,605
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from company operations (3,087) (467) (1,541) (3,611) (6,725) (6,941) 2,455
Equity in earnings from unconsolidated
partnerships 138 136 348 834 685 1,020 428
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) (2,949) (331) (1,193) (2,777) (6,040) (5,921) 2,883
Interest expense, net (1,144) (648) (1,626) (1,206) (1,773) (2,391) (3,646)
Provision for securities litigation
settlement - - (1,500) - - - -
Gain on sale of partnership interests - - - 4,957 - - -
Income tax expense (65) - - (160) - - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item (2) (4,158) (979) (4,319) 814 (7,813) (8,312) (763)
Extraordinary item 3,179 - - 3,342 1,036 - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (979) (979) (4,319) 4,156 (6,777) (8,312) (763)
Preferred stock dividends, net - - - - - - (254)
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ (979) $ (979) $ (4,319) $ 4,156 $ (6,777) $ (8,312) $ (1,017)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary
item (3) $ (2.99) $ (0.73) $ (3.21) $ 0.58 $ (4.49) $ (4.89) $ (1.01)
Net income (loss) (3) $ (0.70) $ (0.73) $ (3.21) $ 2.96 $ (3.89) $ (4.89) $ (1.01)
Weighted average number of common
shares outstanding(3) 1,389,271 1,333,169 1,344,832 1,402,435 1,741,846 1,698,602 1,004,287
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, -------------------------------------------------------------
BALANCE SHEET DATA: 1996 (5) 1995 (4) 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $ (1,167) $ (2,228) $ 1,587 $ (8,594) $ (14,607) $ (2,009)
Property and equipment, net 29,852 12,386 5,272 9,791 18,772 25,638
Intangible assets 16,965 4,047 1,194 1,263 2,513 1,641
Total assets 70,386 28,306 22,592 23,566 38,043 42,203
Total long-term liabilities 39,839 19,723 9,575 7,967 8,368 19,244
Stockholders' equity (deficit) 5,404 (4,005) 300 (3,857) 2,502 10,150
</TABLE>
(1) Includes a (net credit) provision for prior restructuring costs of $(0.5)
million and $7.5 million in 1993 and 1992, respectively.
(2) 1995 includes a $1.5 million provision for MHC's securities litigation
settlement and 1994 includes a $4.8 million gain, net of income tax
provision of $0.2 million on the sale of lithotripsy partnership interests.
(3) Amounts are computed on a pro forma basis as if the reset of par value of
Maxum Common Stock and related conversion into InSight Common Stock had
occurred on January 1, 1991.
(4) Includes two significant acquisitions which were completed during the year.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Acquisitions" included elsewhere in this report.
(5) Includes the acquisition of AHS which was completed on June 26, 1996.
(6) Unaudited.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase
understanding of, and should be read in conjunction with Item 1., Business,
and the consolidated financial statements and accompanying notes. All
references herein to a "Note" are to the "Notes to Consolidated Financial
Statements" contained in Item 8. "Financial Statements and Supplementary
Data" included elsewhere in this report. THE FOLLOWING DISCUSSION AND
ANALYSIS CONTAINS THE HISTORICAL FINANCIAL DATA OF MHC ONLY, WHICH IS TREATED
AS THE ACQUIRER FOR ACCOUNTING PURPOSES IN THE MERGER.
ACQUISITIONS
InSight believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through the
consolidation of duplicative infrastructures.
Subject to its ability to obtain financing terms reasonably acceptable to the
Company, the strategy of InSight will be focused on three interrelated
initiatives: (i) consolidation of the highly fragmented diagnostic imaging
industry through acquisition of organizations which either strategically fit
into its regional networking strategy or provide significant cost savings;
(ii) development of regional networks of radiology providers and physicians
designed to provide the highest quality and most cost-effective unit of
diagnostic information to the broadest population in a given market; and
(iii) new business initiatives focused on broadening its range of services to
managed care organizations, hospitals and physician management companies to
include radiology management services; information management services;
unbundling of current core services such as billing and collections,
technician training and staffing, and asset management and continued
evaluation of opportunities with emerging technologies. InSight believes
that long-term viability is contingent upon its ability to successfully
participate in this industry consolidation. InSight views the Merger of MHC
and AHS as reflective of this consolidation. InSight will continue to
consider and pursue consolidation opportunities.
During 1995, MHC completed two significant acquisitions. In the first half
of the year, MHC acquired certain assets, including Mobile Facilities and
customer contracts from a competitor operating in Ohio and Indiana, and
assumed certain equipment related liabilities. Proceeds from the 1994 sale
of interests in three partnerships that provided lithotripsy services were
used to fund the net purchase price of $2.1 million.
In the second half of 1995, MHC acquired two Centers in Dallas, Texas.
The transaction included the purchase of certain assets, primarily
diagnostic equipment, and the assumption of certain equipment related
liabilities. The purchase price of $1.6 million and an additional $0.7
million for working capital requirements were financed by GE Medical. In
December 1995, one of the Centers was consolidated into two other Centers.
PRIOR RESTRUCTURE OF MHC'S OPERATIONS AND FINANCIAL OBLIGATIONS
During recent years, MHC experienced many adverse market conditions
including significantly increased price competition, changes in equipment
technology, a surplus of equipment capacity and declining reimbursement rates.
In addition, an increased presence of managed care entities and the formation of
health care networks created additional challenges.
Based on these market conditions, management of MHC concluded that the
lowest cost providers of health care services would be best positioned to meet
the challenges imposed by rapid changes in the health care industry. In 1992,
MHC recorded a charge of $7.5 million in anticipation of a restructure of its
operations and financial obligations that was completed in 1994 (the "MHC Prior
Restructure"). The charge included estimated costs for the reconfiguration,
consolidation and wind-down of certain mobile MRI routes, the write-down of
certain older Mobile Facilities to be held for sale, accrual for estimated
termination costs associated with a reduction in work force, and other estimated
expenses and professional fees associated with the execution of the MHC Prior
Restructure.
Execution of the MHC Prior Restructure began in 1993 focused primarily
on reducing negative cash flow in the near-term, improving current viability
and enhancing the potential for long-term viability. During 1993,
significant progress was achieved. The reconfiguration, consolidation and
wind-down of mobile MRI routes referenced above were completed, and four
unprofitable partnerships in which MHC had interests were terminated.
Expenses at MHC's corporate headquarters were reduced significantly,
beginning in 1993, due primarily to a consolidation of functions, reduction
in the headquarters facility and a significant reduction in personnel.
Finally, MHC reached an agreement with GE Medical, its primary creditor, in
early 1994, which was effective June 1993, whereby certain unpaid amounts
past due under then current lease agreements with GE Medical were deferred
and lease agreements were restructured to reduce the overall lease
obligations. In addition, outstanding amounts due MHC's senior creditor
under a revolving credit agreement were settled, resulting in a $1.0 million
extraordinary gain on debt extinguishment. Also in 1993, MHC recorded a net
credit adjustment of $0.5 million associated with the estimated costs of the
MHC Prior Restructure.
During 1994, the MHC Prior Restructure was completed. MHC recorded a
$3.3 million gain on debt extinguishments in connection with the settlement
of outstanding amounts with another significant creditor and two smaller
creditors. In addition, MHC sold its technical services division to GE
Medical. Consideration for the sale included cash and future discounts on
maintenance services to be realized over approximately five years. MHC also
sold its interests in three lithotripsy partnerships discussed above for
approximately $5.0 million in cash. The proceeds were used to retire
outstanding debt obligations, to satisfy working capital requirements and for
business expansion opportunities in the
11
<PAGE>
first half of 1995. This transaction resulted in a pretax gain of approximately
$5.0 million. Finally, MHC terminated two additional unprofitable partnerships
in which it held interests.
The favorable results of the MHC Prior Restructure were diminished by
continued deterioration in the industry. MHC continued to operate while
experiencing negative cash flow by completing transactions involving the
financing of certain operating expenses by GE Medical, and the disposal of
certain assets and partnership interests until the completion of the Merger.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
In connection with the Merger, certain financial accommodations with
MHC's and AHS's primary creditor, GE Medical, became effective in June 1996.
Management believes that InSight's long-term viability is contingent upon its
ability (through MHC and AHS, its principal operating subsidiaries) to
consider, pursue and to successfully participate in the ongoing industry
consolidation.
InSight operates in a capital intensive, high fixed cost industry that
requires significant amounts of working capital to fund operations,
particularly the initial start-up and development expenses of new operations.
Revenues and cash flows have been adversely affected by an increased
collection cycle, increased competitive pressures and major restructurings
within the health care industry. This adverse effect on revenues and cash
flow is expected to continue, especially in the mobile MRI business. Absent
further declines in reimbursement and/or cancellation of customer contracts,
the Company believes it will finance its ongoing operations through
internally generated funds.
InSight continues to pursue other acquisition opportunities. InSight
believes that the expansion of its business through acquisitions is a key
factor in achieving profitability. Generally, acquisition opportunities are
aimed at increasing revenues and profits, and maximizing utilization of
existing capacity. Incremental operating profit resulting from future
acquisitions will vary depending on geographic location, whether facilities
are mobile versus fixed, range of services provided and the Company's ability
to integrate the acquired businesses into its existing infrastructure. The
ability of the Company to capitalize on identified acquisition opportunities
is dependent upon the availability of financing on terms reasonably
acceptable to the Company.
During the six months ended June 30, 1996, MHC obtained financing of
$1.0 million for certain operating expenses, and $1.2 million for transaction
costs related to the Merger. The Company has a working capital deficit of
$1.2 million and $2.2 million, at June 30, 1996 and December 31, 1995,
respectively. The net decrease in the working capital deficit of $1.0 million
is due primarily to the Merger and debt restructuring.
12
<PAGE>
The Company's cash and cash equivalents increased $5.0 million during
the six months ended June 30, 1996. Net cash provided by operating
activities for the six months ended June 30, 1996 was $0.7 million, which
includes $1.0 million related to the financing of operating expenses by the
issuance of debt. Net cash provided by investing activities was $5.1
million, which includes the cash acquired in the acquisition of AHS of $5.5
million. Net cash used by financing activities for the six months ended June
30, 1996 was $0.8 million, which includes $2.3 million of payments on
long-term debt and capital lease obligations, offset by $1.5 million of
proceeds from the issuance of debt related primarily to the financing of the
Merger costs. The Company currently has no lines of credit available to
borrow against for working capital purposes.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
REVENUES: Revenues increased $2.0 million, or approximately 8
percent, during the six months ended June 30, 1996, compared with the same
period in 1995. The increase in revenues was due primarily to the acquisition
of certain customer contracts in April 1995, the acquisition of certain
Centers in October 1995 and increases in volumes on certain contracts
serviced by Mobile and Fixed Facilities. These increases were offset by
continued decreases in reimbursement rates from third party payors.
COSTS OF OPERATIONS: Costs of operations increased $2.6 million, or
approximately 11 percent, during the six months ended June 30, 1996, compared
with the same period in 1995. This increase is primarily due to (i) an
increase in cost of services of $2.3 million and (ii) an increase in
depreciation of $0.7 million; offset by a decrease in the provision for bad
debts of $0.4 million.
Cost of services increased $2.3 million during the six months ended
June 30, 1996, compared with the same period in 1995. The increase is due
primarily to (i) certain one-time charges relating to operating strategies
associated with the Merger which include provisions for the closure of two
small Centers, the write-down of a Mobile Facility and the estimated
costs and termination fees for the early return of four Mobile Facilities; (ii)
increased costs associated with the acquisitions discussed above; and (iii)
higher costs associated with the increase in patient services revenues which
include personnel costs, facility costs, service supplies and professional fees.
The provision for bad debts decreased $0.4 million during the six
months ended June 30, 1996, compared with the same period in 1995. This
decrease is primarily attributable to a $0.3 million charge recorded in June
1995. A similar charge was not recorded in 1996.
Depreciation increased $0.7 million during the six months ended June
30, 1996, compared with the same period in 1995. This increase is due
primarily to capital leases entered into, acquisitions completed, and
leasehold improvements incurred at several of MHC's Fixed Facilities
subsequent to June 30, 1995.
GROSS PROFIT: Gross profit decreased $0.6 million during the six
months ended June 30, 1996, compared with the same period in 1995. This
decrease in primarily attributable to the increase in cost of services
discussed above.
CORPORATE OPERATING EXPENSES: Corporate operating expenses
increased $2.1 million during the six months ended June 30, 1996, compared
with the same period in 1995. This increase is due primarily to (i) the
write-off of $1.5 million of goodwill and other intangible assets related to
two of MHC's Centers, and (ii) a provision in June 1996 of $0.6 million for
termination benefits and facility costs in connection with the reduction in
the duplicative administrative infrastructure as a result of the Merger.
INTEREST EXPENSE, NET: Interest expense, net increased $0.5 million
during the six months ended June 30, 1996, compared with the same period in
1995. This increase is due primarily to debt financed in 1995 in connection
with acquisitions and the financing of certain operating expenses.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT: In connection with the
Merger, MHC recorded an extinguishment of $9.0 million of long-term
obligations owed to GE Medical in June 1996. The extraordinary gain
represents the excess of the carrying value of the debt obligations settled
over the sum of the fair value of the Maxum Series B Preferred Stock issued
in exchange for such debt extinguishment and the sum of future interest
payable on all remaining obligations owed to GE Medical.
13
<PAGE>
In accordance with the provisions of troubled debt accounting, a portion of the
extraordinary gain, equal to the sum of the current and long-term portions of
future interest payable on all remaining GE Medical debt was deferred and will
be reduced by future interest payments over the terms of the respective debt
instruments.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUES: Revenues increased $4.7 million, or approximately 10%, in 1995
compared to 1994. The increase in revenues was related primarily to
acquisitions. This increase was partially offset by the continued decline in
reimbursement rates and a decrease in other revenues in 1995 compared to 1994.
An increase in fee-for-service revenues of $5.0 million in 1995 compared to
1994 was attributable to: (i) the award of an exclusive capitated managed care
contract in December 1994, under which MHC's fees are paid directly by the
managed care organization and are earned on a per-member-per-month basis; and
(ii) the acquisition of certain customer contracts in the first half of 1995.
Other fee-for-service revenues and equipment rental revenues (derived primarily
from Mobile Facilities) decreased $1.8 million, compared to 1994, due to
expiration of hospital service contracts and third party equipment leases.
Management fees decreased $0.6 million in 1995, compared to 1994, due primarily
to the sale or termination of certain partnerships in late 1994.
Approximately 58% of the $2.4 million increase in patient services
revenues was due to increased patient services revenues associated with
acquisitions during 1995. Approximately 25% of the increase is attributable
to a contract awarded in the third quarter of 1994 to provide radiology and
management services at an outpatient Fixed Facility for a hospital customer.
The remainder of the increase was due primarily to increases in procedure
volumes at MHC's other Centers, offset by continued declines in reimbursement
rates.
Other revenues decreased during 1995 compared to 1994, due primarily to
the sale of MHC's technical services division in June 1994.
COSTS OF OPERATIONS: Costs of operations increased $2.9 million,
or approximately 6%, in 1995 compared to 1994. Cost of services in 1995 was
reduced by $0.8 million related to sales/use tax refunds. These refunds
represent taxes paid in prior years attributable to certain mobile diagnostic
imaging equipment, and were received due to a determination by the taxing
authority having reached a determination that the mobile equipment was
subject to motor vehicle tax rather than sales/use tax.
Occupancy expense (which includes operating costs of facilities
leased or subcontracted by MHC) increased $0.8 million, or approximately 88%,
in 1995 compared to 1994. This increase was due primarily to subcontracting
costs incurred related to the capitated managed care contract that was
awarded in December 1994.
Professional fees increased $0.7 million, or approximately 41%, in
1995 compared to 1994, due primarily to the increase in patient services
revenues and to costs incurred related to the capitated managed care
contract discussed above.
In addition to the net impact of the sales/use tax refund, occupancy
expense and professional fees discussed above, all other components of cost of
services experienced a net increase of $2.2 million in 1995 compared to 1994,
due primarily to the variable costs associated with the increase in revenues
resulting primarily from acquisitions in 1995 discussed above.
The provision for bad debts increased $0.5 million, or
approximately 48%, in 1995 compared to 1994, due primarily to the increase in
patient services revenues and a shift in the payor mix in MHC's Centers
related to the penetration of managed care. This change in payor mix
continues to have an unfavorable impact on reimbursement rates realized by
the Centers and resulted in an increase in bad debt expense in 1995
associated with unreimbursed amounts which were not subsequently collectible
from patients. The Company expects reimbursement rates to continue to decline.
14
<PAGE>
Depreciation decreased $0.2 million, or approximately 6%, in 1995
compared to 1994. This decrease was due primarily to a purchase and sale-
leaseback transaction (in connection with MHC's settlement with a significant
creditor in June 1994) which resulted in reductions in net book values of
certain Mobile Facilities.
GROSS PROFIT: Gross profit increased $1.8 million in 1995
compared to 1994. The increase was primarily attributable to higher profit
margins from the absorption of excess capacity associated with acquisitions
completed in 1995 and the capitated managed care contract awarded in December
1994.
CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased
approximately $0.3 million, or approximately 6%, in 1995 compared to 1994. This
decrease was due primarily to reductions in legal costs and insurance premiums.
EQUITY IN EARNINGS OF PARTNERSHIPS: Equity in earnings of
partnerships decreased $0.5 million, or approximately 58%, in 1995 compared
to 1994, due to the sale of certain partnerships in late 1994 discussed below.
INTEREST EXPENSE, NET: Interest expense, net increased $0.4
million, or approximately 35%, in 1995 compared to 1994. This increase was
due primarily to (i) the addition of several capital leases of diagnostic
imaging equipment; (ii) debt obligations incurred as a result of the
acquisitions during 1995; and (iii) interest on operating expenses financed
during late 1994 and in 1995.
PROVISION FOR SECURITIES LITIGATION SETTLEMENT: In anticipation
of the MHC settlement of two class-action lawsuits originally filed in 1993,
MHC recorded a charge of $1.5 million in the fourth quarter of 1995.
GAIN ON SALE OF PARTNERSHIP INTERESTS: In December 1994, MHC sold
its interests in three lithotripsy partnerships for approximately $5.0
million in cash which resulted in a pretax gain of approximately $5.0 million.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENTS: During 1994, MHC
settled its outstanding debt and lease obligations owed to a significant
creditor and two smaller creditors which resulted in a net extraordinary gain
of approximately $3.3 million.
YEARS ENDED DECEMBER 31, 1994 AND 1993
REVENUES: Revenues increased $0.8 million, or approximately 2%,
in 1994 compared to 1993. The increase was due primarily to an increase in
patient services revenues at two Centers. In addition, in the third quarter
of 1994, MHC began providing radiology and management services at an
outpatient Fixed Facility for a hospital customer which resulted in revenues
of approximately $0.8 million in 1994. These increases were partially offset
by a decrease in contract services revenues. Fee-for-service revenues
decreased due primarily to a decrease in the average revenue per procedure.
Equipment lease revenues decreased due primarily to contract terminations for
rentals of equipment to third parties. Revenues for 1993 exclude $4.5 million
of fee-for-service revenues from routes which were reconfigured during 1993
(in connection with the MHC Prior Restructure). The net operating losses of
these routes were charged against the accrual of estimated MHC Prior
Restructure costs during 1993.
15
<PAGE>
COSTS OF OPERATIONS: Costs of operations decreased $1.3 million,
or approximately 3%, during 1994 compared to 1993. Cost of services
decreased $0.6 million due primarily to a $0.5 million provision in 1993 for
the estimated settlement of sales tax audits primarily related to prior years.
During 1993, MHC recorded a provision for bad debts of $0.5 million
resulting from increased collection problems primarily associated with
smaller hospitals and direct patient billings. A similar charge was not
recorded in 1994.
Equipment leases increased $0.6 million and depreciation decreased
$1.4 million due primarily to the reclassification of certain leases from
capital to operating leases late in 1993, as a result of changes in lease
terms and financing arrangements in connection with the MHC Prior
Restructure, and due to the settlement with a significant creditor in 1994.
The net credit of $0.5 million for estimated MHC Prior Restructure
costs in 1993 was to adjust MHC's estimate of the net costs of the MHC Prior
Restructure, based on the current status of negotiations with its largest
creditors at that time. No additional provision or credit was necessary in
1994.
Costs of operations for 1993 of $46.5 million, exclude $6.1 million
of costs from routes that were reconfigured in connection with the MHC Prior
Restructure. As previously discussed, the net operating losses of these
routes were charged against the accrual of estimated MHC Prior Restructure
costs during 1993.
GROSS PROFIT: Gross profit increased $2.1 million in 1994
compared to 1993. The increase is primarily attributable to benefits in 1994
resulting from the MHC Prior Restructure, and, as discussed above, 1993
included one-time charges associated with the estimated settlement of sales
tax audits and the provision for bad debts.
CORPORATE OPERATING EXPENSES: Corporate operating expenses
decreased approximately $1.0 million during 1994 as compared to 1993. The
decrease was due primarily to a decrease in the amortization of intangible
assets and cost reductions for personnel and facility costs at MHC's
headquarters.
EQUITY IN EARNINGS OF PARTNERSHIPS: Equity in earnings of
partnerships for 1994 was comparable to 1993. Partnerships which continued to
operate under MHC's ownership after 1994 contributed $0.5 million and $0.3
million in 1994 and 1993, respectively, net to equity in earnings of
partnerships.
INTEREST EXPENSE, NET: Interest expense, net decreased $0.6
million, or 32%, in 1994 as compared to 1993. The decrease was due primarily
to the aforementioned reclassification of certain leases from capital to
operating leases late in 1993.
GAIN ON SALE OF PARTNERSHIP INTERESTS: In December 1994, MHC sold
its interests in three lithotripsy partnerships for approximately $5.0
million in cash which resulted in a pretax gain of approximately $5.0 million.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENTS: During 1994, MHC
settled its outstanding debt and lease obligations owed to a significant
creditor and two smaller creditors which resulted in a net extraordinary gain
of approximately $3.3 million. During 1993, MHC finalized an agreement with a
senior creditor which resulted in a net extraordinary gain of $1.0 million on
the extinguishment of a revolving credit note agreement.
INFLATION
Inflation in recent years has not had a significant impact on MHC's or
AHS's business, and is not expected to adversely affect the Company in the
near future.
NEW PRONOUNCEMENTS
The Company adopted the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). SFAS No. 123 requires new disclosures regarding employee and
non-employee stock-based compensation plans.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
For the Six Months Ended June 30,1996 and for the
Years Ended December 31, 1995, 1994 and 1993
PAGE NUMBER
-----------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 19
CONSOLIDATED BALANCE SHEETS 20
CONSOLIDATED STATEMENTS OF OPERATIONS 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 23
CONSOLIDATED STATEMENTS OF CASH FLOWS 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 42
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited the accompanying consolidated balance sheet of INSIGHT HEALTH
SERVICES CORP. (a Delaware corporation) and subsidiaries as of June 30, 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the six months ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InSight Health Services Corp.
and subsidiaries as of June 30, 1996, and results of their operations and their
cash flows for the six months ended June 30, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
September 13, 1996
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxum Health Corp.:
We have audited the accompanying consolidated balance sheets of Maxum
Health Corp. and Subsidiaries (MHC) as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 1995. Our audits also included the related financial statement
schedule of valuation and qualifying accounts. These financial statements
and schedule are the responsibility of MHC's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MHC at December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming that
MHC will continue as a going concern. As discussed in Note 3 to the
financial statements, MHC is experiencing difficulty in generating sufficient
cash flow to meet its obligations and sustain its operations. These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Notes 1 and
3. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 1, 1996
19
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1996 1995 1994
-------- ------------ ------------
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,864 $ 1,870 $ 6,950
Trade accounts receivable, net 12,916 6,296 5,181
Other receivables, net 973 490 1,138
Other current assets 1,708 1,704 1,035
-------- -------- --------
Total current assets 22,461 10,360 14,304
-------- -------- --------
DIAGNOSTIC EQUIPMENT HELD FOR SALE - 172 575
-------- -------- --------
PROPERTY AND EQUIPMENT:
Vehicles 978 967 1,030
Land, building and leasehold improvements 8,602 1,623 560
Computer and office equipment 3,638 2,521 2,274
Diagnostic and related equipment 18,113 6,577 4,110
Equipment and vehicles under capital leases 10,479 10,976 6,784
-------- -------- --------
Total property and equipment 41,810 22,664 14,758
Less: Accumulated depreciation 11,958 10,278 9,486
-------- -------- --------
Property and equipment, net 29,852 12,386 5,272
-------- -------- --------
INVESTMENT IN PARTNERSHIPS 359 442 357
OTHER ASSETS 749 899 890
INTANGIBLE ASSETS, net 16,965 4,047 1,194
-------- -------- --------
$ 70,386 $ 28,306 $ 22,592
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
20
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1996 1995 1994
-------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 6,585 $ 3,361 $ 2,441
Current portion of capital lease obligations 2,638 2,782 1,587
Accrued equipment related costs 3,249 1,546 1,979
Accounts payable and other accrued expenses 8,328 4,576 6,196
Accrued payroll and related costs 1,775 323 514
Current portion of deferred gain on debt restructure 1,053 - -
-------- -------- --------
Total current liabilities 23,628 12,588 12,717
-------- -------- --------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 31,653 13,156 7,395
Capital lease obligations, less current portion 3,988 4,667 2,180
Accrued securities litigation settlement 1,900 1,900 -
Deferred gain on debt restructure, less current portion 1,467 - -
Other long-term liabilities 831 - -
-------- -------- --------
Total long-term liabilities 39,839 19,723 9,575
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST 1,515 - -
-------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT) :
Convertible Series A preferred stock,
$.001 par value, 3,500,000 shares authorized;
2,501,760 outstanding at June 30, 1996 stated at 6,750 - -
Common stock, $.001 par value, 25,000,000
shares authorized, 2,710,240 shares outstanding
at June 30, 1996; $.01 par value, 10,000,000 shares
authorized, 3,005,055 and 2,953,415 shares
outstanding at December 31, 1995 and 1994,
respectively 3 30 29
Common stock warrant - 7 7
Additional paid-in capital 23,100 19,693 19,680
Accumulated deficit (24,449) (23,470) (19,151)
Treasury stock, at cost - (265) (265)
-------- -------- --------
Total stockholders' equity (deficit) 5,404 (4,005) 300
-------- -------- --------
$ 70,386 $ 28,306 $ 22,592
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
21
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended Year Ended
June 30, December 31, December 31, December 31,
1996 1995 1994 1993
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Contract services:
Fee-for-service $ 19,304 $ 37,762 $ 32,834 $ 30,661
Equipment rental 672 1,003 2,775 5,396
Management fees 69 211 784 1,044
---------- ---------- ---------- ----------
Total contract services 20,045 38,976 36,393 37,101
Patient services 5,853 10,605 8,228 6,291
Other 562 1,028 1,247 1,683
---------- ---------- ---------- ----------
Total revenues 26,460 50,609 45,868 45,075
COSTS OF OPERATIONS:
Cost of services 15,899 28,772 26,067 26,629
Provision for bad debts 617 1,669 1,124 1,621
Equipment leases 6,957 14,464 14,581 13,932
Depreciation 2,091 3,273 3,467 4,864
Credit adjustment to prior restructure provision - - - (490)
---------- ---------- ---------- ----------
Total costs of operations 25,564 48,178 45,239 46,556
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) 896 2,431 629 (1,481)
CORPORATE OPERATING EXPENSES 3,983 3,972 4,240 5,244
---------- ---------- ---------- ----------
LOSS FROM COMPANY OPERATIONS (3,087) (1,541) (3,611) (6,725)
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 138 348 834 685
---------- ---------- ---------- ----------
OPERATING LOSS (2,949) (1,193) (2,777) (6,040)
OTHER INCOME (EXPENSE):
Interest expense, net (1,144) (1,626) (1,206) (1,773)
Provision for securities litigation settlement - (1,500) - -
Gain on sale of partnership interests - - 4,957 -
---------- ---------- ---------- ----------
(1,144) (3,126) 3,751 (1,773)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (4,093) (4,319) 974 (7,813)
INCOME TAX EXPENSE 65 - 160 -
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (4,158) (4,319) 814 (7,813)
EXTRAORDINARY ITEM - Net gain on
debt extinguishment 3,179 - 3,342 1,036
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (979) $ (4,319) $ 4,156 $ (6,777)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ (2.99) $ (3.21) $ 0.58 $ (4.49)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) $ (0.70) $ (3.21) $ 2.96 $ (3.89)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding 1,389,271 1,344,832 1,402,435 1,741,846
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
22
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Stockholder
---------------- --------------------------- Paid-in Accumulated Note Treasury
Shares Amount Shares Amount Warrant Capital Deficit Receivable Stock Total
------ ------ ------ ------ ------- ------- ------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 - $ - 2,906,762 $29 $ - $19,179 $(16,530) $(131) $ (45) $2,502
Stock issued under employee
purchase plan - - 42,726 - - 43 - - - 43
Repayment of stockholder
note receivable - - - - - - - 21 - 21
Capital contribution-former
stockholder and creditor - - - - - 457 - - - 457
Issuance of common stock
warrant - - - - 7 - - - - 7
Surrender of 588,750 shares
of Treasury stock in
connection with debt
extinguishment - - - - - - - - (110) (110)
Net loss - - - - - - (6,777) - - (6,777)
----- ------ --------- ----- ----- ------- -------- ------- ------- -------
BALANCE AT DECEMBER 31, 1993 - - 2,949,488 29 7 19,679 (23,307) (110) (155) (3,857)
Stock issued under employee
purchase plan - - 3,927 - - 1 - - - 1
Surrender of 132,750 shares
of treasury stock in
settlement of stockholder
note receivable - - - - - - - 110 (110) -
Net income - - - - - - 4,156 - - 4,156
----- ------ --------- ----- ----- ------- -------- ------- ------- -------
BALANCE AT DECEMBER 31, 1994 - - 2,953,415 29 7 19,680 (19,151) - (265) 300
Stock issued under employee
purchase plan - - 51,640 1 - 13 - - - 14
Net loss - - - - - - (4,319) - - (4,319)
----- ------ --------- ----- ----- ------- -------- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 - - 3,005,055 30 7 19,693 (23,470) - (265) (4,005)
Issuance of Series A
Preferred Stock and
cancellation of common
stock warrant 1,250,880 3,375 - - (7) - - - - 3,368
Acquisition of AHS 1,250,880 3,375 1,349,908 1 - 3,644 - - - 7,020
Retirement of MHC'S
Treasury stock - - - - - (265) - - 265 -
Reset the par value of
InSight common stock
issued in exchange for
MHC's common stock - - (1,644,723) (28) - 28 - - - -
Net loss - - - - - - (979) - - (979)
--------- ------ --------- ----- ----- ------- -------- ------- ------- -------
BALANCE AT JUNE 30, 1996 2,501,760 $6,750 2,710,240 $ 3 $ - $23,100 $(24,449) $ - $ - $ 5,404
--------- ------ --------- ----- ----- ------- -------- ------- ------- -------
--------- ------ -------- ----- ----- ------- -------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended Year Ended
June 30, December 31, December 31, December 31,
1996 1995 1994 1993
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (979) $ (4,319) $ 4,156 $ (6,777)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 4,022 4,060 3,913 6,390
(Gain) loss on disposal of assets (133) (35) (112) 293
Provision for securities litigation
settlement - 1,500 - -
Gain on sale of partnership interests - - (4,957) -
Operating expenses financed by issuance
of debt 1,015 2,330 2,672 -
Credit adjustment to prior restructure
provision - - - (490)
Extraordinary gain on debt
extinguishments (3,179) - (3,342) (1,036)
Cash provided by (used in) changes in
operating assets and liabilities:
Payments for restructure costs - - (700) (1,502)
Receivables (174) (524) (38) 1,171
Other current assets (851) (110) 782 694
Accounts payable and other current
liabilities 975 (1,089) 1,088 3,019
---------- ---------- ---------- ----------
Net cash provided by operating
activities 696 1,813 3,462 1,762
---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Cash acquired in acquisition of AHS 5,489 - - -
Acquisition of Centers - (1,855) (510) -
Acquisition of customer contracts
and intangibles - (2,108) - -
Proceeds from termination of partnership - - - 204
Proceeds from sales of assets 369 745 1,358 -
Proceeds from sale of partnership interests - - 5,007 -
Additions to property and equipment (960) (548) (349) (715)
Decrease in other assets, net 195 190 582 3,012
---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities 5,093 (3,576) 6,088 2,501
---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Payments of debt and capital lease obligations (2,302) (6,020) (4,752) (3,376)
Proceeds from issuance of debt 1,507 2,689 268 1,648
Net repayments on revolving note payable - - (250) (2,300)
Capital contribution - former stockholder and creditor - - - 457
Other, net - 14 1 64
---------- ---------- ---------- ----------
Net cash used by financing activities (795) (3,317) (4,733) (3,507)
---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,994 (5,080) 4,817 756
CASH AND CASH EQUIVALENTS:
Beginning of period 1,870 6,950 2,133 1,377
---------- ---------- ---------- ----------
End of period $ 6,864 $ 1,870 $ 6,950 $ 2,133
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SUPPLEMENTAL INFORMATION (Note 13)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
24
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER
InSight Health Services Corp. ("InSight" or the "Company") is a Delaware
corporation formed on February 23, 1996 in connection with the Agreement and
Plan of Merger, dated as of February 26, 1996 (the "Merger Agreement"), among
American Health Services Corp., a Delaware corporation ("AHS"), Maxum Health
Corp., a Delaware corporation ("MHC" or "Maxum"), InSight and two wholly owned
subsidiaries of InSight, AHSC Acquisition Company, a Delaware corporation ("AHSC
Acquisition"), and MXHC Acquisition Company, a Delaware corporation ("MXHC
Acquisition"). Pursuant to the terms of the Merger Agreement, (i) AHSC
Acquisition merged with and into AHS and MXHC Acquisition merged with and into
Maxum (collectively, the "Merger"), (ii) each outstanding share of common stock,
par value $.03 per share, of AHS ("AHS Common Stock") was converted into the
right to receive one-tenth of a share of common stock, par value $.001 per
share, of InSight ("InSight Common Stock"), (iii) each outstanding share of
Series B Senior Convertible Preferred Stock, par value $.03 per share, of AHS
("AHS Series B Preferred Stock") which was convertible into 100 shares of AHS
Common Stock was converted into the right to receive 10 shares of InSight
Common Stock, (iv) each outstanding share of Series C Preferred Stock, par value
$.03 per share, of AHS (the "AHS Series C Preferred Stock"), which was issued
immediately prior to the consummation of the Merger, was converted into the
right to receive 1.25088 shares of Series A Preferred Stock, par value $.001 per
share, of InSight (the "InSight Series A Preferred Stock"), (v) each outstanding
share of common stock, par value $.01 per share, of Maxum ("Maxum Common Stock")
was converted into the right to receive .598 of a share of InSight Common Stock,
(vi) each outstanding share of Series B Preferred Stock, par value $.01 per
share, of Maxum (the "Maxum Series B Preferred Stock"), which was issued
immediately prior to the consummation of the Merger, was converted into the
right to receive 83.392 shares of InSight Series A Preferred Stock, and (vii)
each outstanding option, warrant or other right to purchase AHS Common Stock and
Maxum Common Stock was converted into the right to acquire, on the same terms
and conditions, shares of InSight Common Stock, with the number of shares and
exercise price applicable to such option, warrant or other right adjusted based
on the applicable exchange ratio for the underlying AHS Common Stock or Maxum
Common Stock.
Concurrent with the consummation of the Merger, AHS and MHC completed a
debt restructuring with General Electric Company, GE Medical, the primary
creditor of MHC and AHS, and General Electric Capital Corporation. This
restructuring resulted in the reduction of certain debt and operating lease
obligations and cancellation of certain stock warrants of MHC and AHS in
exchange for, among other things, the issuance to GE Medical, immediately prior
to the consummation of the Merger, of Maxum Series B Preferred Stock and AHS
Series C Preferred Stock. In connection with this restructuring, MHC recorded
the extinguishment of $9.0 million of long-term debt obligations and an
extraordinary gain representing the difference in the carrying value ($9.0
million) of the debt obligations settled over the fair value ($3.4 million) of
the Maxum Series B Preferred Stock issued to GE Medical. In
accordance with the provisions of troubled debt accounting, a portion of the
extraordinary gain, equal to the sum of the current and long-term portions of
future interest payable on all remaining GE Medical debt and capital lease
obligations of $1.0 million and $1.5 million, respectively, was deferred and
will be reduced by future interest payments over the terms of the respective
debt instruments.
At the effective time of the Merger, MHC Series B Preferred Stock and AHS
Series C Preferred Stock issued to GE Medical was converted into the right to
receive such number of shares of InSight Series A Preferred Stock that is
convertible into such number of shares of InSight Common Stock representing
approximately 48% of InSight Common Stock outstanding at the effective time
of the Merger (after giving effect to such conversion). Under an amended
equipment maintenance service agreement, GE Medical will also be entitled to
receive certain supplemental service fee payments based on future pretax
income of InSight.
The Merger was accounted for using the purchase method of accounting in
accordance with generally accepted accounting principles. MHC is treated as
the acquiror for accounting purposes, based upon the relative revenues, book
values and other factors. THE CONSOLIDATED FINANCIAL STATEMENTS PRESENTED
HEREIN REPRESENT THE OPERATING RESULTS OF MHC ONLY, EXCEPT FOR THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996, WHICH REFLECTS THE ACQUISITION
OF AHS ON JUNE 26, 1996. Management believes the results of operations of
AHS for the period from June 27, 1996 to June 30, 1996 are immaterial to the
Consolidated Financial Statements taken as a whole.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
The Company provides diagnostic imaging, treatment and related services to
hospitals, physicians and their patients through its imaging network in 30
states throughout the United States, with a substantial presence in
southern California, primarily Los Angeles County, and northern Texas,
primarily the Dallas/Ft. Worth metroplex. The Company's services are
provided through a network of 39 mobile magnetic resonance imaging (MRI)
facilities (Mobile Facilities), 14 fixed-site MRI facilities (Fixed
Facilities), 8 multi-modality imaging centers (Centers), two Leksell
Stereotactic Gamma Unit treatment centers (Gamma Knife), and one radiation
oncology center. An additional radiation oncology center is operated by
the Company as a part of one of its Centers.
25
<PAGE>
b. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of InSight and
its wholly owned subsidiaries, MHC and AHS (Note 1). The Company's
investment interests in partnerships (the Partnerships) are accounted for
under the equity method of accounting for ownership of 50 percent or less
when the Company does not exercise significant control over the operations
of the Partnership and have primary responsibility for the Partnership's
long-term debt. The Company's consolidated financial statements include two
Partnerships which have been accounted for under the equity method (Note
12).
At June 30, 1996, the Company's consolidated balance sheet includes two 50
percent owned Partnerships and one less than 50 percent owned limited
liability company. Since the Company controls the operations of these 50
percent or less owned entities and is primarily responsible for the
associated long-term debt, management believes that consolidation of these
entities is the most meaningful financial statement presentation (Note 12).
Significant intercompany balances have been eliminated.
c. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
d. REVENUE RECOGNITION
Revenues from contract fee-for-service (primarily Mobile Facilities) and
from patient services (primarily Centers) are recognized when services are
provided. Patient services revenues are presented net of related
contractual adjustments. Equipment rental revenues, management fees and
other revenues are recognized over the applicable contract period.
Revenues collected in advance are recorded as unearned revenue.
e. CASH EQUIVALENTS
Cash equivalents are generally composed of highly liquid investments with
original maturities of three months or less, such as certificates of
deposit and commercial paper.
f. DIAGNOSTIC EQUIPMENT HELD FOR SALE
Diagnostic equipment held for sale is stated at the lower of cost or the
estimated net realizable value and consists of older owned Mobile
Facilities.
g. PROPERTY AND EQUIPMENT
Property and equipment are depreciated and amortized on the straight-line
method using the following estimated useful lives:
Vehicles 3 to 8 years
Buildings 7 to 19 years
Leasehold improvements Term of lease
Computer and office equipment 3 to 8 years
Diagnostic and related equipment 5 to 8 years
Equipment and vehicles under capital leases Term of lease
26
<PAGE>
The Company capitalizes expenditures for betterments and major renewals.
Maintenance, repairs and minor replacements are charged to operations as
incurred. When assets are sold or otherwise disposed of, the cost and
related reserves are removed from the accounts and any resulting gain or
loss is included in the results of operations.
h. INTANGIBLE ASSETS
The Company assesses the recoverability of its intangible assets (including
goodwill) by determining whether the intangible asset balance can be
recovered over the remaining amortization period through projected
nondiscounted future cash flows. If projected future cash flows indicate
that the unamortized intangible asset balances will not be recovered, an
adjustment is made to reduce the net intangible asset to an amount
consistent with projected future cash flows discounted at the Company's
incremental borrowing rate. Cash flow projections, although subject to a
degree of uncertainty, are based on trends of historical performance and
management's estimate of future performance, giving consideration to
existing and anticipated competitive and economic conditions.
The Company has classified as goodwill the cost in excess of fair value of
the net assets acquired in purchase transactions. Intangible assets are
amortized on the straight-line basis over the following periods:
Goodwill 6 to 20 years
Non-compete agreements 5 to 7 years
Customer service contracts 2 years
Certificates of need 6 years
i. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standard No. 109,
Accounting for Income Taxes (SFAS No. 109), whereby the Company recorded the
benefit of its net operating loss carryforwards and also recorded a
valuation allowance for the entire amount.
j. INCOME (LOSS) PER COMMON SHARE
The number of shares used in computing income (loss) per common share is
equal to the weighted average number of common and common equivalent shares
outstanding during the respective period, adjusted retroactively for the
conversion of Maxum Common Stock into InSight Common Stock as a result of
the Merger. Common stock equivalents relating to options, warrants and
convertible preferred stock are not included in 1996, 1995, 1994 and 1993,
due to their antidilutive effect.
k. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of financial instruments are estimated using available market
information and other valuation methodologies. The fair value of the
Company's financial instruments is estimated to approximate the related
book value, unless otherwise indicated.
l. POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS
The Company does not provide post-employment or post-retirement benefits to
employees. Accordingly, Statement of Financial Accounting Standard
No. 112, Employers Accounting for Post-Employment Benefits, and Statement
of Financial Accounting Standard No. 106,
27
<PAGE>
Employers Accounting for Post-Retirement Benefits have no impact on the
Company's financial statements.
m. NEW PRONOUNCEMENTS
In 1996, the Company adopted the provisions of the Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121).
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
SFAS No. 123 requires new disclosures regarding employee and non-employee
stock-based compensation plans.
n. RECLASSIFICATIONS
Reclassifications have been made to certain 1995, 1994 and 1993 amounts to
conform to the 1996 presentation.
3. PRIOR RESTRUCTURE OF MHC'S OPERATIONS AND FINANCIAL OBLIGATIONS
During recent years, MHC experienced many adverse market conditions and was
significantly impacted by continued deterioration and uncertainties in the
health care industry. In 1992, MHC recorded a charge of $7.5 million in
anticipation of a restructure of its operations and financial obligations (the
Prior Restructure). MHC began executing the Prior Restructure in 1993 and
completed it in 1994. In 1993, MHC recorded a net credit adjustment of $0.5
million to the Prior Restructure provision, resulting in a net charge associated
with the Prior Restructure of $7.0 million.
The Prior Restructure involved the reconfiguration, consolidation and
wind-down of certain Mobile Facilities and partnerships in which MHC had
ownership interests. In addition, significant cost reductions at MHC's
headquarters were achieved and a broad restructuring and/or settlement of
obligations with all of MHC's significant creditors and certain smaller
creditors were completed. Extraordinary gains from extinguishment of debt,
associated with these restructured and settled obligations, of $1.0 million and
$3.3 million, were recorded in 1993 and 1994, respectively.
GE Medical provided financing for the settlement of obligations with MHC's
two other significant creditors. In return for certain concessions made by GE
Medical, MHC agreed to certain contingent lease rental adjustments over the
remaining lease terms (Note 8) and issued a common stock warrant for 700,000
shares. As a result of the Merger, the common stock warrant was canceled. In
addition, MHC sold its technical services division to GE Medical in 1994.
Consideration for the sale included cash and future discounts on maintenance
services to be realized over approximately five years.
By the end of 1994, MHC had completed the Prior Restructure and had
achieved the objectives of reducing negative cash flow in the near-term,
improving current and near-term viability and enhancing the potential for
long-term viability. The favorable results of the Prior Restructure, however,
were diminished by continued deterioration in the industry. MHC continued to
operate while experiencing negative cash flow by completing transactions
involving the financing of certain lease and other operating expenses with GE
Medical, and the disposal of certain assets and partnership interests.
As of December 31, 1995, MHC did not have the resources to support its
existing debt service and lease requirements and the obligation to settle
pending securities litigation (Note 14). The accompanying December 31, 1995
financial statements were prepared on a going concern basis, and accordingly
did not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities had MHC been unable to continue as a going concern. In June 1996,
the financial accommodation transactions with GE Medical were closed and the
Merger was consummated (Note 1).
28
<PAGE>
4. ACQUISITIONS
In June 1996, InSight, MHC and AHS completed the Merger (Note 1). The
Merger was accounted for under the purchase method with MHC being treated as the
acquiror for accounting purposes.
In April 1995, MHC purchased certain assets, primarily Mobile Facilities of
$2.4 million and intangible assets of $2.0 million in Ohio and Indiana. MHC
paid approximately $2.1 million in cash and assumed certain equipment related
liabilities of approximately $2.3 million.
In October 1995, MHC acquired two Centers in Dallas, Texas. The
transaction included the purchase of certain assets, primarily diagnostic
equipment of $1.1 million and intangible assets of $1.0 million, and the
assumption of $0.5 million of equipment related liabilities. The purchase price
of $1.6 million and an additional $0.7 million for working capital requirements
were financed by GE Medical. MHC began providing services at both Centers
effective October 1, 1995 and, in December 1995, completed the planned
consolidation of the two Centers and an existing Center acquired in 1991, which
resulted in additional acquisition related costs of $0.2 million.
These acquisitions were accounted for under the purchase method.
Accordingly, the results of related operations have been included in the
consolidated financial statements since the applicable acquisition dates. The
pro forma effects of these acquisitions, as if they had occurred as of January
1, 1995, are summarized as follows (amounts in thousands):
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
--------------- -----------------
Revenues $ 44,249 $ 92,507
Expenses 49,474 98,528
---------- ----------
Loss before extraordinary item (5,225) (6,021)
Extraordinary item 3,179 -
---------- ----------
Net loss $ (2,046) $ (6,021)
---------- ----------
---------- ----------
Loss per share before extraordinary item (1.93) $ (2.22)
---------- ----------
---------- ----------
Net loss per share $ (0.75) $ (2.22)
---------- ----------
---------- ----------
The pro forma results for 1996 and 1995 include $0.3 million and $1.2
million of amortization of intangibles, respectively, and $0.5 million of
interest expense in 1995 related to these acquisitions. The pro forma
results do not include the interest and lease savings resulting from the
Merger.
5. TRADE RECEIVABLES
Trade receivables are comprised of the following (amounts in thousands):
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<PAGE>
December 31,
June 30, -------------
1996 1995 1994
--------- ---- ----
Trade receivables $ 23,004 $ 10,199 $ 8,532
Less: Allowances for doubtful accounts and
contractual adjustments 7,808 3,283 2,893
Allowances for professional fees 2,280 620 458
-------- -------- -------
Net trade receivables $ 12,916 $ 6,296 $ 5,181
-------- -------- -------
-------- -------- -------
Net trade receivables arise from revenue
generated by:
Patient services $ 7,362 $ 2,478 $ 1,830
Fee-for-service 4,693 3,643 3,184
Other 861 175 167
-------- -------- -------
Net trade receivables $ 12,916 $ 6,296 $ 5,181
-------- -------- -------
-------- -------- -------
Receivables related to patient services revenues are due primarily from
managed care organizations, patients' private insurance companies and government
payors. Receivables arising from fee-for-service revenues are due primarily
from hospitals.
The allowance for doubtful accounts and contractual adjustments include
management's estimate of the amounts expected to be written off on specific
accounts and for write-offs on other as yet unidentified accounts included in
accounts receivable. In estimating the write-offs and adjustments on specific
accounts, management relies on a combination of in-house analysis and a review
of contractual payment rates from private health insurance programs or under the
federal Medicare program. In estimating the allowance for unidentified
write-offs and adjustments, management relies on historical experience. The
amounts the Company will ultimately realize could differ materially in the near
term from the amounts assumed in arriving at the allowance for doubtful accounts
and contractual adjustments in the financial statements at June 30, 1996.
The Company reserves a contractually agreed upon percentage at several of
its Centers, averaging 20 percent of the accounts receivable balance from
patients, for payments to radiologists for interpreting the results of the
diagnostic imaging procedures. Payments to radiologists are only due when
amounts are received. At that time, the balance is transferred from the
allowance account to a professional fees payable account.
6. INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
December 31,
June 30, -------------
1996 1995 1994
-------- ---- ----
Total intangible assets $ 17,861 $ 4,822 $ 1,447
Less: Accumulated amortization 896 775 253
-------- -------- -------
$ 16,965 $ 4,047 $ 1,194
-------- -------- -------
-------- -------- -------
Goodwill $ 16,382 $ 3,338 $ 1,182
Non-compete agreements 245 191 -
Customer service contracts 113 188 -
Certificates of need 158 175 -
Other 67 155 12
-------- -------- -------
$ 16,965 $ 4,047 $ 1,194
-------- -------- -------
-------- -------- -------
In connection with the Merger and MHC's acquisitions in 1996 (Note 1) and
1995 (Note 4), MHC recorded $13.6 million and $3.4 million of intangible assets,
respectively. On December 31, 1994, MHC acquired the remaining 40% interest in
a Center, 60% of which was acquired in 1992, and recorded goodwill of $0.5
million. Projected future cash flows for two of MHC' Centers at June 30, 1996
indicated that the unamortized goodwill of $1.4 million and the unamortized
deferred organizational costs of $0.1 million related to these two Centers were
not recoverable. Therefore, in accordance with the
30
<PAGE>
Company's policy, the intangible assets related to these Centers were written
off as of June 30, 1996. Amortization of intangible assets of $1.9 million
(including the $1.5 million discussed above), $0.6 million, $0.2 million and
$0.9 million for the six months ended June 30, 1996 and for the years ended
December 31, 1995, 1994, and 1993, respectively, is included in Corporate
Operating Expenses.
7. EQUIPMENT AND OTHER NOTES PAYABLE
Equipment and other notes payable consists of the following (amounts in
thousands):
December 31,
June 30, -------------
1996 1995 1994
-------- ---- ----
Notes payable to GE Medical, bearing
interest at rates which range from 8
percent to 12.5 percent, maturing at
various dates through February 2005.
The notes are secured by substantially
all of the Company's assets. $ 36,072 $15,374 $9,316
Notes payable to third parties (other
than banks), bearing interest at rates
which range from 6.6 percent to 10 percent,
maturing at various dates through May 2000.
The notes are primarily secured by certain
diagnostic equipment. 935 1,143 520
Other notes payable. 1,231 - -
-------- ------- ------
Total notes payable 38,238 16,517 9,836
Less: Current portion 6,585 3,361 2,441
-------- ------- ------
Long-term debt $ 31,653 $13,156 $7,395
-------- ------- ------
Scheduled maturities of long-term debt at June 30, 1996, are as follows
(amounts in thousands):
1997 $6,585
1998 7,644
1999 7,934
2000 6,885
2001 2,799
Thereafter 6,391
-------
$38,238
-------
-------
The terms of the notes payable to GE Medical include certain restrictive
covenants which, among others, limit capital expenditures and restrict payment
of dividends. As of June 30, 1996, the Company was in compliance with these
covenants.
Interest expense on debt related to GE Medical for the six months ended
June 30, 1996 and the years ended December 31, 1995, 1994 and 1993, was $0.8
million, $1.0 million, $0.6 million, and $0.3 million, respectively.
31
<PAGE>
8. LEASE OBLIGATIONS AND COMMITMENTS
The Company is leasing diagnostic equipment, certain other equipment and
its office facilities under various capital and operating leases. Future
minimum scheduled rental payments required under these noncancelable leases at
June 30, 1996, are as follows (amounts in thousands):
Capital Operating
------- ---------
1997 $ 3,180 $ 19,768
1998 2,494 16,589
1999 1,224 11,493
2000 681 5,360
2001 46 2,488
Thereafter - 496
------- --------
Total minimum lease payments 7,625 $ 56,194
--------
--------
Less: Amounts representing interest 999
-------
Present value of capital lease obligations 6,626
Less: Current portion 2,638
-------
Long term capital lease obligations $ 3,988
-------
-------
As of June 30, 1996, a substantial amount of equipment leased by the
Company is subject to contingent rental adjustments dependent on certain
operational factors through 1999. The Company's future operating and capital
lease obligations to GE Medical were approximately $33.2 million and $4.3
million, respectively.
Rental expense for diagnostic equipment and other equipment for the six
months ended June 30, 1996 and for the years ended December 31, 1995, 1994
and 1993, was $7.0 million, $14.5 million, $14.6 million, and $13.9 million,
respectively. These amounts include contingent rental expense of $0.2
million, $0.5 million, $0.8 million and $0.5 million for the six months ended
June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Company occupies office facilities under lease agreements expiring
through August 2000. Rental expense for these facilities for the six months
ended June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993,
was $0.3 million, $0.6 million, $0.6 million, and $0.8 million, respectively.
9. CAPITAL STOCK
Warrants - In connection with the Prior Restructure discussed in Note 3,
MHC issued a warrant for 700,000 shares of its Common Stock to GE Medical.
This warrant was canceled in connection with the Merger (Note 1).
Additionally, InSight assumed a warrant to purchase 20,000 shares of its
common stock at an exercise price of $2.50 per share issued to the estate of Cal
Kovens, a former director of AHS.
32
<PAGE>
STOCK OPTIONS - MHC has a stock option plan and AHS has three stock
option plans which provided for the granting of incentive or nonstatutory
stock options to key employees, non-employee directors and independent
contractors. In addition, in August 1994, MHC issued options to purchase
44,850 shares to non-employee directors. These options were not covered
by an existing plan but were approved at MHC's June 25, 1996 stockholders'
meeting. The Company also has two stock option plans which provide for the
granting of incentive and nonstatutory stock options to key employees,
independent contractors and non-employee directors. Incentive stock
options must have a exercise price of at least the fair market value of
InSight Common Stock on the grant date. Options become vested cumulatively
over various periods up to four years from the grant date, are exercisable
in whole or in installments, and expire five or ten years from the grant
date. Pursuant to the Merger, the Company assumed all of MHC's and
AHS's outstanding options at June 26, 1996. No shares are available
for future grants under the MHC and AHS plans; however, shares are
available for future grants of options under the Company's two stock option
plans. The following table summarizes stock option activity for the years
ended December 31, 1993, 1994, and 1995 and for the six months ended
June 30, 1996, with shares and prices adjusted retroactively for the
applicable exchange ratio in the Merger:
Exercise Price
Per Share Range
Number of ---------------
Shares From To
--------- ---- --
Outstanding at December 31, 1992 242,070 $1.39 $19.72
Granted 44,850 1.25 1.25
Forfeited (102,108) 7.84 19.72
-------- ----- ------
Outstanding at December 31, 1993 184,812 1.25 16.94
Granted 91,195 0.10 0.42
Canceled (55,315) 1.39 19.72
Forfeited (55,494) 1.39 8.26
------- ----- ------
Outstanding at December 31, 1994 165,198 0.10 16.94
Granted 53,820 0.84 0.84
Canceled (14,950) 0.15 16.94
------- ----- ------
Outstanding at December 31, 1995 204,068 0.10 15.64
Granted 89,850 0.10 5.37
AHS Options Assumed 76,000 2.50 16.20
-------- ----- ------
Outstanding at June 30, 1996 369,918 0.10 16.20
-------- ----- ------
-------- ----- ------
Exercisable at June 30, 1996 263,378 0.10 16.20
-------- ----- ------
-------- ----- ------
33
<PAGE>
Stock Purchase Plan - MHC had an Employee Stock Purchase Plan which
provided for the sale of up to 375,000 shares of common stock. MHC's Board of
Directors terminated the Plan at the effective time of the Merger.
10. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, which requires the asset and liability method of
accounting for income taxes. The provision for income taxes for the six months
ended June 30, 1996 and for the year ended December 31, 1994 represents
primarily state and federal tax expenses under the Alternative Minimum Tax
(AMT). Deferred income tax assets and liabilities, which arise from temporary
differences between the financial statement and tax bases of assets and
liabilities, are as follows at June 30, 1996 (amounts in thousands):
Reserves $ 2,148
Accrued expenses, not currently deductible 1,222
Deferred gain on debt restructure 887
Depreciation and amortization (126)
Other 153
NOL carryforwards 13,896
Valuation allowance (18,180)
--------
Total $ -
--------
--------
As of June 30, 1996, the Company had net operating loss carryforwards of
approximately $38.5 million, expiring in 2004 through 2010. As a result of the
Merger, there will be a substantial limitation on the use of these net operating
loss carryforwards. The amount of that limitation has not yet been determined.
A valuation allowance is provided against the deferred tax asset when it
is more likely than not that some portion of the deferred tax asset will not
be realized. The Company has established a valuation allowance for the
deferred tax allowance for the deferred tax asset as, in management's best
estimate, it is not likely to be realized in the near term.
11. RETIREMENT SAVINGS PLANS
The Company, through MHC, has a 401(k) profit sharing plan (the MHC Plan)
for all MHC employees, whereby MHC may match a percentage of employee
contributions to the Plan and make additional contributions on behalf of the
employees at the discretion of its Board of Directors. Contributions of
$50,000, $100,000, $62,000 and $40,000 were made during the six months ended
June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
respectively. Contributions of $12,000 in 1994 and the full amount in 1993 were
funded with forfeitures.
The Company, through AHS, has a 401(k) profit sharing plan (the AHS Plan)
for all AHS employees, whereby AHS matches a percentage of employee
contributions to the AHS Plan.
Subsequent to June 30, 1996, the Company combined the MHC Plan and the
AHS Plan into one plan (the Plan). Under this Plan, which is available to
all eligible employees, the Company will match a percentage of employee
contributions to the Plan.
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The Company, through MHC, has direct ownership in two Partnerships at June
30, 1996, both of which operate Centers. MHC owns 43.75% and 50% of these
Partnerships, serves as the managing general partner and provides certain
management services under agreements expiring in 2007 and 2004, respectively.
These Partnerships are accounted for under the equity method since the Company
does not exercise significant control over the operations of these Partnerships
or have primary responsibility for the
34
<PAGE>
Partnership's long-term debt. Set forth below is certain financial data of the
Partnerships (amounts in thousands):
December 31,
June 30, ------------------------
1996 1995 1994
-------- -------- -------
Combined Financial Position:
Current assets:
Cash $ 549 $ 582 $ 93
Trade receivables,
less allowances 721 675 624
Other 31 24 66
Property and equipment, net 442 566 309
------- ------- -------
Total assets 1,743 1,847 1,092
Current liabilities (358) (238) (256)
Due to MHC (269) (499) -
Long-term liabilities (226) (82) (20)
------- ------- -------
Net assets $ 890 $ 1,028 $ 816
------- ------- -------
------- ------- -------
Set forth below are the combined operating results of the Partnerships and
the Company's equity in earnings of the Partnerships (amounts in thousands):
Six Months Years Ended December 31,
Ended June 30, ------------------------------
1996 1995 1994 1993
-------- -------- -------- -------
Operating Results:
Net revenues $ 2,346 $ 4,455 $ 13,456 $ 16,162
Expenses 2,002 3,636 9,217 12,223
--------- ------- -------- --------
Net income $ 344 $ 819 $ 4,239 $ 3,939
--------- ------- -------- --------
--------- ------- -------- --------
Equity in Earnings:
Share of net income of
Partnerships $ 138 $ 348 $ 876 $ 650
Minority interest - - (42) (15)
Amortization of deferred gain - - - 50
--------- ------- -------- --------
Equity in earnings of
partnerships $ 138 $ 348 $ 834 $ 685
--------- ------- -------- --------
--------- ------- -------- --------
REVENUES OF THE PARTNERSHIPS are recognized when services are provided to
patients at established billing rates or at the amount realizable under
agreements with third party payors, with the provision for contractual
adjustments deducted to report net patient services revenues. The Partnerships'
patient receivables are generally reimbursed by managed care organizations,
and/or patient's private insurance companies, with the remainder of the patient
receivables reimbursed by health care plans and government payors.
LEASE COMMITMENTS OF THE PARTNERSHIPS exist under various operating leases
for equipment and office space. Future minimum lease payments for the
Partnerships' noncancelable leases at June 30, 1996, are as follows (amounts in
thousands):
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<PAGE>
Capital Operating
------- ----------
1997 $102 $ 764
1998 102 727
1999 43 152
2000 36 -
---- ------
$283 $1,643
---- ------
---- ------
The Company, through AHS, has direct ownership in two Partnerships and
one limited liability company, all of which operate Centers. AHS owns 50% of
each of the Partnerships and 35% of the limited liability company. Since the
Company controls the operations and is primarily responsible for the
associated long-term debt, the Centers have been included in the Company's
consolidated balance sheet at June 30, 1996. The summarized condensed
balance sheet data of the Company's three 50 percent or less owned and
controlled entities which are consolidated into the Company's balance sheet
at June 30, 1996 is as follows (amounts in thousands):
Current assets $ 2,327
Total assets 3,955
Current liabilities 1,019
Long-term debt 416
Minority interest equity 1,391
In December 1994, MHC sold the common stock of three wholly owned
subsidiaries, whose primary operations were equity interests of approximately
20% in each of three partnerships that provided lithotripsy services, for
approximately $5.0 million in cash. MHC's investment in and share of earnings
of these partnerships had been reported in MHC's financial statements using the
equity method of accounting. This transaction resulted in a pretax gain of
approximately $5.0 million in 1994. In addition, two other Partnerships which
provided services through mobile MRI and CT facilities were terminated in 1994.
MHC leased equipment to certain Partnerships under direct financing leases
and operating leases, and arranged for equipment maintenance services. In
connection with providing these and other services, MHC received management fees
related to certain Partnerships. Revenues related to these Partnership
activities included in MHC's financial statements for the years ending December
31, 1994 and 1993 were $1.3 million and $3.5 million, respectively.
Substantially all of these revenues relate to Partnerships that were sold or
terminated in 1994 or 1993.
At June 30, 1996, the Company has a receivable of $0.3 million related to
certain lease and operating expenses of the two existing Partnerships that are
accounted for under the equity method of accounting.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (amounts in thousands):
36
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
-----------------------------
1996 1995 1994 1993
------------- ------- ------ ------
<S> <C> <C> <C> <C>
Cash paid for interest $1,011 $1,411 $ 879 $897
Noncash investing and financing activities:
Equipment purchased with debt - 2,133 1,385 107
Equipment additions under capital leases 238 8,117 2,779 475
Prepaid insurance premiums financed 208 555 430 717
Debt extinguished with issuance of
preferred stock (9,018) - - -
Deferred gain on debt restructure 2,519 - - -
Accrued interest on debt extinguishment (48) - - -
Preferred stock issued 3,375 - - -
Cancellation of common stock warrant (7) - - -
</TABLE>
14. LITIGATION SETTLEMENTS
MAXUM - In May and June 1993, MHC was named a defendant in two lawsuits filed
on behalf of a purported class of stockholders in the U.S. District Court for
the Southern District of New York (the Court). Also named as defendants were
the underwriting firms that led MHC's initial public offering in September
1991, a former stockholder and senior creditor of MHC, and certain executives
and members of MHC's Board of Directors. These two actions were consolidated
into one action. In February 1994, the plaintiffs filed a second
consolidated amended complaint, which superseded the previously filed
complaints. The plaintiffs alleged that misstatements and omissions were
made by MHC and the other defendants in connection with MHC's initial public
offering and in subsequent public disclosures from September 19, 1991 until
March 1, 1993 when MHC announced that it would write down assets and
establish reserves related to the restructuring of its mobile MRI business.
The plaintiffs sought monetary damages under various provisions of the
federal securities laws and state law in an unspecified amount, as well as
other relief. In March 1994, MHC and all other defendants moved to dismiss
the second amended complaint for, among other things, failure to state a
claim. In November 1994, the Court granted the motions to dismiss and gave
the plaintiffs permission to file a third amended complaint. In January
1995, the plaintiffs served their third consolidated amended complaint. At
approximately the same time, plaintiffs agreed to dismiss without prejudice
their claims against the two underwriter defendants. In June 1995, MHC and
the other defendants moved to dismiss the third amended complaint for failure
to state a claim and failure to plead fraud with particularity.
On February 23, 1996, while the motions to dismiss were still under
consideration by the Court, the defendants, plaintiffs and other interested
parties (acting through their respective counsel) entered into a Stipulation
of Settlement pursuant to which, subject to certain conditions, the action
was settled and all claims dismissed on the merits. In anticipation of this
settlement, MHC recorded a charge of $1.5 million in the fourth quarter of
1995. As a part of the Merger discussed in Note 1, the Company arranged to
borrow approximately $1.9 million to finance the litigation settlement. This
borrowing will be payable over a five year period beginning in late 1996.
On April 8, 1996, the Court entered an order that, among other things,
approved the proposed settlement and scheduled a hearing on June 21, 1996 to
determine, among other things, whether to grant final approval to the
settlement.
The Final Judgment of Dismissal became final on July 26, 1996. Pursuant
to the parties' Stipulation of Settlement, and as a result of all conditions
to effectiveness having been met, including MHC's having financing available
to it for its contribution, the settlement became effective as of July 27,
1996. On July 29, 1996, MHC and other parties collectively paid to the
plaintiffs in the class action the
37
<PAGE>
balance of the agreed upon settlement amount, including accrued interest,
thereby completing the remaining obligations of MHC.
AHS - In September 1992, a complaint was filed in the United States District
Court for the District of Puerto Rico by PRF, Inc. d/b/a San Juan Health Centre,
Inc., Drs. Pablo Rodriguez Millan and Rafael Rodriquez Sepulveda and their
spouses against Philips Credit Corporation ("Philips"), AHS, Clarke J.
Underwood, Margaret van Gilse d/b/a Berkshire Consulting Group, et al (Case No.
92-2266). The complaint alleged against all defendants violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), mail fraud, wire
fraud, misrepresentation and fraud, infliction of emotional distress and
tortious misconduct upon Drs. Millan and Sepulveda and their spouses, and loss
of consortium by Dr. Millan. The complaint alleged against AHS breach of
management agreement, breach of voting trust agreement and breach of fiduciary
duty, tortious interference with contractual relations, and breach of fiduciary
duty to Drs. Millan and Sepulveda and their spouses. The complaint sought
compensatory damages in excess of $400,000,000, punitive damages, costs,
injunctive relief and attorneys' fees. Mr. Underwood and Ms. van Gilse are
former officers/employees of AHS.
San Juan Health Centre ("SJHC"), a freestanding health care clinic, was
created by Drs. Millan and Sepulveda and Mr. Amezquita, who are the three
shareholders of PRF, Inc., the surviving entity of a merger of PRF, Inc. and
San Juan Health Centre, Inc. ("SJ Inc."). Prior to AHS's involvement with
SJHC, Philips was a large creditor of PRF, Inc., having made sizable loans
for medical equipment purchases and operations. Philips was at the time and,
until February 1993, continued to be AHS's primary lender. In January 1990,
in connection with Philips making another large loan to PRF, Inc. and SJ
Inc., Philips requested AHS to manage SJHC, which it agreed to do. In
connection with the loan, PRF, Inc. and SJ Inc. entered into a management
agreement with AHS on January 12, 1990, with a two-year term, pursuant to
which AHS was to provide SJHC with general management services. In October
1991, PRF, Inc. notified AHS that it would not be extending the management
agreement beyond the initial two-year term. As of January 1992, AHS was
no longer the manager of SJHC. Berkshire Consulting Group became the manager
of SJHC. Also, in connection with the loan, on January 13, 1990, Drs. Millan
and Sepulveda placed their PRF, Inc. and SJ Inc. stock into a voting trust.
In the voting trust agreement, AHS was named the trustee of the voting trust
with broad powers with respect to the stock. AHS resigned as trustee on June
24, 1992.
In July 1993, one of the plaintiffs, PRF, Inc., filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court,
District of Puerto Rico (Case No. 93-03880 SEK). In the context of this
proceeding, all of the claims of PRF, Inc. have been resolved. The defendants
subsequently moved to dismiss the individual and conjugal partnership claims on
the basis that they were derivative of the resolved claims of PRF, Inc. On
March 11, 1996, the District Court issued an Opinion and Order and Partial
Judgment dismissing with prejudice all claims brought by the individual
plaintiffs and conjugal partnership plaintiffs based on alleged violations of
the RICO statute, mail fraud, wire fraud, misrepresentation and fraud,
intentional infliction of emotional distress, tortious misconduct, and loss of
consortium. As a result of the entry of the Partial Judgment and issuance of
the Opinion and Order, only three counts remained--a claim against AHS for
alleged breach of a voting trust agreement, and breach of fiduciary duty claims
brought, as separate claims by the conjugal partnerships and the husband and
wife who make up each conjugal partnership. On May 15, 1996, a Further Judgment
was entered finally resolving the remaining claims against AHS. The Company
made a payment of $50,000 to settle the remaining claims.
In addition to the foregoing matters, InSight is engaged in the defense of
lawsuits arising out of the ordinary course and conduct of its business and has
insurance policies covering such potential insurable losses where such coverage
is cost-effective. InSight believes that the outcome of any such lawsuits will
not have a material adverse impact on InSight's business.
38
<PAGE>
15. AHS FINANCIAL STATEMENTS
In connection with the Merger, the consolidated statements of operations
and cash flows for AHS for the period from January 1, 1996 to June 26, 1996 are
presented as follows (amounts in thousands):
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES:
Contract services $ 3,066
Patient services 14,723
-------
Total revenues 17,789
COSTS OF OPERATIONS:
Cost of services 9,337
Provision for doubtful accounts 451
Equipment leases 2,485
Depreciation 1,986
-------
Total costs of operations 14,259
-------
GROSS PROFIT 3,530
CORPORATE OPERATING EXPENSES 2,141
-------
INCOME FROM COMPANY OPERATIONS 1,389
INTEREST EXPENSE, NET (1,994)
-------
LOSS BEFORE INCOME TAXES (605)
-------
INCOME TAX EXPENSE 152
-------
NET LOSS $ (757)
-------
-------
The consolidated statement of operations does not include approximately $1,450
of costs incurred related to the Merger.
39
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (757)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,250
Deferred rent expense (104)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (31)
Decrease in prepaid expenses and other 35
Increase in other assets (501)
Increase in accounts payable and accrued expenses 219
Increase in professional fees payable (113)
Decrease in reserve for center terminations (309)
--------
Net cash provided by operating activities 689
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (558)
--------
Net cash used in investing activities (558)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (1,219)
Increase in principal under long-term obligations 480
Proceeds from issuance of common stock 8
Decrease in minority interest (87)
--------
Net cash used in financing activities (818)
--------
NET DECREASE IN CASH (687)
CASH, beginning of period 6,176
--------
CASH, end of period $ 5,489
--------
--------
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE BOARD OF DIRECTORS
The Company's Certificate of Incorporation, which was filed with the
Secretary of State of Delaware on February 23, 1996 ("Certificate"), provides
for a three-tiered classified Board of Directors with staggered terms of office.
The Board of Directors consists of three classes, designated as Class I, Class
II and Class III. The authorized number of directors is five, and there are
currently five directors. The initial four directors were designated in the
Certificate on February 23, 1996, and on July 19, 1996, an additional director
was elected by the unanimous written consent of the Board of Directors.
Pursuant to the Certificate, at each annual meeting of stockholders only
one class of directors will be elected, and each class of directors will serve a
three-year term and until their successors are duly elected and qualified. The
term of the Class I director will expire at the 1997 annual meeting, the term of
the Class II director will expire at the 1998 annual meeting, and the term of
the Class III directors will expire at the 1999 annual meeting.
Set forth below are the directors of the Company:
YEAR FIRST
ELECTED
NAME AGE POSITION TO SERVE
---- --- -------- ---------
E. Larry Atkins 49 President and Chief Executive
Officer and Director, Class I 1996
Grant R. Chamberlain 31 Director, Class II 1996
Frank E. Egger 52 Chairman of the Board and Director,
Class III 1996
Leonard H. Habas 53 Director, Class III 1996
Ronald G. Pantello 52 Director, Class II 1996
E. Larry Atkins has been a director and president and chief executive
officer of the Company since February 23, 1996. Mr. Atkins joined AHS in 1986
and has served as AHS's president and chief executive officer since August 1990
and chairman of the board from December 1990 to June 1992. Mr. Atkins served as
executive vice president and chief operating officer of AHS from 1986 to August
1990. Mr. Atkins became a director of AHS in 1988. From 1979 to 1986, Mr.
Atkins served as president and chief executive officer of AMI Diagnostic
Services, a wholly-owned subsidiary of American Medical International, Inc.
Frank E. Egger has been chairman of the board and a director of the Company
since February 23, 1996. Mr. Egger was a director of AHS from August 1991 until
June 26, 1996. He was appointed chairman of the board of AHS in May 1995, and
served as such until June 26, 1996. Presently, Mr. Egger serves as vice
president of Kovens & Associates, Inc. ("Kovens & Associates"), a successor
entity to Kovens Enterprises, where Mr. Egger served as chief financial officer
from 1980 to 1995. Kovens & Associates is a group of real estate development
and investment companies based in Miami, Florida.
Leonard H. Habas has been a director of the Company since February 23,
1996. From 1986 to June 26, 1996, Mr. Habas was a director of MHC. Since 1995
he has been a director , chairman of the board and chief executive officer of
Advance Publishers, L.C., a book distribution company based in Winter Park,
Florida. He established his own financing and consulting firm in 1987, which he
continues to own. Mr. Habas is also a director of Dick Davis Digest and CeraMed
Corporation.
<PAGE>
Ronald G. Pantello has been a director of the Company since February 23,
1996. From 1993 to June 26, 1996, Mr. Pantello was a director of MHC. He is a
founding partner of Lally, McFarland & Pantello, an advertising agency
specializing in the health care industry, based in New York City, and has been
its chief executive officer since 1980.
Grant R. Chamberlain has been a director of the Company since July 19,
1996. Since April 1995, Mr. Chamberlain has been a vice president of
Shattuck Hammond Partners, an investment banking firm based in New York City.
From April 1991 to April 1995, he served as manager of strategic
investments and restructurings for GE Medical.
From February 23, 1996 through June 30, 1996, the Board of Directors held
one meeting at which all the directors were present. In addition, the Board of
Directors took action by unanimous written consent three times.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Company's Compensation Committee currently consists of two non-employee
directors, Messrs. Habas (chairman) and Pantello. The Compensation Committee is
responsible for determining the specific forms and levels of compensation of
the Company's executive officers, and administering the Company's 1996
Employee Stock Option Plan and 1996 Directors' Stock Option Plan, AHS's 1987
Stock Option Plan, AHS's 1989 Stock Incentive Plan, AHS's 1992 Option and
Incentive Plan, and MHC's 1989 Stock Option Plan.
AUDIT COMMITTEE. The Audit Committee currently consists of Messrs.
Chamberlain (chairman) and Pantello. The Audit Committee's principal
functions are to review the results of the Company's annual audit of its
financial statements with the Company's independent public accountants and
approve the appointment of the Company's independent public accountants.
NOMINATING COMMITTEE. The Nominating Committee currently consists of
Messrs. Egger (chairman) and Habas. The Nominating Committee's primary function
is to make recommendations relating to the organization, size and composition of
the Board of Directors and Board committees.
The Company does not have an executive or similar committee. The Company's
Board generally acts in its entirety upon matters which might otherwise be the
responsibility of such a committee.
COMPENSATION OF DIRECTORS. The members of the Company's Board who are not
employees of the Company receive an annual director fee of $15,000 and options
to purchase InSight Common Stock for their services as directors, as provided in
the Company's 1996 Directors' Stock Option Plan ("Directors' Plan"). On March
28, 1996, the Company entered into a consulting agreement with Mr. Egger
pursuant to which Mr. Egger receives $100,000 per year for services rendered to
the Company in connection with its acquisition and financing activities. See
"Item 11 - Employment Agreements and Severance Agreements" and "Item 13 -
Certain Relationships and Related Transactions."
The Directors' Plan provided for the automatic grant at the
effective time of the Merger to each non-employee director then serving on the
Company's Board of an option to purchase 15,000 shares of InSight Common Stock
at an exercise price equal to the fair market value of such stock on the date of
the grant. In addition, each new director of the Company who commences service
after the effective time of the Merger will be granted an option to purchase
15,000 shares of InSight Common Stock. The initial grants vest monthly on a pro
rata basis over a three-year period, so long as the individual remains a
director of the Company or is an employee or independent contractor of the
Company or any of its subsidiaries. At the end of such three-year period and
annually thereafter during the term of the Directors' Plan, so long as the
individual remains a director, he or she will be granted an option to purchase
5,000 shares of InSight Common Stock. These additional grants vest monthly over
one year on the same terms as the initial grants. These options expire ten
years from the date of grant. In accordance with this formula, on June 26,
1996, each of Messrs. Egger, Habas and Pantello were granted options to purchase
15,000 shares of InSight Common Stock at an option price of $5.37 per share. In
addition, on July 19, 1996, Mr. Chamberlain was granted an option to purchase
15,000 shares of InSight Common Stock at an option price of $7.00 per share.
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company, together with the year in which they
were appointed to their current positions, are set forth below:
EXECUTIVE OFFICER AGE POSITION YEAR
----------------- --- -------- ----
E. Larry Atkins 49 President, Chief Executive Officer 1996
and Director
Glenn P. Cato 43 Senior Executive Vice President and 1996
Chief Operating Officer
Thomas V. Croal 36 Executive Vice President, Chief
Financial Officer and Secretary 1996
Michael A. Boylan 40 Senior Vice President-Operations 1996
Michael D. Cragin 48 Senior Vice President-Operations 1996
Robert N. LaDouceur 51 Senior Vice President-Operations 1996
Deborah M. MacFarlane 40 Senior Vice President-Marketing 1996
Robert J. Armstrong 58 Vice President-Design & Construction 1996
Brian G. Drazba 35 Vice President-Finance and 1996
Corporate Controller
Information concerning Mr. Atkins is set forth above under "The Board of
Directors."
Glenn P. Cato has been senior executive vice president and chief operating
officer of the Company since February 23, 1996. Mr. Cato has served as
president and chief executive officer of MHC since March 1994 and served as
secretary from 1993 until June 26, 1996. From 1989 to 1994, he served as senior
vice president and chief financial officer of MHC.
Thomas V. Croal has been executive vice president, chief financial officer
and secretary of the Company since February 23, 1996. Mr. Croal served as a
director of AHS from March 1991 until June 26, 1996. He has served as vice
president and chief financial officer of AHS since April 1991. He was
controller of AHS from 1989 until April 1991. In December 1990, Mr. Croal was
appointed corporate secretary. From 1981 to 1989, Mr. Croal was employed by
Arthur Andersen & Co., an independent public accounting firm.
Michael A. Boylan has been senior vice president-operations of the Company
since February 23, 1996. Mr. Boylan has served as executive vice president of
MHC since March 1994. From 1992 to 1994, he served as a regional vice president
of MHC's principal operating subsidiary, Maxum Health Services Corp. ("MHSC")
From 1991 to 1992, he served as an executive director of certain of MHC's
operations. From 1986 to 1991, Mr. Boylan served in various capacities as an
officer or employee, including president and chief operating officer,with
American Medical Imaging Corporation.
Michael D. Cragin has been senior vice president-operations of the
Company since February 23, 1996. Mr. Cragin has served as regional vice
president, western operations of AHS since he joined AHS in May 1994. From
1989 to 1994 he was Director of Professional Business Affairs at Saint
John's Hospital, Santa Monica, California.
Robert N. LaDouceur has been senior vice president-operations of the
Company since February 23, 1996. Mr. LaDouceur has served as executive vice
president of MHC since March 1994. From 1992 to 1994, he served as a regional
vice president of MHSC. From 1991 to 1992, he served as an executive director
of certain of MHC's operations. From 1984 to 1991, Mr. LaDouceur served in
various capacities as an officer or employee, including vice president, with
Glassrock Home Health Care.
Deborah M. MacFarlane has served as senior vice president-marketing of the
Company since March 28, 1996. Since July 1991, she has served as vice
president, marketing of AHS. From 1987 until June 1991, Ms. MacFarlane served
as director of marketing for the Center Operating Group of Medical Imaging
Centers of America, Inc.
Robert J. Armstrong has been vice president, design and construction of the
Company since March 28, 1996. Since 1985, Mr. Armstrong has been vice
president, design and construction of AHS. Mr. Armstrong served as director of
design and construction of AHS from 1983 to 1985.
<PAGE>
Brian G. Drazba has been vice president, finance of the Company since March
28, 1996. Since June 1995, he has served as vice president, finance of AHS.
Mr. Drazba served as corporate controller for AHS from 1992 to 1995. From 1985
to 1992, Mr. Drazba was employed by Arthur Andersen & Co.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors and officers and persons who own more than
10% of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers, Inc.
Directors and officers and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of the reports they file.
Based solely on the review of the copies of such reports and written
representations from certain persons that certain reports were not required
to be filed by such persons, the Company believes that all its directors,
officers and greater than 10% beneficial owners complied with all filing
requirements applicable to them with respect to transactions for the period
February 23, 1996 through June 30, 1996, except that each of Messrs. Egger,
Habas and Pantello failed to include in their timely filed Initial Statement
of Beneficial Ownership of Securities on Form 3 an automatic option grant
pursuant to InSight's Directors' Plan, and Messrs. Armstrong and Drazba,
neither of whom owns beneficially or otherwise any InSight Common Stock,
failed to timely file an Initial Statement of Beneficial Ownership of
Securities on Form 3; when it was brought to their attention, Messrs. Egger,
Habas and Pantello agreed to promptly file an amendment to Form 3 and Messrs.
Armstrong and Drazba agreed to promptly file a Form 3, disclosing these
inadvertant omissions.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Because (i) the Company was not a reporting company pursuant to Section
13(a) or 15(d) of the Exchange Act until June 26, 1996, (ii) its fiscal year
ended shortly thereafter on June 30, 1996 and (iii) each of its predecessors,
MHC and AHS, were reporting companies and have reported executive
compensation information through the year ended December 31, 1995, the
following table sets forth information concerning the annual, long-term and
all other compensation for services rendered in all capacities to the
Company, its subsidiaries and predecessors for the years ended December 31,
1995, 1994 and 1993, and the six months ended June 30, 1996 of (i) the
Company's Chief Executive Officer and (ii) the four most highly compensated
executive officers (other than the chief executive officer) of the Company
(the "Other Executive Officers") whose aggregate cash compensation exceeded
$100,000 for the year ended December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term All Other
Annual Compensation Compensation Compensation(3)
---------------------------------------------------------- ------------ ---------------
Awards
Name and Principal Stock Options
Position Period Salary(1) Bonus(2) Other(3) (Shares)
- ------------------ ------ --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
E. Larry Atkins Six months ended
President and Chief June 30, 1996 $123,200 $ -- $ 5,250 -- $ 4,691
Executive Officer Year ended 1995 246,400 61,600 4,680 175,000 7,882
Year ended 1994 220,000 54,000 3,789 -- 9,327
Year ended 1993 200,000 -- 11,763 -- 10,245
Glenn P. Cato Six months ended
Senior Executive Vice June 30, 1996 97,500 10,000 3,000 -- --
President and Chief Year ended 1995 172,500 20,000 6,000 30,000 3,158
Operating Officer Year ended 1994 143,750 71,875 4,500 57,500 1,751
Year ended 1993 109,000 40,000 -- -- 612
Thomas V. Croal Six months ended
Executive Vice, June 30, 1996 87,615 -- 4,500 -- 2,669
President, Chief Year ended 1995 175,230 43,808 4,742 125,000 5,252
Financial Officer and Year ended 1994 148,500 38,000 4,836 -- 3,519
Corporate Secretary Year ended 1993 135,000 10,000 8,760 -- 1,950
Robert N. LaDouceur Six months ended
Senior Vice June 30, 1996 82,500 10,000 3,900 -- --
President-Operations Year ended 1995 165,000 20,000 6,400 30,000 3,072
Year ended 1994 165,000 82,500 5,400 35,000 1,751
Year ended 1993 96,158 10,000 141,878 20,000 1,010
<PAGE>
Michael A. Boylan Six months ended
Senior Vice June 30, 1996 81,865 25,000 3,900 -- --
President-Operations Year ended 1995 165,000 20,000 6,400 30,000 --
Year ended 1994 165,000 82,500 5,400 35,000 --
Year ended 1993 111,729 10,000 170,789 20,000 --
_______________________
</TABLE>
(1) Includes amounts for periods during which the chief executive officer and
the Other Executive Officers of the Company, whose aggregate cash
compensation exceeded $100,000, served as executive officers of AHS or MHC,
which are now wholly owned subsidiaries of the Company. The Other
Executive Officers were also the four most highly compensated
executive officers (other than the chief executive officer) of
the Company for the six months ended June 30, 1996.
(2) Annual bonuses are earned and accrued during the fiscal years indicated,
and paid subsequent to the end of each fiscal year.
(3) Amounts of Other Annual Compensation include perquisites (auto allowances
and commissions for contract awards and renewals) and amounts of All Other
Compensation include (i) amounts contributed to MHC's or AHS's 401(k)
profit sharing plans, as the case may be, (ii) specified premiums on
executive split-dollar insurance arrangements, and (iii) specified premiums
on executive health insurance arrangements, for the chief executive officer
and the Other Executive Officers of the Company.
OPTION GRANTS
During the six months ended June 30, 1996, no stock options were granted
under the Company's 1996 Employee Stock Option Plan, nor under any stock option
plan of either AHS or MHC, to the chief executive officer and the Other
Executive Officers of the Company.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
During the six months ended June 30, 1996, neither of the chief
executive officer nor the Other Executive Officers of the Company exercised
any stock options. The following table sets forth information with respect
to the unexercised stock options to purchase InSight Common Stock granted,
under MHC's and AHS's stock option plans and assumed by the Company pursuant
to the Merger, to the chief executive officer and the Other Executive
Officers of the Company as of June 30, 1996.
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options at
Name June 30, 1996 June 30, 1996
- ---- ---------------------- -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
E. Larry Atkins 19,000 10,500 $ 20,090 $ 30,135
Glenn P. Cato 46,345 5,980 227,310 27,113
Thomas V. Croal 10,000 7,500 14,350 21,525
Robert N. LaDouceur 32,890 5,980 160,682 27,113
Michael A. Boylan 32,890 5,980 160,682 27,113
_____________________
(1) Based on the closing price reported on NASDAQ Small Cap Market for InSight
Common Stock on that date of $5.37.
INDEMNIFICATION AGREEMENTS
The Company has entered into separate indemnification agreements with each
of its directors and officers that could require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status
<PAGE>
or service as directors and officers and to advance expenses incurred by them as
a result of any proceedings against them as to which they could be indemnified.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
The Company has entered into executive employment agreements with its
chief executive officer, the Other Executive Officers and Messrs. Cragin
and Drazba and Ms. MacFarlane, which provide for rolling twelve (12) month
periods of employment, and severance compensation equal to 12 months of
compensation at his or her annual salary rate then in effect, in the event
the executive's employment is terminated (i) because of physical or mental
disability, (ii) because of discretionary action of the Board of Insight, or
(iii) voluntarily by the executive due to a "Change of Control." A "Change of
Control" will have occurred if (a) the Company or its stockholders enter into
an agreement to dispose of, whether by sale, exchange, merger, consolidation,
reorganization, dissolution or liquidation, (i) not less than 80% of the
assets of the Company or (ii) a portion of the outstanding InSight Common
Stock such that one person or "group" (as defined by the SEC) owns, of record
or beneficially, not less than 50% of the outstanding InSight Common Stock;
or (b) one person or "group" (as defined by the SEC) acquires not less than
18% of the Post-Conversion Common Stock (as defined below). However, a
Change of Control will not have occurred if GE Medical converts its Series A
Preferred Stock into InSight Common Stock. "Post-Conversion Common Stock"
means the outstanding InSight Common Stock issuable, at the time a
determination is made, upon conversion of the outstanding Series A Preferred
Stock. In the event that the executive's employment is terminated for cause,
he or she has no right to receive any severance compensation under his or her
employment agreement. In consideration for such severance compensation, each
executive has agreed not to solicit, entice, divert or otherwise contact any
customer or employee of InSight for any provision of services which
constitute "Company Business" during the period that the executive is
receiving severance compensation or for a period of 12 months after the
executive's termination of employment, whichever is later. "Company
Business" means the development and operation, at times together with other
healthcare providers, of outpatient facilities which provide diagnostic
services in the areas of general radiology, MRI, cardiology and neurosciences
utilizing the related equipment and computer programs and software and
various distribution methods and investment structures. Mr. Cato's executive
employment agreement also provides that his term of employment shall be three
(3) years commencing on June 26, 1996. Subsequent to June 26, 1996, he will
be employed for rolling twelve (12) month periods.
Mr. Egger, a director and chairman of the board, has entered into a
consulting agreement with InSight providing for compensation at the rate of
$100,000 per year. Mr. Egger's agreement provides for severance compensation
equal to 12 months of compensation in the event the agreement is terminated as a
result of (i) Mr. Egger becoming physically or mentally disabled, (ii)
discretionary action of the Board of InSight, or (iii) a corporate
reorganization that has the effect of diminishing or impairing Mr. Egger's
consulting responsibilities.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership, reported to the Company
as of September 30, 1996, of InSight's Common Stock, including shares as to
which a right to acquire ownership exists (for example, through the exercise of
stock options and warrants and conversions of Series A Preferred Stock) within
the meaning of Rule 13d-3(d)(1) under the Exchange Act, of (i) each person known
to the Company to own beneficially 5% or more of InSight Common Stock, (ii) each
director of the Company, (iii) the Company's executive officers,and (iv) all
directors and executive officers, as a group.
Amount and Percentage
Nature of of
Name and Address Beneficial Common
of Beneficial Owner Ownership(1) Stock
- ------------------- ------------ ------
General Electric Company (2) 2,501,760 48%
20825 Swenson Drive
Suite 100
Waukesha, WI 53186
<PAGE>
Amount and Percentage
Nature of of
Name and Address Beneficial Common
of Beneficial Owner Ownership(1) Stock
- ------------------- ------------ ------
E. Larry Atkins (3)
4400 MacArthur Blvd., Suite 800 12,100 *
Newport Beach, CA 92660
Grant R. Chamberlain (4)
630 Fifth Avenue, Suite 2900 1,666 *
New York, NY 10111
Frank E. Egger (5)
551 N.W. 77th St., Suite 114 28,369 1%
Boca Raton, FL 33487
Leonard H. Habas (6)
501 So. New York Avenue 34,508 1.3%
Suite 210
Winter Park, FL 32789
Estate of Cal Kovens (7)
9999 Collins Ave. #K-1 482,031 17.4%
Bal Harbor, FL 33154
Roz Kovens (8)
9999 Collins Ave. #K-1 563,876 20.3%
Bal Harbor, FL 33154
Ronald G. Pantello (9)
60 Madison Avenue 20,023 *
New York, NY 10010
Glenn P. Cato (10)
4400 MacArthur Blvd., Suite 800 46,345 1.7%
Newport Beach, CA 92660
Thomas V. Croal (11)
4400 MacArthur Blvd., Suite 800 5,000 *
Newport Beach, CA 92660
Michael A. Boylan (12)
110 Gibraltar Road 32,890 1.2%
Horsham, PA 18901
Robert N. LaDouceur (13)
11011 King Street, Suite 240 32,890 1.2%
Overland Park, KS 66210
<PAGE>
Amount and Percentage
Nature of of
Name and Address Beneficial Common
of Beneficial Owner Ownership(1) Stock
- ------------------- ------------ ------
Robert J. Armstrong 0 0
4400 MacArthur Blvd., Suite 800
Newport Beach, CA 92660
Michael D. Cragin 0 0
4400 MacArthur Blvd., Suite 800
Newport Beach, CA 92660
Brian G. Drazba 0 0
4400 MacArthur Blvd., Suite 800
Newport Beach, CA 92660
Deborah M. MacFarlane 0 0
4400 MacArthur Blvd., Suite 800
Newport Beach, CA 92660
All directors and executive
officers, as a group (14) 213,791 7.4%
(13 persons)
- -----------------------------
* Less than 1% of the outstanding Common Stock.
(1) For purposes of this table, a person is deemed to have "BENEFICIAL
OWNERSHIP" of any security that such person has the right to acquire
within 60 days after September 30, 1996.
(2) Includes 2,501,760 shares of Common Stock into which InSight Series A
Preferred Stock held by GE Medical are convertible at any time, subject to
certain antidilution and other adjustments.
(3) Includes an option to purchase 7,000 shares of InSight Common Stock at
an exercise price of $2.50 per share. Does not include an option to
purchase 10,500 shares of InSight Common Stock at an exercise price of
$2.50 per share, which is not currently exercisable.
(4) Includes an option to purchase 1,666 shares of InSight Common Stock at
an exercise price of $7.00 per share. Does not include an option to
purchase 13,334 shares of InSight Common Stock at an exercise price of
$7.00 per share, which is not currently exercisable.
(5) Includes (i) an option to purchase 3,000 shares of InSight Common Stock
at an exercise price of $16.20 per share, (ii) an option to purchase
1,800 shares of InSight Common Stock at an exercise price of $2.50 per
share, (iii) an option to purchase 2,083 shares of InSight Common Stock
at an exercise price of $5.37 per share and (iv) warrants to purchase
2,268 shares of InSight Common Stock at an exercise price of $5.64 per
share. Does not include (i) an option to purchase 1,200 shares of
InSight Common Stock at an exercise price of $2.50 per share and (ii) an
option to purchase 12,917 shares of InSight Common Stock at an exercise
price of $5.37 per share, which are not currently exercisable. The InSight
Common Stock and warrants held by Mr. Egger are pledged to the estate of
Cal Kovens as security for the repayment of a loan. If the loan is not
repaid when due, the estate of Mr. Kovens would have the right to sell such
of the pledged securities as are necessary to satisfy the indebtedness.
(6) Includes (i) an option to purchase 8,970 shares of InSight Common Stock
at an exercise price of $1.25 per share, (ii) an option to purchase 4,485
shares of InSight Common Stock at an exercise price of $15.64 per share,
(iii) an option to purchase 2,083 shares of InSight Common Stock at an
exercise price of $5.37 per share, and (iv) an option to purchase 8,970
shares of InSight Common Stock at an exercise price of $0.10 per share.
Does not include an option to purchase 12,917 shares of InSight Common
Stock at an exercise price of $5.37 per share, which is not currently
exercisable.
(7) The information in the table is based upon Amendment No.1 to Schedule
13D filed with the SEC on July 9, 1996. Includes warrants to purchase
(i) 20,000 shares of InSight Common Stock at an exercise price of $2.50
per share and (ii) 33,645 shares of InSight Common Stock at an exercise
price of $5.64 per share.
(8) The information in the table is based upon Amendment No. 1 to Schedule
13D filed with the SEC on July 9, 1996. Includes (i) an option to
purchase 1,800 shares of InSight Common Stock at an exercise price of
$2.50 per share, (ii) warrants to purchase 7,660 shares of InSight
Common Stock at an exercise price of $5.64 per share and (iii) by virtue
of her status as personal representative of the estate of Cal Kovens,
the 482,031 shares of InSight Common Stock beneficially owned by it.
<PAGE>
(9) Includes (i) an option to purchase 8,970 shares of InSight Common Stock
at an exercise price of $1.25 per share, (ii) an option to purchase 2,083
shares of InSight Common Stock at an exercise price of $5.37 per share and
and (iii) an option to purchase 8,970 shares of InSight Common Stock at an
exercise price of $0.10 per share. Does not include an option to purchase
12,917 shares of InSight Common Stock at an exercise price of $5.37 per
share, which is not currently exercisable.
(10) Includes (i) an option to purchase 25,415 shares of InSight Common Stock
at an exercise price of $0.42 per share, (ii) an option to purchase 8,970
shares of InSight Common Stock at an exercise price of $0.10 per share,
and (iii) an option to purchase 11,960 shares of InSight Common Stock at
an exercise price of $0.84 per share. Does not include an option to
purchase 5,980 shares of InSight Common Stock at an exercise price of $0.84
per share, which is not currently exercisable.
(11) Includes an option to purchase 5,000 shares of InSight Common Stock at an
exercise price of $2.50 per share. Does not include an option to purchase
7,500 shares of InSight Common Stock at an exercise price of $2.50 per
share, which is not currently exerciable.
(12) Includes (i) an option to purchase 8,970 shares of InSight Common Stock at
an exercise price of $0.10 per share, (ii) an option to purchase 11,960
shares of InSight Common Stock at an exercise price of $0.42 per share, and
(iii) an option to purchase 11,960 shares of InSight Common Stock at an
exercise price of $0.84 per share. Does not include an option to purchase
5,980 shares of InSight Common Stock at an exercise price of $0.84 per
share, which is not currently exercisable.
(13) Includes (i) an option to purchase 8,970 shares of InSight Common Stock
at an exercise price of $0.10 per share, (ii) an option to purchase
11,960 shares of InSight Common Stock at an exercise price of $0.42 per
share, and (iii) an option to purchase 11,960 shares of InSight Common
Stock at an exercise price of $0.84 per share. Does not include an option
to purchase 5,980 shares of InSight Common Stock at an exercise price of
$0.84 per share, which is not currently exercisable.
(14) Assumes the exercise in full of all currently exercisable warrants and
options described in footnotes (3), (4), (5), (6), (7), (8), (9), (10),
(11), (12) and (13).
Except as otherwise noted, the Company believes that each of the
stockholders listed in the table above has sole voting and dispositive power
over all shares owned.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH THE ESTATE OF CAL KOVENS
In February 1992, AHS purchased a Gamma Knife from Elekta to be located in
California and made a deposit toward the purchase of another Gamma Knife. AHS
received nonrecourse interim financing of $2,000,000 toward the acquisition of
the Gamma Knife and the deposit for the other Gamma Knife from Cal Kovens (a
director until his death on February 6, 1995). The interim financing was
borrowed from Mr. Kovens pursuant to the terms of a nonrecourse promissory note
secured by the Gamma Knife and due August 24, 1992, at an interest rate of 10.5%
per annum. Mr. Kovens extended the term of the note while AHS sought to obtain
permanent financing.
In December 1992, AHS's wholly owned subsidiary, Radiosurgery Centers, Inc.
("RCI"), entered into a five-year loan of $2,750,000 with City National Bank of
Florida ("City National Bank"), and the promissory note in favor of Mr. Kovens
was repaid from the proceeds of such loan in the first quarter of 1993. The new
loan was guaranteed by Mr. Kovens and his spouse, Roz Kovens. During the second
half of fiscal 1993, Mr. Kovens repurchased RCI's promissory note from City
National Bank. Pursuant thereto, Mr. Kovens was paid approximately $195,000 in
interest in fiscal 1993.
<PAGE>
In early 1993, RCI, AHS and Elekta became involved in a dispute when RCI
advised Elekta that it intended to relocate the Gamma Knife System it purchased
for a location in California to Miami, Florida, since in December 1992, RCI had
entered into an agreement with Public Health Trust, an agency and
instrumentality of Metropolitan Dade County, Florida, to establish and operate a
Gamma Knife center at Jackson Memorial Hospital Medical Center located in Miami.
The parties settled their claims and, pursuant to the terms thereof, Mr. Kovens
agreed to guarantee certain scheduled payments of $250,000 to be made by RCI to
Elekta in connection with the delivery of the Gamma Knife to Miami, which
payment has been made by RCI.
In February 1994, RCI entered into a new five-year loan of $2,900,000 with
County National Bank of South Florida. Mr. Kovens was repaid from the proceeds
of such new bank loan in the first quarter of 1994. This loan was guaranteed by
Mr. Kovens and secured by certain real property owned by Mr. Kovens. Effective
March 1, 1996, RCI refinanced the remainder of the equipment loan (approximately
$2,075,000) with GE Medical on terms substantially equivalent to the original
equipment loan. The loan is secured by all of the assets of the Gamma Knife
center, as well as by a letter of credit of $300,000 which is guaranteed by the
estate of Cal Kovens.
In November 1994, AHS issued Mr. Kovens a warrant to purchase 200,000
shares of AHS Common Stock at $0.25 per share in consideration of the Gamma
Knife financing activities discussed above. Pursuant to the terms of the
Merger, InSight assumed the warrant which, after the applicable exchange
ratio, became a warrant to purchase 20,000 shares of InSight Common Stock at
the exercise price of $2.50 per share. The warrant is exercisable at any
time up to November 14, 1997.
TRANSACTIONS WITH FRANK E. EGGER
For fiscal year commencing July 1, 1996, Mr. Egger is being paid
$100,000 per year for acquisition and financing activities pursuant to a
consulting agreement. In the event the agreement is terminated as a result
of (i) Mr. Egger becoming physically or mentally disable, (ii) discretionary
action of the Board of InSight, or (iii) a corporate reorganization that has
the effect of diminishing or impairing Mr. Egger's consulting responsibilities,
he is entitled to a severance compensation equal to 12 months of compensation.
Pursuant to certain agreements among InSight, AHS and the holders of AHS
Series B Preferred Stock, InSight issued to Mr. Egger on August 9, 1996 a
warrant to purchase 2,268 shares of InSight Common Stock at the exercise
price of $5.64 per share. The warrant is exercisable at any time up to
August 9, 2001. In addition, subject to certain conditions, Mr. Egger, and
other holders, have certain "piggyback" registration rights to register the
shares subject to the warrants under the Securities Act. See "Transactions
with Holders of AHS Series B Preferred Stock."
TRANSACTIONS WITH GE MEDICAL
GE Medical, as the primary creditor of AHS and Maxum, had from time to
time granted AHS and Maxum certain financial accommodations with respect to
certain loans and leases. In exchange for such accommodations, AHS and Maxum
issued certain considerations to GE Medical. As a prerequisite to the
consummation of the Merger, certain financial accommodations were provided by
GE, the primary creditor of each of AHS and Maxum, and its affiliate GE
Capital. As a result, certain debt and operating lease obligations of AHS
and Maxum were reduced in exchange for, among other things, the issuance to
GE Medical immediately prior to the consummation of the Merger of AHS Series
C Preferred Stock and Maxum Series B Preferred Stock. At the effective time
of the Merger, the AHS Series C Preferred Stock and Maxum Series B Preferred
Stock issued to GE Medical was converted into the right to receive such
number of shares of InSight Series A Preferred Stock which were convertible
into InSight Common Stock representing approximately 48% of InSight Common
Stock outstanding at the effective time of the Merger (after giving effect to
such conversion).
In addition, as part of the granting of certain financial accommodations
contemplated to be provided by GE Medical, at the effective time of the
Merger, warrants previously issued to GE Medical by AHS to acquire 1,589,072
shares of AHS Common Stock, and warrants previously issued to GE Medical by
Maxum to acquire 700,000 shares of Maxum Common Stock, were canceled.
Furthermore, GE Medical has the right to receive for ten years annual
payments ("Supplemental Service Fee") under its maintenance agreements with
InSight, AHS and Maxum equal to 14% of InSight pre-tax income, subject to
certain adjustments, and further subject to proportional reductions for
certain post-Merger acquisitions. InSight
<PAGE>
may terminate the Supplemental Service Fee at any time during such ten-year
period by making a payment to GE Medical equal to $8 million less the
discounted value of the aggregate amount of such Supplemental Service Fee
(calculated at a discount rate of 15% per annum) paid through the date of such
termination payment.
In negotiating the Merger with GE Medical, AHS and Maxum, the Company
agreed to reimburse to GE Medical an amount equal to 40% of the legal costs
incurred by GE Medical in connection with such transactions. The amount
reimbursed to GE Medical in the six months ended June 30, 1996, was
approximately $240,316.
TRANSACTIONS WITH HOLDERS OF AHS SERIES B PREFERRED STOCK
Pursuant to certain agreements among InSight, AHS and the holders of AHS
Series B Preferred Stock, the holders of Series B Preferred Stock agreed to
waive any rights to dividends, liquidation preferences, voting and redemption
they might have had in connection with the Merger and certain other rights.
In consideration therefor, upon the consummation of the Merger, InSight
issued to such holders, including Mr. Egger, Roz Kovens and the estate of
Cal Kovens, warrants to purchase an aggregate of 50,000 shares of InSight
Common Stock at the exercise price of $5.64 per share. The warrants are
exercisable at any time up to August 9, 2001. In addition, subject to
certain conditions, the holders have certain "piggy-back" registration rights
to register the shares subject to the warrants under the Securities Act.
TRANSACTIONS WITH SHATTUCK HAMMOND PARTNERS
On August 14, 1996, the Company entered into an agreement with Shattuck
Hammond Partners ("SHP"), an investment banking firm located in New York in
which a director of the Company, Mr. Chamberlain, is a vice president,
pursuant to which SHP will provide general strategic advisory and investment
banking services. The term of the agreement commenced July 1, 1996 and
extends through December 31, 1997. The Company is obligated to pay SHP
$180,000, payable in quarterly installments of $30,000. SHP also will be
entitled to separately negotiated fees for certain mergers or acquisitions.
In addition, the Company also issued SHP a warrant to purchase 35,000 shares
of InSight Common Stock at an exercise price of $5.50 per share. The warrant
vests cumulatively on a monthly basis over the 18 month term of the agreement.
The warrant is exercisable at any time up to August 14, 2000. In addition, SHP
has certain "piggy-back" registration rights to register the shares subject to
the warrant under the Securities Act.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14 (a) (1). FINANCIAL STATEMENTS
Included in Part II of this report:
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 14 (a) (2). FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule
Schedule IX - Valuation and Qualifying Accounts
All other schedules have been omitted because they are either not required
or not applicable, or the information is presented in the consolidated
financial statements or notes thereto.
ITEM 14 (a) (3). EXHIBITS
EXHIBIT NUMBER DESCRIPTION AND REFERENCES
- -------------- --------------------------
*2.1 Agreement and Plan of Merger dated as of February 26, 1996,
by and among InSight, AHS, AHSC Acquisition Company, MHC and
MXHC Acquisition Company, previously filed and incorporated
herein by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-02935), filed
April 29, 1996.
*3.1 Certificate of Incorporation of InSight, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*3.2 Bylaws of InSight, previously filed and incorporated herein
by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-02935), filed April 29,
1996.
*10.1 Master Debt Restructuring Agreement by and among General
Electric Company acting through GE Medical Systems, General
Electric Capital Corporation, InSight, AHS and MHC (without
schedules and exhibits) previously filed and incorporated
herein by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-02935), filed
April 29, 1996.
*10.2 Registration Rights Agreement by and between General
Electric Company acting through GE Medical Systems and
InSight, previously filed and incorporated herein by
reference from the Company's Registration Statement on Form
S-4 (Registration No. 333-02935), filed April 29, 1996.
<PAGE>
*10.3 Master Service Agreement Addendum by and among General
Electric Company acting through GE Medical Systems, InSight,
AHS and MHC, previously filed and incorporated herein by
reference from the Company's Registration Statement on Form
S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.4 InSight's 1996 Directors' Stock Option Plan, previously
filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*10.5 InSight's 1996 Employee Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*10.6 Form of Indemnification Agreement between InSight and each
of its directors and executive officers, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration Statement
No. 333-02935), filed April 29, 1996.
*10.8 Agreements and form of warrants with holders of Series B
Preferred Stock of AHS, previously filed and incorporated
herein by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-02935), filed
April 29, 1996.
*10.9 AHS 1987 Stock Option Plan, previously filed and
incorporated herein by reference from Post-Effective
Amendment No. 4 on Form S-1 to AHS's Registration Statement
(Registration No. 33-00088), filed September 5, 1985.
*10.10 AHS 1989 Stock Incentive Plan, previously filed and
incorporated herein by reference from AHS's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, filed
April 15, 1991.
*10.11 AHS 1992 Option and Incentive Plan, previously filed and
incorporated herein by reference from AHS's Registration
Statement on Form S-8 (Registration No. 33-51532), filed
September 1, 1992.
*10.12 MHC 1989 Stock Option Plan, Amended and Restated as of
October 28, 1993, previously filed and incorporated herein
by reference from MHC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
*10.13 Letter Agreement for Consulting Services between InSight and
Frank E. Egger dated March 28, 1996, previously filed and
incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*10.14 Executive Employment Agreement between InSight and E. Larry
Atkins dated as of February 25, 1996, previously filed and
incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*10.15 Executive Employment Agreement between InSight and Glenn P.
Cato dated as of May 1, 1996, previously filed and
incorporated herein by reference from the Company's
Amendment No. 1 to the Registration Statement on Form S-4
(Registration No. 333-02935), filed May 9, 1996.
*10.16 Form of Executive Employment Agreement between InSight and
various officers of InSight, dated as of February 25,
1996, previously filed and incorporated herein by reference
from the Company's Registration Statement on Form S-4
(Registration No. 333-02935), filed April 29, 1996.
10.17 Nonqualified Stock Option Agreement, dated August 17, 1994,
between MHC and Leonard H. Habas, filed herewith.
<PAGE>
10.18 Nonqualified Stock Option Agreement, dated August 17, 1994,
between MHC and Ronald G. Pantello, filed herewith.
21 Subsidiaries of InSight, filed herewith.
__________________
* Previously filed.
ITEM 14(b). REPORTS ON FORM 8-K. The Company filed a Current Report on Form
8-K with the SEC on July 5, 1996
ITEM 14(c). The Exhibits described above in Item 14(a)(3) are incorporated by
reference herein.
ITEM 14(d). Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSIGHT HEALTH SERVICES CORP.
By /s/ E. Larry Atkins
--------------------
E. Larry Atkins, President and
Chief Executive Officer
Date: October 15, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ E. Larry Atkins Director, President and October 15, 1996
- ------------------- Chief Executive Officer
E. Larry Atkins (Principal Executive Officer)
/s/ Thomas V. Croal Executive Vice President and October 15, 1996
- ------------------- Chief Financial Officer
Thomas V. Croal (Principal Accounting Officer)
/s/ Grant R. Chamberlain Director October 15, 1996
- ------------------------
Grant R. Chamberlain
/s/ Frank E. Egger Director October 15, 1996
- ------------------
Frank E. Egger
/s/ Leonard H. Habas Director October 15, 1996
- --------------------
Leonard H. Habas
/s/ Ronald G. Panello Director October 15, 1996
- ---------------------
Ronald G. Panello
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements for INSIGHT HEALTH SERVICES CORP. included in this
Form 10-K and have issued our report thereon dated September 13, 1996. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Orange County, California
September 13, 1996
<PAGE>
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning Cost and End of
of Period Expenses Other Period
---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1993:
Allowance for doubtful accounts $ 466 $ 1,621 $ (423) (A) $ 1,664
Allowance for contractual adjustments 250 2,504 (1,724) (A) 1,030
Inventory reserve 81 749 - 830
------- ------- -------- -------
Total $ 797 $ 4,874 $ (2,147) $ 3,524
------- ------- -------- -------
------- ------- -------- -------
December 31, 1994:
Allowance for doubtful accounts $ 1,664 $ 1,124 $ (1,233) (A) $ 1,555
Allowance for contractual adjustments 1,030 2,692 (2,384) (A) 1,338
Inventory reserve 830 - (830) (B) -
------- ------- -------- -------
Total $ 3,524 $ 3,816 $ (4,447) $ 2,893
------- ------- -------- -------
------- ------- -------- -------
December 31, 1995:
Allowance for doubtful accounts $ 1,555 $ 1,669 $ (1,489) (A) $ 1,735
Allowance for contractual adjustments 1,338 4,512 (4,302) (A) 1,548
------- ------- -------- -------
Total $ 2,893 $ 6,181 $ (5,791) (A) $ 3,283
------- ------- -------- -------
------- ------- -------- -------
June 30, 1996:
Allowance for doubtful accounts $ 1,735 $ 617 $ (63) (A)(C) $ 2,289
Allowance for contractual adjustments 1,548 3,440 531 (A)(C) 5,519
------- ------- -------- -------
Total $ 3,283 $ 4,057 $ 468 $ 7,808
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
(A) Write-offs of uncollectible accounts.
[cad 179](B) MHC sold all inventory on hand in 1994.
(C) In connection with the Merger, MHC acquired the valuation and qualifying
accounts related to AHS.
<PAGE>
EXHIBIT 10.17
MAXUM HEALTH CORP.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, entered into as of August 17, 1994, between MAXUM HEALTH
CORP., a Delaware corporation (the "Company"), and Leonard H. Habas (the
"Optionee").
WITNESSETH:
WHEREAS, Optionee is a non-employee member of the Board of Directors of the
Company who has rendered valuable services to the Company, and whom the Board of
Directors desires to retain; and
WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the option to purchase
Stock described in this Agreement to Optionee as an inducement to enter into or
remain on the Board of Directors of the Company, and as an incentive for
extraordinary efforts during such service;
WHEREAS, certain capitalized terms used herein are defined in Section 11
below;
NOW, THEREFORE, it is agreed as follows:
SECTION 1. GRANT OF OPTION.
(a) OPTION. On the terms and conditions stated below, the Company hereby
grants to Optionee a Nonqualified Stock Option to purchase fifteen thousand
(15,000) Shares of Stock (the "Option Shares") at an Exercise Price equal to
$.0625 per Share.
(b) CONTINGENT GRANT. The Option granted herein is expressly conditioned
on receiving the approval of the majority of Shares of the Company present, or
represented and entitled to vote, at a vote of the stockholders held in
accordance with the Bylaws of the Company by the earlier of (i) the second
anniversary of this Agreement or (ii) the Company's next Annual Meeting of
Stockholders.
SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, this Agreement and the
rights and privileges conferred hereby shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of this Agreement, or of any right or privilege conferred hereby, contrary
Page 1
<PAGE>
to the provisions hereof, or upon any attempted sale under any execution,
attachment or similar process upon the rights and privileges conferred hereby,
this Agreement and the rights and privileges conferred hereby shall immediately
become null and void.
This option may be transferred by Optionee only by will, the laws of
descent and distribution, or by a qualified domestic relations order as defined
in the Code, and during his lifetime, may be exercised only by Optionee, his
guardian or legal representative, or the beneficiaries of such qualified
domestic relations order.
SECTION 3. RIGHT TO EXERCISE; HOLDING PERIOD.
(a) VESTING. Subject to Section 1 (b) above, the right of Optionee to
purchase the Option Shares is fully vested at the date of this grant.
(b) PARTIAL OR FULL EXERCISE. Optionee may exercise all or any part this
option for the Option Shares that have not been previously exercised.
SECTION 4. EXERCISE PROCEDURES.
(a) NOTICE OF EXERCISE. The Optionee or the Optionee's representative may
exercise his rights to purchase by giving written notice to the Secretary of the
Company pursuant to Section 10(d). The notice shall specify the election to
exercise this option, the number of Shares for which it is being exercised and
the form of payment. The notice shall be signed by the person or persons
exercising this option. In the event that this option is being exercised by a
representative of Optionee, the notice shall be accompanied by proof
(satisfactory to the Company) of the representative's right to exercise this
option. The Optionee or Optionee's representative shall deliver to the
Secretary of the Company, at the time of giving the notice, payment in a form
permissible under Section 5 for the full amount of the Purchase Price. A form
of exercise notice is attached hereto as Exhibit "A".
(b) ISSUANCE OF SHARES. After receiving a proper notice of exercise, the
Company shall cause to be issued a certificate or certificates for the Shares as
to which this option has been exercised, registered in the name of the person
exercising this option (or in the names of such person and his or her spouse as
community property or as joint tenants with right of survivorship) and bearing
the appropriate legends. The Company shall cause such certificate or
certificates to be delivered to or upon the order of the person exercising the
option.
SECTION 5. PAYMENT FOR STOCK.
The entire Purchase Price may be paid in lawful money of the United States
of America. Alternatively, to the extent that applicable law permits and
subject to the sole and absolute discretion of the Committee, all or part of the
Purchase Price may be paid by the surrender of Shares in good form for transfer.
Such Shares must have a fair market value (as determined by
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<PAGE>
the Committee) on the date of exercise of this option which, together with any
amount paid in lawful money, is equal to the Purchase Price.
With the Committee's consent, which may be given or withheld in its sole
and absolute discretion, Optionee may pay some or all of the Purchase Price by
delivery of the Optionee's promissory note (in a form and on terms satisfactory
to the Committee).
SECTION 6. TERM AND EXPIRATION.
(a) BASIC TERM. This option shall in any event expire on the date ten
(10) years after the Date of Grant.
(b) TERMINATION OF SERVICE (EXCEPT BY DEATH OR DISABILITY). If Optionee's
Service terminates for any reason other than death or Disability, then this
Agreement shall expire on the date three (3) months after such termination.
Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this option
has become vested under Section 3(a) before Optionee's Service terminated.
(c) DEATH OR DISABILITY OF OPTIONEE. If Optionee dies or suffers
Disability while in Service, then this option shall expire on the earlier of the
following dates:
(1) The expiration date determined pursuant to Section 6(a) above;
(2) The date six (6) months after the Optionee's death; or
(3) The date twelve (12) months after Optionee suffers Disability;
(d) LEAVES OF ABSENCE. For purposes of this Section 6, Service shall be
deemed to continue during any period when the Optionee is on military leave,
sick leave, or other bona fide leave of absence (to be determined in the sole
discretion of the Committee).
SECTION 7. LEGALITY OF INITIAL ISSUANCE.
No Shares shall be issued upon the exercise of this option unless and until
the Company has determined that:
(a) It and Optionee have taken any actions the Company decides are
required to register the Shares under the Securities Act or to perfect an
exemption from the registration requirements thereof;
(b) Any applicable listing requirement of any stock exchange on which
Stock is listed has been satisfied; and
(c) Any other applicable provision of state or federal law has been
satisfied.
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<PAGE>
SECTION 8. INVESTMENT INTENT.
(a) GENERAL. Regardless of whether the offering and sale of Shares have
been registered under the Securities Act or have been registered or qualified
under the securities laws of any state, the Company may impose restrictions upon
the sale, pledge or other transfer of such Shares (including the placement of
appropriate legends on stock certificates) if, in the judgment of the Company
and its counsel, such restrictions are necessary or desirable in order to
achieve compliance with the Securities Act, the securities laws of any state,
other applicable law, or with restrictions imposed by the Company's
underwriters.
(b) INVESTMENT INTENT AT GRANT. Optionee represents and agrees that the
Shares to be acquired upon exercising this option will be acquired for
investment, and not with a view to the sale or distribution thereof.
(c) INVESTMENT INTENT AT EXERCISE. In the event that the sale of Shares
is not registered under the Securities Act, but an exemption is available which
requires an investment representation or other representation, the Optionee
shall represent and agree at the time of exercise that the Shares being acquired
upon exercising this option are being acquired for investment, and not with a
view to the sale or distribution thereof, and shall make such other
representations as are deemed necessary or appropriate by the Company and its
counsel.
(d) LEGEND. All certificates evidencing Shares acquired under this
Agreement shall, where applicable and in the discretion of the Committee, have
placed thereon a legend substantially as follows:
"THE SHARES OF STOCK OF THE CORPORATION REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE RESOLD IN THE
ABSENCE OF REGISTRATION THEREUNDER OR THE AVAILABILITY OF AN EXEMPTION
THEREFROM."
and such other restrictive legends as are required or deemed advisable under the
provisions of any applicable law.
(e) REMOVAL OF LEGENDS. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
(f) ADMINISTRATION. Any determination by the Company, the Committee or
their counsel in connection with any of the matters set forth in this Section 8
shall be conclusive and binding on the Optionee and all other persons.
Page 4
<PAGE>
SECTION 9. SHARES AND ADJUSTMENTS.
(a) GENERAL. In the event of any change in the outstanding Shares that
occurs by reason of a stock dividend or split, recapitalization, merger,
consolidation, combination, exchange of shares, or other similar corporate
change, the aggregate number of Shares subject to this option, and the Exercise
Price, may (but need not) be adjusted appropriately by the Committee, whose
determination shall be final and conclusive; provided, however, that fractional
shares shall be rounded to the nearest whole share.
(b) RESERVATION OF RIGHTS. Except as provided in this Section 9, Optionee
shall have no rights by reason of (i) any subdivision or consolidation of shares
of stock of any class, (ii) the payment of any dividend, or (iii) any other
increase or decrease in the number of shares of stock of any class. Any issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of the
Shares subject to this option. The grant of this option shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
(c) DISSOLUTION OR MERGER. In the event that, prior to the exercise in
full of this option a merger or dissolution in which the Company is not the
surviving business entity shall occur, or a transfer of substantially all the
assets of the Company shall occur:
(1) If provision be made in writing in connection with such
transaction for the assumption and continuance of the option hereby
granted, or the substitution for such option of a new option covering the
shares of the successor business entity, with appropriate adjustment as to
number and kind of shares and prices, this option, or the new option
substituted therefor, as the case may be, shall continue in the same
manner and under the terms provided.
(2) In the event provision is not made in such transaction for the
continuance and assumption of this option, or for the substitution of an
option covering the shares of the successor business entity, the Optionee
shall be entitled within a reasonable period of time, prior to the
effective date of any such transaction, to purchase the full number of
Option Shares.
SECTION 10. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. In the event that the Company determines that it
is required to withhold foreign, federal, state or local taxes as a result of
the exercise of this option, Optionee, as a condition to the exercise of this
option, shall make arrangements satisfactory to the Company to enable it to
satisfy all withholding requirements. If agreeable to the Committee and
Page 5
<PAGE>
the Company's counsel, Optionee shall be allowed to deliver previously owned
Shares, or Shares obtained from the exercise of this option, for the payment of
such withholding tax; provided that Optionee MUST make advance elections, or
otherwise satisfy Rule 16b-3 of the Securities Exchange Act of 1934.
(b) RIGHTS AS A STOCKHOLDER. Neither Optionee nor Optionee's
representative shall have any rights as a stockholder with respect to any Shares
subject to this Agreement until such Shares have been issued in the name of
Optionee or Optionee's representative.
(c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be construed
as giving Optionee the right to continue Service. The Company and/or the
Board reserves the right to terminate Optionee's Service at any time, to the
fullest extent allowed by the Company's Bylaws.
(d) NOTICE. Any notice required by the terms of this Agreement shall be
given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States Postal Service, by registered or certified mail
with postage and fees prepaid, by express mail or other overnight delivery
service or by facsimile transmission, receipt confirmed, addressed to the party
entitled to such notice at the address shown below such party's signature on
this Agreement, or at such other address as such party may designate by ten (10)
days' advance written notice to the other party to this Agreement.
(e) ENTIRE AGREEMENT. This Agreement constitutes the entire contract
between the parties hereto with regard to the subject matter hereof.
(f) CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE AS SUCH LAWS ARE APPLIED TO
CONTRACTS ENTERED INTO AND PERFORMED IN SUCH STATE.
(g) GENDER AND NUMBER. Whenever the masculine, feminine or neuter gender,
or the singular or plural number is used herein, the application of one shall
include the application of the other as the context so indicates.
SECTION 11. DEFINITIONS.
(a) "AGREEMENT" shall mean this Nonqualified Stock Option Agreement.
(b) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" shall mean the Compensation Committee of the Board, or, if
none has been appointed, the full Board.
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<PAGE>
(e) "DATE OF GRANT" shall mean the date first above written, which is the
date the Committee resolved to grant this option.
(f) "DISABILITY" shall mean that Optionee is unable to engage in any
Substantial Gainful Activity by reason of any medically determinable physical
or mental impairment which, in the sole and final judgment of the Committee,
can be expected to result in death or which has lasted, or can be expected to
last, for a continuous period of not less than 12 months.
(g) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of this option, as specified in Section 1(a).
(h) "INCENTIVE STOCK OPTION" shall mean an employee incentive stock option
described in section 422 of the Code.
(i) "NONQUALIFIED STOCK OPTION" shall mean a stock option not described in
sections 422, 423(b) or 424(b) of the Code.
(h) "OPTION SHARES" means the number of shares initially subject to this
option determined pursuant to Section 1(a) hereof.
(k) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Shares with respect to which this option is being exercised.
(l) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
(m) "SERVICE" means the period Optionee is continuously rendering services
for compensation to the Company or a subsidiary whether as a common law
employee, or as an independent contractor, or as a member of the Board.
(n) "SHARE" shall mean a share of Stock, as adjusted in accordance with
Section 9 (if applicable).
(o) "STOCK" shall mean the Common Stock of the Company, par value of $.O1
per share.
(p) "SUBSIDIARY" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50% of the total combined voting power
of all classes of outstanding stock of such corporation.
(q) "SUBSTANTIAL GAINFUL ACTIVITY" means the performance of significant
duties over a reasonable period of time in work for remuneration or profit
(or in work of a type generally performed for remuneration or profit), and
including Service as a member of the Board.
(r) "TRANSFEREE" shall mean any person to whom the Optionee has directly
or indirectly transferred any Share acquired under this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its officer duly authorized to act on behalf of the Committee, and
the Optionee has personally executed this Agreement.
[END OF PAGE]
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<PAGE>
OPTIONEE MAXUM HEALTH CORP.
/s/ Leonard H. Habas
- ----------------------------------- By: /s/ Glenn P. Cato
(Signature) ---------------------------
Name: Glenn P. Cato
------------------------
Title: President and CEO
Leonard H. Habas -----------------------
- -----------------------------------
(Name)
Optionee's Address: Company Address:
7 Windsor Place 14850 Quorum Drive, Ste. 400
Old Tappan, NJ 07675 Dallas, Texas 75240
SSN: ###-##-####
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<PAGE>
EXHIBIT 10.18
MAXUM HEALTH CORP.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, entered into as of August 17, 1994, between MAXUM HEALTH
CORP., a Delaware corporation (the "Company"), and Ronald G. Pantello (the
"Optionee").
WITNESSETH:
WHEREAS, Optionee is a non-employee member of the Board of Directors of the
Company who has rendered valuable services to the Company, and whom the Board of
Directors desires to retain; and
WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the option to purchase
Stock described in this Agreement to Optionee as an inducement to enter into or
remain on the Board of Directors of the Company, and as an incentive for
extraordinary efforts during such service:
WHEREAS, certain capitalized terms used herein are defined in Section 11
below;
NOW, THEREFORE, it is agreed as follows:
SECTION 1. GRANT OF OPTION.
(a) OPTION. On the terms and conditions stated below, the Company hereby
grants to Optionee a Nonqualified Stock Option to purchase fifteen thousand
(15,000) Shares of Stock (the "Option Shares") at an Exercise Price equal to
$.0625 per Share.
(b) CONTINGENT GRANT. The Option granted herein is expressly conditioned
on receiving the approval of the majority of Shares of the Company present, or
represented and entitled to vote, at a vote of the stockholders held in
accordance with the Bylaws of the Company by the earlier of (i) the second
anniversary of this Agreement or (ii) the Company's next Annual Meeting of
Stockholders.
SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, this Agreement and the
rights and privileges conferred hereby shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of this Agreement, or of any right or privilege conferred hereby, contrary
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<PAGE>
to the provisions hereof, or upon any attempted sale under any execution,
attachment or similar process upon the rights and privileges conferred
hereby, this Agreement and the rights and privileges conferred hereby shall
immediately become null and void.
This option may be transferred by Optionee only by will, the laws of
descent and distribution, or by a qualified domestic relations order as defined
in the Code, and during his lifetime, may be exercised only by Optionee, his
guardian or legal representative, or the beneficiaries of such qualified
domestic relations order.
SECTION 3. RIGHT TO EXERCISE; HOLDING PERIOD.
(a) VESTING. Subject to Section 1(b) above, the right of Optionee to
purchase the Option Shares is fully vested at the date of this grant.
(b) PARTIAL OR FULL EXERCISE. Optionee may exercise all or any part this
option for the Option Shares that have not been previously exercised.
SECTION 4. EXERCISE PROCEDURES.
(a) NOTICE OF EXERCISE. The Optionee or the Optionee's representative may
exercise his rights to purchase by giving written notice to the Secretary of the
Company pursuant to Section 10(d). The notice shall specify the election to
exercise this option, the number of Shares for which it is being exercised and
the form of payment. The notice shall be signed by the person or persons
exercising this option. In the event that this option is being exercised by a
representative of Optionee, the notice shall be accompanied by proof
(satisfactory to the Company) of the representative's right to exercise this
option. The Optionee or Optionee's representative shall deliver to the
Secretary of the Company, at the time of giving the notice, payment in a form
permissible under Section 5 for the full amount of the Purchase Price. A form
of exercise notice is attached hereto as Exhibit "A".
(b) ISSUANCE OF SHARES. After receiving a proper notice of exercise, the
Company shall cause to be issued a certificate or certificates for the Shares as
to which this option has been exercised, registered in the name of the person
exercising this option (or in the names of such person and his or her spouse as
community property or as joint tenants with right of survivorship) and bearing
the appropriate legends. The Company shall cause such certificate or
certificates to be delivered to or upon the order of the person exercising the
option.
SECTION 5. PAYMENT FOR STOCK.
The entire Purchase Price may be paid in lawful money of the United States
of America. Alternatively, to the extent that applicable law permits and
subject to the sole and absolute discretion of the Committee, all or part of the
Purchase Price may be paid by the surrender of Shares in good form for transfer.
Such Shares must have a fair market value (as determined by
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<PAGE>
the Committee) on the date of exercise of this option which, together with any
amount paid in lawful money, is equal to the Purchase Price.
With the Committee's consent, which may be given or withheld in its sole
and absolute discretion, Optionee may pay some or all of the Purchase Price by
delivery of the Optionee's promissory note (in a form and on terms satisfactory
to the Committee).
SECTION 6. TERM AND EXPIRATION.
(a) BASIC TERM. This option shall in any event expire on the date ten
(10) years after the Date of Grant.
(b) TERMINATION OF SERVICE (EXCEPT BY DEATH OR DISABILITY). If Optionee's
Service terminates for any reason other than death or Disability, then this
Agreement shall expire on the date three (3) months after such termination.
Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this option
has become vested under Section 3(a) before Optionee's Service terminated.
(c) DEATH OR DISABILITY OF OPTIONEE. If Optionee dies or suffers
Disability while in Service, then this option shall expire on the earlier of the
following dates:
(1) The expiration date determined pursuant to Section 6(a) above;
(2) The date six (6) months after the Optionee's death; or
(3) The date twelve (12) months after Optionee suffers Disability;
(d) LEAVES OF ABSENCE. For purposes of this Section 6, Service shall be
deemed to continue during any period when the Optionee is on military leave,
sick leave, or other bona fide leave of absence (to be determined in the sole
discretion of the Committee).
SECTION 7. LEGALITY OF INITIAL ISSUANCE.
No Shares shall be issued upon the exercise of this option unless and until
the Company has determined that:
(a) It and Optionee have taken any actions the Company decides are
required to register the Shares under the Securities Act or to perfect an
exemption from the registration requirements thereof;
(b) Any applicable listing requirement of any stock exchange on which
Stock is listed has been satisfied; and
(c) Any other applicable provision of state or federal law has been
satisfied.
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<PAGE>
SECTION 8. INVESTMENT INTENT.
(a) GENERAL. Regardless of whether the offering and sale of Shares have
been registered under the Securities Act or have been registered or qualified
under the securities laws of any state, the Company may impose restrictions upon
the sale, pledge or other transfer of such Shares (including the placement of
appropriate legends on stock certificates) if, in the judgment of the Company
and its counsel, such restrictions are necessary or desirable in order to
achieve compliance with the Securities Act, the securities laws of any state,
other applicable law, or with restrictions imposed by the Company's
underwriters.
(b) INVESTMENT INTENT AT GRANT. Optionee represents and agrees that the
Shares to be acquired upon exercising this option will be acquired for
investment, and not with a view to the sale or distribution thereof.
(c) INVESTMENT INTENT AT EXERCISE. In the event that the sale of Shares
is not registered under the Securities Act, but an exemption is available which
requires an investment representation or other representation, the Optionee
shall represent and agree at the time of exercise that the Shares being acquired
upon exercising this option are being acquired for investment, and not with a
view to the sale or distribution thereof, and shall make such other
representations as are deemed necessary or appropriate by the Company and its
counsel.
(d) LEGEND. All certificates evidencing Shares acquired under this
Agreement shall, where applicable and in the discretion of the Committee, have
placed thereon a legend substantially as follows:
"THE SHARES OF STOCK OF THE CORPORATION REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE RESOLD IN THE
ABSENCE OF REGISTRATION THEREUNDER OR THE AVAILABILITY OF AN EXEMPTION
THEREFROM."
and such other restrictive legends as are required or deemed advisable under the
provisions of any applicable law.
(e) REMOVAL OF LEGENDS. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
(f) ADMINISTRATION. Any determination by the Company, the Committee or
their counsel in connection with any of the matters set forth in this Section 8
shall be conclusive and binding on the Optionee and all other persons.
Page 4
<PAGE>
SECTION 9. SHARES AND ADJUSTMENTS.
(a) GENERAL. In the event of any change in the outstanding Shares that
occurs by reason of a stock dividend or split, recapitalization, merger,
consolidation, combination, exchange of shares, or other similar corporate
change, the aggregate number of Shares subject to this option, and the
Exercise Price, may (but need not) be adjusted appropriately by the
Committee, whose determination shall be final and conclusive; provided,
however, that fractional shares shall be rounded to the nearest whole share.
(b) RESERVATION OF RIGHTS. Except as provided in this Section 9, Optionee
shall have no rights by reason of (i) any subdivision or consolidation of shares
of stock of any class, (ii) the payment of any dividend, or (iii) any other
increase or decrease in the number of shares of stock of any class. Any issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of the
Shares subject to this option. The grant of this option shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
(c) DISSOLUTION OR MERGER. In the event that, prior to the exercise in
full of this option a merger or dissolution in which the Company is not the
surviving business entity shall occur, or a transfer of substantially all the
assets of the Company shall occur:
(1) If provision be made in writing in connection with such
transaction for the assumption and continuance of the option hereby
granted, or the substitution for such option of a new option covering the
shares of the successor business entity, with appropriate adjustment as to
number and kind of shares and prices, this option, or the new option
substituted therefor, as the case may be, shall continue in the same
manner and under the terms provided.
(2) In the event provision is not made in such transaction for the
continuance and assumption of this option, or for the substitution of an
option covering the shares of the successor business entity, the Optionee
shall be entitled within a reasonable period of time, prior to the
effective date of any such transaction, to purchase the full number of
Option Shares.
SECTION 10. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. In the event that the Company determines that it
is required to withhold foreign, federal, state or local taxes as a result of
the exercise of this option, Optionee, as a condition to the exercise of this
option, shall make arrangements satisfactory to the Company to enable it to
satisfy all withholding requirements. If agreeable to the Committee and
Page 5
<PAGE>
the Company's counsel, Optionee shall be allowed to deliver previously owned
Shares, or Shares obtained from the exercise of this option, for the payment of
such withholding tax; provided that Optionee MUST make advance elections, or
otherwise satisfy Rule 16b-3 of the Securities Exchange Act of 1934.
(b) RIGHTS AS A STOCKHOLDER. Neither Optionee nor Optionee's
representative shall have any rights as a stockholder with respect to any Shares
subject to this Agreement until such Shares have been issued in the name of
Optionee or Optionee's representative.
(c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be construed
as giving Optionee the right to continue Service. The Company and/or the
Board reserves the right to terminate Optionee's Service at any time, to the
fullest extent allowed by the Company's Bylaws.
(d) NOTICE. Any notice required by the terms of this Agreement shall be
given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States Postal Service, by registered or certified mail
with postage and fees prepaid, by express mail or other overnight delivery
service or by facsimile transmission, receipt confirmed, addressed to the party
entitled to such notice at the address shown below such party's signature on
this Agreement, or at such other address as such party may designate by ten (10)
days' advance written notice to the other party to this Agreement.
(e) ENTIRE AGREEMENT. This Agreement constitutes the entire contract
between the parties hereto with regard to the subject matter hereof.
(f) CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE AS SUCH LAWS ARE APPLIED TO
CONTRACTS ENTERED INTO AND PERFORMED IN SUCH STATE.
(g) GENDER AND NUMBER. Whenever the masculine, feminine or neuter gender,
or the singular or plural number is used herein, the application of one shall
include the application of the other as the context so indicates.
SECTION 11. DEFINITIONS.
(a) "AGREEMENT" shall mean this Nonquafified Stock Option Agreement.
(b) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" shall mean the Compensation Committee of the Board, or, if
none has been appointed, the full Board.
Page 6
<PAGE>
(e) "DATE OF GRANT" shall mean the date first above written, which is the
date the Committee resolved to grant this option.
(f) "DISABILITY" shall mean that Optionee is unable to engage in any
Substantial Gainful Activity by reason of any medically determinable physical
or mental impairment which, in the sole and final judgment of the Committee,
can be expected to result in death or which has lasted, or can be expected to
last, for a continuous period of not less than 12 months.
(g) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of this option, as specified in Section 1(a).
(h) "INCENTIVE STOCK OPTION" shall mean an employee incentive stock option
described in section 422 of the Code.
(i) "NONQUALIFIED STOCK OPTION" shall mean a stock option not described in
sections 422, 423(b) or 424(b) of the Code.
0) "OPTION SHARES" means the number of shares initially subject to this
option determined pursuant to Section 1(a) hereof.
(k) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Shares with respect to which this option is being exercised.
(l) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
(m) "SERVICE" means the period Optionee is continuously rendering services
for compensation to the Company or a subsidiary whether as a common law
employee, or as an independent contractor, or as a member of the Board.
(n) "SHARE" shall mean a share of Stock, as adjusted in accordance with
Section 9 (if applicable).
(o) "STOCK" shall mean the Common Stock of the Company, par value of $.01
per share.
(p) "SUBSIDIARY" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50% of the total combined voting power
of all classes of outstanding stock of such corporation.
(q) "SUBSTANTIAL GAINFUL ACTIVITY" means the performance of significant
duties over a reasonable period of time in work for remuneration or profit
(or in work of a type generally performed for remuneration or profit), and
including Service as a member of the Board.
(r) "TRANSFEREE" shall mean any person to whom the Optionee has directly
or indirectly transferred any Share acquired under this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its officer duly authorized to act on behalf of the Committee, and
the Optionee has personally executed this Agreement.
[END OF PAGE]
Page 8
<PAGE>
OPTIONEE MAXUM HEALTH CORP.
/s/ Ronald G. Pantello
- ----------------------------------- By: /s/ Glenn P. Cato
(Signature) ---------------------------
Name: Glenn P. Cato
------------------------
Title: President and CEO
Ronald G. Pantello -----------------------
- -----------------------------------
(Name)
Optionee's Address: Company Address:
25 Berkshire Road 14850 Quorum Drive, Ste. 400
Woodcliff Lake, NJ 07675 Dallas, Texas 75240
SSN: ###-##-####
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<PAGE>
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
American Health Services Corp. Delaware
Radiosurgery Centers, Inc. Delaware
Maxum Health Corp. Delaware
MTS Enterprises, Inc. Texas
Quest Financial Services Inc. Delaware
Maxum Health Services Corp. Delaware
DiagnosTemps, Inc. Delaware
Maxum Health Management Corp. Delaware
Maxum Health Services of North Texas, Inc. Texas
Maxum Health Services of Arlington, Inc. Texas
Maxum Health Services of Dallas, Inc. Texas
North Dallas Diagnostic Center, Inc. Texas
Open MRI, Inc. Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
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0
6,750
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</TABLE>
