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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28622
INSIGHT HEALTH SERVICES CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0702770
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
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 and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or informative statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _______
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 30, 1997 (based on the closing price on the NASDAQ
Small Cap Market on that date) was $14,452,668.
The number of shares outstanding of the Registrant's Common Stock as of
September 30, 1997 was 2,714,725.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the next Annual Meeting of Stockholders
of the Registrant are incorporated herein by reference in Part III.
Certain exhibits are incorporated herein by reference as set forth in Item
14(a)(3), Exhibits, in Part IV.
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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.
On September 13, 1996, AHS changed its name to InSight Health Corp. ("IHC").
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.
RECAPITALIZATION
On October 14, 1997, InSight consummated a recapitalization
("Recapitalization") pursuant to which (a) certain investors affiliated with
TC Group, LLC and its affiliates (collectively, "Carlyle"), a private
merchant bank headquartered in Washington, D.C., made a cash investment of
$25 million in the Company and received therefor (i) 25,000 shares of newly
issued InSight Convertible Preferred Stock, Series B, par value $0.001 per
share ("Series B Preferred Stock"), initially convertible, at the option of
the holders thereof, in the aggregate into 2,985,075 shares of InSight Common
Stock, and (ii) warrants (the "Carlyle Warrants") to purchase up to 250,000
shares of InSight Common Stock at the current exercise price of $10.00 per
share; (b) General Electric Company ("GE") (i) surrendered its rights with
respect to its supplemental service fee (see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below) in exchange for (A) the issuance of 7,000 shares of newly issued
InSight Convertible Preferred Stock, Series C, par value $0.001 per share
("Series C Preferred Stock"), initially convertible, at the option of the
holders thereof, in the aggregate into 835,821 shares of InSight Common
Stock, and (B) warrants (the "GE Warrants") to purchase up to 250,000 shares
of InSight Common Stock at the current exercise price of $10.00 per share,
and (ii) agreed to exchange all of its InSight Convertible Preferred Stock,
Series A, on the business day (the "Second Closing") after all waiting
periods with respect to GE's filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, have expired or been terminated, for an
additional 20,953 shares of Series C Preferred Stock, initially convertible,
at the option of the holders thereof, in the aggregate into 2,501,760 shares
of InSight Common Stock; and (c) the Company executed a Credit Agreement with
NationsBank,
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N.A. pursuant to which NationsBank, as agent, committed to provide a total of
$125 million in senior secured credit, including a $50 million acquisition
facility, upon the satisfaction of certain customary conditions (the "Bank
Financing").
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the "Board") is currently fixed
at nine. Six directors (the "Common Stock Directors") are to be elected by
the common stockholders, one of whom (the "Joint Director") is to be proposed
by Carlyle and GE and approved by a majority of the Board in its sole
discretion. Of the three remaining directors, two are to be elected by the
holders of the Series B Preferred Stock and one is to be elected by the
holders of the Series C Preferred Stock, subject to increase and decrease in
certain circumstances. Presently, the Board of Directors of the Company
consists of seven directors, five of whom are Common Stock Directors and two
of whom are Preferred Stock Directors elected by Carlyle. GE has informed
the Company of its intention to wait until the Second Closing to elect its
Preferred Stock Director. The vacancy created for the Joint Director has not
been filled.
CENTERS IN OPERATION
InSight provides diagnostic imaging, treatment and related management services
in 26 states throughout the United States. InSight's services are provided
through a network of 35 mobile magnetic resonance imaging ("MRI") facilities
("Mobile Facilities"), 28 fixed-site MRI facilities ("Fixed Facilities"), ten
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 part of one
of its Centers. The Company's operations are located throughout the United
States, with a substantial presence in 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.
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"
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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. Open MRI systems are priced in the range of $0.6
million to $1 million.
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.
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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 consolidation.
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. The strategy of InSight is
focused on five interrelated initiatives: (i) the consolidation of the highly
fragmented, diagnostic imaging 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 a radiology co-source product where InSight
will provide management services for radiology departments within hospitals,
(iii) 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, (iv)
development of a network of open MRI systems to protect InSight's existing high
field MRI market and to expand in markets in which InSight does not have a
presence and (v) 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.
In fiscal 1997, InSight completed three acquisitions of Centers and Mobile
Facilities and in the first quarter of fiscal 1998, InSight completed one
acquisition of a Center and entered into a definitive agreement for the purchase
of another Center, subject to the satisfaction of certain conditions. Also, in
fiscal 1997, an open MRI system was installed and became operational at one of
the Company's Fixed Facilities and a second open MRI system was installed at one
of the Company's Centers, subject to the issuance of a CON. The CON has been
received and InSight expects the open MRI system to become operational in the
second quarter of 1998. In addition, in the first quarter of 1998, InSight
entered into two joint venture arrangements for the development of two open MRI
Centers.
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The foregoing acquisitions and developments have been financed by GE. Upon
the effectiveness of the Bank Financing, the Company believes it will be well
positioned to pursue additional acquisition and development opportunities.
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.
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. 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 ("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
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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 patients to 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.
Under current Medicare policy, imaging centers may generally participate in
the Medicare program as either medical groups or, subject to the discretion
of individual Medicare carriers, Independent Physiological Laboratories
("IPLs"). The IPL is a loosely defined Medicare provider category that is
not specifically authorized to provide imaging services. Accordingly, certain
carriers permit IPLs to provide imaging services and others do not. In the
past, InSight has preferred, to the extent possible, to operate its imaging
centers for Medicare purposes as IPLs. InSight believes that the designation
of its imaging centers as IPLs gives it greater operational control than it
would have if its imaging centers were operated under the medical group
model, where InSight would function as a "manager".
On June 18, 1997, in response to the lack of designation for imaging
services, HCFA published proposed regulations which, among other things,
would establish a new category of Medicare provider referred to as an
Independent Diagnostic Treatment Facility ("IDTF"). The proposed IDTF
regulations contemplate an effective date of January 1, 1998, although
InSight's management believes that the effective date could be July 1, 1998.
If these regulations are implemented, it appears that imaging centers will
have the option to participate in the Medicare program as either (i) IDTFs
or (ii) medical groups.
InSight has evaluated the proposed IDTF regulations for the purpose of
assessing their potential impact on InSight's operations. Although InSight
believes that the impact of the IDTF regulations is likely to be positive
overall, InSight had a number of concerns and submitted comments to HCFA
regarding those concerns. InSight currently anticipates converting its
imaging centers to IDTFs once that category is available; however, if some of
the IDTF qualifications and obligations, outlined in the proposed IDTF
regulations are unmodified, InSight believes that IDTFs may be at a
substantial competitive disadvantage with those imaging centers operated as
medical groups. Accordingly, InSight may consider converting some or all of
its existing centers into the medical group model, with InSight functioning
as a "manager" of the radiology group. This conversion will require the
cooperation of the radiology groups associated with InSight's imaging centers.
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".
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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 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 contract services revenues, primarily earned by its Mobile
Facilities, represent approximately 51% of total revenues. Each year
approximately one-quarter to one-third of the contract services agreements
are subject to renewal. It is expected that some high volume customer
accounts will elect not to renew their agreements and instead will purchase
or lease their own diagnostic imaging equipment and some customers may choose
an alternative services provider. In the past where agreements have not been
renewed, the Company has been able to obtain replacement customer accounts;
however, it is not always possible to obtain replacement accounts and some
replacement accounts have been smaller than the lost account. The
non-renewal of a single customer agreement would not have a material impact
on InSight's contract services revenues; however, non-renewal of several
agreements could have a material impact on contract services revenues.
In addition, the Company's contract services revenues with regard to its
Mobile Facilities in certain markets depend in part on some customer accounts
with high volume. If the future reimbursement levels of such customers were
to decline or cease or if such customers were to become financially insolvent
and if such agreements were not replaced with new accounts or with the
expansion of services on existing accounts, InSight's contract services
revenues would be adversely affected.
8
<PAGE>
No single source accounts for more than 10% of InSight's revenues. The
Company 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 the Company'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 the
purchase or execution of leases for new equipment.
Several substantial companies are presently engaged in the manufacture of MRI
(including open MRI), CT and other diagnostic imaging equipment, including GE
Medical Systems, 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 15, 1997, InSight had approximately 544 full-time and 80
part-time employees. None of the Company's employees are covered by a
collective bargaining agreement. Management believes its employee relations
to be satisfactory.
ITEM 2. PROPERTIES
The following table includes the primary properties utilized by InSight as of
September 15, 1997:
<TABLE>
<CAPTION>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ---------------- ----------- --------
<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 13,800 Hobart, Indiana
Harbor/UCLA Diagnostic Imaging Center 15,000 Torrance, California
LEASED:
InSight Corporate Headquarters 12,300 Newport Beach, California
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
Open MRI of Hayward 6,400 Hayward, California
Central Maine Imaging Center 7,250 Lewiston, Maine
Training/Applications/Fleet Services 20,000 Winston-Salem, North Carolina
Chattanooga Outpatient Center 14,700 Chattanooga, Tennessee
Broad Street Imaging Center 12,700 Columbus, Ohio
</TABLE>
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
InSight is engaged from time to time 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
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 1997.
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 prices as reported by NASDAQ
for InSight Common Stock for the quarters indicated:
QUARTER ENDED LOW HIGH
------------------ ----- -----
September 30, 1996 4 3/4 7 5/8
December 31, 1996 4 3/4 7
March 31, 1997 4 1/4 6
June 30, 1997 4 4 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 30, 1997, the Company's records indicate that there were in
excess of 2,500 beneficial holders of the Common Stock and approximately
535 stockholders of record.
The following is a list of securities sold by the Company during the period
covered by this report on Form 10-K which, pursuant to the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), were not registered under the Securities Act:
On August 10, 1996, the Company issued to the former holders of IHC Series B
Preferred Stock, in consideration for certain agreements in connection with
the Merger, warrants to purchase an aggregate of 50,000 shares of InSight
Common Stock at an exercise price of $5.64 per share. The warrants are fully
vested and exercisable at any time up to August 9, 2001.
On August 14, 1996, the Company issued to Shattuck Hammond Partners, Inc.
("SHP"), an investment banking firm in which a director of the Company, Grant
R. Chamberlain, is a vice president, a warrant to purchase 35,000 shares of
InSight Common Stock at an exercise price of $5.50 per share. The warrant
was issued as partial consideration for SHP's agreement to provide general
strategic advisory and investment banking services during the 18-month period
commencing July 1, 1996 and ending December 31, 1997. The warrant vests
cumulatively on a monthly basis over the term of such agreement.
10
<PAGE>
On March 11, 1997, the Company issued to Anthony J. LeVecchio, a former
director of Maxum, a warrant to purchase 15,000 shares of InSight Common
Stock at an exercise price of $5.50 per share. The warrant was issued in
partial consideration for Mr. LeVecchio's agreement to provide general
strategic and business development activities commencing April 1, 1997, for a
one year period. The warrant vests cumulatively at the rate of 5,000 shares
on the first, second and third anniversary dates of such agreement.
ITEM 6. SELECTED FINANCIAL DATA
On June 26, 1996, pursuant to the Merger Agreement each of MHC and IHC 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 presented as of and for the year ended
June 30, 1997, the six months ended June 30, 1996 and 1995 (unaudited), and
for the years ended December 31, 1995, 1994, 1993 and 1992 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 year ended June 30, 1997, the six months ended June
30, 1996 and for the years ended December 31, 1995 and 1994 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this report.
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ----------------------- YEARS ENDED DECEMBER 31,
JUNE 30, JUNE 30, JUNE 30, ----------------------------------------------
1997 1996(1) 1995(1) (4) 1995 (1) 1994 (1) 1993 (1) 1992 (1)
---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 93,063 $ 26,460 $ 24,434 $ 50,609 $ 45,868 $ 45,075 $ 45,135
Costs of operations (2) 80,337 27,420 22,986 48,778 45,439 47,456 45,329
---------- ---------- ----------- ---------- ---------- ---------- ----------
Gross profit (loss) 12,726 (960) 1,448 1,831 429 (2,381) (194)
Corporate operating expenses 7,431 2,127 1,915 3,372 4,040 4,344 6,747
---------- ---------- ----------- ---------- ---------- ---------- ----------
Income (loss) from company operations 5,295 (3,087) (467) (1,541) (3,611) (6,725) (6,941)
Equity in earnings from unconsolidated
partnerships 468 138 136 348 834 685 1,020
---------- ---------- ----------- ---------- ---------- ---------- ----------
Operating income (loss) 5,763 (2,949) (331) (1,193) (2,777) (6,040) (5,921)
Interest expense, net (4,055 ) (1,144) (648) (1,626) (1,206) (1,773) (2,391)
Provision for securities litigation
settlement - - - (1,500) - - -
Gain on sale of partnership interests - - - - 4,957 - -
Provision for income taxes (427 ) (65) - - (160) - -
---------- ---------- ----------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item 1,281 (4,158) (979) (4,319) 814 (7,813) (8,312)
Extraordinary item - 3,179 - - 3,342 1,036 -
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net income (loss) $ 1,281 $ (979) $ (979) $ (4,319) $ 4,156 $ (6,777) $ (8,312)
---------- ---------- ----------- ---------- ---------- ---------- ----------
---------- ---------- ----------- ---------- ---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary
item (3) $ 0.24 $ (2.99) $ (0.73) $ (3.21) $ 0.58 $ (4.49) $ (4.89)
---------- ---------- ----------- ---------- ---------- ---------- ----------
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net income (loss) (3) $ 0.24 $ (0.70) $ (0.73) $ (3.21) $ 2.96 $ (3.89) $ (4.89)
---------- ---------- ----------- ---------- ---------- ---------- ----------
---------- ---------- ----------- ---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding (3) 5,440,315 1,389,271 1,333,169 1,344,832 1,402,435 1,741,846 1,698,602
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
---------------------- ----------------------------------------------
1997 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $(5,740 ) $(1,167) $(2,228) $1,587 $(8,594) $(14,607)
Property and equipment, net 34,488 29,852 12,386 5,272 9,791 18,772
Intangible assets 33,272 16,965 4,047 1,194 1,263 2,513
Total assets 98,322 70,386 28,306 22,592 23,566 38,043
Total long-term liabilities 59,205 39,839 19,723 9,575 7,967 8,368
Stockholders' equity (deficit) 6,685 5,404 (4,005) 300 (3,857) 2,502
</TABLE>
(1) The selected consolidated financial data represents historical data of
MHC only.
(2) Includes a (net credit) provision for prior restructuring costs of
$(0.5) million and $7.5 million in 1993 and 1992, respectively.
(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, 1992.
(4) Unaudited.
11
<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 Item 8.
"Financial Statements and Supplementary Data", included elsewhere in this
report.
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
consolidation. The strategy of InSight will be focused on five 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 a radiology co-source product where InSight will provide
management services for radiology departments within hospitals, (iii)
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, (iv)
development of a network of open MRI systems and (v) 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 IHC as reflective of this consolidation.
As part of its consolidation strategy, InSight completed three acquisitions
during fiscal 1997 and one in the first quarter of fiscal 1998 as follows:
In September 1996, InSight completed the acquisition of a Fixed Facility in
Hayward, California. The transaction included the purchase of certain
assets, primarily diagnostic equipment. The purchase price of approximately
$2.8 million was financed by GE.
In May 1997, InSight acquired certain assets, primarily Mobile Facilities, in
Maine and New Hampshire, and assumed certain equipment related liabilities.
The purchase price of approximately $6.8 million and an additional $0.4
million for working capital requirements were financed by GE.
In June 1997, InSight completed the acquisition of a Center in Chattanooga,
Tennessee. The transaction included the purchase of certain assets,
primarily diagnostic equipment, and the assumption of certain equipment
related liabilities. The purchase price of approximately $9.0 million was
financed by GE.
In July 1997, InSight completed the acquisition of a Center in Columbus,
Ohio. As part of this transaction, InSight also has a majority ownership in
the development of a new Center in Dublin, Ohio. The transactions included
the purchase of certain assets, primarily diagnostic equipment, and the
assumption of certain equipment related liabilities. The purchase price of
approximately $5.5 million and approximately $0.5 million for the Center
under development were financed by GE.
In July 1997, InSight entered into a definitive agreement to acquire a Center
in Murfreesboro, Tennessee, subject to the satisfaction of certain
conditions. GE has agreed to finance the purchase price of
approximately $2.7 million; however, the Bank Financing may be used to finance
the purchase price.
Upon the consummation of the Bank Financing, which InSight expects to occur
by early November 1997, InSight will have at its disposal an acquisition
facility in the amount of $50 million, which may be increased under certain
circumstances to $75 million. InSight believes this facility will enhance
its ability to participate in the industry consolidation.
12
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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
and yet is constantly under external pressure to contain costs and reduce
prices. Revenues and cash flows have been adversely affected by an increased
collection cycle, competitive pressures and major restructurings within the
health care industry. This adverse effect on revenues and cash flow is
expected to continue, especially in the mobile diagnostic imaging business.
Management believes that InSight's long-term viability and success is
contingent upon its ability to successfully execute its five interrelated
strategic initiatives.
InSight continues to pursue acquisition opportunities. InSight believes that
the expansion of its business through acquisitions is a key factor in
achieving and maintaining 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, the range of services provided and the
Company's ability to integrate the acquired businesses into its existing
infrastructure. Since the Merger, InSight has completed four acquisitions
and entered into a definitive agreement with respect to an additional
acquisition, as discussed above.
As noted above (see Item 1. "Business-Recapitalization"), the Company
consummated the Recapitalization on October 14, 1997 pursuant to which (a)
the Company issued to Carlyle 25,000 shares of Series B Preferred Stock
having a liquidation preference of $1,000 per share and warrants to purchase
250,000 shares of InSight Common Stock at the current exercise price of
$10.00 per share, generating net proceeds to the Company (after related
transaction costs of approximately $2.0 million) of approximately $23.0
million; (b) the Company issued to GE 7,000 shares of Series C Preferred
Stock, with a liquidation preference of $1,000 per share, in consideration of
the termination of GE's right to receive supplemental service fee payments
equal to 14% of InSight's pre-tax income, (for which the Company will record
a non-recurring expense of approximately $6.7 million in the second quarter
of fiscal 1998), and agreed to issue to GE an additional 20,953 shares of
Series C Preferred Stock at the Second Closing in exchange for all of GE's
shares of Series A Preferred Stock; and (c) the Company executed a Credit
Agreement with NationsBank which, subject to the satisfaction of certain
customary conditions, is expected to be consummated by early November and
includes (i) a $50 million term loan facility consisting of a $20 million
tranche with increasing amortization over a five year period and a $30
million tranche principally repayable in years 6 and 7, (ii) a $25 million
revolving working capital facility with a five-year maturity, and (iii) a $50
million acquisition facility, which may be increased by up to an additional
$25 million upon the satisfaction of certain conditions, including
commitments from participating lenders. The net proceeds from the Carlyle
investment will be used to refinance a portion of the outstanding GE
indebtedness (approximately $23 million). At the initial funding of the Bank
Financing, all of the term loan facility is expected to be drawn down to
refinance all of the remaining GE indebtedness (approximately $47 million)
and approximately $10 million of the revolving facility is expected to be
drawn down for working capital purposes. If the Bank Financing is not
consummated for any reason, the Company would be required to seek alternate
financing. In such event, there can be no assurance that such financing
would be available on acceptable terms.
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 the Company's revenues and profits.
In connection with the Merger, certain financial accommodations with MHC's
and IHC's primary creditor, GE, became effective in June 1996. The financial
accommodations with GE have restricted InSight's ability to raise capital,
incur additional debt, enter into additional leases for equipment, complete
acquisitions, or enter into other corporate transactions without first
obtaining a waiver or consent from GE. The GE indebtedness is expected to be
repaid in full from the proceeds of the Carlyle investment and the Bank
Financing. The terms of the Series B Preferred Stock and the Series C
Preferred Stock, as well as the Bank Financing, contain similar restrictions
on InSight's ability to act without first obtaining a waiver or consent from
Carlyle, GE and NationsBank.
13
<PAGE>
Working capital decreased to a deficit of approximately $5.7 million at June
30, 1997 from a deficit of approximately $1.2 million at June 30, 1996. This
increase in deficit of approximately $4.5 million is primarily due to the
current portion of additional debt incurred as a result of the Company's
acquisition strategy discussed above and principal payments on long-term
debt, offset by net income before depreciation and amortization. GE loaned
the Company approximately $25.0 million to complete the acquisitions and has
agreed to loan the Company approximately $2.7 million to complete the
acquisition in Murfreesboro, Tennessee discussed above. Notwithstanding the
above, the Company believes that its current cash balances and cash flows
from operations, will be sufficient to finance its current operations through
June 30, 1998.
Cash and cash equivalents increased to approximately $7.1 million at June 30,
1997 from approximately $6.8 million at June 30, 1996. This increase of
approximately $0.3 million resulted primarily from (i) cash provided by
operating activities of approximately $7.3 million and (ii) long-term
borrowings of approximately $33.7 million, offset by (i) the acquisition of
Centers and Mobile Facilities (approximately $18.6 million), (ii) purchases
of property and equipment (approximately $7.1 million), and (iii) payments on
debt and capital lease obligations (approximately $11.0 million).
The Company has committed to purchase, at an aggregate cost of approximately
$4.0 million, three MRI systems for delivery during the quarter ending
December 31, 1998. The Company has obtained commitments to finance the
purchase or lease of such equipment; however, the Bank Financing may be used
to finance the purchase of such equipment. In addition, the Company has
committed to purchase or lease from GE, at an aggregate cost of
approximately $20 million, including siting costs, 20 open MRI systems for
delivery and installation over the next two years. The Company may purchase,
lease or upgrade other MRI systems as opportunities arise to place new
equipment into service when new contract services agreements are signed,
existing agreements are renewed, acquisitions are completed, or new imaging
centers are developed in accordance with the Company's strategic initiatives.
In February 1996, MHC and the other parties in a class action securities
lawsuit reached a settlement. On July 29, 1996, following final court
approval, MHC and the other parties collectively paid to the plaintiffs in
the class action the balance of the agreed upon settlement amount. In
anticipation of this settlement, MHC recorded a charge of $1.5 million in
1995 and as part of the Merger borrowed approximately $1.9 million from GE
to finance the settlement.
RESULTS OF OPERATIONS
BECAUSE THE MERGER WAS ACCOUNTED FOR USING THE PURCHASE METHOD OF ACCOUNTING
AND MHC WAS TREATED AS THE ACQUIROR, THE FOLLOWING DISCUSSION AND ANALYSIS
CONTAINS THE HISTORICAL FINANCIAL DATA OF THE COMPANY (REFLECTING THE
COMBINED OPERATIONS OF IHC AND MHC) FOR THE YEAR ENDED JUNE 30, 1997 AND THE
HISTORICAL FINANCIAL DATA OF MHC ONLY FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994.
YEAR ENDED JUNE 30, 1997 AND SIX MONTHS ENDED JUNE 30, 1996
REVENUES: Revenues increased approximately $66.6 million for the year ended
June 30, 1997, compared to the six months ended June 30, 1996. The increase
in revenues was due primarily to additional IHC revenues as a result of the
Merger (approximately $38.7 million), increases in revenues due to the
acquisitions discussed above (approximately $2.0 million) and an increase in
contract services, patient services and other revenues at MHC (approximately
$25.9 million). The increase of $25.9 million in MHC revenues was primarily
due to a year of results for 1997 compared to the six month period in 1996.
Compared to 1996 on an annualized basis, MHC revenues decreased by
approximately $0.5 million, or approximately 1%.
Contract services revenues increased approximately $27.8 million for the year
ended June 30, 1997, compared to the six months ended June 30, 1996. This
increase was due primarily to additional IHC revenues as a result of the
Merger (approximately $7.8 million), an increase in revenues due to the
acquisitions discussed above (approximately $0.2 million) and an increase in
MHC revenues of approximately $19.8 million. The increase of $19.8 million
was primarily due to a year of results for 1997 compared to a six month
period in 1996. Compared to 1996 on an annualized basis, MHC revenues
decreased approximately $0.2 million, or 0.5%. This decrease was due to
reductions in reimbursement (approximately 6%) from customers, primarily
hospitals, offset by increased utilization (approximately 30%).
14
<PAGE>
InSight's contract services revenues, primarily earned by its Mobile
Facilities, represent approximately 51% of total revenues. Each year
approximately one-quarter to one-third of the contract services agreements
are subject to renewal. It is expected that some high volume customer
accounts will elect not to renew their agreements and instead will purchase
or lease their own diagnostic imaging equipment and some customers may choose
an alternative services provider. In the past where agreements have not been
renewed, the Company has been able to obtain replacement customer accounts;
however, it is not always possible to obtain replacement accounts and some
replacement accounts have been smaller than the lost account. The
non-renewal of a single customer agreement would not have a material impact
on InSight's contract services revenues; however, non-renewal of several
agreements could have a material impact on contract services revenues.
In addition, the Company's contract services revenues with regard to its
Mobile Facilities in certain markets depend in part on some customer accounts
with high volume. If the future reimbursement levels of such customers were
to decline or cease or if such customers were to become financially insolvent
and if such agreements were not replaced with new accounts or with the
expansion of services on existing accounts, InSight's contract services
revenues would be adversely affected.
Patient services revenues increased approximately $36.9 million for the year
ended June 30, 1997, compared to the six months ended June 30, 1996. The
increase in revenues was due primarily to additional IHC revenues as a result
of the Merger (approximately $30.5 million), increased revenues due to the
acquisitions discussed above (approximately $1.8 million), and an increase in
MHC revenues of approximately $4.6 million. The increase in MHC revenues of
$4.6 million was primarily due to a year of results for 1997 compared to a
six month period in 1996. Compared to 1996 on an annualized basis, MHC
revenues decreased approximately $1.3 million, or 11%. This decrease was due
to continued declines in reimbursement (approximately 5%) from third party
payors and the closure of a Fixed Facility in June 1996, offset by increased
utilization (approximately 20%).
No single source accounts for more than 10% of InSight's revenues. The
Company has six individual contracts with the county of Los Angeles
("County") covering six separate sites. In the aggregate, these sites earn
revenues which represent approximately 10% of the Company's annual revenues.
From time to time, the County has experienced financial difficulties. If
such difficulties caused the County to curtail or terminate the Company's
services, the Company's business would be adversely affected.
Management believes that any future increases in revenues can only be
achieved by higher utilization and not by increases in procedure prices since
reimbursement is declining; however, excess capacity of diagnostic imaging
equipment, increased competition, and the expansion of managed care may
impact utilization and make it difficult for the Company to achieve revenue
increases in the future, absent the execution of provider agreements with
managed care companies and other payors, and the execution of the Company's
strategic initiatives.
COSTS OF OPERATIONS: Costs of operations increased approximately $52.9
million for the year ended June 30, 1997, compared to the six months ended
June 30, 1996. This increase was due primarily to additional IHC costs as a
result of the Merger (approximately $29.8 million), an increase in costs due
to the acquisitions discussed above (approximately $1.5 million), and an
increase in costs at MHC of approximately $21.6 million. The increase of
$21.6 million at MHC was primarily due to a year of results for 1997 compared
to a six month period in 1996. Compared to 1996 on an annualized basis, MHC
costs decreased approximately $5.8 million, or 11%. This decrease was due to
a reduction in costs of services, provision for doubtful accounts, and
equipment leases and depreciation and amortization.
Costs of services, including the provision for doubtful accounts, increased
approximately $35.6 million for the year ended June 30, 1997, compared to the
six months ended June 30, 1996. The increase in costs was due primarily to
additional IHC costs as a result of the Merger (approximately $20.8
million), an increase in costs due to the acquisitions discussed above
(approximately $1.2 million) and an increase in costs at MHC (approximately
$13.6 million). The increase in costs at MHC was due primarily to a year of
results for 1997 compared to a six month period in 1996. Compared to 1996 on
an annualized basis, MHC costs decreased approximately $2.9 million. This
decrease was due to (i) reduced costs in service supplies and equipment
maintenance and (ii) one time charges in 1996 related to the closure of two
Centers and the early return of four Mobile Facilities.
15
<PAGE>
Equipment leases and depreciation and amortization increased approximately
$17.4 million for the year ended June 30, 1997, compared to the six months
ended June 30, 1996. The increase was due primarily to additional IHC costs
as a result of the Merger (approximately $9.2 million), increased costs due
to the acquisitions discussed above (approximately $0.3 million) and an
increase in costs at MHC (approximately $7.9 million). The increase at MHC
of $7.9 million was primarily due to a year of results for 1997 compared to a
six month period in 1996. Compared to 1996 on an annualized basis, MHC costs
decreased approximately $0.8 million. This decrease was due to a write down
of approximately $1.5 million of intangibles in 1996 which did not occur in
1997.
Under the terms of the amended equipment maintenance service agreement with
GE, GE was entitled to receive a supplemental service fee
equal to 14% of pretax income, subject to certain adjustments. During the
year ended June 30, 1997, the Company recorded a provision of approximately
$0.3 million in connection with this agreement. The Company's future
obligations under this agreement were terminated as part of the
Recapitalization. As mentioned above, the Company will record a
non-recurring expense of $6.7 million in the second quarter of fiscal 1998
in connection with the termination of this agreement.
GROSS PROFIT: Gross profit increased approximately $13.7 million during the
year ended June 30, 1997, compared to the six months ended June 30, 1996.
The increase was due primarily to additional gross profit from IHC as a
result of the Merger (approximately $8.9 million), an increase due to the
acquisitions discussed above (approximately $0.5 million), and an increase at
MHC (approximately $4.3 million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately $5.3 million for the year ended June 30, 1997, compared to the
six months ended June 30, 1996. The increase was partially related to
maintaining duplicate staffing during the transition phase of the Merger and
to additional consulting and legal costs associated with the Company's
acquisition activities. The Company has achieved annualized cost savings
(approximately $1.0 million) compared to the historical combined costs of MHC
and IHC, primarily as a result of elimination of duplicate facilities
including corporate headquarters, and synergies in staff and functional areas.
INTEREST EXPENSE, NET: Interest expense, net increased approximately $2.9
million for the year ended June 30, 1997, compared to the six months ended
June 30, 1996. The increase was due primarily to (i) additional debt assumed
as a result of the Merger (approximately $3.3 million) and (ii) additional
debt related to the acquisitions discussed above (approximately $0.3
million), offset by reduced interest as a result of (i) amortization of the
deferred gain on the debt restructure with GE (approximately $1.0
million) and (ii) amortization of long-term debt.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT: In connection with the Merger,
MHC recorded an extraordinary gain on debt extinguishment of approximately
$3.2 million in 1996. There was no similar gain in 1997.
INCOME (LOSS) PER COMMON SHARE: Net income per common share was $0.24 for
the year ended June 30, 1997, compared to a net loss per common share before
extraordinary item of $(2.99) for the six months ended June 30, 1996. The
improvement in income per common share is the result of (i) increased gross
profit, and (ii) an increase in earnings from unconsolidated partnerships,
offset by (i) increased corporate operating expenses, and (ii) increased
interest expense.
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 decreases in
reimbursement rates from third party payors.
COSTS OF OPERATIONS: Costs of operations increased $4.4 million, or
approximately 19 percent, during the six months ended June 30, 1996, compared
with the same period in 1995. This increase was primarily due to (i) the
write down of approximately $1.5 million of goodwill and other intangibles
related to two of MHC's Centers; (ii) an increase in cost of services of $2.3
million and (iii) an increase in depreciation of $0.7 million offset by a
decrease in the provision for doubtful accounts of $0.4 million.
16
<PAGE>
Costs of services increased $2.3 million during the six months ended June 30,
1996, compared with the same period in 1995. The increase was due primarily
to (i) certain one-time charges relating to operating strategies associated
with the Merger which include provisions for the closure of two 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 doubtful accounts 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 was 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 $2.4 million during the six months
ended June 30, 1996, compared with the same period in 1995. This decrease
was primarily attributable to the increase in costs of services discussed
above.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased $0.2
million during the six months ended June 30, 1996, compared with the same
period in 1995. This increase was due primarily to 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 was 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 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.
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 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 were paid directly by
the managed care organization and were 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.
17
<PAGE>
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 $3.3 million, or
approximately 7%, in 1995 compared to 1994. Costs 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 costs 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 doubtful accounts 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 had 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.
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 $1.4 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 $0.7 million, or approximately 17%, in 1995 compared to 1994.
This decrease was due primarily to reductions in legal costs and insurance
premiums.
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS: Equity in earnings of
unconsolidated 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.
18
<PAGE>
INFLATION
Inflation in recent years has not had a significant impact on MHC's or IHC's
business, and is not expected to adversely affect the Company in the near
future.
NEW PRONOUNCEMENTS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation". As
permitted under the standard, the Company continued to account for employee
stock options in accordance with APB Opinion No. 25 and made necessary pro
forma disclosures mandated by SFAS No. 123. The adoption of this standard
had no impact on the Company's results of operations.
In fiscal 1998, the Company will be required to adopt SFAS No. 129,
"Disclosure of Information about Capital Structure", which continues the
existing requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. The adoption of this
standard will have no effect on the Company's results of operations.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 128,
"Earnings per Share ("EPS")". This standard is effective for both interim
and annual reporting periods ending after December 15, 1997. SFAS No. 128
replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic EPS is computed by dividing reported earnings by weighted average
shares outstanding. Diluted EPS is computed in the same way as fully diluted
EPS, except that the calculation now uses the average share price for the
reporting period to compute dilution from options under the treasury stock
method. Management believes that adoption of this standard will not have a
significant impact on earnings per share.
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted. The Company
believes that adoption of these standards will not have a material impact on
the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
for the Year Ended June 30, 1997, for
the Six Months Ended June 30,1996 and for the
Years Ended December 31, 1995 and 1994
PAGE NUMBER
-----------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 22
CONSOLIDATED BALANCE SHEETS 23-24
CONSOLIDATED STATEMENTS OF OPERATIONS 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 26
CONSOLIDATED STATEMENTS OF CASH FLOWS 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28-42
SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 49
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited the accompanying consolidated balance sheets of INSIGHT
HEALTH SERVICES CORP. (a Delaware corporation) and subsidiaries as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended June 30, 1997 and 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 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, 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, 1997 and 1996, and results of their
operations and their cash flows for the year ended June 30, 1997 and for the
six months ended June 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
October 14, 1997
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxum Health Corp.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Maxum Health Corp. and
Subsidiaries (MHC) for each of the two 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 results of MHC's operations and its cash flows for each
of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statements 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
22
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
- -------
CURRENT ASSETS:
Cash and cash equivalents $ 7,135 $ 6,864
Trade accounts receivable, net 15,645 12,916
Other receivables, net 358 973
Other current assets 1,554 1,708
--------- ----------
Total current assets 24,692 22,461
--------- ----------
PROPERTY AND EQUIPMENT:
Vehicles 968 978
Land, building and leasehold improvements 9,589 8,602
Computer and office equipment 3,855 3,638
Diagnostic and related equipment 28,193 18,113
Equipment and vehicles under capital leases 8,086 10,479
--------- ----------
50,691 41,810
Less: Accumulated depreciation and amortization 16,203 11,958
--------- ----------
Property and equipment, net 34,488 29,852
--------- ----------
INVESTMENT IN PARTNERSHIPS 402 359
--------- ----------
OTHER ASSETS 5,468 749
--------- ----------
INTANGIBLE ASSETS, net 33,272 16,965
--------- ----------
$ 98,322 $ 70,386
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
23
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 11,901 $ 6,585
Current portion of capital lease obligations 3,561 2,638
Accrued equipment related costs 2,882 3,249
Accounts payable and other accrued expenses 8,822 8,328
Accrued payroll and related costs 2,521 1,775
Current portion of deferred gain on debt restructure 745 1,053
---------- ----------
Total current liabilities 30,432 23,628
---------- ----------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 54,421 31,653
Capital lease obligations, less current portion 3,312 3,988
Accrued securities litigation settlement - 1,900
Deferred gain on debt restructure, less current portion 728 1,467
Other long-term liabilities 744 831
---------- ----------
Total long-term liabilities 59,205 39,839
---------- ----------
COMMITMENTS (Note 8)
MINORITY INTEREST 2,000 1,515
---------- ----------
STOCKHOLDERS' EQUITY:
Convertible Series A preferred stock, $.001 par value, 3,500,000 shares
authorized; 2,501,760 outstanding at June 30, 1997 and 1996,
respectively, stated at 6,750 6,750
Common stock, $.001 par value, 25,000,000 shares authorized,
2,714,725 and 2,710,240 shares outstanding at June 30, 1997 and 1996,
respectively 3 3
Additional paid-in capital 23,100 23,100
Accumulated deficit (23,168) (24,449)
---------- ----------
Total stockholders' equity 6,685 5,404
---------- ----------
$ 98,322 $ 70,386
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
24
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six
Year Ended Months Ended Year Ended Year Ended
June 30, June 30, December 31, December 31,
1997 1996 1995 1994
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Contract services $ 47,827 $ 20,045 $ 38,976 $ 36,393
Patient services 42,706 5,853 10,605 8,228
Other 2,530 562 1,028 1,247
----------- ----------- ---------- ----------
Total revenues 93,063 26,460 50,609 45,868
----------- ----------- ---------- ----------
COSTS OF OPERATIONS:
Costs of services 50,564 15,899 28,772 26,067
Provision for doubtful accounts 1,506 617 1,669 1,124
Equipment leases 18,396 6,957 14,464 14,581
Depreciation and amortization 9,871 3,947 3,873 3,667
----------- ----------- ---------- ----------
Total costs of operations 80,337 27,420 48,778 45,439
----------- ----------- ---------- ----------
GROSS PROFIT (LOSS) 12,726 (960) 1,831 429
CORPORATE OPERATING EXPENSES 7,431 2,127 3,372 4,040
----------- ----------- ---------- ----------
INCOME (LOSS) FROM COMPANY OPERATIONS 5,295 (3,087) (1,541) (3,611)
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIP 468 138 348 834
----------- ----------- ---------- ----------
OPERATING INCOME (LOSS) 5,763 (2,949) (1,193) (2,777)
OTHER INCOME (EXPENSE):
Interest expense, net (4,055) (1,144) (1,626) (1,206)
Provision for securities litigation settlement - - (1,500) -
Gain on sale of partnership interests - - - 4,957
----------- ----------- ---------- ----------
(4,055) (1,144) (3,126) 3,751
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 1,708 (4,093) (4,319) 974
PROVISION FOR INCOME TAXES 427 65 - 160
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,281 (4,158) (4,319) 814
EXTRAORDINARY ITEM - Net gain on
debt extinguishment - 3,179 - 3,342
----------- ----------- ---------- ----------
NET INCOME (LOSS) $ 1,281 $ (979) $ (4,319) $ 4,156
----------- ----------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ 0.24 $ (2.99) $ (3.21) $ 0.58
----------- ----------- ---------- ----------
Net income (loss) $ 0.24 $ (0.70) $ (3.21) $ 2.96
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted average number of common shares
outstanding 5,440,315 1,389,271 1,344,832 1,402,435
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ---------------------------------------
Shares Amount Shares Amount Warrant
-------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 - $ - 2,949,488 $ 29 $ 7
Stock issued under employee
purchase plan - - 3,927 - -
Surrender of 132,750 shares
of treasury stock in
settlement of stockholder
note receivable - - - - -
Net income - - - - -
--------- --------- -------- ------- --------
BALANCE AT DECEMBER 31, 1994 - - 2,953,415 29 7
Stock issued under employee
purchase plan - - 51,640 1 -
Net loss - - - - -
--------- --------- -------- ------- --------
BALANCE AT DECEMBER 31, 1995 - - 3,005,055 30 7
Issuance of Series A
Preferred Stock and
cancellation of common
stock warrant 1,250,880 3,375 - - (7)
Acquisition of IHC 1,250,880 3,375 1,349,908 1 -
Retirement of MHC's
treasury stock - - - - -
Reset the par value of
InSight common stock
issued in exchange for
MHC'S common stock - - (1,644,723) (28) -
Net loss - - - - -
--------- --------- ---------- ------- --------
BALANCE AT JUNE 30, 1996 2,501,760 6,750 2,710,240 3 -
Stock options exercised - - 4,485 - -
Net income - - - - -
--------- --------- -- -------- ------- --------
BALANCE AT JUNE 30, 1997 2,501,760 $ 6,750 2,714,725 $ 3 $ -
--------- --------- -------- ------- --------
--------- --------- -------- ------- --------
<CAPTION>
Additional Stockholder
Paid-In Accumulated Note Treasury
Capital Deficit Receivable Stock Total
----------- ---------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 19,679 $ (23,307) $ (110) $ (155) $(3,857)
Stock issued under employee
purchase plan 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 19,680 (19,151) - (265) 300
Stock issued under employee
purchase plan 13 - - - 14
Net loss - (4,319) - - (4,319)
--------- --------- -------- ------- --------
BALANCE AT DECEMBER 31, 1995 19,693 (23,470) - (265) (4,005)
Issuance of Series A
Preferred Stock and
cancellation of common
stock warrant - - - - 3,368
Acquisition of IHC 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 28 - - - -
Net loss - (979) - - (979)
--------- --------- -------- ------- --------
BALANCE AT JUNE 30, 1996 23,100 (24,449) - - 5,404
Stock options exercised - - - - -
Net income - 1,281 - - 1,281
--------- --------- -------- ------- --------
BALANCE AT JUNE 30, 1997 $ 23,100 $ (23,168) $ - $ - $ 6,685
--------- --------- -------- -------- --------
--------- --------- -------- -------- --------
</TABLE>
26
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Six
Year Ended Months Ended Year Ended Year Ended
June 30, June 30, December 31, December 31,
1997 1996 1995 1994
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,281 $ (979) $ (4,319) $ 4,156
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 9,871 4,022 4,060 3,913
Amortization of deferred gain on debt restructure (1,047) - - -
Gain on disposal of assets (113) (133) (35) (112)
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
Extraordinary gain on debt extinguishments - (3,179) - (3,342)
Cash provided by (used in) changes in
operating assets and liabilities:
Payments for restructure costs - - - (700)
Receivables (1,664) (174) (524) (38)
Other current assets 157 (851) (110) 782
Accounts payable and other current liabilities (1,143) 975 (1,089) 1,088
--------- --------- ---------- ----------
Net cash provided by operating activities 7,342 696 1,813 3,462
--------- --------- ---------- ----------
INVESTING ACTIVITIES:
Cash acquired in acquisition of IHC - 5,489 - -
Acquisition of Centers and Mobile Facilities (18,566) - (1,855) (510)
Acquisition of customer contracts and intangibles - - (2,108) -
Proceeds from sales of assets 347 369 745 1,358
Proceeds from sale of partnership interests - - - 5,007
Additions to property and equipment (7,102) (960) (548) (349)
(Increase) decrease in other assets (4,937) 195 190 582
--------- --------- ---------- ----------
Net cash provided by (used in) investing activities (30,258) 5,093 (3,576) 6,088
--------- --------- ---------- ----------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease obligations (11,026) (2,302) (6,020) (4,752)
Proceeds from issuance of debt 33,728 1,507 2,689 268
Net repayments on revolving note payable - - - (250)
Other 485 - 14 1
--------- --------- ---------- ----------
Net cash provided by (used in) financing activities 23,187 (795) (3,317) (4,733)
--------- --------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS: 271 4,994 (5,080) 4,817
Cash, beginning of period 6,864 1,870 6,950 2,133
--------- --------- ---------- ----------
Cash, end of period $ 7,135 $ 6,864 $ 1,870 $ 6,950
--------- --------- ---------- ----------
--------- --------- ---------- ----------
SUPPLEMENTAL INFORMATION (Note 13)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<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 (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 (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 (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 (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), the primary creditor of MHC
and AHS. 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, 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. 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 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 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 will also be entitled to receive certain
supplemental service fee payments based on future pretax income of InSight.
On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC).
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 for
the six months ended June 30, 1996 and for the years ended December 31, 1995 and
1994, respectively, represent the operating results of MHC only.
28
<PAGE>
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 26
states throughout the United States, with a substantial presence in
California, primarily Los Angeles County, and northern Texas, primarily the
Dallas/Ft. Worth metroplex. The Company's services are provided through a
network of 35 mobile magnetic resonance imaging (MRI) facilities (Mobile
Facilities), 28 fixed-site MRI facilities (Fixed Facilities), 10
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.
b. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of InSight and
its wholly owned subsidiaries, MHC and IHC (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 does not 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, 1997 and 1996, respectively, the Company has consolidated 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 services (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. 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 5 years
Diagnostic and related equipment 5 to 8 years
Equipment and vehicles under capital leases Term of lease
29
<PAGE>
The Company capitalizes expenditures for improvements 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.
g. 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 (See Note
6):
Goodwill 6 to 20 years
Non-compete agreements 5 to 7 years
Certificates of need 6 years
h. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which requires the asset and liability
method of accounting for income taxes.
i. 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 excluded for all periods prior to June 30,
1997 because they are antidilutive.
j. 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.
k. NEW PRONOUNCEMENTS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock Based Compensation". As
permitted under the standard, the Company continued to account for employee
stock options in accordance with APB Opinion No. 25 and made necessary pro
forma disclosures mandated by SFAS No. 123. The adoption of this standard
had no impact on the Company's results of operations.
In fiscal 1998, the Company will be required to adopt SFAS No. 129,
"Disclosure of Information about Capital Structure", which continues the
existing requirements to disclose the pertinent rights and privileges of
all securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. The adoption of this
standard will have no effect on the Company's results of operations.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 128,
"Earnings per Share (EPS)". This standard is effective for both interim
and annual reporting periods ending after December 15, 1997. SFAS No. 128
replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic EPS is
30
<PAGE>
computed by dividing reported earnings by weighted average shares
outstanding. Diluted EPS is computed in the same way as fully diluted EPS,
except that the calculation now uses the average share price for the
reporting period to compute dilution from options under the treasury stock
method. Management believes that adoption of this standard will not have a
significant impact on earnings per share.
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information." FASB Nos. 130 and 131 are effective for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The
Company believes that adoption of these standards will not have a material
impact on the Company.
l. RECLASSIFICATIONS
Reclassifications have been made to certain 1996, 1995 and 1994 amounts to
conform to the 1997 presentation.
3. PRIOR RESTRUCTURE OF MHC'S OPERATIONS AND FINANCIAL OBLIGATIONS
As of December 31, 1995, MHC did not have the resources to support its
existing debt service and lease requirements and an obligation to settle
pending securities litigation. The accompanying 1995 and 1994 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 were closed and the Merger was consummated
(Note 1).
4. ACQUISITIONS
In June 1996, InSight, MHC and IHC 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 September 1996, InSight purchased certain assets of a Fixed Facility in
California for approximately $2.8 million in cash.
In May 1997, InSight purchased certain assets, primarily Mobile Facilities in
Maine and New Hampshire. InSight paid approximately $6.8 million in cash and
assumed certain equipment related liabilities of approximately $1.9 million.
In June 1997, InSight purchased certain assets of a Center in Tennessee.
InSight paid approximately $9.0 million in cash and assumed certain equipment
related liabilities of approximately $1.9 million.
In May 1997, the Company entered into a definitive agreement to purchase certain
assets of a Center in Ohio. As part of the definitive agreement, the Company
deposited approximately $5.5 million into an escrow account. At June 30, 1997
this deposit is included in other assets.
31
<PAGE>
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, 1996,
are summarized as follows (amounts in thousands):
Six Months
Year Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
(Unaudited)
Revenues $104,370 $50,092
Expenses 102,285 54,286
-------- -------
Income (loss) before extraordinary item 2,085 (4,194)
Extraordinary item - 3,179
-------- -------
Net income (loss) $ 2,085 $(1,015)
-------- -------
-------- -------
Income (loss) per share before extraordinary item $ 0.38 $ (1.55)
-------- -------
-------- -------
Net income (loss) per share $ 0.38 $ (0.37)
-------- -------
-------- -------
The pro forma results for 1997 and 1996 include $0.8 million and $0.7 million of
amortization of intangibles, respectively, and $1.7 million and $0.8 million of
interest expense, respectively, related to these acquisitions. The pro forma
results in 1996 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):
June 30,
------------------
1997 1996
------- -------
Trade receivables $26,271 $23,004
Less: Allowances for doubtful accounts and
contractual adjustments 7,491 7,808
Allowances for professional fees 3,135 2,280
------- -------
Net trade receivables $15,645 $12,916
------- -------
------- -------
Net trade receivables arise from revenue generated by:
Patient services $ 9,199 $ 7,362
Contract services 5,431 4,693
Other 1,015 861
------- -------
Net trade receivables $15,645 $12,916
------- -------
------- -------
Receivables related to patient services revenues are due primarily from
managed care organizations, patients' private insurance companies and
government payors. Receivables arising from contract 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, 1997.
32
<PAGE>
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):
June 30,
------------------
1997 1996
------- -------
Intangible assets $35,290 $17,861
Less: Accumulated amortization 2,018 896
------- -------
$33,272 $16,965
------- -------
------- -------
Goodwill $32,804 $16,382
Non-compete agreements 175 245
Customer service contracts - 113
Certificates of need 125 158
Other 168 67
------- -------
$33,272 $16,965
------- -------
------- -------
In connection with the Company's acquisitions in 1997 and the Merger in 1996
(Note 1), the Company recorded $17.6 million and $13.6 million of intangible
assets, respectively. Projected future cash flows for two of MHC's 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
Company's policy, the intangible assets related to these Centers were written
down during the six months ended June 30, 1996. Amortization of intangible
assets was $1.4 million, $1.9 million (including the $1.5 million discussed
above), $0.6 million and $0.2 million for the year ended June 30, 1997, for
the six months ended June 30, 1996 and for the years ended December 31, 1995,
and 1994, respectively.
33
<PAGE>
7. EQUIPMENT AND OTHER NOTES PAYABLE
Equipment and other notes payable consists of the following (amounts in
thousands):
June 30,
------------------
1997 1996
------- -------
Notes payable to GE, bearing interest at rates
which range from 9.16 percent to 12.5
percent, maturing at various dates through
August 2004. The notes are secured by
substantially all of the Company's assets. $62,329 $36,072
Notes payable to banks and third parties bearing
interest rates which range from 8.13 percent to
11 percent, maturing at various dates through
September 2000. The notes are primarily secured by
certain buildings and diagnostic equipment. 3,993 2,166
------- -------
Total equipment and other notes payable 66,322 38,238
Less: Current portion 11,901 6,585
------- -------
Long-term equipment and other notes payable $54,421 $31,653
------- -------
------- -------
Scheduled maturities of equipment and other notes payable at June 30, 1997,
are as follows (amounts in thousands):
1998 $11,901
1999 13,574
2000 12,472
2001 8,095
2002 6,840
Thereafter 13,440
-------
$66,322
-------
-------
The terms of the notes payable to GE include certain restrictive
covenants which, among others, limit capital expenditures and restrict
payment of dividends. As of June 30, 1997, the Company was in compliance
with these covenants.
Interest paid, including amounts deferred as part of the debt restructuring,
on debt related to GE for the year ended June 30, 1997, for the six
months ended June 30, 1996 and the years ended December 31, 1995 and 1994,
was $4.0 million, $0.8 million, $1.0 million and $0.6 million, respectively.
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, 1997, are as follows (amounts in thousands):
Capital Operating
------- ---------
1998 $4,107 $16,148
1999 2,258 11,282
2000 1,256 5,831
2001 98 3,346
2002 - 1,230
Thereafter - 2,062
------- ---------
Total minimum lease payments 7,719 $39,899
---------
---------
Less: Amounts representing interest 846
-------
Present value of capital lease
obligations 6,873
Less: Current portion 3,561
-------
Long term capital lease obligations $3,312
-------
-------
As of June 30, 1997, 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 were approximately $24.8 million and $2.6 million,
respectively.
34
<PAGE>
Rental expense for diagnostic equipment and other equipment for the year
ended June 30, 1997, for the six months ended June 30, 1996 and for the years
ended December 31, 1995 and 1994, was $18.3 million, $7.0 million, $14.5
million and $14.6 million, respectively. These amounts include contingent
rental expense of $0.3 million, $0.2 million, $0.5 million and $0.8 million
for the year ended June 30, 1997, for the six months ended June 30, 1996 and
for the years ended December 31, 1995 and 1994, respectively.
The Company occupies office facilities under lease agreements expiring
through June 2007. Rental expense for these facilities for the year ended
June 30, 1997, for the six months ended June 30, 1996 and for the years ended
December 31, 1995 and 1994, was $1.9 million, $0.3 million, $0.6 million and
$0.6 million, respectively.
Under the terms of the amended equipment service agreement with GE (Note 1),
GE is entitled to receive a supplemental service fee equal to 14% of pretax
income, subject to certain adjustments. During the year ended June 30, 1997
the Company recorded a provision of approximately $0.3 million in connection
with this agreement.
InSight is engaged, from time to time, 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.
9. CAPITAL STOCK
WARRANTS - During 1997, InSight issued warrants to purchase 50,000 shares of
its common stock at an exercise price of $5.64 per share to the previous
preferred stockholders of IHC. InSight also issued a warrant to purchase
35,000 shares of its common stock at an exercise price of $5.50 per share to
an investment banking firm. InSight also issued a warrant to purchase 15,000
shares of its common stock at an exercise price of $5.50 per share to a
consultant. In connection with the Merger, 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 IHC.
STOCK OPTIONS - The Company 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 an exercise price of at least the fair market value of its 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. In addition,
MHC has a stock option plan and IHC has two stock option plans which provided
for the granting of incentive or nonstatutory stock options to key employees,
non-employee directors and independent contractors. Pursuant to the Merger,
the Company assumed all of MHC's and IHC's outstanding options at June 26,
1996. No shares are available for future grants under the MHC and IHC plans.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. SFAS No. 123 was issued in 1995 and,
if fully adopted, changes the methods for recognition of cost on plans
similar to those of the Company. Adoption of SFAS No. 123 is optional,
however pro forma disclosures as if the Company had adopted the cost
recognition method are required. Had compensation cost for stock options
awarded under this plan been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have reflected the
following pro forma amounts:
June 30,
-------------------------
1997 1996
---------- ------------
Net Income (Loss): As Reported $1,281,000 $ (979,000)
Pro Forma 966,000 (1,055,000)
Primary EPS: As Reported 0.24 (0.70)
Pro Forma 0.18 (0.76)
35
<PAGE>
The Company may grant options for up to 446,433 shares under one plan and
158,000 shares under the second plan. A summary of the status of the
Company's two stock option plans at June 30, 1997 and 1996 and changes during
the periods then ended is presented below:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1997 June 30, 1996
------------------------- --------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 369,918 $ 2.37 204,068 $3.04
Granted 233,000 6.19 195,850 S3.23
Exercised 4,485 2.50 30,000 0.25
Forfeited - - - -
Expired 25,000 13.85 - -
------- ------ ------- -----
Outstanding at end of period 573,433 $ 3.98 369,918 $3.15
------- ------ ------- -----
------- ------ ------- -----
Exercisable at end of period 296,416 $ 2.12 263,378 $4.25
------- ------ ------- -----
------- ------ ------- -----
Weighted average fair value of
options granted $ 5.04 $2.61
</TABLE>
272,230 of the options outstanding at June 30, 1997 have exercise prices of
$0.10 to $2.50, a weighted average exercise price of $0.86 and a weighted
average remaining contractual life of 6.35 years. 255,430 of these options
are exercisable. 58,000 of the options outstanding at June 30, 1997 have
exercise prices of $3.75 to $5.50, a weighted average exercise price of $5.25
and a weighted average remaining contractual life of 8.98 years. 16,200 of
these options are exercisable. 223,000 of the options outstanding at June
30, 1997 have exercise prices of $6.25 to $7.00, a weighted average exercise
price of $6.30 and a weighted average remaining contractual life of 9.25
years. 4,583 of these options are exercisable. 20,203 of the options
outstanding at June 30, 1997 have exercise prices of $15.64 to $16.20, a
weighted average exercise price of $15.80 and a weighted average remaining
contractual life of 4.19 years. 20,203 of these options are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Black Scholles pricing model with the following assumptions used for the
grants in fiscal periods 1997 and 1996; weighted average risk-free interest
rate of 7.02 percent and 6.75 percent; expected dividend yields of 0.00
percent; and a weighted average contractual life of 8.08 and 9.29 years,
respectively.
10. INCOME TAXES
The provision for income taxes for the year ended June 30, 1997 was computed
using effective tax rates calculated as follows:
Federal statutory tax rate 34.0%
State income taxes, net of federal benefit 1.2
Permanent items, including goodwill, non-deductible
merger costs 41.8
Utilization of deferred tax assets (52.0)
-----
Net effective tax rate 25.0%
-----
-----
36
<PAGE>
The provision for income taxes includes income taxes currently payable and those
deferred because of temporary differences between the financial statements and
tax bases of assets and liabilities. The provision for income taxes for the
year ended June 30, 1997 consisted of the following (amounts in thousands):
Current provision
Federal $ 1,268
State 47
--------
1,315
--------
Deferred taxes arising from temporary differences:
State income taxes (31)
Accrued expenses (629)
Deferred gain on debt restructure (368)
Reserves 31
Other 109
--------
(888)
--------
Total provision $ 427
--------
--------
The components of the Company's deferred tax asset as of June 30, 1997 and 1996,
respectively, which arise due to timing differences between financial and tax
reporting and net operating loss (NOL) carryforwards are as follows:
June 30,
-----------------------
1997 1996
---------- ----------
Reserves $ 1,714 $ 1,683
Accrued expenses
(not currently deductible) 604 1,233
Deferred gain on debt restructure 519 887
Depreciation and amortization (139) 77
Other 550 157
NOL carryforwards 15,748 15,601
Valuation allowances (18,996) (19,638)
--------- ----------
$ - $ -
--------- ----------
--------- ----------
As of June 30, 1997, the Company had NOL 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 NOL carryforwards.
A valuation allowance is provided against the deferred tax asset when it is more
likely than not that 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 has a 401(k) profit sharing plan (Company Plan), which is available
to all eligible employees, pursuant to which the Company matches a percentage of
employee contributions to the Company Plan. Company contributions of $335,000
were made for the year ended June 30, 1997.
The Company, through MHC, had a 401(k) profit sharing plan (MHC Plan) for all
MHC employees, pursuant to which MHC matched a percentage of employee
contributions to the Plan and made additional contributions on behalf of the
employees at the discretion of its Board of Directors. Contributions of
$50,000, $100,000 and $62,000 were made during the six months ended June 30,
1996 and the years ended December 31, 1995 and 1994, respectively. MHC
contributions of $12,000 in 1994 were funded with forfeitures.
The Company, through IHC, had a 401(k) profit sharing plan (IHC Plan) for all
IHC employees, pursuant to which IHC matched a percentage of employee
contributions to the IHC Plan. In 1997, the Company combined the MHC Plan and
the IHC Plan into the Company Plan.
37
<PAGE>
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The Company, through MHC, has direct ownership in two Partnerships at June 30,
1997, both of which operate Centers. In June 1996, the MHC closed one of the
Centers and is currently in the process of dissolving the Partnership. 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. These
Partnerships are accounted for under the equity method since the Company does
not exercise significant control over the operations of these Partnerships or
does not have primary responsibility for the Partnership's long-term debt. Set
forth below is certain financial data of these Partnerships (amounts in
thousands):
June 30,
----------------------------
1997 1996
---------- ----------
Combined Financial Position:
Current assets:
Cash $ 444 $ 549
Trade receivables, less allowances 729 721
Other 21 31
Property and equipment, net 143 442
---------- ----------
Total assets 1,337 1,743
Current liabilities (141) (358)
Due to MHC (49) (269)
Long-term liabilities (40) (226)
---------- ----------
Net assets $ 1,107 $ 890
---------- ----------
---------- ----------
Set forth below are the combined operating results of the Partnerships and the
Company's equity in earnings of the Partnerships (amounts in thousands):
<TABLE>
<CAPTION>
Six
Year Ended Months Ended Years Ended
June 30, June 30, December 31,
------------------------
1997 1996 1995 1994
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Operating Results:
Net revenues $ 4,353 $ 2,346 $ 4,455 $ 13,456
Expenses 3,284 2,002 3,636 9,217
--------- --------- -------- ---------
Net income $ 1,069 $ 344 $ 819 $ 4,239
--------- --------- -------- ---------
--------- --------- -------- ---------
Equity in Earnings:
Share of net income of
Partnerships $ 468 $ 138 $ 348 $ 876
Minority interest - - - (42)
--------- --------- -------- ---------
Equity in earnings of Partnerships $ 468 $ 138 $ 348 $ 834
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
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.
38
<PAGE>
LEASE COMMITMENTS OF THE PARTNERSHIPS exist under various operating leases for
equipment and office space. Future minimum lease payments for the Partnerships'
noncancelable leases as of June 30, 1997, are as follows (amounts in
thousands):
OPERATING
---------
1998 $ 570
1999 142
------
$ 712
------
------
The Company, through IHC, has direct ownership in two Partnerships and one
limited liability company, all of which operate Centers. IHC 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, 1997 and 1996. Set forth below is the summarized
combined financial data of the Company's 50% or less owned and controlled
entities which are consolidated (amounts in thousands):
Year Ended
June 30,
1997
----------
Condensed Combined Statement
of Operations Data:
Net revenues $ 7,106
Expenses 5,151
Provision for center profit distribution 1,019
--------
Net income $ 936
--------
--------
June 30,
-----------------------
1997 1996
----------- ----------
Condensed Combined Balance Sheet Data:
Current assets $ 2,596 $ 2,327
Total assets 4,288 3,955
Current liabilities 727 1,019
Long-term debt 424 416
Minority interest equity 1,702 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 year ended December
31, 1994 were $1.3 million. Substantially all of these revenues relate to
Partnerships that were sold or terminated in 1994.
At June 30, 1996, the Company had 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.
39
<PAGE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (amounts in thousands):
<TABLE>
<CAPTION>
Six Years Ended
Year Ended Months Ended December 31,
June 30, June 30, ------------------------
1997 1996 1995 1994
---------- -------------- ---------- ----------
<C> <C> <C> <C> <C>
Interest paid $ 5,114 $ 1,011 $ 1,411 $ 879
Equipment additions under capital leases 1,779 238 8,117 2,779
Prepaid insurance premiums financed - 208 555 430
Debt and accrued interest extinguished with issuance of
preferred stock - (9,066) - -
Deferred and accrued interest gain on debt restructure - 2,519 - -
Preferred stock issued - 3,375 - -
Cancellation of common stock warrant - (7) - -
</TABLE>
14. SUBSEQUENT EVENT
On October 14, 1997, InSight consummated a recapitalization
(Recapitalization) pursuant to which (a) certain investors affiliated with TC
Group, LLC and its affiliates (collectively, Carlyle), a private merchant
bank headquartered in Washington, D.C., made a cash investment of $25 million
in the Company and received therefor (i) 25,000 shares of newly issued
Convertible Preferred Stock, Series B, par value $0.001 per share (Series B
Preferred Stock), initially convertible, at the option of the holders
thereof, in the aggregate into 2,985,075 shares of common stock, and (ii)
warrants (Carlyle Warrants) to purchase up to 250,000 shares of common stock
at the current exercise price of $10.00 per share; (b) General Electric
Company (GE) (i) surrendered its rights under the amended equipment service
agreement to receive supplemental service fee payments equal to 14% of pretax
income (see Note 8, above) in exchange for (i) the issuance of 7,000 shares
of newly issued Convertible Preferred Stock, Series C, par value $0.001 per
share (Series C Preferred Stock) initially convertible, at the option of the
holders thereof, in the aggregate into 835,821 shares of common stock, and
(ii) warrants (the GE Warrants) to purchase up to 250,000 shares of common
stock at the current exercise price of $10.00 per share, (for which the
Company will record a non-recurring expense of approximately $6.7 million in
the second quarter of fiscal 1998), and (ii) agreed to exchange all of its
InSight Series A Preferred Stock, on the business day (Second Closing) after
all waiting periods with respect to GE's filing under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, have expired or been
terminated, for an additional 20,953 shares of Series C Preferred Stock,
initially convertible, at the option of the holders thereof, in the aggregate
into 2,501,760 shares of common stock; and (c) the Company executed a Credit
Agreement with NationsBank, N.A. pursuant to which NationsBank, as agent,
committed to provide, subject to the satisfaction of customary conditions, a
total of $125 million in senior secured credit, including (i) a $50 million
term loan facility consisting of a $20 million tranche with increasing
amortization over a five year period and a $30 million tranche principally
repayable in years 6 and 7, (ii) a $25 million revolving working capital
facility with a five-year maturity, and (iii) a $50 million acquisition
facility, which may be increased by up to an additional $25 million upon the
satisfaction of certain conditions, including commitments from participating
lenders (Bank Financing).
The terms of the Series B Preferred Stock and the Series C Preferred Stock
(collectively, Preferred Stock) are substantially the same. The Preferred
Stock has a liquidation preference of $1,000 per share. It will participate
in any dividends paid with respect to the common stock. There is no
mandatory or optional redemption provision for the Preferred Stock. The
Series B Preferred Stock is initially convertible, at the option of the
holders thereof, into 2,985,075 shares of common stock, and the Series C
Preferred Stock will, as of the Second Closing, be initially convertible, at
the option of the holders thereof, into 3,337,581 shares of common stock, in
each case at an initial conversion price of $8.375 per share.
For so long as Carlyle and its affiliates own at least 33% of the Series B
Preferred Stock or GE and its affiliates own at least 33% of the Series C
Preferred Stock, respectively, the approval of at least 67% of the holders of
such series of Preferred Stock is required before the Company may take
certain actions including, but not limited to, amending its certificate of
incorporation or bylaws, changing the number of directors or the manner in
which directors are selected, incurring indebtedness in excess of $15 million
in any fiscal year, issuing certain equity securities below the then current
market price or the then applicable conversion price, acquiring equity
interests or assets of entities for consideration equal to or greater than
$15 million, and engaging in
40
<PAGE>
mergers for consideration equal to or greater than $15 million. The Preferred
Stock will vote with the common stock on an as-if-converted basis on all matters
except the election of directors, subject to an aggregate maximum Preferred
Stock percentage of 37% of all votes entitled to be cast on such matters.
Assuming the conversion of all of the Series B Preferred Stock into common stock
and the exercise of all of the Carlyle Warrants, Carlyle would own approximately
31% of the common stock of the Company, on a fully diluted basis. Assuming the
conversion of all of the Series C Preferred Stock after the Second Closing and
the exercise of the GE Warrants, GE would own approximately 34% of the common
stock of the Company, on a fully diluted basis.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the Board) is currently fixed at
nine. Six directors (Common Stock Directors) are to be elected by the common
stockholders, one of whom (Joint Director) is to be proposed by Carlyle and
GE and approved by a majority of the Board in its sole discretion. Of the
three remaining directors (Preferred Stock Directors), two are to be elected
by the holders of the Series B Preferred Stock and one is to be elected by
the holders of the Series C Preferred Stock, in each case acting by written
consent and without a meeting of the common stockholders. As long as Carlyle
and certain affiliates thereof own an aggregate of at least 50% of the Series
B Preferred Stock, the holders of the Series B Preferred Stock will have the
right to elect two Preferred Stock Directors and as long as Carlyle and
certain affiliates thereof own an aggregate of at least 25% of such stock,
such holders will have the right to elect one Preferred Stock Director. As
long as GE and its affiliates own an aggregate of at least 25% of the Series
C Preferred Stock it will have the right to elect one Preferred Stock
Director. If any such ownership percentage falls below
the applicable threshold, the Preferred Stock Director(s) formerly entitled
to be elected by Carlyle or GE, as the case may be, will thereafter be
elected by the common stockholders.
At any time after the first anniversary of the initial funding of the Bank
Financing, all of the Series B Preferred Stock and the Series C Preferred
Stock may be converted into a newly created Convertible Preferred Stock,
Series D, par value $0.001 per share (Series D Preferred Stock). The Series
D Preferred Stock allows the number of directors to be automatically
increased to a number which would permit each of Carlyle and GE, by filling
the newly created vacancies, to achieve representation on the Board
proportionate to their respective common stock ownership percentages on an
as-if-converted basis but would limit such representation to less than two
thirds of the Board of Directors for a certain period of time. The Series D
Preferred Stock has a liquidation preference of $0.001 per share but no
mandatory or optional redemption provision. It will participate in any
dividends paid with respect to the common stock and will be convertible into
6,322,660 shares of common stock. Presently, the Board consists of seven
directors, five of whom are Common Stock Directors and two of whom are
Preferred Stock Directors. GE intends to wait until the Second Closing to
elect its Preferred Stock Director. The vacancy created for the Joint
Director has not yet been filled.
Holders of the Preferred Stock also have a right of first offer with respect
to future sales in certain transactions or proposed transactions not
involving a public offering by the Company of its common stock or securities
convertible into common stock. Holders of the Preferred Stock are also
entitled to certain demand and "piggyback" registration rights.
41
<PAGE>
Set forth below is an unaudited pro forma condensed consolidated balance
sheet as of June 30, 1997, as if the transaction described above had occurred
on June 30, 1997 (amounts in thousands):
Pro Forma
-----------------------------
As Reported Adjustments Total
------------ ------------- -------------
(unaudited)
Current assets $ 24,692 $ 1,477 $ 26,169
Property and equipment, net 34,488 - 34,488
Investment in partnerships 402 - 402
Other assets 5,468 3,100 8,568
Intangible assets 33,272 - 33,272
--------- ----------- ----------
$ 98,322 $ 4,577 $ 102,899
--------- ----------- ----------
--------- ----------- ----------
Current liabilities $ 30,432 $ (10,054) $ 20,378
Long-term liabilities 59,205 (9,276) 49,929
Minority interest 2,000 - 2,000
Stockholders' equity 6,685 23,907 30,592
--------- ----------- ----------
$ 98,322 $ 4,577 $ 102,899
--------- ----------- ----------
--------- ----------- ----------
The unaudited pro forma condensed consolidated balance sheet as of June 30,
1997 gives effect to the issuance of $25 million of Series B Preferred Stock
and the draw down of the $50 million term loan Bank Financing, which was used
to repay approximately $70 million in outstanding notes payable and to pay
approximately $5 million in transaction costs.
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's next Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's next Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the Securities and
Exchange Commission in connection with the Company's next Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the Securities and
Exchange Commission in connection with the Company's next Annual Meeting of
Stockholders, and is incorporated herein by reference.
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
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 14 (a) (2). FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
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.
*2.2 Asset Purchase and Liabilities Assumption Agreement dated as of
January 3, 1997, by and among InSight Health Corp., Mobile
Imaging Consortium, Limited Partnership and Mobile Imaging
Consortium-New Hampshire, previously filed and incorporated
herein by reference from the Company's Current Report on Form
8-K, filed June 16, 1997.
*2.3 Amendment No. 1 to Asset Purchase and Liabilities Assumption
Agreement dated as of May 30, 1997, by and among InSight Health
Corp., Mobile Imaging Consortium, Limited Partnership and
Mobile Imaging Consortium-New Hampshire, previously filed
and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 16, 1997.
43
<PAGE>
*2.4 Asset Purchase and Liabilities Assumption Agreement dated as of
June 20, 1997, by and between InSight Health Corp. and Desmond
L. Fischer, M.D. (d/b/a Chattanooga Outpatient Center),
previously filed and incorporated herein by reference from the
Company's Current Report on Form 8-K, filed July 14, 1997.
*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 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series B, of InSight, filed
herewith.
3.3 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series C, of InSight, filed
herewith.
3.4 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series D, of InSight, filed
herewith.
3.5 Amended and Restated Bylaws of InSight, filed herewith.
*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.
*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.
44
<PAGE>
*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, 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, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K for the six months ended June 30, 1996.
*10.18 Nonqualified Stock Option Agreement, dated August 17, 1994,
between MHC and Ronald G. Pantello, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K for the six months ended June 30, 1996.
10.19 Warrant Certificate No. S-1 dated August 14, 1996 in the name
of Shattuck Hammond Partners, Inc., filed herewith.
10.20 Warrant Certificate No. L-1 dated March 11, 1997 in the name of
Anthony J. LeVecchio, filed herewith.
10.21 Form of Stock Option Agreement between InSight and non-employee
directors of InSight relating to InSight's 1996 Directors' Stock
Option Plan, filed herewith.
10.22 Form of Stock Option Agreement between InSight and employees of
InSight relating to InSight's 1996 Employee Stock Option Plan,
filed herewith.
21 Subsidiaries of InSight, filed herewith.
* Previously filed.
45
<PAGE>
ITEM 14(b). REPORTS ON FORM 8-K. The Company filed a Current Report on
Form 8-K with the Securities and Exchange Commission on June 19,
1997, under Item 2 thereof, reporting the acquisition of Maine
Imaging Consortium.
ITEM 14(c). The Exhibits described above in Item 14(a)(3) are attached
hereto or incorporated by reference herein, as noted.
ITEM 14(d). Not applicable.
46
<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 14, 1997
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------- ------- ------
<S> <C> <C>
/s/ E. LARRY ATKINS Director, President and October 14, 1997
- -------------------------- Chief Executive Officer
E. Larry Atkins (Principal Executive Officer)
/s/ THOMAS V. CROAL Executive Vice President and October 14, 1997
- -------------------------- Chief Financial Officer
Thomas V. Croal (Principal Accounting Officer)
/s/ GRANT R. CHAMBERLAIN Director October 14, 1997
- --------------------------
Grant R. Chamberlain
/s/ DAVID W. DUPREE Director October 14, 1997
- --------------------------
David W. Dupree
/s/ FRANK E. EGGER Director October 14, 1997
- --------------------------
Frank E. Egger
/s/ LEONARD H. HABAS Director October 14, 1997
- --------------------------
Leonard H. Habas
/s/ RONALD G. PANTELLO Director October 14, 1997
- --------------------------
Ronald G. Pantello
/s/ GLENN A. YOUNGKIN Director October 14, 1997
- --------------------------
Glenn A. Youngkin
</TABLE>
47
<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 October 14, 1997. 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
October 14, 1997
48
<PAGE>
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning of Cost and End of
Period Expenses Other Period
------------ ----------- --------------- -------------
<S> <C> <C> <C> <C>
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) $ 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
---------- --------- ---------- -----------
---------- --------- ---------- -----------
June 30, 1997:
Allowance for doubtful accounts $ 2,289 $ 1,506 $ (1,453)(A) $ 2,342
Allowance for contractual adjustments 5,519 17,483 (17,853)(A) 5,149
---------- --------- ---------- -----------
Total $ 7,808 $18,989 $(19,306) $ 7,491
---------- --------- ---------- -----------
---------- --------- ---------- -----------
</TABLE>
(A) Write offs of uncollectable accounts.
(B) MHC sold all inventory on hand in 1994.
(C) In connection with the Merger, MHC acquired the valuation and
qualifying accounts related to IHC.
49
<PAGE>
INSIGHT HEALTH SERVICES CORP.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF CONVERTIBLE PREFERRED STOCK, SERIES B
(Pursuant to Section 151(g) of the General Corporation
Law of the State of Delaware.)
InSight Health Services Corp., a corporation organized and existing under
the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY
CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the
Company (the "Board") by the certificate of incorporation of the Company, as
amended, the Board unanimously adopted the following resolutions on October 14,
1997 authorizing the issuance of the Series B Convertible Preferred Stock of the
Company, which resolutions are still in full force and effect and are not in
conflict with any provisions of the Certificate of Incorporation or Bylaws of
the Company:
RESOLVED, that pursuant to authority vested in the Board by the
Certificate of Incorporation, the Board does hereby establish a series of
preferred stock of the Company from the Company's authorized class of
3,500,000 shares of $.001 par value preferred shares, such series to consist
of 25,000 shares, and does hereby fix and state the voting rights,
designation, powers, preferences and relative participating, optional or
other special rights and the qualifications, limitations or restrictions
thereof, as follows:
SECTION 1. DESIGNATION.
The Preferred Stock created and authorized hereby shall be designated as
the "Convertible Preferred Stock, Series B" (hereinafter called the "SERIES B
PREFERRED STOCK"). The number of shares of Series B Preferred Stock shall be
25,000 and no more.
SECTION 2. RANK.
The Series B Preferred Stock shall, with respect to dividend distributions
and distributions upon the liquidation, winding up and dissolution of the
Company, rank senior to all classes of Common Equity of the Company, and to each
other class or series of Capital Stock of the Company (except for the
Convertible Preferred Stock, Series A (hereinafter called the "SERIES A
PREFERRED STOCK")) the terms of which do not expressly provide that it ranks
senior to or on a parity with the Series B Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding up and dissolution
of the Company (collectively referred to with the Common Equity of the Company
as "JUNIOR SECURITIES"). The Series B Preferred Stock shall, with respect to
dividend distributions and distributions upon the liquidation, winding up and
dissolution of the Company, rank on a parity with any class or series of Capital
Stock hereafter created which expressly provides that it ranks on a parity with
the Series B Preferred Stock as to dividend distributions and distributions upon
the liquidation, winding up and dissolution of the Company (shares of such a
class or series, together with shares of the Series A Preferred Stock, shares of
the Convertible Preferred Stock, Series C (the "SERIES C PREFERRED STOCK"), and
shares
<PAGE>
of the Convertible Preferred Stock, Series D (the "SERIES D PREFERRED
STOCK") are, collectively, the "PARITY SECURITIES"); provided that any purported
Parity Securities that were not created, authorized or issued in accordance with
Section 11 hereof shall be deemed to be Junior Securities and not Parity
Securities. The Series B Preferred Stock shall, with respect to dividend
distributions and distributions upon the liquidation, winding up and dissolution
of the Company, rank junior to each class or series of Capital Stock hereafter
issued in accordance with Section 11 hereof and which expressly provides that it
ranks senior to the Series B Preferred Stock as to dividend distributions or
distributions upon the liquidation, winding up and dissolution of the Company
("SENIOR SECURITIES"). Any purported Supervoting Securities that were not
created, authorized or issued in accordance with Section 11 hereof shall be
deemed for all purposes related to voting rights to be identical to Common
Stock, including, without limitation, as to voting rights with respect to the
election of directors and all other matters submitted to a vote of stockholders.
SECTION 3. DIVIDENDS.
(a) The Company may (when, as and if declared by the Board of Directors
of the Company) declare and pay dividends, out of the entire assets and funds of
the Company legally available therefor to the holders of the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock and the common stock, $.001 par value per share, of the Company
(the "COMMON STOCK") ratably based on the number of shares of Common Stock held
by each such Holder (assuming full conversion of all such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series
D Preferred Stock into Common Stock); PROVIDED, HOWEVER, that no dividend
whatsoever shall be paid, and no distribution shall be made, on any Common Stock
unless and until each holder of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, and Series D Preferred Stock shall have been
paid in full its respective pro rata portion of such dividend.
(b) Holders of shares of the Series B Preferred Stock shall be entitled
to receive the dividends provided for in Section 3(a) hereof in preference to
and in priority over any dividends upon any of the Junior Securities, except
for the Common Stock.
(c) Holders of shares of the Series B Preferred Stock shall be entitled
to receive the dividends provided for in Section 3(a) hereof on a pro rata basis
with respect to any dividends upon any Parity Securities.
SECTION 4. LIQUIDATION PREFERENCE.
(a) Upon any Liquidating Event with respect to the Company, the Holders
of shares of Series B Preferred Stock then outstanding shall be entitled to be
paid, out of the assets of the Company available for distribution to its
stockholders, $1,000 per share of Series B Preferred Stock (the "LIQUIDATION
PREFERENCE"), plus an amount in cash equal to any declared but unpaid dividends
thereon, before any payment shall be made or any assets distributed to the
holders of any of the Junior Securities, including, without limitation, Common
Stock. Except as provided in the preceding sentence, holders of shares of
Series B Preferred Stock shall not be entitled to any distribution in the event
of liquidation, dissolution or winding up of the affairs of the
2
<PAGE>
Company. If the assets of the Company are not sufficient to pay in full the
liquidation payments payable to the holders of outstanding shares of the
Series B Preferred Stock and all Parity Securities, then the holders of all
such shares shall share equally and ratably in such distribution of assets of
the Company in accordance with the amounts which would be payable on such
distribution if the amount to which the holders of outstanding shares of
Series B Preferred Stock and the holders of outstanding shares of all Parity
Securities are entitled were paid in full.
(b) "LIQUIDATING EVENT" shall mean, with respect to any Person, any of
the following events: (i) the commencement by such Person of a voluntary case
under the bankruptcy laws of the United States, as now or hereafter in effect,
or the commencement of an involuntary case against such Person with respect to
which the petition shall not be controverted within 15 days, or be dismissed
within 60 days, after commencement thereof; (ii) the appointment of a custodian
for, or the taking charge by a custodian of, all or substantially all of the
property of such Person; (iii) the commencement by such Person of any proceeding
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to such Person; (iv) the
commencement against such Person of any proceeding set forth in the preceding
clause (iii), which is not controverted within 10 days thereof and dismissed
within 60 days after the commencement thereof; (v) the adjudication of such
Person insolvent or bankrupt, or the adoption by such Person of a plan of
liquidation; (vi) the occurrence of any Change of Control with respect to
such Person or (vii) the filing of a certificate of dissolution in respect of
the Company with the Secretary of State of the State of Delaware; in any of
cases (i) through (vi) above, in a single transaction or series of related
transactions.
SECTION 5. TYPE A CONVERSION
(a) Each holder of Series B Preferred Stock shall have the right, at its
option, at any time, to convert, subject to the terms and provisions of this
Section 5, all, but not less than all, of its Series B Preferred Stock then
outstanding into such number of fully paid and non-assessable shares of Common
Stock as results from dividing (i) the sum of (A) the aggregate Liquidation
Preference of all shares of Series B Preferred Stock to be converted plus (B)
any declared but unpaid dividends on such shares, by (ii) the applicable
Conversion Price on the Conversion Date. In addition, and without limiting the
right to conversion in whole set forth above, substantially contemporaneously
with any Partial Conversion Event, each holder of Series B Preferred Stock shall
have the right, at its option, to convert (which conversion, if such option is
exercised, shall be deemed to occur on such Partial Conversion Event), subject
to the terms and provisions of this Section 5, all or any part of its Series B
Preferred Stock then outstanding into such number of fully paid and
non-assessable shares of Common Stock as results from dividing (i) the sum of
(A) the aggregate Liquidation Preference of all shares of Series B Preferred
Stock to be converted plus (B) any declared but unpaid dividends on such shares,
by (ii) the applicable Conversion Price (as defined below) on the Conversion
Date. The person or persons entitled to receive the shares of Common Stock upon
conversion of such shares of Series B Preferred Stock shall be treated for all
purposes as having become the record holder or holders of such shares of Common
Stock on the Conversion Date and such conversion shall be at the Conversion
Price in effect at such time.
3
<PAGE>
(b) In order to convert all or any portion of its outstanding Series B
Preferred Stock into shares of Common Stock pursuant to this Section 5, the
holder of such Series B Preferred Stock shall deliver certificates representing
the shares of Series B Preferred Stock to be converted to the Company at its
principal office, together with written notice that it elects to convert those
shares of Series B Preferred Stock into shares of Common Stock in accordance
with the provisions of this Section 5. Such notice shall specify the number of
shares of Series B Preferred Stock to be converted and the name or names in
which the holder wishes the certificates for shares of Common Stock to be
registered.
(c) Upon any Type A Conversion, pursuant to this Section 5 and Section 5
of the certificate of designation of Series C Preferred Stock, of all of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock, the
Company shall immediately file a certificate with the Secretary of State of the
State of Delaware, pursuant to Section 151(g) of the Delaware General
Corporation Law, setting forth a resolution or resolutions adopted by the Board
of Directors of the Company that none of the authorized shares of Series D
Preferred Stock are outstanding and that none will be issued subject to the
Series D Certificate of Designation.
SECTION 6. TYPE B CONVERSION
(a) The right to conversion set forth in this Section 6 shall be in
addition to, and not in lieu of, the conversion rights set forth in Section 5.
(b) At any time on or after the Type B Trigger Date, the Majority Holders
may elect to deliver an irrevocable Type B Conversion notice (the "TYPE B
CONVERSION NOTICE") to the Company; PROVIDED, HOWEVER, that no such Type B
Conversion Notice shall be effective unless substantially contemporaneously with
the delivery of such Type B Conversion Notice, Majority Holders of the Series C
Preferred Stock shall deliver a Type B Conversion Notice (as defined in the
Certificate of Designation relating to the Series C Preferred Stock) to the
Company. The date of delivery to the Company of a Type B Conversion Notice
shall be denominated herein a "TYPE B EVENT DATE" or a "CONVERSION DATE". Upon
receipt of a Type B Conversion Notice, the Company shall as soon as practicable
deliver a copy of such Type B Conversion Notice to each holder of Series B
Preferred Stock and each holder of Series C Preferred Stock.
(c) On the Type B Event Date, each share of Series B Preferred Stock then
outstanding shall automatically be converted into such number of fully paid and
non-assessable shares of Series D Preferred Stock as results from dividing (i)
the sum of (A) the aggregate Liquidation Preference of such share of Series B
Preferred Stock plus (B) any declared but unpaid dividends on such share, by
(ii) the product of ten (10) times the applicable Conversion Price on the
Conversion Date. The person or persons entitled to receive the shares of Series
D Preferred Stock upon conversion of such shares of Series B Preferred Stock
shall be treated for all purposes (including without limitation voting rights)
as having become the record holder or holders of such shares of Series D
Preferred Stock on the Type B Event Date, whether or not such person or persons
deliver its certificates for shares of Series B Preferred Stock to the Company
on the Type B Event Date.
4
<PAGE>
(d) As soon as practicable after the Type B Event Date, each holder of
Series B Preferred Stock shall deliver its certificates for shares of Series B
Preferred Stock to the Company at its principal office. Except as provided in
this Certificate of Designation, all rights with respect to such Series B
Preferred Stock shall terminate on the Type B Event Date, and on such Type B
Event Date the holders of the shares of Series D Preferred Stock into which the
shares of Series B Preferred Stock were converted shall have all of the rights
accorded to holders of the Company's Series D Preferred Stock.
(e) The rights of holders of shares of Series B Preferred Stock pursuant
to this Section 6 shall not be transferable, except to an Initial Purchaser
Affiliate.
SECTION 7. GENERAL PROVISIONS RELATING TO CONVERSION
The following provisions shall be applicable to any conversion pursuant to
either Section 5 or Section 6 hereof.
(a) As promptly as practicable after the surrender as hereinabove
provided of certificates representing shares of Series B Preferred Stock
converted or to be converted into shares of Common Stock or Series D
Preferred Stock, the Company shall deliver or cause to be delivered to the
holder, or the holder's designee, certificates representing the number of
fully paid and non-assessable shares of Common Stock or Series D Preferred
Stock into which the shares of Series B Preferred Stock are converted
(including any adjustment pursuant to Section 8(b) below) and, if less than
the entire number of shares of Series B Preferred Stock represented by the
certificate or certificates surrendered is to be converted, a new certificate
for the number of shares of Series B Preferred Stock not so converted. So
long as any shares of Series B Preferred Stock remain outstanding, the
Company shall not close its Common Stock transfer books. The issuance of
certificates representing shares of Common Stock or Series D Preferred Stock
issued upon the conversion of shares of Series B Preferred Stock shall be
made without charge to the holder of Series B Preferred Stock for any tax in
respect of the issuance of such certificates (other than any transfer,
withholding or other tax if the shares of Common Stock or Series D Preferred
Stock are to be registered in a name different from that of the registered
holder of Series B Preferred Stock).
(b) No fractional shares of Common Stock or scrip representing
fractional shares of Common Stock or Series D Preferred Stock shall be issued
upon any conversion of any shares of Series B Preferred Stock, and the number
of shares of Common Stock or Series D Preferred Stock to be issued shall be
rounded up to a whole share.
(c) The Company shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock and preferred stock, par
value $.001 per share, solely for the purpose of effecting the conversion of
shares of Series B Preferred Stock and the Series C Preferred Stock and the
issuance of Common Stock in respect of the Warrants and the GE Warrants, the
full number of whole shares of Common Stock and Series D Preferred Stock then
deliverable upon the conversion of all shares of Series B Preferred Stock and
Series C Preferred Stock then outstanding and the issuance of Common Stock in
respect of the Warrants and the GE Warrants. The Company shall take at all
times such corporate action as shall be necessary in
5
<PAGE>
order that the Company may validly and legally issue fully paid and
non-assessable shares of Common Stock or Series D Preferred Stock upon the
conversion of shares of Series B Preferred Stock in accordance with the
provisions of Section 5 and Section 6, the conversion of shares of Series C
Preferred Stock and the issuance of Common Stock in respect of the Warrants
and the GE Warrants. If at any time the number of authorized but unissued
shares of Common Stock or Series D Preferred Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series B
Preferred Stock, the conversion of all then outstanding shares of Series C
Preferred Stock and the issuance of Common Stock in respect of the Warrants
and the GE Warrants, in addition to such other remedies as shall be available
to the holders of the Series B Preferred Stock, the Company shall forthwith
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock or Series D Preferred Stock to such numbers
of shares as shall be sufficient for such purpose, including but not limited
to promptly calling and holding a meeting of the Company's stockholders, at
which the Company's stockholders shall vote on a proposed amendment to the
Certificate of Incorporation that would so increase the number of authorized
shares of Common Stock or preferred stock, par value $.001 per share, as
appropriate, a favorable vote for which amendment shall have been recommended
to the Company's stockholders by the Board of Directors, pursuant to a duly
and validly adopted resolution of the Board of Directors setting forth the
amendment proposed and declaring its advisability, all in accordance with
Section 242 of the Delaware General Corporation Law; and, in case of an
increase in the number of authorized shares, of such preferred stock, the
Board of Directors shall promptly cause to become effective a certificate of
increase pursuant to Section 151 of the Delaware General Corporation Law.
(d) If any shares of Common Stock or Series D Preferred Stock to be
reserved for the purpose of conversion of Series B Preferred Stock require
registration or listing with, or approval of, any governmental authority,
stock exchange, NASD Inc., Nasdaq or other regulatory body under any federal
or state law, federal or state regulation, rule of NASD Inc., Nasdaq or
otherwise, before such shares may be validly issued or delivered upon
conversion, the Company shall, in good faith and as expeditiously as
practicable, endeavor to secure such registration, listing or approval, as
the case may be.
(e) All shares of Common Stock or Series D Preferred
Stock that may be issued upon conversion of the Series B Preferred Stock
shall upon issuance by the Company be validly issued, fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof.
(f) In the event of any taking by the Company of a
record of the holders of any class of Capital Stock for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of Capital Stock or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Series B
Preferred Stock, at least 20 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right.
6
<PAGE>
(g) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issuance or sale of securities or any other action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but shall at all times in good
faith assist in the carrying out of all the provisions of this Section 7 and
Sections 5, 6 and 8 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
shares of Series B Preferred Stock against impairment of any kind.
SECTION 8. CONVERSION PRICE.
(a) As used herein, the "Conversion Price" shall initially be $8.375 per
share of Common Stock, subject to adjustment as set forth below. In order to
prevent the dilution of the rights granted hereunder, the Conversion Price shall
be subject to adjustment from time to time as provided in this Section 8.
(b) If and whenever the Company issues or sells or, in accordance with
Section 8(c), is deemed to have issued or sold, any share of Common Equity
without consideration or for a consideration per share less than the Conversion
Price in effect immediately prior to such issuance or sale, the Conversion Price
in effect immediately prior to such time shall immediately be reduced to the
price determined by dividing (i) an amount equal to the sum of (A) the number of
shares of Common Equity outstanding immediately prior to such issuance
multiplied by the Conversion Price in effect immediately prior to such issuance,
and (B) the consideration, if any, received by the Company upon such issuance,
by (ii) the total number of shares of Common Equity outstanding immediately
after such issuance. Notwithstanding the foregoing, there shall be no
adjustment to the Conversion Price with respect to (i) the granting of stock
options to employees of the Company authorized but not granted as of the Initial
Issue Date for an aggregate of up to 300,000 shares of Common Equity (as such
number of shares is equitably adjusted for subsequent stock splits
reclassifications, stock combinations, stock dividends and recapitalizations),
or (ii) the issuance upon exercise of up to 300,000 shares of Common Equity (as
such number of shares is equitably adjusted for subsequent stock splits, stock
combinations, stock dividends and recapitalizations) in connection with the
stock options described in clause (i) of this sentence.
(c) For purposes of determining the adjusted Conversion Price under
Section 8(b) above, the following shall be applicable:
(1) CONSIDERATION. If any Common Equity, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for
cash, the consideration received therefor shall be deemed to be the cash
amount received by the Company therefor (which, in the case of any public
offering of such securities for cash, shall not be reduced for any
underwriters discount, and in no event shall be reduced by the amount of
any reasonable expenses actually paid by the Company in connection
therewith). In case any Common Equity, Options or Convertible Securities
are issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by
7
<PAGE>
the Company shall be the fair market value of such consideration. In
case any Common Equity, Options or Convertible Securities are issued to
the owners of the other constituent entity in connection with any merger
in which the Company or any Subsidiary of the Company is a constituent
entity, the amount of consideration for such Common Equity, Options or
Convertible Securities shall be deemed to be the fair market value of
such portion of the net assets and business of such other constituent
entity as is fairly attributable to such Common Equity, Options or
Convertible Securities, as the case may be. The fair market value of any
consideration other than cash shall be determined jointly by the Company
and the Majority Holders. If such parties are unable to reach agreement
within a reasonable period of time, such fair market value shall be
determined by an appraiser jointly selected by the Company and the
Majority Holders. If such parties are unable to reach agreement within a
reasonable period of time, such fair market value shall be determined by
an appraiser reasonably selected by the Company and reasonably approved
by the Majority Holders. The determination of such appraiser shall be
final and binding on the Company and the holders of the shares of Series
B Preferred Stock, and the fees and expenses of such appraiser shall be
paid by the Company, unless the fair market value determined by such
appraiser is less than five percent (5%) above the value proposed in
writing by the Company and rejected by the Majority Holders prior to the
selection of such appraiser, in which event the fees and expenses of such
appraiser shall be for the account of the holders of the then outstanding
shares of Series B Preferred Stock (on a pro rata basis).
(2) OPTIONS AND CONVERTIBLE SECURITIES. In the case of the granting
or sale of any Option or Convertible Security (whether or not at the time
convertible, exercisable or exchangeable):
(A) the aggregate maximum number of shares of Common Equity
deliverable, directly or indirectly, upon exercise of any
Option shall be deemed to have been issued at the
time such Option was granted and for a consideration equal
to the (i) consideration (determined in the manner provided in
subsection (1) above), if any, received by the Company upon the
issuance of such Option plus (ii) the minimum purchase price
provided in such Option for the Common Equity covered thereby,
up to an amount equal to the Conversion Price in effect at the
time such Option was granted;
(B) the aggregate maximum number of shares of Common Equity
deliverable upon conversion of or in exchange for any such
Convertible Security, or upon the exercise of any Option to
purchase or acquire any Convertible Security and the
subsequent conversion or exchange thereof, shall be deemed to
have been issued at the time such Convertible Security was
issued or such Option was issued and for a consideration equal
to the consideration, if any, received by the Company for any
such Convertible Security and any related Option, plus the
additional consideration (determined in the manner provided in
subsection (1)
8
<PAGE>
above), if any, to be received by the Company upon the
conversion or exchange of such Convertible Security, or upon
the exercise of any related Option to purchase or acquire any
Convertible Security and the subsequent conversion or exchange
thereof;
(C) on any change in the number of shares of Common Equity
deliverable, directly or indirectly, upon conversion, exercise
or exchange of any such Option or Convertible Security or any
change in the consideration to be received by the Company upon
such exercise, conversion or exchange, including, but not
limited to, a change resulting from the anti-dilution
provisions thereof, the Conversion Price as then in effect
shall forthwith be readjusted to such Conversion Price as would
have been obtained had an adjustment been made upon the
issuance of such Option or Convertible Security upon the basis
of such change;
(D) if the Conversion Price shall have been adjusted upon the
issuance of any such Option or Convertible Security, no further
adjustment of the Conversion Price shall be made for the actual
issuance of Common Equity upon any exercise, conversion, or
exchange thereof;
provided, however, that none of the events set forth in Section 8(c)(2)(A)
through 8(c)(2)(D), inclusive, shall result in any increase in the
Conversion Price.
(3) INTEGRATED TRANSACTION. In case any Option is issued in
connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options shall be deemed to have been issued without consideration.
(4) TREASURY SHARES. The number of shares of Common Equity
outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held shall be considered an issuance or sale of Common Equity.
(5) RECORD DATE. If the Company takes a record of the holders of
Common Equity for the purpose of entitling them (A) to receive a dividend
or other distribution payable in Common Equity, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Equity, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issuance or sale of the shares of Common Equity deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(d) If the Company at any time subdivides (by any stock split, stock
dividend, reclassification, recapitalization or otherwise) one or more classes
of its outstanding shares of Common Equity into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced. If the Company at any time combines
9
<PAGE>
(by reverse stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination shall be proportionately
increased.
(e) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's
assets or other transaction, in each case which is effected in such a way
that the holders of Common Equity are entitled to receive (either directly or
upon subsequent liquidation) stock, securities, cash, debt instruments or
assets with respect to or in exchange for Common Equity is referred to herein
as a "CORPORATE CHANGE." In case of any Corporate Change, each share of
Series B Preferred Stock then outstanding will become convertible only into
the kind and amount of securities, cash and other property receivable upon
such Corporate Change by the holder of the number of shares of Common Stock
into which such share of Series B Preferred Stock was convertible immediately
prior thereto (assuming such holder of Common Stock failed to exercise any
rights of election). The Company shall not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor
entity (if other than the Company) resulting from consolidation or merger or
the entity purchasing such assets assumes by written instrument the
obligation to deliver to the holders of shares of Series B Preferred Stock
such shares of stock, securities, cash, debt instruments or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
(f) If any event occurs of the type contemplated by the provisions of
this Section 8 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company's Board of
Directors shall make an appropriate adjustment in the Conversion Price so as
to protect the rights of the holders of the shares of Series B Preferred
Stock; provided that no such adjustment shall increase the Conversion Price
obtainable as otherwise determined pursuant to this Section 8.
(g) If the Company declares or pays a dividend upon the Common Equity
payable otherwise than out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles, consistently
applied) except for a stock dividend payable in shares of Common Stock (a
"LIQUIDATING DIVIDEND"), then the Company shall pay to each holder of a share
of Series B Preferred Stock at the time of payment thereof the Liquidating
Dividend which would have been paid to such holder on the Common Stock such
holder would have owned had such holder fully exercised its right to convert
the shares of Series B Preferred Stock into shares of Common Stock
immediately prior to the date on which a record is taken for such Liquidating
Dividend, or, if no record is taken, the date as of which the record holders
of Common Equity entitled to such dividends are to be determined; provided,
however, that if a Liquidating Dividend would involve the declaration or
payment as a dividend of at least the lesser of (i) twenty percent (20%) of
the Company's assets and (ii) Five Million Dollars ($5,000,000), then such
Liquidating Dividend shall, at the option of the Majority Holders, be deemed
to be a Liquidating Event and the rights of the holders of the shares of
Series B Preferred Stock upon such Liquidating Event shall be governed by
Section 4 hereof.
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<PAGE>
(h) Any transaction approved by the unanimous vote of
the Acquisitions Committee or the unanimous vote of the Board pursuant to
Section 10(c)(4) hereof shall not result in any adjustment to the Conversion
Price in effect as of the closing of such transaction.
SECTION 9. NO REDEMPTION.
The shares of Series B Preferred Stock shall not be
subject to mandatory redemption by the Company.
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SECTION 10. VOTING RIGHTS AND RELATED PROVISIONS.
(a) The Holders of shares of the Series B Preferred Stock will have
the right to vote with the holders of Common Stock and the holders of the
Series C Preferred Stock with respect to all matters submitted to a
shareholder vote, except for the election of directors, which will be
governed by Section 10(b) below. Each Holder of Series B Preferred Stock
will have one vote for every share of Common Stock into which each share of
Series B Preferred Stock is convertible pursuant to Sections 5 and 7 hereof
as of the record date for such vote; provided, however, that the aggregate
number of votes under this Section 10(a), when combined with the aggregate
number of votes attributable to the holders of the Series C Preferred Stock
pursuant to Section 10(a) of the Certificate of Designation with respect to
the Series C Preferred Stock, with respect to any given matter submitted to a
shareholder vote, shall not exceed 37% of the total number of votes eligible
to be cast with respect to such matter (the "AGGREGATE VOTING LIMITATION").
In order to effectuate the Aggregate Voting Limitation, the eligible votes
allocable to each holder of shares of Series B Preferred Stock and Series C
Preferred Stock shall be reduced, on a pro rata basis based on the percentage
of aggregate Series B Preferred Stock and Series C Preferred Stock
liquidation preference attributable to the shares owned by such holder, to
the highest whole number consistent with the Aggregate Voting Limitation.
Any shares of Series B Preferred Stock or Series C Preferred Stock held by
the Company or any Subsidiary of the Company shall not have voting rights
hereunder and shall not be counted in determining the presence of a quorum or
in calculating any percentage of shares under this Section 10.
(b) The provisions set forth in this Section 10(b) shall govern the
rights of the holders of the Series B Preferred Stock to elect directors of
the Company:
(1) SERIES B DIRECTORS; JOINT DIRECTOR.
(A) The number of directors of the Company shall be as from time
to time fixed by, or determined in the manner provided in, the Certificate
of Incorporation and the Bylaws of the Company (subject, in all respects,
to the protective provisions contained in Section 11 hereof). Prior to a
Type B Event Date, the number of directors shall be no less than eight (8)
nor more than nine (9), of which one member shall be the Joint Director.
Two of such directors shall be designated as "SERIES B DIRECTORS" and shall
be elected by the Majority Holders and one such director shall be
designated as "Joint Director" and shall be an Independent director
nominated by the Majority Holders of the Series B Preferred Stock and the
Majority Holders of the Series C Preferred Stock, approved by the Board of
Directors in its sole discretion. Unless a Type B Conversion Notice has
been given, one Series B Director shall automatically be removed if the
aggregate liquidation preference with respect to the Series B Preferred
Stock owned by the Initial Purchaser and the Initial Purchaser Affiliates,
taken as a whole, falls below 50% but is no less than 25% of the total
liquidation preference of the shares of Series B Preferred Stock outstanding
on the Initial Issue Date. Unless a Type B Conversion Notice has been
given, both Series B Directors shall automatically be removed if the
aggregate liquidation preference with respect to the Series B Preferred
Stock owned by the Initial Purchaser and the Initial Purchaser Affiliates,
taken as a whole, falls below
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25% of the total liquidation preference of the shares of Series B Preferred
Stock outstanding on the Initial Issue Date. Prior to a Type B Event Date,
the Majority Holders shall have the exclusive right to remove such Series B
Director or Series B Directors without cause at any time and to designate
another person or persons as the Series B Director or Series B Directors.
(B) The Preferred Stock Directors shall be divided into three (3)
classes as nearly equal in number as possible, with the term of office of
the first Preferred Stock Director to be nominated and elected by the
holders of the Series B Preferred Stock, at their option at any time after
the initial issuance of the shares of Series B Preferred Stock, to expire
at the annual meeting of stockholders held in 1998, the term of office of
the second Preferred Stock Director to be nominated and elected by the
holders of the Series B Preferred Stock upon initial issuance of the shares
of Series B Preferred Stock to expire at the annual meeting of stockholders
held in 2000, the term of office of the Preferred Stock Director to be
nominated and elected by the holders of the Series C Preferred Stock upon
initial issuance of the shares of Series C Preferred Stock to expire at the
annual meeting of stockholders held in 1999, and the term of office of the
Joint Director to expire at the annual meeting of stockholders for 1997.
At each annual meeting of stockholders after such initial classification
and election, directors elected to succeed those directors whose terms
expire at such annual meeting shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election.
(C) Upon a Type B Event Date, any Series B Director already
serving as a member of the Board shall continue to serve in such position
until the expiration of his term and the election of his successor or until
his earlier death, removal, resignation or retirement. After a Type B Event
Date, the Joint Director and the Series B Director or Directors shall be
subject to removal only for cause and only by the affirmative vote of
eighty percent (80%) of the combined voting power of the outstanding shares
of the Corporation entitled to vote. The Preferred Stock Directors and the
Joint Director shall not be removed without cause otherwise than as
described in this Section 10(b)(1).
(D) After a Type B Event Date, the Board of Directors shall
comprise: (i) one Joint Director, until the expiration of his term, as
provided herein; (ii) three Preferred Stock Directors, until the expiration
of their respective terms, after which time such positions previously
elected by holders of the series of Preferred Stock that gave the Type B
Conversion Notice shall be subject to election by holders of shares of
Series D Preferred Stock, subject to the limitations contained in the
Series D Certificate of Designation; (iii) not less than four (4) nor more
than five (5) additional directors elected by holders of shares of Common
Equity and Series D Preferred Stock, subject to the limitations contained
in the Series D Certificate of Designation; and (iv) such number of other
directors (the "Conversion Directors") elected following a Type B Event
Date by the holders of shares of Series D Preferred Stock as is determined
pursuant to the Series D Certificate of Designation.
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(2) With respect to filling the vacancy on the Board of Directors
with the initial Joint Director, the holders of shares of Series B
Preferred Stock and Series C Preferred Stock shall give written notice to
the Secretary of the Company of the identity of the person nominated by
such holders. Such written notice shall be executed, manually, or by
photocopy or facsimile, in any number of counterparts, by the Majority
Holders of the Series B Preferred Stock and by the Majority Holders of the
Series C Preferred Stock. The person so nominated shall be "independent,"
which means that such person shall not be a director, officer, or employee
or affiliate (as defined in Section 203(c) of the Delaware General
Corporation Law) of any of the holders of Series B Preferred Stock or
Series C Preferred Stock or the Company. Upon receipt of such written
notice, the Board of Directors shall have ten (10) business days in which
to approve or disapprove such nominee. If the Board of Directors approves
such nominee, such nominee shall immediately fill such vacancy. If the
Board of Directors disapproves such nominee, the Secretary of the Company
shall immediately give written notice thereof to all of the holders of
shares of Series B Preferred Stock and Series C Preferred Stock. If such a
written notice from the Secretary has not been received by such holders
twelve (12) business days after the receipt by the Company of such written
notice of nomination, then the Board of Directors shall be conclusively
deemed to have approved such nominee and such nominee shall immediately
fill such vacancy. If such written notice from the Secretary has been so
received within such twelve (12) business days, such holders may nominate
another independent person by written notice to the Secretary, subject to
the same approval process as hereinabove provided. Such process of
nomination and approval or disapproval shall continue until an independent
person is nominated who is approved or deemed to be approved by the Board
of Directors. No nominations for such director shall be made or received
other than as described in this Section 10(b)(2).
(3) With respect to the nomination and election of succeeding Joint
Directors, the holders of shares of Series B Preferred Stock and Series C
Preferred Stock shall give timely written notice to the Secretary of the
Company of the identity of the person nominated by such holders. Such
written notice shall be executed, manually, or by photocopy or facsimile,
in any number of counterparts, by the Majority Holders of the Series B
Preferred Stock and by the Majority Holders of the Series C Preferred
Stock. Such written notice shall be timely if received at the principal
executive office of the Company not less than 60 days nor more than 120
days before the meeting of shareholders at which such director is to be
elected. The person so nominated shall be "independent," which means that
such person shall not be a director, officer, employee or affiliate (as
defined in Section 203(c) of the Delaware General Corporation Law) of any
of the holders of Series B Preferred Stock or Series C Preferred Stock or
the Company. Upon receipt of such written notice, the Board of Directors
shall have ten (10) business days in which to approve or disapprove such
nominee. If the Board of Directors disapproves such nominee, the Secretary
of the Company shall immediately give written notice thereof to all of the
holders of shares of Series B Preferred Stock and Series C Preferred Stock.
If such a written notice from the Secretary has not been received by such
holders twelve (12) business days after the receipt by the Company of such
written
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notice of nomination, then the Board of Directors shall be
conclusively deemed to have approved such nominee. If such written notice
from the Secretary has been so received within such twelve (12) business
days, such holders may nominate another independent person by written
notice to the Secretary, subject to the same approval process as
hereinabove provided. Such process of nomination and approval or
disapproval shall continue until an independent person is nominated who is
approved or deemed to be approved by the Board of Directors. No
nominations for such director shall be made or received other than as
described in this Section 10(b)(3). Election of such person shall be by
the holders of shares of the Company's Common Stock.
(4) Prior to a Type B Event Date, a vacancy of a Preferred Stock
Director position shall be filled only by a majority vote of or written
consent of holders of a majority of the then outstanding shares of the
series of Preferred Stock that elected the director whose death,
resignation, retirement, disqualification or removal from office caused the
vacancy. Prior to a Type B Event Date, a vacancy of the position of Joint
Director shall be filled only by the Board of Directors, following
nomination by holders of a majority of the then outstanding shares of
Series B Preferred Stock and holders of a majority of the then outstanding
shares of the Series C Preferred Stock, pursuant to the procedure described
in Section 10(b)(2). Directors chosen pursuant to any of the foregoing
provisions shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which they have been elected
expires and until their successors are duly elected and have qualified or
until their earlier resignation or removal. If holders of shares of Series
B Preferred Stock shall, pursuant to the certificate of incorporation,
cease to have the right to elect two Preferred Stock Directors but still
shall have the right to elect one Preferred Stock Director, then holders of
a majority of the then outstanding shares of Series B Preferred Stock shall
promptly designate by written notice to the Company one of the two
Preferred Stock Directors elected by holders of shares of Series B
Preferred Stock as the director to be retained, and the other such director
shall be deemed to have resigned immediately upon receipt by the Company of
such written notice. If holders of shares of Series B Preferred Stock
shall, pursuant to the certificate of incorporation, but not as a result of
a Type B Conversion, cease to have the right to elect any Preferred Stock
Directors, then the two directors elected by holders of shares of Series B
Preferred Stock shall be deemed to have resigned immediately upon such
cessation. Upon the occurrence of any such deemed resignation referred to
in the immediately preceding two sentences, the directorship previously
held by the director deemed to have resigned shall automatically become a
vacancy to be filled by the Board of Directors.
(5) Shares of Series B Preferred Stock shall be deemed to be shares
"entitled to vote" or "entitled to vote in the election of directors" for
purposes of the provisions of the Certificate of Incorporation that employ
such terms, and, for purposes of such provisions at any time, each
outstanding share of Series B Preferred Stock shall count as such number of
shares of Common Stock into which such share of Series B Preferred Stock is
then convertible pursuant to Sections 5 and 7 hereof (subject to the
percentage
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limitation set forth in Section 10(a) hereof as such percentage
limitation would otherwise apply pursuant to such Section).
(c) Immediately following the initial issuance of shares of Series B
Preferred Stock, the Board of Directors shall appoint the following committees
of the Board of Directors with the respective duties, membership and voting
requirements stated below. After such appointment and until a Type B Event
Date, the following matters shall be deemed approved by the Board of Directors
only upon receiving the affirmative vote of a majority of the Board of Directors
and a majority of the directors elected by the holders of the Series B Preferred
Stock and the Series C Preferred Stock: (A) a decision to eliminate or discharge
the Audit Committee, Compensation Committee, Executive Committee or the
Acquisitions Committee, as described more fully below (such committees are the
"Committees"), (B) a decision to reduce, narrow, attenuate or otherwise weaken
the delegation of powers by the Board of Directors to any of the Committees,
unless such reduction, narrowing, attenuation or other weakening is the transfer
of delegated powers from the Compensation Committee or the Acquisitions
Committee to the Executive Committee, (C) a decision to change the number of
members of any Committee, the identity of the persons or entities entitled to
select each of the members of any Committee, the size of the required vote for
approval by any Committee and the size of the required vote of the Board of
Directors necessary to approve actions that failed to obtain the required
approval vote on the appropriate Committee; and (D) a decision to create any new
committee. If the holders of the Series B Preferred Stock shall cease to have
the right to nominate and elect any director at all, otherwise than as a result
of the conversion of their shares of Series B Preferred Stock in a Type B
Conversion, then such holders shall no longer have the right to select any
member of any of the committees set forth below and the member or members of
such committees selected by such holders shall automatically cease to be a
member or members of such committees.
(1) COMPENSATION COMMITTEE. The Compensation Committee shall
consist of three (3) members, at least one (1) of whom shall be
selected jointly by the Series B Directors and director elected by
holders of the Series C Preferred Stock (the "SERIES C DIRECTOR"), and
who shall be a director. An affirmative vote of at least two (2)
members of the Compensation Committee shall be required for approval
of matters considered by the Compensation Committee. The Compensation
Committee shall ensure that the representative on the Compensation
Committee nominated by the Series B Directors and the Series C
Director receive adequate notice of and an opportunity to participate
in any meetings of the Compensation Committee;
(2) AUDIT COMMITTEE. The Audit Committee shall consist of three
(3) directors, including as many Independent directors as are
available, not to exceed three (3). An affirmative vote of at least
two (2) members of the Audit Committee shall be required for approval
of matters considered by the Audit Committee.
(3) EXECUTIVE COMMITTEE. The Executive Committee shall consist
of four (4) members, one (1) of whom shall be selected by the Series B
Directors (and shall be a Series B Director), one (1) of whom shall be
the Series C Director
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and two (2) of whom shall be selected by the Board of Directors. The members
selected by the Series B Directors and the Series C Director may be removed
only by the Series B Directors and the Series C Director, respectively.
The Executive Committee shall, in addition to the customary duties of an
executive committee, have the right to approve any financing activity,
including but not limited to the Capital Budget Plan. An affirmative vote
of at least three (3) members of the Executive Committee shall be required
for approval of any matters considered by the Executive Committee.
Each financing activity not approved by the Executive Committee may be
referred to the Board of Directors for approval, which approval shall
require a Supermajority Vote; and
(4) ACQUISITIONS COMMITTEE. The Acquisitions Committee shall
consist of four (4) members, one (1) of whom shall be selected by the
Series B Directors (and shall be a Series B Director), one (1) of whom
shall be the Series C Director, and two (2) of whom shall be selected
by the Board of Directors (and shall be directors). The Acquisitions
Committee shall have the right to approve any transaction of the types
described in Section 11(n), (o), (p) and (q) with respect to which
transaction the aggregate consideration payable in connection with
such transaction (including, without limitation, cash consideration,
the fair market value of any securities and the net present value of
any deferred consideration) is less than $15 million. A unanimous
vote of the Acquisitions Committee shall be required for approval of
any matters considered by the Acquisitions Committee. Except as
described in Section 10(d)(5) below, each matter considered but not
unanimously approved by the Acquisitions Committee may be referred to
the Board of Directors for approval, which approval shall require a
majority vote of the Board of Directors.
(5) CERTAIN TRANSACTIONS. The unanimous approval of the
Acquisitions Committee or the unanimous approval of the Board of
Directors shall be required before the Company or any of its
Subsidiaries engage in a transaction of the types described in Section
11(n), (o) (which, only for purposes of this clause, shall also apply
to Capital Expenditures made by the Company in the ordinary course of
business), (p) and (q), in which transaction: (A) the aggregate
consideration payable in connection with such transaction (including,
without limitation, cash consideration, the fair market value of any
securities and the net present value of any deferred consideration) is
less than $15 million; and (B) the Company is to issue its Common
Equity at an implicit or explicit price of less than $8.375 per share.
Such implicit price shall be determined in an appraisal approved
unanimously by the Acquisitions Committee or unanimously by the Board
of Directors, such appraisal to be performed by an independent
appraiser selected unanimously by the Acquisitions Committee or
unanimously by the Board of Directors.
(d) Prior to a Type B Event Date, the following matters shall be deemed
approved by the Board of Directors only upon a Supermajority Vote in respect of
any such matter:
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(1) Approving the annual Capital Budget Plan; and
(2) Approving the Company entering into any financing activity
not approved by the Executive Committee.
(e) The bylaws of the Company may be altered, amended, or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors at any
regular or special meeting of the stockholders or the Board of Directors, but
only if such alteration, amendment, repeal, or adoption has been approved:
(1) in case of adoption by the Board of Directors prior to the First
Meeting following a Type B Event Date, by a majority of the Preferred Stock
Directors and either (A) a majority of the entire Board of Directors (if
such alteration, amendment, repeal, or adoption does not increase the
number of directors) or (B) by at least 80% of the members of the entire
Board of Directors (if such alteration, amendment, repeal, or adoption does
increase the number of directors);
(2) in case of adoption by the stockholders at any meeting of
stockholders (other than the First Meeting following a Type B Event Date)
with a record date on or prior to a Type B Event Date, by holders of at
least eighty percent (80%) of the outstanding shares of the Corporation
entitled to vote in the election of directors, voting as one class, and by
holders of a majority of the shares, outstanding as of such record date, of
whichever (or both) of Series B Preferred Stock and Series C Preferred
Stock continued (as of such record date) to have the right under the
certificate of incorporation to elect one or more Preferred Stock
Directors.
(f) If a Type B Event Date occurs prior to October 14, 1999, then the
following provisions shall apply:
(1) From such Type B Event Date until the second subsequent annual
stockholders meeting of the Company after such Type B Event Date, none of
the following actions or transactions shall be effected by the Company or
approved by the Company as a stockholder of any Subsidiary of the Company,
and neither the Initial Purchaser nor any Initial Purchaser Affiliates
shall engage in, or be a party to, any of the following actions or
transactions involving the Company or any Subsidiary of the Company, if, as
of the record date for the determination of the stockholders entitled to
vote thereon, or consent thereto, any other Person which obtained its
equity interest in the Company as a result of a transfer of securities from
the Initial Purchaser or any Initial Purchaser Affiliate beneficially owns
or controls, directly or indirectly, five percent (5%) or more of the
outstanding shares of the Company entitled to vote:
(A) any merger or consolidation of the Company or any of its
Subsidiaries with or into such other Person;
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(B) any sale, lease, exchange or other disposition of all or any
substantial part of the assets of the Company or any of its
Subsidiaries to such other Person;
(C) the issuance or delivery of any voting securities of the
Company or any of its Subsidiaries to such other Person in exchange
for cash, other assets or securities, or a combination thereof; or
(D) any dissolution or liquidation of the Company;
PROVIDED, HOWEVER, that such prohibition shall not apply with respect to
any such action or transaction approved by (I) the affirmative vote of not
less than eighty percent (80%) of the outstanding shares of the Company
entitled to vote or (II) at least two-thirds (2/3) of the directors of the
Company (which must include either (i) the Joint Director, if either (x)
such Joint Director served in such position as of the Type B Event Date, or
(y) such Joint Director has been approved by a majority of the directors
who were Common Stock Directors as of the Type B Event Date, or (ii) at
least one director who was a Common Stock Director prior to the Type B
Event Date, unless neither the Joint Director, nor any of such Common Stock
Directors continue to serve on the Board of Directors at such time). For
purposes of this Section 10(f), a Person shall be deemed to own or control,
directly or indirectly, any outstanding shares of stock of the Company (A)
which it has the right to acquire pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or otherwise, or (B)
which are beneficially owned, directly or indirectly (including shares
deemed owned through application of clause (A) above), by any other
corporation, person or other entity (x) with which it or its "affiliate" or
"associate" (as defined below) has any agreement, arrangement, or
understanding for the purpose of acquiring, holding, voting or disposing of
stock of the Company or (y) which is its "affiliate" or "associate," as
those terms are defined under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
(2) No transfer of Series C Preferred Stock may be made by the
Initial Purchaser or any Initial Purchaser Affiliate (other than a transfer
permitted under Rule 144 under the Securities Act or a transfer pursuant to
a registered offering under registration rights from the Company) unless
prior thereto, the transferee in such transfer shall have agreed to be
bound by the terms of Section 10(f)(1).
SECTION 11. PROTECTIVE PROVISIONS.
Without limiting the provisions of any other Series of Preferred Stock, for
so long as the Initial Purchaser and the Initial Purchaser Affiliates, taken as
a whole, owns or own at least 33% in total liquidation preference, taken as a
whole, of the outstanding shares of Series B Preferred Stock, the Company shall
not take, and shall cause its Subsidiaries not to take, any of the following
actions without the affirmative vote of holders of at least sixty-seven percent
(67%) of the shares of the Series B Preferred Stock then outstanding:
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(a) alter, change or amend (by merger or otherwise) any of (i) the rights,
preferences and privileges of the Series B Preferred Stock or any other class of
Capital Stock, or (ii) the terms or provisions of any Option or Convertible
Security;
(b) enter into any transaction or event that could result in a Special
Corporate Event with respect to the Company or any Subsidiary;
(c) initiate any Liquidating Event with respect to the Company or any
Subsidiary;
(d) amend, restate, alter, modify or repeal (by merger or otherwise) the
Certificate of Incorporation or the Amended Bylaws of the Company, including,
without limitation, amendment, restating, modifying or repealing (by merger or
otherwise) any certificate of designation or preferences (as in effect from time
to time) relating to the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock or the Series D Preferred Stock, including, without
limitation, the filing by the Company of a certificate with the Secretary of
State of the State of Delaware, pursuant to Section 151(g) of the Delaware
General Corporation Law, setting forth a resolution or resolutions adopted by
the Board of Directors of the Company that none of the authorized shares of
Series D Preferred Stock are outstanding and that none will be issued subject to
the Series D Certificate of Designation;
(e) amend, restate, alter, modify or repeal (by merger or otherwise) or
permit any Subsidiary to amend, restate, alter, modify or repeal (by merger or
otherwise) the certificate of incorporation, other organizational documents, or
bylaws of any Subsidiary in any material respect;
(f) change the number of directors of the Company to a number less than
eight (8) or more than nine (9) or the manner in which the directors are
selected, as provided in the Certificate of Incorporation, Amended Bylaws,
Series B Preferred Stock Certificate of Designation, Series C Preferred Stock
Certificate of Designation and Series D Preferred Stock Certificate of
Designation;
(g) incur any Indebtedness, in the aggregate with respect to the Company
and its Subsidiaries, in excess of $15 million in any Fiscal Year; PROVIDED,
HOWEVER, that this provision shall not apply to draw-downs under any credit
facility as to which a credit agreement had been executed and delivered on or
prior to the Initial Issue Date;
(h) become a party to Operating Leases during any Fiscal Year with respect
to which the present value of all payments due during the term of such Operating
Leases in the aggregate (determined using a discount rate of 10%) exceed $15
million;
(i) create, authorize or issue any shares of Series B Preferred Stock or
any class or series of Senior Securities, Parity Securities or Supervoting
Securities or shares of any such class or series;
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(j) reclassify any authorized stock of the Company into Series B Preferred
Stock or any class or series of Senior Securities, Parity Securities,
Supervoting Securities or shares of such class or series;
(k) increase or decrease the authorized number of shares of Series B
Preferred Stock or any class or series of Senior Securities or Parity Securities
or shares of any such class or series;
(l) issue any equity security below either the then current Market Price
(without deduction for any underwriters' discount) or the then-applicable
Conversion Price other than for (A) management stock options currently
authorized and available for grant for not more than Three Hundred Thousand
(300,000) shares of Common Stock in the aggregate, in which senior management of
the Company shall not participate, (B) management stock options exercisable at
not less than the then-applicable Conversion Price per share of Common Stock
issued after October 14, 1997, exercisable for not more than Five Hundred
Thousand (500,000) shares of Common Stock in the aggregate, in which only
certain members of senior management of the Company shall participate, and
(C) the Common Stock underlying such management stock options and other stock
options outstanding as of October 14, 1997;
(m) declare or pay any dividend or make any distribution (including
without limitation by way of redemption, purchase or other acquisition) with
respect to shares of Capital Stock or any securities convertible into, or
exercisable, redeemable or exchangeable for, any share of Capital Stock
(including without limitation any Option or Convertible Security) directly or
indirectly, whether in cash, obligations or shares of the Company or other
property;
(n) acquire, in one or a series of related transactions, any equity
ownership interest or interests of any Person, where the aggregate consideration
payable in connection with such acquisition (including without limitation cash
consideration, the fair market value of any securities and the net present value
of any deferred consideration) is equal to or greater than $15 million;
(o) acquire any asset or assets of any Person in any transaction or
transactions, where the aggregate consideration payable in connection with any
single such transaction (including, without limitation, cash consideration, the
fair market value of any securities and the net present value of any deferred
consideration), whether such transaction is effected in a single transaction or
series of related transactions, is greater than $15 million; PROVIDED, HOWEVER,
that this provision shall not apply to Capital Expenditures made by the Company
in the Ordinary Course of Business;
(p) merge or consolidate with any Person, or permit any other Person to
merge into it, where (i) the stockholders of the Company immediately prior to
the consummation of such merger or consolidation shall, immediately after the
consummation of such merger or consolidation, hold securities possessing more
than 50% of both the total voting power of and the beneficial ownership
interests in the surviving entity of such merger or consolidation and (ii) the
equity holders of the subject Person immediately prior to the consummation of
such transaction shall receive (directly or indirectly) aggregate consideration
payable in connection with such
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transaction (including without limitation cash consideration, the fair market
value of any securities and the net present value of any deferred consideration)
equal to or greater than $15 million,
(q) cause or permit any Subsidiary to merge or consolidate with any Person
(other than the Company or a wholly-owned Subsidiary of the Company), or cause
or permit any other Person to merge into it, where: (i) the stockholders of such
Subsidiary immediately prior to the consummation of such merger or consolidation
shall, immediately after the consummation of such merger or consolidation, hold
securities possessing more than 50% of both the total voting power of and the
beneficial ownership interests in the surviving entity of such merger or
consolidation and (ii) the equity holders of the subject Person immediately
prior to the consummation of such transaction shall receive (directly or
indirectly) aggregate consideration payable in connection with such transaction
(including without limitation cash consideration, the fair market value of any
securities and the net present value of any deferred consideration) equal to or
greater than $15 million;
(r) substantially and materially engage in, either through acquisition or
internal development, any business other than the business of providing
diagnostic services to the healthcare industry;
(s) make or permit any of its Subsidiaries to make Capital Expenditures
any fiscal year in excess, in the aggregate, of two percent (2%) above the
approved Capital Budget Plan for such fiscal year of the Company unless such
expenditure is approved by the Executive Committee of the Board of Directors or
a Supermajority Vote of the Board of Directors of the Company;
(t) (i) sell, transfer, convey, lease or dispose of, outside the Ordinary
Course of Business, any assets or properties of the Company or any Subsidiary,
whether now or hereafter acquired, in any transaction or transactions, if (X)
the aggregate consideration payable in connection with any single such
transaction (including, without limitation, cash consideration, the fair market
value of any securities and the net present value of any deferred
consideration), is greater than $5 million or (Y) the aggregate consideration
payable in connection with all such transactions (including, without limitation,
cash consideration, the fair market value of any securities and the net present
value of any deferred consideration), consummated after the Initial Issue Date,
taken as a whole, is or would become as a result of such transaction greater
than $20 million; (ii) undergo or cause or permit any Subsidiary to undergo a
reorganization or recapitalization; (iii) merge or consolidate with any Person,
or permit any other Person to merge into it, where the stockholders of the
Company immediately prior to the consummation of such merger or consolidation
shall, immediately after the consummation of such merger or consolidation,
hold securities possessing 50% or less of either the total voting power of or
the beneficial ownership interests in the surviving entity of such merger or
consolidation; (iv) cause or permit any Subsidiary to merge or consolidate
with any other Person (other than the Company or a wholly-owned Subsidiary of
the Company), or cause or permit any other Person to merge into such
Subsidiary, where the stockholders of such Subsidiary immediately prior to
the consummation of such merger or consolidation shall, immediately after the
consummation of
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such merger or consolidation, hold 50% or less of either the total voting
power of or the beneficial ownership interests in the surviving entity of such
merger or consolidation if (X) the value of the assets of such Subsidiary is
greater than $5 million or (Y) the aggregate value of the assets of all such
Subsidiaries with respect to all such mergers or consolidations consummated
after the Initial Issue Date, taken as a whole and including such transaction,
is or would become as a result of such transaction greater than $20 million;
(u) permit any Subsidiary of the Company to issue or sell any share of
Capital Stock, Option or Convertible Security; PROVIDED, HOWEVER, that the
Company may form a new Subsidiary not all of the equity securities of which need
be owned directly or indirectly by the Company (a "PARTIAL SUBSIDIARY"), but
only if (i) at the time of creation of such Partial Subsidiary, such Partial
Subsidiary is designated as such in a written notice to the holders of the
shares of Series B Preferred Stock, and, (ii) cumulatively through time no more
than $5,000 of assets (in the aggregate) are transferred to such Partial
Subsidiary by the Company or any other Subsidiary, and (iii) no liabilities of
such Partial Subsidiary are ever assumed or guaranteed by the Company or any
other Subsidiary; or
(v) issue any share of Series D Preferred Stock, otherwise than pursuant
to a Type B Conversion.
The rights provided to holders of shares of Series B Preferred Stock in
this Section 11 shall be in addition to and not in lieu of the other rights and
protections granted to the holders of the shares of Series B Preferred Stock
hereunder.
SECTION 12. REISSUANCE OF SERIES B PREFERRED STOCK.
Shares of Series B Preferred Stock that have been issued and reacquired or
converted in any manner, including shares purchased, redeemed, exchanged, or
converted into shares of Common Equity, shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized but
unissued shares of preferred stock of the Company undesignated as to series and
may be designated or redesignated and issued or reissued, as the case may be, as
part of any series of preferred stock of the Company, provided that such shares
may not in any event be reissued as Series B Preferred Stock.
SECTION 13. BUSINESS DAY.
If any payment, redemption or exchange shall be required by the terms
hereof to be made on a day that is not a Business Day, such payment, redemption
or exchange shall be made on the immediately succeeding Business Day.
SECTION 14. CERTAIN NOTIFICATION OBLIGATIONS.
The Company will notify the Initial Purchaser of each subsequent sale or
disposition of any assets or properties of either the Company or any Subsidiary
(other than in the Ordinary Course of Business) once the aggregate consideration
payable in connection with all such sales or dispositions for the Company and
its Subsidiaries outside the Ordinary Course of Business
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(including without limitation cash consideration, the fair market value of any
securities and the net present value of any deferred consideration) exceeds
$10,000,000 in any fiscal year.
SECTION 15. PREEMPTIVE RIGHTS
(a) Subject to the terms and conditions specified in this Section 15, the
Company hereby grants to each holder of shares of Series B Preferred Stock a
right of first offer with respect to future sales in any transaction or proposed
transaction not involving a public offering by the Company of its shares of
Common Equity or any securities convertible or exchangeable, directly or
indirectly, into Common Equity (collectively, "PREEMPTIVE SECURITIES").
Preemptive Securities shall include, without limitation, all shares of Common
Stock and all Convertible Securities.
(b) Each time the Company proposes to offer any Preemptive Securities in a
transaction not involving a public offering of such Preemptive Securities, the
Company shall first make an offering of such Preemptive Securities to each
holder of shares of Series B Preferred Stock in accordance with the following
provisions:
(1) The Company shall deliver a notice by certified mail (the
"PREEMPTIVE NOTICE") to each holder of shares of Series B Preferred Stock
stating (i) its bona fide intention to offer Preemptive Securities, (ii)
the number of such Preemptive Securities to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Preemptive
Securities. In addition, the Preemptive Notice will contain all other
information which would be provided to prospective purchasers with respect
to the proposed offering.
(2) With respect to any Type A Offering of Preemptive Securities, by
written notification given by each holder of shares of Series B Preferred
Stock within 15 Business Days from the date of the Preemptive Notice, each
holder may elect to purchase or obtain, at the price and on the terms
specified in the Preemptive Notice, up to that portion of such Preemptive
Securities which equals the proportion that the number of shares of Common
Stock issuable upon conversion of the shares of Series B Preferred Stock
then held by such holder bears to the total number of shares of Common
Stock of the Company then outstanding (assuming full conversion of all
convertible securities, including without limitation the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock).
(3) With respect to any Type B Offering of Preemptive Securities, by
written notification given by each holder of shares of Series B Preferred
Stock within 15 Business Days from the date of the Preemptive Notice, each
holder may elect to purchase or obtain, at the price and on the terms
specified in the Preemptive Notice, up to that portion of such Preemptive
Securities which equals the proportion that the number of shares of Common
Stock issuable upon conversion of the shares of Series B Preferred Stock
then held by such holder bears to the number of shares of Common Stock of
the Company into which the outstanding shares of Series B Preferred Stock
and the outstanding shares of Series B Preferred Stock are then
convertible.
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(4) If any of the holders of Series B Preferred Stock decline to
exercise any right of refusal with respect to any offering to such holders
of Series B Preferred Stock of any Preemptive Securities, such holders (the
"DECLINING SERIES B HOLDERS") shall give written notification of such
election to decline to exercise such rights to the Company within 15
Business Days from the date of the Preemptive Notice. Within 3 Business
Days thereafter, the Company shall give written notification (the "DECLINED
PREEMPTIVE SECURITIES NOTICE") to each holder of Series B Preferred Stock
of the following: (i) the total number of shares of Preemptive Securities
which the Declining Series B Holders declined to purchase (collectively,
the "DECLINED PREEMPTIVE SECURITIES"), and (ii) the price and terms
specified in the Preemptive Notice relating to such Declined Preemptive
Securities.
(5) By written notification given by each holder of shares of Series
B Preferred Stock within 3 Business Days from the date of the Declined
Preemptive Securities Notice, each holder of Series B Preferred Stock may
elect to purchase or obtain, at the price and on the terms specified by the
Company for such sale of such Preemptive Securities, such Declined
Preemptive Securities at the price and on the terms specified in the
Preemptive Notice; PROVIDED, HOWEVER, that if the total number of Declined
Preemptive Securities so elected to be purchased by such holders of Series
B Preferred Stock pursuant hereto (collectively, the "ELECTING HOLDERS")
exceeds the total number of Declined Preemptive Securities, each such
Electing Holder shall purchase, and the Company shall sell to such Electing
Holder, that portion of the total number of Declined Preemptive Securities
which equals the proportion that the number of shares of Common Stock
issuable upon conversion of the shares of Series B Preferred Stock then
held by such holder bears to the number of shares of Common Stock of the
Company into which the outstanding shares of all Electing Holders are then
convertible.
(6) If all Preemptive Securities referred to in any Preemptive Notice
are not elected to be obtained as provided in Section 15(b)(2) or 15(b)(3),
or Section 15(b)(4) or 15(b)(5), as applicable, the Company may, at any
time after the latest date set forth above for the exercise of the right to
purchase any such Preemptive Securities by any holder of Series B Preferred
Stock (the "PREEMPTIVE RIGHT EXPIRATION DATE") to the date sixty (60) days
from the Preemptive Right Expiration Date offer the remaining unsubscribed
portion of such Preemptive Securities to any Person or Persons at a price
equal to the price specified in the relevant Preemptive Notice. If the
Company does not enter into an agreement for the sale of the Preemptive
Securities within sixty (60) days after the Preemptive Right Expiration
Date, or if such agreement is not consummated within ninety (90) days of
the Preemptive Right Expiration Date, the right provided under this Section
15 shall be deemed to be revived and such Preemptive Securities shall not
be offered unless first reoffered to each holder of shares of Series B
Preferred Stock in accordance herewith.
(7) The rights set forth in this Section 15 shall not be applicable
to the issuance or sale of shares of Common Stock pursuant to Options
approved by the Board
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to officers, directors and employees of the Company for the primary
purpose of soliciting or retaining their employment or services.
SECTION 16. DEFINITIONS.
As used in this Certificate, the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa), unless the context otherwise requires:
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of a majority or more of the voting securities of a Person
shall be deemed to be control.
"AMENDED BYLAWS" means the Amended and Restated Bylaws of the Company, as
in effect from time to time.
"AGGREGATE VOTING LIMITATION" has the meaning set forth in Section 10(a).
"BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL BUDGET PLAN" means, for each fiscal year of the Company, the plan
of the Company for making Capital Expenditures for such fiscal year which has
been approved for such fiscal year by either the Executive Committee or a
Supermajority Vote of the Board of Directors of the Company.
"CAPITAL EXPENDITURES" means, for any period, expenditures made by the
Company or any of its Subsidiaries to acquire or construct fixed assets, plant
and Fixtures and Equipment (including additions, improvements, upgrades and
replacements, but excluding repairs) during such period calculated in accordance
with GAAP.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a lease that would at such
time be required to be capitalized on a balance sheet in accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a
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Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CERTIFICATE OF INCORPORATION" means the certificate of incorporation (as
defined in Section 104 of the Delaware General Corporation Law) of the Company
in effect on the date hereof, including, without limitation, the Series A,
Series B, Series C and the Series D Certificates of Designation.
"CHANGE OF CONTROL" with respect to a Person shall be deemed to have
occurred (i) at such time as any person (as defined in Section 13(d)(3) of the
Securities and Exchange Act of 1934) at any time shall directly or indirectly
acquire more than 40% in outstanding voting power of such Person, (ii) at such
time as during any one year period, individuals who at the beginning of such
period constitute such Person's Board of Directors or other governing body cease
to constitute at least a majority of such board or governing body (provided,
however, that a change in directors upon a Type B Event Date shall not be deemed
to cause a Change in Control pursuant to this clause (ii)), (iii) upon
consummation of a merger or consolidation of such Person into or with another
Person in which the shareholders of the subject Person immediately prior to the
consummation of such transaction shall own less than Fifty Percent (50%) of the
voting securities of the surviving Person (or the parent corporation of the
surviving Person where the surviving Person is wholly-owned by the parent
corporation) immediately following the consummation of such transaction or (iv)
the sale, transfer or lease of all or substantially all of the assets of such
Person, in any of cases (i), (ii), (iii) or (iv) in a single transaction or
series of related transactions; PROVIDED, that no Change of Control hereunder
with respect to the Company shall be deemed to occur solely by reason of (x) the
ownership by the Initial Purchaser or any Affiliate thereof or the Majority
Holders of the Series C Preferred Stock or any Affiliate thereof of any Capital
Stock of the Company or (y) the conversion of shares of Series C Preferred Stock
into either Series D Preferred Stock (and any change in the Board of Directors
incident thereto) or Common Stock, or (z) the conversion of shares of Series D
Preferred Stock into Common Stock.
"COMMITTEES" has the meaning set forth in Section 10(e).
"COMMON EQUITY" means all shares now or hereafter authorized of any class
of common stock of the Company (including the Common Stock) and any other stock
of the Company, however designated, authorized after the date hereof, which has
the right (subject always to prior rights of any class or series of preferred
stock) to participate in any distribution of the assets or earnings of the
Company without limit as to per share amount.
"COMMON STOCK" has the meaning set forth in Section 3(a).
"COMMON STOCK DIRECTOR" means, for any period prior to any Type B Event
Date, any director other than the Joint Director or a director elected by the
holders of the Series B Preferred Stock or the Series C Preferred Stock.
"COMPANY" means InSight Health Services Corp., a Delaware corporation.
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"CONVERSION DATE" means (i) in the event of a Type A Conversion, the date
set forth in Section 5(a) (in the event of a partial conversion relating to a
Partial Conversion Event) or Section 5(b) (in the event of any other conversion
pursuant to Section 5), and (ii) in the event of a Type B Conversion, the date
of receipt by the Company of the relevant Type B Conversion Notice.
"CONVERSION DIRECTORS" has the meaning set forth in Section 10.
"CONVERSION PRICE" has the meaning set forth in Section 8.
"CONVERTIBLE SECURITY" means any stock or securities, directly or
indirectly, convertible into or exchangeable for Common Equity, including
without limitation any exchangeable debt securities.
"CORPORATE CHANGE" has the meaning set forth in Section 8(e).
"CREDIT FACILITY" means a credit facility to which the Company is a party
with NationsBank, N.A.
"DECLINED PREEMPTIVE SECURITIES" has the meaning set forth in Section
15(b)(4).
"DECLINED PREEMPTIVE SECURITIES NOTICE" has the meaning set forth in
Section 15(b)(4).
"DECLINING SERIES B HOLDERS" has the meaning set forth in Section 15(b)(4).
"ELECTING HOLDERS" has the meaning set forth in Section 15(b)(5).
"ENCUMBRANCE" means any claim, lien, pledge, option, charge, easement,
security interest, right-of-way, encumbrance or other right of third parties,
and, with respect to any securities, any agreements, understandings or
restrictions affecting the voting rights or other incidents of record or
beneficial ownership pertaining to such securities.
"FIRST MEETING" means the meeting of the newly constituted Board of
Directors to be held two calendar days after a Type B Event Date, at the
principal offices of the Corporation.
"FISCAL YEAR" means each year ending June 30, or any other fiscal year as
approved by the Board of Directors.
"FIXTURES AND EQUIPMENT" means all of the furniture, fixtures, furnishings,
machinery, equipment and other tangible assets owned by the Company or any
Subsidiary that are material to the conduct of their businesses as currently
conducted.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect as of the Initial Issue Date.
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"INDEBTEDNESS" means, as to any Person without duplication, (a) all items
which, in accordance with GAAP, would be included as a liability on the balance
sheet of such Person and its Subsidiaries (including any obligation of such
Person to the issuer of any letter of credit for reimbursement in respect of any
drafts drawn under such letter of credit), excluding obligations in respect of
deferred taxes and deferred employee compensation and benefits, and anything in
the nature of capital stock, surplus capital and retained earnings; (b) the
amount available for drawing under all letters of credit issued for the account
of such Person; (c) Capital Lease Obligations of such Person; and (d) all
obligations of other Persons that such Person has guaranteed, including, without
limitation, all obligations of such Person consisting of recourse liabilities
with respect to accounts receivable sold or otherwise disposed of by such
Person; provided, however, that the term Indebtedness shall not include trade
accounts payable (other than for borrowed money) arising in, and accrued
expenses incurred in, the ordinary course of business of such Person, provided
the same are not more than sixty (60) days overdue or are being contested in
good faith.
"INDEPENDENT" means any Person who is not an officer or employee of the
Company or any Subsidiary or other Affiliate of the Company or otherwise paid
any compensation or remuneration by the Company or any Subsidiary or other
Affiliate of the Company other than director's fees.
"INITIAL ISSUE DATE" means October 14, 1997.
"INITIAL PURCHASER" shall mean the Persons to whom shares of Series B
Preferred Stock are initially issued by the Company.
"INITIAL PURCHASER AFFILIATE" means the Initial Purchaser, the general
partner of any Initial Purchaser, and any investor in any Initial Purchaser or
in the general partner of any Initial Purchaser, in any case, as of the date
hereof.
"JOINT DIRECTOR" has the meaning set forth in Section 10(b)(4).
"JUNIOR SECURITIES" has the meaning set forth in Section 2.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the Company's principal place of business, the City of New York
or at a place of payment are authorized by law, regulation or executive order to
remain closed. If a payment date is a Legal Holiday at a place of payment,
payment may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"LIQUIDATING DIVIDEND" has the meaning set forth in Section 8(g).
"LIQUIDATING EVENT" has the meaning set forth in Section 4(b).
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"LIQUIDATION PREFERENCE" has the meaning set forth in Section 4(a).
"MAJORITY HOLDERS," at any time, and with respect to any class or series of
Capital Stock of the Company, means holders of a majority of the shares of such
class or series then outstanding. If the term is used without reference to a
particular class or series of Capital Stock of the Company, it means Majority
Holders of the Series B Preferred Stock.
"MARKET PRICE" means as to any security the average of the closing prices
of any such security's sales on all domestic securities exchanges on which such
security may at the time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
Nasdaq as of 4:00 P.M., New York time, on such day, or, if on any day such
security is not quoted in Nasdaq, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as reported by
the National Quotation Bureau, Incorporated, or any similar successor
organization, in each such case averaged over a period of twenty-one (21)
Business Days consisting of the day as of which "Market Price" is being
determined and the twenty (20) consecutive Business Days prior to such day;
provided that if such security is listed on any domestic securities exchange the
term "Business Days" as used in this sentence means business days on which such
exchange is open for trading. If at any time such security is not listed on any
domestic securities exchange or quoted in Nasdaq or the domestic over-the-
counter market, the "Market Price" shall be the fair value thereof determined by
the Company and approved by the Majority Holders; provided that if such parties
are unable to reach agreement within a reasonable period of time, such fair
value shall be determined by an appraiser jointly selected by the Company and
the Majority Holders. The determination of such appraiser shall be final and
binding on the Company and holders of the shares of Series B Preferred Stock,
and the fees and expenses of such appraiser shall be paid by the Company.
"OPERATING LEASE" shall mean any lease with respect to which the
obligations of the lessee thereunder are, at the time any determination thereof
is to be made, not required to be capitalized on the lessee's balance sheet in
accordance with GAAP.
"OPTION" shall mean any rights or options to subscribe for or purchase
Common Equity or Convertible Securities.
"ORDINARY COURSE OF BUSINESS" shall mean the ordinary course of business
for a company engaged in the business of providing diagnostic services to the
healthcare industry as so provided by the Company as of the Initial Issue Date;
provided, that all sales by the Company or any Subsidiary, as the case may be,
of inventory and sales of Fixtures and Equipment no longer used or useful in
such business shall be deemed to be in the Ordinary Course of Business.
"PARITY SECURITIES" has the meaning set forth in Section 2.
"PARTIAL CONVERSION EVENT" means (i) the consummation of the sale by any
holder of its shares of Series B Preferred Stock to a third party at any time
approved by the Board, (ii) the
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consummation of a public offering of the Common Stock at any time and
(iii) at any time following April 14, 1999, the consummation of a private
sale of Common Stock.
"PARTIAL SUBSIDIARY" has the meaning set forth in Section 11(u).
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization or government or agency or political subdivision
thereof (including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"PREEMPTIVE NOTICE" has the meaning set forth in Section 15(b).
"PREEMPTIVE RIGHT EXPIRATION DATE" has the meaning set forth in Section
15(b)(6).
"PREEMPTIVE SECURITIES" has the meaning set forth in Section 15(a).
"PREFERRED STOCK DIRECTORS" means the Series B Directors and the Series C
Director.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement
dated as of October 14, 1997 between the Company and the Initial Purchaser.
"SENIOR SECURITIES" has the meaning set forth in Section 2.
"SERIES A PREFERRED STOCK" has the meaning set forth in Section 2.
"SERIES B DIRECTOR" has the meaning set forth in Section 10.
"SERIES B PREFERRED STOCK" has the meaning set forth in Section 1.
"SERIES C DIRECTOR" has the meaning set forth in Section 10.
"SERIES C PREFERRED STOCK" has the meaning set forth in Section 2.
"SERIES D PREFERRED STOCK" has the meaning set forth in Section 2.
"SPECIAL CORPORATE EVENT" with respect to a Person shall be deemed to have
occurred (i) at such time as any person (as defined in Section 13(d)(3) of the
Securities and Exchange Act of 1934) at any time shall directly or indirectly
acquire more than 20% in outstanding voting power of such Person, (ii) at such
time as during any one year period, individuals who at the beginning of such
period constitute such Person's Board of Directors or other governing body cease
to constitute at least a majority of such board or governing body (provided,
however, that a change in directors upon a Type B Event Date shall not be deemed
to cause a Special Corporate Event pursuant to this clause (ii)), (iii) upon
consummation of a merger or consolidation of such Person into or with another
Person in which the shareholders of the subject Person immediately prior to the
consummation of such transaction shall own less than Fifty Percent (50%) of the
voting securities of the surviving Person (or the parent corporation of the
surviving Person where the surviving Person is wholly-owned by the parent
corporation) immediately following the
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consummation of such transaction or (iv) the sale, transfer or lease of all or
substantially all of the assets of such Person, in any of cases (i), (ii), (iii)
or (iv) in a single transaction or series of related transactions; provided,
that no Special Corporate Event hereunder with respect to the Company shall be
deemed to occur solely by reason of the ownership by the Initial Purchaser or
any Affiliate thereof or the Majority Holders of the Series C Preferred Stock
or any Affiliate thereof of any Capital Stock of the Company.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of
which at least a majority in interest of the outstanding voting stock (having by
the terms thereof voting power under ordinary circumstances to elect a majority
of the directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, owned or controlled by such Person, by one or more
Subsidiaries of such Person or by such Person and one or more of its
Subsidiaries, or (b) any corporate or non-corporate entity in which such Person,
one or more Subsidiaries of such Person, or such person and one or more
Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof, has an ownership interest and one hundred percent (100%)
of the revenue of which is included in the consolidated financial reports of
such Person consistent with GAAP.
"SUPERMAJORITY VOTE" means the affirmative vote of six (6) directors of the
Company with respect to the matter subject to such vote.
"SUPERVOTING SECURITIES" means any class or series of the Company's Capital
Stock the holders of which have the right to cast more than one vote per share
and/or have the right to elect one or more members of the Board of Directors,
voting as a class or series.
"TYPE A CONVERSION" means a conversion of shares of Series B Preferred
Stock into shares of Common Stock pursuant to Section 5 hereof.
"TYPE A OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by
the Company of Preemptive Securities in which the proposed sale price reflects a
price per share of Common Stock at or above the higher of (i) the Market Price
per share of Common Stock, determined as of the date of the Preemptive Notice
relating to such offering and (ii) $8.375 per share of Common Stock.
"TYPE B CONVERSION" means a conversion of shares of Series B Preferred
Stock into shares of Series D Preferred Stock pursuant to Section 6 hereof.
"TYPE B CONVERSION NOTICE" has the meaning set forth in Section 6(b).
"TYPE B EVENT DATE" has the meaning set forth in Section 6(b).
"TYPE B OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by
the Company of Preemptive Securities in which the proposed sale price reflects a
price per share of Common Stock below the higher of (i) the Market Price per
share of Common Stock, determined
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as of the date of the Preemptive Notice relating to such offering and (ii)
$8.375 per share of Common Stock.
"TYPE B TRIGGER DATE" means the date one year after the initial borrowing
of funds under the Credit Facility.
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IN WITNESS WHEREOF, InSight Health Services Corp. has caused this
Certificate to be executed by its Executive Vice President and Secretary this
14th day of October, 1997.
INSIGHT HEALTH SERVICES CORP.
By: /s/ Thomas V. Croal
----------------------------------
Name: Thomas V. Croal
Office: Executive Vice President
and Secretary
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INSIGHT HEALTH SERVICES CORP.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF CONVERTIBLE PREFERRED STOCK, SERIES C
(Pursuant to Section 151(g) of the General Corporation
Law of the State of Delaware.)
InSight Health Services Corp., a corporation organized and existing under
the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY
CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of
the Company (the "Board") by the certificate of incorporation of the Company,
as amended, the Board unanimously adopted the following resolutions on
October 14, 1997 authorizing the issuance of the Series C Convertible
Preferred Stock of the Company, which resolutions are still in full force and
effect and are not in conflict with any provisions of the certificate of
incorporation or bylaws of the Company:
RESOLVED, that pursuant to authority vested in the Board by the
Certificate of Incorporation, the Board does hereby establish a series of
preferred stock of the Company from the Company's authorized class of
3,500,000 shares of $.001 par value preferred shares, such series to consist
of 27,953 shares, and does hereby fix and state the voting rights,
designation, powers, preferences and relative participating, optional or
other special rights and the qualifications, limitations or restrictions
thereof, as follows:
SECTION 1. DESIGNATION.
The Preferred Stock created and authorized hereby shall be designated as
the "Convertible Preferred Stock, Series C" (hereinafter called the "SERIES C
PREFERRED STOCK"). The number of shares of Series C Preferred Stock shall be
27,953 and no more.
SECTION 2. RANK.
The Series C Preferred Stock shall, with respect to dividend distributions
and distributions upon the liquidation, winding up and dissolution of the
Company, rank senior to all classes of Common Equity of the Company, and to each
other class or series of Capital Stock of the Company (except for the
Convertible Preferred Stock, Series A (hereinafter called the "SERIES A
PREFERRED STOCK")) the terms of which do not expressly provide that it ranks
senior to or on a parity with the Series C Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding up and dissolution
of the Company (collectively referred to with the Common Equity of the Company
as "JUNIOR SECURITIES"). The Series C Preferred Stock shall, with respect to
dividend distributions and distributions upon the liquidation, winding up and
dissolution of the Company, rank on a parity with any class or series of Capital
Stock hereafter created which expressly provides that it ranks on a parity with
the Series C Preferred Stock as to dividend distributions and distributions upon
the liquidation, winding up and dissolution of the Company (shares of such a
class or series, together with shares of the Series A Preferred Stock, shares of
the Convertible Preferred Stock, Series B (the "SERIES B PREFERRED STOCK"), and
shares
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of the Convertible Preferred Stock, Series D (the "SERIES D PREFERRED STOCK")
are, collectively, the "Parity Securities"); provided that any purported
Parity Securities that were not created, authorized or issued in accordance
with Section 11 hereof shall be deemed to be Junior Securities and not Parity
Securities. The Series C Preferred Stock shall, with respect to dividend
distributions and distributions upon the liquidation, winding up and
dissolution of the Company, rank junior to each class or series of Capital
Stock hereafter issued in accordance with Section 11 hereof and which
expressly provides that it ranks senior to the Series C Preferred Stock as to
dividend distributions or distributions upon the liquidation, winding up and
dissolution of the Company ("SENIOR SECURITIES"). Any purported Supervoting
Securities that were not created, authorized or issued in accordance with
Section 11 hereof shall be deemed for all purposes related to voting rights
to be identical to Common Stock, including, without limitation, as to voting
rights with respect to the election of directors and all other matters
submitted to a vote of stockholders.
SECTION 3. DIVIDENDS.
(a) The Company may (when, as and if declared by the Board of Directors
of the Company) declare and pay dividends, out of the entire assets and funds
of the Company legally available therefor, to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock and the common stock, $.001 par value per share,
of the Company (the "COMMON STOCK") ratably based on the number of shares of
Common Stock held by each such Holder (assuming full conversion of all such
shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock into Common Stock); PROVIDED,
HOWEVER, that no dividend whatsoever shall be paid, and no distribution shall
be made, on any Common Stock unless and until each holder of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock shall have been paid in full its respective pro rata
portion of such dividend.
(b) Holders of shares of the Series C Preferred Stock shall be entitled
to receive the dividends provided for in Section 3(a) hereof in preference to
and in priority over any dividends upon any of the Junior Securities, except
for the Common Stock.
(c) Holders of shares of the Series C Preferred Stock shall be entitled
to receive the dividends provided for in Section 3(a) hereof on a pro rata
basis with respect to any dividends upon any Parity Securities.
SECTION 4. LIQUIDATION PREFERENCE.
(a) Upon any Liquidating Event with respect to the Company, the Holders
of shares of Series C Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, $1,000 per share of Series C Preferred Stock (the "LIQUIDATION
PREFERENCE"), plus an amount in cash equal to any declared but unpaid
dividends thereon, before any payment shall be made or any assets distributed
to the holders of any of the Junior Securities, including, without
limitation, Common Stock. Except as provided in the preceding sentence,
holders of shares of Series C Preferred Stock shall not be entitled to any
distribution in the event of liquidation, dissolution or winding up of the
affairs of the
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Company. If the assets of the Company are not sufficient to pay in full the
liquidation payments payable to the holders of outstanding shares of the
Series C Preferred Stock and all Parity Securities, then the holders of all
such shares shall share equally and ratably in such distribution of assets of
the Company in accordance with the amounts which would be payable on such
distribution if the amount to which the holders of outstanding shares of
Series C Preferred Stock and the holders of outstanding shares of all Parity
Securities are entitled were paid in full.
(b) "LIQUIDATING EVENT" shall mean, with respect to any Person, any of
the following events: (i) the commencement by such Person of a voluntary
case under the bankruptcy laws of the United States, as now or hereafter in
effect, or the commencement of an involuntary case against such Person with
respect to which the petition shall not be controverted within 15 days, or be
dismissed within 60 days, after commencement thereof; (ii) the appointment of
a custodian for, or the taking charge by a custodian of, all or substantially
all of the property of such Person; (iii) the commencement by such Person of
any proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any jurisdiction whether now or hereafter in effect relating to such Person;
(iv) the commencement against such Person of any proceeding set forth in the
preceding clause (iii), which is not controverted within 10 days thereof and
dismissed within 60 days after the commencement thereof; (v) the adjudication
of such Person insolvent or bankrupt, or the adoption by such Person of a
plan of liquidation; (vi) the occurrence of any Change of Control with
respect to such Person or (vii) the filing of a certificate of dissolution in
respect of the Company with the Secretary of State of the State of Delaware;
in any of cases (i) through (vi) above, in a single transaction or series of
related transactions.
SECTION 5. TYPE A CONVERSION
(a) Each holder of Series C Preferred Stock shall have the right, at its
option, at any time, to convert, subject to the terms and provisions of this
Section 5, all, but not less than all, of its Series C Preferred Stock then
outstanding into such number of fully paid and non-assessable shares of
Common Stock as results from dividing (i) the sum of (A) the aggregate
Liquidation Preference of all shares of Series C Preferred Stock to be
converted plus (B) any declared but unpaid dividends on such shares, by (ii)
the applicable Conversion Price on the Conversion Date. In addition, and
without limiting the right to conversion in whole set forth above,
substantially contemporaneously with any Partial Conversion Event, each
holder of Series C Preferred Stock shall have the right, at its option, to
convert (which conversion, if such option is exercised, shall be deemed to
occur on such Partial Conversion Event), subject to the terms and provisions
of this Section 5, all or any part of its Series C Preferred Stock then
outstanding into such number of fully paid and non-assessable shares of
Common Stock as results from dividing (i) the sum of (A) the aggregate
Liquidation Preference of all shares of Series C Preferred Stock to be
converted plus (B) any declared but unpaid dividends on such shares, by (ii)
the applicable Conversion Price (as defined below) on the Conversion Date.
The person or persons entitled to receive the shares of Common Stock upon
conversion of such shares of Series C Preferred Stock shall be treated for
all purposes as having become the record holder or holders of such shares of
Common Stock on the Conversion Date and such conversion shall be at the
Conversion Price in effect at such time.
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(b) In order to convert all or any portion of its outstanding Series C
Preferred Stock into shares of Common Stock pursuant to this Section 5, the
holder of such Series C Preferred Stock shall deliver certificates
representing the shares of Series C Preferred Stock to be converted to the
Company at its principal office, together with written notice that it elects
to convert those shares of Series C Preferred Stock into shares of Common
Stock in accordance with the provisions of this Section 5. Such notice shall
specify the number of shares of Series C Preferred Stock to be converted and
the name or names in which the holder wishes the certificates for shares of
Common Stock to be registered.
(c) Upon any Type A Conversion, pursuant to this Section 5 and Section 5
of the certificate of designation of Series B Preferred Stock, of all of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock,
the Company shall immediately file a certificate with the Secretary of State
of the State of Delaware, pursuant to Section 151(g) of the Delaware General
Corporation Law, setting forth a resolution or resolutions adopted by the
Board of Directors of the Company that none of the authorized shares of
Series D Preferred Stock are outstanding and that none will be issued subject
to the Series D Certificate of Designation.
SECTION 6. TYPE B CONVERSION
(a) The right to conversion set forth in this Section 6 shall be in
addition to, and not in lieu of, the conversion rights set forth in Section
5.
(b) At any time on or after the Type B Trigger Date, the Majority
Holders may elect to deliver an irrevocable Type B Conversion notice (the
"TYPE B CONVERSION NOTICE") to the Company; PROVIDED, HOWEVER, that no such
Type B Conversion Notice shall be effective unless substantially
contemporaneously with the delivery of such Type B Conversion Notice,
Majority Holders of the Series B Preferred Stock shall deliver a Type B
Conversion Notice (as defined in the Certificate of Designation relating to
the Series B Preferred Stock) to the Company. The date of delivery to the
Company of a Type B Conversion Notice shall be denominated herein a "TYPE B
EVENT DATE" or a "CONVERSION DATE". Upon receipt of a Type B Conversion
Notice, the Company shall as soon as practicable deliver a copy of such Type
B Conversion Notice to each holder of Series C Preferred Stock and each
holder of Series B Preferred Stock.
(c) On the Type B Event Date, each share of Series C Preferred Stock
then outstanding shall automatically be converted into such number of fully
paid and non-assessable shares of Series D Preferred Stock as results from
dividing (i) the sum of (A) the aggregate Liquidation Preference of such
share of Series C Preferred Stock plus (B) any declared but unpaid dividends
on such share, by (ii) the product of ten (10) times the applicable
Conversion Price on the Conversion Date. The person or persons entitled to
receive the shares of Series D Preferred Stock upon conversion of such shares
of Series C Preferred Stock shall be treated for all purposes (including
without limitation voting rights) as having become the record holder or
holders of such shares of Series D Preferred Stock on the Type B Event Date,
whether or not such person or persons deliver its certificates for shares of
Series C Preferred Stock to the Company on the Type B Event Date.
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(d) As soon as practicable after the Type B Event Date, each holder of
Series C Preferred Stock shall deliver its certificates for shares of Series
C Preferred Stock to the Company at its principal office. Except as provided
in this Certificate of Designation, all rights with respect to such Series C
Preferred Stock shall terminate on the Type B Event Date, and on such Type B
Event Date the holders of the shares of Series D Preferred Stock into which
the shares of Series C Preferred Stock were converted shall have all of the
rights accorded to holders of the Company's Series D Preferred Stock.
(e) The rights of holders of shares of Series C Preferred Stock pursuant
to this Section 6 shall not be transferable, except to an Affiliate as of the
Initial Issue Date of the holder.
SECTION 7. GENERAL PROVISIONS RELATING TO CONVERSION
The following provisions shall be applicable to any conversion pursuant
to either Section 5 or Section 6 hereof.
(a) As promptly as practicable after the surrender as hereinabove
provided of certificates representing shares of Series C Preferred Stock
converted or to be converted into shares of Common Stock or Series D
Preferred Stock, the Company shall deliver or cause to be delivered to the
holder, or the holder's designee, certificates representing the number of
fully paid and non-assessable shares of Common Stock or Series D Preferred
Stock into which the shares of Series C Preferred Stock are converted
(including any adjustment pursuant to Section 8(b) below) and, if less than
the entire number of shares of Series C Preferred Stock represented by the
certificate or certificates surrendered is to be converted, a new certificate
for the number of shares of Series C Preferred Stock not so converted. So
long as any shares of Series C Preferred Stock remain outstanding, the
Company shall not close its Common Stock transfer books. The issuance of
certificates representing shares of Common Stock or Series D Preferred Stock
issued upon the conversion of shares of Series C Preferred Stock shall be
made without charge to the holder of Series C Preferred Stock for any tax in
respect of the issuance of such certificates (other than any transfer,
withholding or other tax if the shares of Common Stock or Series D Preferred
Stock are to be registered in a name different from that of the registered
holder of Series C Preferred Stock).
(b) No fractional shares of Common Stock or scrip representing
fractional shares of Common Stock or Series D Preferred Stock shall be issued
upon any conversion of any shares of Series C Preferred Stock, and the number
of shares of Common Stock or Series D Preferred Stock to be issued shall be
rounded up to a whole share.
(c) The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock and preferred stock, par value
$.001 per share, solely for the purpose of effecting the conversion of shares
of Series C Preferred Stock and Series B Preferred Stock and the issuance of
Common Stock in respect of the Warrants and the Carlyle Warrants, the full
number of whole shares of Common Stock and Series D Preferred Stock then
deliverable upon the conversion of all shares of Series B Preferred Stock and
Series C Preferred Stock then outstanding and the issuance of Common Stock in
respect of the Warrants and the Carlyle Warrants. The Company shall take at
all times such corporate action as shall be
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necessary in order that the Company may validly and legally issue fully paid
and non-assessable shares of Common Stock or Series D Preferred Stock upon
the conversion of shares of Series B Preferred Stock and Series C Preferred
Stock in accordance with the provisions of Section 5 and Section 6, and the
issuance of Common Stock in respect of the Warrants and the Carlyle Warrants.
If at any time the number of authorized but unissued shares of Common Stock
or Series D Preferred Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series B Preferred Stock and the Series
C Preferred Stock and the issuance of Common Stock in respect of the Warrants
and the GE Warrants, in addition to such other remedies as shall be available
to the holders of the Series C Preferred Stock, the Company shall forthwith
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock and Series D Preferred Stock to such numbers
of shares as shall be sufficient for such purpose, including but not limited
to promptly calling and holding a meeting of the Company's stockholders, at
which the Company's stockholders shall vote on a proposed amendment to the
Certificate of Incorporation that would so increase the number of authorized
shares of Common Stock or preferred stock, par value $.001 per share, as
appropriate, a favorable vote for which amendment shall have been recommended
to the Company's stockholders by the Board of Directors, pursuant to a duly
and validly adopted resolution of the Board of Directors setting forth the
amendment proposed and declaring its advisability, all in accordance with
Section 242 of the Delaware General Corporation Law; and, in case of an
increase in the number of authorized shares of such preferred stock, the
Board of Directors shall promptly cause to become effective a certificate of
increase pursuant to Section 151 of the Delaware General Corporation Law.
(d) If any shares of Common Stock or Series D Preferred Stock to be
reserved for the purpose of conversion of Series C Preferred Stock require
registration or listing with, or approval of, any governmental authority,
stock exchange, NASD Inc., Nasdaq or other regulatory body under any federal
or state law, federal or state regulation, rule of NASD Inc., Nasdaq or
otherwise, before such shares may be validly issued or delivered upon
conversion, the Company shall, in good faith and as expeditiously as
practicable, endeavor to secure such registration, listing or approval, as
the case may be.
(e) All shares of Common Stock or Series D Preferred Stock that may be
issued upon conversion of the Series C Preferred Stock shall upon issuance by
the Company be validly issued, fully paid and non-assessable and free from
all taxes, liens and charges with respect to the issuance thereof.
(f) In the event of any taking by the Company of a record of the holders
of any class of Capital Stock for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of Capital
Stock or any other securities or property, or to receive any other right, the
Company shall mail to each holder of Series C Preferred Stock, at least 20
days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
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(g) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any
other action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but shall at
all times in good faith assist in the carrying out of all the provisions of
this Section 7 and Sections 5, 6 and 8 and in the taking of all such action
as may be necessary or appropriate in order to protect the conversion rights
of the holders of the shares of Series C Preferred Stock against impairment
of any kind.
SECTION 8. CONVERSION PRICE.
(a) As used herein, the "Conversion Price" shall initially be $8.375 per
share of Common Stock, subject to adjustment as set forth below. In order to
prevent the dilution of the rights granted hereunder, the Conversion Price
shall be subject to adjustment from time to time as provided in this Section
8.
(b) If and whenever the Company issues or sells or, in accordance with
Section 8(c), is deemed to have issued or sold, any share of Common Equity
without consideration or for a consideration per share less than the
Conversion Price in effect immediately prior to such issuance or sale, the
Conversion Price in effect immediately prior to such time shall immediately
be reduced to the price determined by dividing (i) an amount equal to the sum
of (A) the number of shares of Common Equity outstanding immediately prior to
such issuance multiplied by the Conversion Price in effect immediately prior
to such issuance, and (B) the consideration, if any, received by the Company
upon such issuance, by (ii) the total number of shares of Common Equity
outstanding immediately after such issuance. Notwithstanding the foregoing,
there shall be no adjustment to the Conversion Price with respect to (i) the
granting of stock options to employees of the Company authorized but not
granted as of the Initial Issue Date for an aggregate of up to 300,000 shares
of Common Equity (as such number of shares is equitably adjusted for
subsequent stock splits, reclassifications, stock combinations, stock
dividends and recapitalizations), or (ii) the issuance upon exercise of up to
300,000 shares of Common Equity (as such number of shares is equitably
adjusted for subsequent stock splits, stock combinations, stock dividends and
recapitalizations) in connection with the stock options described in clause
(i) of this sentence.
(c) For purposes of determining the adjusted Conversion Price under
Section 8(b) above, the following shall be applicable:
(1) CONSIDERATION. If any Common Equity, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for
cash, the consideration received therefor shall be deemed to be the cash
amount received by the Company therefor (which, in the case of any public
offering of such securities for cash, shall not be reduced for any
underwriters discount, and in no event shall be reduced by the amount of
any reasonable expenses actually paid by the Company in connection
therewith). In case any Common Equity, Options or Convertible Securities
are issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by
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the Company shall be the fair market value of such consideration. In
case any Common Equity, Options or Convertible Securities are issued to
the owners of the other constituent entity in connection with any merger
in which the Company or any Subsidiary of the Company is a constituent
entity, the amount of consideration for such Common Equity, Options or
Convertible Securities shall be deemed to be the fair market value of
such portion of the net assets and business of such other constituent
entity as is fairly attributable to such Common Equity, Options or
Convertible Securities, as the case may be. The fair market value of any
consideration other than cash shall be determined jointly by the Company
and the Majority Holders. If such parties are unable to reach agreement
within a reasonable period of time, such fair market value shall be
determined by an appraiser jointly selected by the Company and the
Majority Holders. If such parties are unable to reach agreement within a
reasonable period of time, such fair market value shall be determined by
an appraiser reasonably selected by the Company and reasonably approved
by the Majority Holders. The determination of such appraiser shall be
final and binding on the Company and the holders of the shares of Series
C Preferred Stock, and the fees and expenses of such appraiser shall be
paid by the Company, unless the fair market value determined by such
appraiser is less than five percent (5%) above the value proposed in
writing by the Company and rejected by the Majority Holders prior to the
selection of such appraiser, in which event the fees and expenses of such
appraiser shall be for the account of the holders of the then outstanding
shares of Series C Preferred Stock (on a pro rata basis).
(2) OPTIONS AND CONVERTIBLE SECURITIES. In the case of the granting
or sale of any Option or Convertible Security (whether or not at the time
convertible, exercisable or exchangeable):
(A) the aggregate maximum number of shares of Common Equity
deliverable, directly or indirectly, upon exercise of any
Option shall be deemed to have been issued at the time such
Option was granted and for a consideration equal to the (i)
consideration (determined in the manner provided in subsection
(1) above), if any, received by the Company upon the issuance
of such Option plus (ii) the minimum purchase price provided in
such Option for the Common Equity covered thereby, up to an
amount equal to the Conversion Price in effect at the time such
Option was granted;
(B) the aggregate maximum number of shares of Common Equity
deliverable upon conversion of or in exchange for any such
Convertible Security, or upon the exercise of any Option to
purchase or acquire any Convertible Security and the subsequent
conversion or exchange thereof, shall be deemed to have been
issued at the time such Convertible Security was issued or such
Option was issued and for a consideration equal to the
consideration, if any, received by the Company for any such
Convertible Security and any related Option, plus the
additional consideration (determined in the manner provided in
subsection (1)
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above), if any, to be received by the Company upon the
conversion or exchange of such Convertible Security, or upon
the exercise of any related Option to purchase or acquire any
Convertible Security and the subsequent conversion or exchange
thereof;
(C) on any change in the number of shares of Common Equity
deliverable, directly or indirectly, upon conversion, exercise
or exchange of any such Option or Convertible Security or any
change in the consideration to be received by the Company upon
such exercise, conversion or exchange, including, but not
limited to, a change resulting from the anti-dilution
provisions thereof, the Conversion Price as then in effect
shall forthwith be readjusted to such Conversion Price as would
have been obtained had an adjustment been made upon the
issuance of such Option or Convertible Security upon the basis
of such change;
(D) if the Conversion Price shall have been adjusted upon the
issuance of any such Option or Convertible Security, no further
adjustment of the Conversion Price shall be made for the actual
issuance of Common Equity upon any exercise, conversion, or
exchange thereof;
provided, however, that none of the events set forth in Section 8(c)(2)(A)
through 8(c)(2)(D), inclusive, shall result in any increase in the
Conversion Price.
(3) INTEGRATED TRANSACTION. In case any Option is issued in
connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options shall be deemed to have been issued without consideration.
(4) TREASURY SHARES. The number of shares of Common Equity
outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held shall be considered an issuance or sale of Common Equity.
(5) RECORD DATE. If the Company takes a record of the holders of
Common Equity for the purpose of entitling them (A) to receive a dividend
or other distribution payable in Common Equity, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Equity, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issuance or sale of the shares of Common Equity deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(d) If the Company at any time subdivides (by any stock split, stock
dividend, reclassification, recapitalization or otherwise) one or more classes
of its outstanding shares of Common Equity into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced. If the Company at any time combines
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(by reverse stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination shall be proportionately
increased.
(e) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's
assets or other transaction, in each case which is effected in such a way
that the holders of Common Equity are entitled to receive (either directly or
upon subsequent liquidation) stock, securities, cash, debt instruments or
assets with respect to or in exchange for Common Equity is referred to herein
as a "CORPORATE CHANGE." In case of any Corporate Change, each share of
Series C Preferred Stock then outstanding will become convertible only into
the kind and amount of securities, cash and other property receivable upon
such Corporate Change by the holder of the number of shares of Common Stock
into which such share of Series C Preferred Stock was convertible immediately
prior thereto (assuming such holder of Common Stock failed to exercise any
rights of election). The Company shall not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor
entity (if other than the Company) resulting from consolidation or merger or
the entity purchasing such assets assumes by written instrument the
obligation to deliver to the holders of shares of Series C Preferred Stock
such shares of stock, securities, cash, debt instruments or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
(f) If any event occurs of the type contemplated by the provisions of
this Section 8 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company's Board of
Directors shall make an appropriate adjustment in the Conversion Price so as
to protect the rights of the holders of the shares of Series C Preferred
Stock; provided that no such adjustment shall increase the Conversion Price
obtainable as otherwise determined pursuant to this Section 8.
(g) If the Company declares or pays a dividend upon the Common Equity
payable otherwise than out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles, consistently
applied) except for a stock dividend payable in shares of Common Stock (a
"LIQUIDATING DIVIDEND"), then the Company shall pay to each holder of a share
of Series C Preferred Stock at the time of payment thereof the Liquidating
Dividend which would have been paid to such holder on the Common Stock such
holder would have owned had such holder fully exercised its right to convert
the shares of Series C Preferred Stock into shares of Common Stock
immediately prior to the date on which a record is taken for such Liquidating
Dividend, or, if no record is taken, the date as of which the record holders
of Common Equity entitled to such dividends are to be determined; provided,
however, that if a Liquidating Dividend would involve the declaration or
payment as a dividend of at least the lesser of (i) twenty percent (20%) of
the Company's assets and (ii) Five Million Dollars ($5,000,000), then such
Liquidating Dividend shall, at the option of the Majority Holders, be deemed
to be a Liquidating Event and the rights of the holders of the shares of
Series C Preferred Stock upon such Liquidating Event shall be governed by
Section 4 hereof.
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(h) Any transaction approved by the unanimous vote of the Acquisitions
Committee or the unanimous vote of the Board pursuant to Section 10(c)(4)
hereof shall not result in any adjustment to the Conversion Price in effect
as of the closing of such transaction.
SECTION 9. NO REDEMPTION.
The shares of Series C Preferred Stock shall not be subject to
mandatory redemption by the Company.
SECTION 10. VOTING RIGHTS AND RELATED PROVISIONS.
(a) The Holders of shares of the Series C Preferred Stock will have the
right to vote with the holders of Common Stock and the holders of the Series
B Preferred Stock with respect to all matters submitted to a shareholder
vote, except for the election of directors, which will be governed by Section
10(b) below. Each Holder of Series C Preferred Stock will have one vote for
every share of Common Stock into which each share of Series C Preferred Stock
is convertible pursuant to Sections 5 and 7 hereof as of the record date for
such vote; provided, however, that the aggregate number of votes under this
Section 10(a), when combined with the aggregate number of votes attributable
to the holders of the Series B Preferred Stock pursuant to Section 10(a) of
the Certificate of Designation with respect to the Series C Preferred Stock,
with respect to any given matter submitted to a shareholder vote, shall not
exceed 37% of the total number of votes eligible to be cast with respect to
such matter (the "AGGREGATE VOTING LIMITATION"). In order to effectuate the
Aggregate Voting Limitation, the eligible votes allocable to each holder of
shares of Series B Preferred Stock and Series C Preferred Stock shall be
reduced, on a pro rata basis based on the percentage of aggregate Series B
Preferred Stock and Series C Preferred Stock liquidation preference
attributable to the shares owned by such holder, to the highest whole number
consistent with the Aggregate Voting Limitation. Any shares of Series B
Preferred Stock or Series C Preferred Stock held by the Company or any
Subsidiary of the Company shall not have voting rights hereunder and shall
not be counted in determining the presence of a quorum or in calculating any
percentage of shares under this Section 10.
(b) The provisions set forth in this Section 10(b) shall govern the
rights of the holders of the Series C Preferred Stock to elect directors of
the Company:
(1) SERIES C DIRECTOR; JOINT DIRECTOR.
(A) The number of directors of the Company shall be as from time
to time fixed by, or determined in the manner provided in, the Certificate
of Incorporation and the Bylaws of the Company (subject, in all respects,
to the protective provisions contained in Section 11 hereof). Prior to a
Type B Event Date, the number of directors shall be no less than eight (8)
nor more than nine (9), of which one member shall be the Joint Director.
One such director shall be designated as "SERIES C DIRECTOR" and shall be
elected by the Majority Holders and one such director shall be designated
as "JOINT DIRECTOR" and shall be an Independent director nominated by the
Majority Holders of the Series B Preferred Stock and the Majority Holders
of the Series C Preferred Stock,
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approved by the Board of Directors in its sole discretion. Unless a Type
B Conversion Notice has been given, the Series C Director shall
automatically be removed if the aggregate liquidation preference with
respect to the Series C Preferred Stock owned by the Initial Purchaser
and any Affiliate as of the Initial Issue Date of the Initial Purchaser,
taken as a whole, falls below 25% of the total liquidation preference of
the shares of Series C Preferred Stock and shares of Series A Preferred
Stock outstanding on the Initial Issue Date. Prior to a Type B Event
Date, the Majority Holders shall have the exclusive right to remove such
Series C Director without cause at any time and to designate another
person as the Series C Director.
(B) The Preferred Stock Directors shall be divided into three (3)
classes as nearly equal in number as possible, with the term of office of
the first Preferred Stock Director to be nominated and elected by the
holders of the Series B Preferred Stock, at their option at any time after
the initial issuance of the shares of Series B Preferred Stock, to expire
at the annual meeting of stockholders held in 1998, the term of office of
the second Preferred Stock Director to be nominated and elected by the
holders of the Series B Preferred Stock upon initial issuance of the shares
of Series B Preferred Stock to expire at the annual meeting of stockholders
held in 2000, the term of office of the Preferred Stock Director to be
nominated and elected by the holders of the Series C Preferred Stock upon
initial issuance of the shares of Series C Preferred Stock to expire at the
annual meeting of stockholders held in 1999, and the term of office of the
Joint Director to expire at the annual meeting of stockholders held in
1997. At each annual meeting of stockholders after such initial
classification and election, directors elected to succeed those directors
whose terms expire at such annual meeting shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders
after their election.
(C) Upon a Type B Event Date, any Series C Director already
serving as a member of the Board shall continue to serve in such position
until the expiration of his term and the election of his successor or until
his earlier death, removal, resignation or retirement. After a Type B Event
Date, the Joint Director and the Series C Director shall be subject to
removal only for cause and only by the affirmative vote of eighty percent
(80%) of the combined voting power of the outstanding shares of the
Corporation entitled to vote. The Preferred Stock Directors and the Joint
Director shall not be removed without cause otherwise than as described in
this Section 10(b)(1).
(D) After a Type B Event Date, the Board of Directors shall
comprise: (i) one Joint Director, until the expiration of his term, as
provided herein; (ii) three Preferred Stock Directors, until the expiration
of their respective terms, after which time such positions previously
elected by holders of the series of Preferred Stock that gave the Type B
Conversion Notice shall be subject to election by holders of shares of
Series D Preferred Stock, subject to the limitations contained in the
Series D Certificate of Designation; (iii) not less than four (4) nor more
than five (5) additional directors elected by holders of shares of Common
Equity and Series D Preferred Stock, subject to the limitations contained
in the Series D Certificate of Designation; and (iv) such number of other
directors (the "CONVERSION DIRECTORS") elected following a Type B Event
Date by
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the holders of shares of Series D Preferred Stock as is determined
pursuant to the Series D Certificate of Designation.
(2) With respect to filling the vacancy on the Board of Directors
with respect to the initial Joint Director, the holders of shares of Series
B Preferred Stock and Series C Preferred Stock shall give written notice to
the Secretary of the Company of the identity of the person nominated by
such holders. Such written notice shall be executed, manually, or by
photocopy or facsimile, in any number of counterparts, by the Majority
Holders of the Series B Preferred Stock and by the Majority Holders of the
Series C Preferred Stock. The person so nominated shall be "independent,"
which means that such person shall not be a director, officer, or employee
or affiliate (as defined in Section 203(c) of the Delaware General
Corporation Law) of any of the holders of Series B Preferred Stock or
Series C Preferred Stock or of the Company. Upon receipt of such written
notice, the Board of Directors shall have ten (10) business days in which
to approve or disapprove such nominee. If the Board of Directors approves
such nominee, such nominee shall immediately fill such vacancy. If the
Board of Directors disapproves such nominee, the Secretary of the Company
shall immediately give written notice thereof to all of the holders of
shares of Series B Preferred Stock and Series C Preferred Stock. If such a
written notice from the Secretary has not been received by such holders
twelve (12) business days after the receipt by the Company of such written
notice of nomination, then the Board of Directors shall be conclusively
deemed to have approved such nominee and such nominee shall immediately
fill such vacancy. If such written notice from the Secretary has been so
received within such twelve (12) business days, such holders may nominate
another independent person by written notice to the Secretary, subject to
the same approval process as hereinabove provided. Such process of
nomination and approval or disapproval shall continue until an independent
person is nominated who is approved or deemed to be approved by the Board
of Directors. No nominations for such director shall be made or received
other than as described in this Section 10(b)(2).
(3) With respect to the nomination and election of succeeding Joint
Directors, the holders of shares of Series B Preferred Stock and Series C
Preferred Stock shall give timely written notice to the Secretary of the
Company of the identity of the person nominated by such holders. Such
written notice shall be executed, manually, or by photocopy or facsimile,
in any number of counterparts, by the Majority Holders of the Series B
Preferred Stock and by the Majority Holders of the Series C Preferred
Stock. Such written notice shall be timely if received at the principal
executive office of the Company not less than 60 days nor more than 120
days before the meeting of shareholders at which such director is to be
elected. The person so nominated shall be "independent," which means that
such person shall not be a director, officer, employee or affiliate (as
defined in Section 203(c) of the Delaware General Corporation Law) of any
of the holders of Series B Preferred Stock or Series C Preferred Stock or
the Company. Upon receipt of such written notice, the Board of Directors
shall have ten (10) business days in which to approve or disapprove such
nominee. If the Board of Directors disapproves such nominee, the Secretary
of the Company shall immediately give written
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notice thereof to all of the holders of shares of Series B Preferred
Stock and Series C Preferred Stock. If such a written notice from the
Secretary has not been received by such holders twelve (12) business days
after the receipt by the Company of such written notice of nomination,
then the Board of Directors shall be conclusively deemed to have approved
such nominee. If such written notice from the Secretary has been so
received within such twelve (12) business days, such holders may nominate
another independent person by written notice to the Secretary, subject to
the same approval process as hereinabove provided. Such process of
nomination and approval or disapproval shall continue until an
independent person is nominated who is approved or deemed to be approved
by the Board of Directors. No nominations for such director shall be
made or received other than as described in this Section 10(b)(3).
Election of such person shall be by the holders of shares of the
Company's Common Stock.
(4) Prior to a Type B Event Date, a vacancy of a Preferred Stock
Director position shall be filled only by a majority vote of or written
consent of holders of a majority of the then outstanding shares of the
series of Preferred Stock that elected the director whose death,
resignation, retirement, disqualification or removal from office caused the
vacancy. Prior to a Type B Event Date, a vacancy of the position of Joint
Director shall be filled only by the Board of Directors, following
nomination by holders of a majority of the then outstanding shares of
Series B Preferred Stock and holders of a majority of the then outstanding
shares of the Series C Preferred Stock, pursuant to the procedure described
in Section 10(b)(2). Directors chosen pursuant to any of the foregoing
provisions shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which they have been elected
expires and until their successors are duly elected and have qualified or
until their earlier resignation or removal. If holders of shares of Series
C Preferred Stock shall, pursuant to the Certificate of Incorporation, but
not as a result of a Type B Conversion, cease to have the right to elect
any Preferred Stock Directors, then the director elected by holders of
shares of Series C Preferred Stock shall be deemed to have resigned
immediately upon such cessation. Upon the occurrence of any such deemed
resignation referred to in the immediately preceding two sentences, the
directorship previously held by the director deemed to have resigned shall
automatically become a vacancy to be filled by the Board of Directors.
(5) Shares of Series C Preferred Stock shall be deemed to be shares
"entitled to vote" or entitled to vote in the election of directors for
purposes of the provisions of the Certificate of Incorporation that employ
such terms, and, for purposes of such provisions at any time, each
outstanding share of Series C Preferred Stock shall count as such number of
shares of Common Stock into which such share of Series C Preferred Stock is
then convertible pursuant to Sections 5 and 7 hereof (subject to the
percentage limitation set forth in Section 10(a) hereof as such percentage
limitation would otherwise apply pursuant to such Section 10(a)).
(c) Immediately following the initial issuance of shares of Series B
Preferred Stock, the Board of Directors shall appoint the following
committees of the Board of Directors with the
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respective duties, membership and voting requirements stated below. After
such appointment and until a Type B Event Date, the following matters shall
be deemed approved by the Board of Directors only upon receiving the
affirmative vote of a majority of the Board of Directors and a majority of
the directors elected by the holders of the Series B Preferred Stock and the
Series C Preferred Stock: (A) a decision to eliminate or discharge the Audit
Committee, Compensation Committee, Executive Committee or the Acquisitions
Committee, as described more fully below (such committees are the
"COMMITTEES"), (B) a decision to reduce, narrow, attenuate or otherwise
weaken the delegation of powers by the Board of Directors to any of the
Committees, unless such reduction, narrowing, attenuation or other weakening
is the transfer of delegated powers from the Compensation Committee or the
Acquisitions Committee to the Executive Committee, (C) a decision to change
the number of members of any Committee, the identity of the persons or
entities entitled to select each of the members of any Committee, the size of
the required vote for approval by any Committee and the size of the required
vote of the Board of Directors necessary to approve actions that failed to
obtain the required approval vote on the appropriate Committee; and (D) a
decision to create any new committee. If the holders of the Series C
Preferred Stock shall cease to have the right to nominate and elect any
director at all, otherwise than as a result of the conversion of their shares
of Series C Preferred Stock in a Type B Conversion, then such holders shall
no longer have the right to select any member of any of the committees set
forth below and the member or members of such committees selected by such
holders shall automatically cease to be a member or members of such
committees.
(1) COMPENSATION COMMITTEE. The Compensation Committee shall
consist of three (3) members, at least one (1) of whom shall be
selected jointly by the Series C Director and directors elected by
holders of the Series B Preferred Stock (the "SERIES B DIRECTORS"),
and who shall be a director. An affirmative vote of at least two (2)
members of the Compensation Committee shall be required for approval
of matters considered by the Compensation Committee. The Compensation
Committee shall ensure that the representative on the Compensation
Committee nominated by the Series B Directors and the Series C
Director receive adequate notice of and an opportunity to participate
in any meetings of the Compensation Committee;
(2) AUDIT COMMITTEE. The Audit Committee shall consist of three
(3) directors, including as many Independent directors as are
available, not to exceed three (3). An affirmative vote of at least
two (2) members of the Audit Committee shall be required for approval
of matters considered by the Audit Committee.
(3) EXECUTIVE COMMITTEE. The Executive Committee shall consist
of four (4) members, one (1) of whom shall be the Series C Director,
one (1) of whom shall be selected by the Series B Directors (and shall
be a Series B Director) and two (2) of whom shall be selected by the
Board of Directors (and shall be directors). The members selected by
the Series B Directors and the Series C Director may be removed only
by the Series B Directors and the Series C Director, respectively.
The Executive Committee shall, in addition to the customary duties of
an executive committee, have the right to approve any
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financing activity, including but not limited to the Capital Budget Plan.
An affirmative vote of at least three (3) members of the Executive
Committee shall be required for approval of any matters considered by the
Executive Committee. Each financing activity not approved by the
Executive Committee may be referred to the Board of Directors for
approval, which approval shall require a Supermajority Vote; and
(4) ACQUISITIONS COMMITTEE. The Acquisitions Committee shall
consist of four (4) members, one (1) of whom shall be the Series C
Director, one (1) of whom shall be selected by the Series B Directors
(and shall be a Series B Director), and two (2) of whom shall be
selected by the Board of Directors (and shall be directors). The
Acquisitions Committee shall have the right to approve any transaction
of the types described in Section 11(n), (o), (p) and (q) with respect
to which transaction the aggregate consideration payable in connection
with such transaction (including, without limitation, cash
consideration, the fair market value of any securities and the net
present value of any deferred consideration) is less than $15 million.
A unanimous vote of the Acquisitions Committee shall be required for
approval of any matters considered by the Acquisitions Committee.
Except as described in Section 10(d)(5) below, each matter considered
but not unanimously approved by the Acquisitions Committee may be
referred to the Board of Directors for approval, which approval shall
require a majority vote of the Board of Directors.
(5) CERTAIN TRANSACTIONS. The unanimous approval of the
Acquisitions Committee or the unanimous approval of the Board of
Directors shall be required before the Company or any of its
Subsidiaries engage in a transaction of the types described in Section
11(n), (o) (which, only for purposes of this clause, shall also apply
to Capital Expenditures made by the Company in the ordinary course of
business), (p) and (q), in which transaction: (A) the aggregate
consideration payable in connection with such transaction (including,
without limitation, cash consideration, the fair market value of any
securities and the net present value of any deferred consideration) is
less than $15 million; and (B) the Company is to issue its Common
Equity at an implicit or explicit price of less than $8.375 per share.
Such implicit price shall be determined in an appraisal approved
unanimously by the Acquisitions Committee or unanimously by the Board
of Directors, such appraisal to be performed by an independent
appraiser selected unanimously by the Acquisitions Committee or
unanimously by the Board of Directors.
(d) Prior to a Type B Event Date, the following matters shall be deemed
approved by the Board of Directors only upon a Supermajority Vote in respect of
any such matter:
(A) Approving the annual Capital Budget Plan; and
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(B) Approving the Company entering into any financing activity
not approved by the Executive Committee.
(e) The bylaws of the Company may be altered, amended, or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors at any
regular or special meeting of the stockholders or the Board of Directors, but
only if such alteration, amendment, repeal, or adoption has been approved:
(1) in case of adoption by the Board of Directors prior to the First
Meeting following a Type B Event Date, by a majority of the Preferred Stock
Directors and either (A) a majority of the entire Board of Directors (if such
alteration, amendment, repeal, or adoption does not increase the number of
directors) or (B) by at least 80% of the members of the entire Board of
Directors (if such alteration, amendment, repeal, or adoption does increase the
number of directors);
(2) in case of adoption by the stockholders at any meeting of
stockholders (other than the First Meeting following a Type B Event Date) with a
record date on or prior to a Type B Event Date, by holders of at least eighty
percent (80%) of the outstanding shares of the Corporation entitled to vote in
the election of directors, voting as one class, and by holders of a majority of
the shares, outstanding as of such record date, of whichever (or both) of Series
B Preferred Stock and Series C Preferred Stock continued (as of such record
date) to have the right under the certificate of incorporation to elect one or
more Preferred Stock Directors.
(f) If a Type B Event Date occurs prior to October 14, 1999, then the
following provisions shall apply:
(1) From such Type B Event Date until the second subsequent annual
stockholders meeting of the Company after such Type B Event Date, none of
the following actions or transactions shall be effected by the Company or
approved by the Company as a stockholder of any Subsidiary of the Company,
and neither the Initial Purchaser nor any other holder of shares of
Series D Preferred Stock (other than a holder pursuant to either a transfer
permitted under Rule 144 under the Securities Act of 1933, as amended or a
transfer pursuant to a registered offering under registration rights from
the Company) shall engage in, or be a party to, any of the following
actions or transactions involving the Company or any Subsidiary of the
Company, if, as of the record date for the determination of the
stockholders entitled to vote thereon, or consent thereto, any other Person
which obtained its equity interest in the Company as a result of a transfer
of securities from the Initial Purchaser or any other Person referred to in
clauses (A) through (D) of this sentence beneficially owns or controls,
directly or indirectly, five percent (5%) or more of the outstanding shares
of the Company entitled to vote:
(A) any merger or consolidation of the Company or any of its
Subsidiaries with or into such other Person;
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(B) any sale, lease, exchange or other disposition of all or any
substantial part of the assets of the Company or any of its
Subsidiaries to such other Person;
(C) the issuance or delivery of any voting securities of the
Company or any of its Subsidiaries to such other Person in exchange
for cash, other assets or securities, or a combination thereof; or
(D) any dissolution or liquidation of the Company;
PROVIDED, HOWEVER, that such prohibition shall not apply with respect to
any such action or transaction approved by (I) the affirmative vote of not
less than eighty percent (80%) of the outstanding shares of the Company
entitled to vote or (II) at least two-thirds (2/3) of the directors of the
Company (which must include either (i) the Joint Director, if either (x)
such Joint Director served in such position as of the Type B Event Date, or
(y) such Joint Director has been approved by a majority of the directors
who were Common Stock Directors as of the Type B Event Date, or (ii) at
least one director who was a Common Stock Director prior to the Type B
Event Date, unless neither the Joint Director, nor any of such Common Stock
Directors continue to serve on the Board of Directors at such time). For
purposes of this Section 10(f), a Person shall be deemed to own or control,
directly or indirectly, any outstanding shares of stock of the Company (A)
which it has the right to acquire pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or otherwise, or (B)
which are beneficially owned, directly or indirectly (including shares
deemed owned through application of clause (A) above), by any other
corporation, person or other entity (x) with which it or its "affiliate" or
"associate" (as defined below) has any agreement, arrangement, or
understanding for the purpose of acquiring, holding, voting or disposing of
stock of the Company or (y) which is its "affiliate" or "associate," as
those terms are defined under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
(2) No transfer of Series C Preferred Stock may be made by the
Initial Purchaser or any Affiliate of the Initial Purchaser (other than a
transfer permitted under Rule 144 under the Securities Act or a transfer
pursuant to a registered offering under registration rights from the
Company) unless prior thereto, the transferee in such transfer shall have
entered into an agreement in form and substance reasonably satisfactory to
the Company, agreeing to be bound by the terms of Section 10(f)(1).
(g) The Majority Holders shall have the right to appoint one (1) observer
(who may be, but shall not be required to be, an employee of the Initial
Purchaser) to attend each meeting of the Board of Directors of the Company and
each meeting of any committee of the Board of Directors (the "Board Observer")
The Board Observer shall be entitled to a copy of all written materials
(including Board meeting agendas and background materials) distributed to each
member of the Board of Directors of the Company as and when so distributed.
SECTION 11. PROTECTIVE PROVISIONS.
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Without limiting the provisions of any other Series of Preferred Stock, for
so long as the Initial Purchaser and any Affiliate as of the Initial Date of the
Initial Purchaser, taken as a whole, owns or own at least 33% in total
liquidation preference, taken as a whole, of the outstanding shares of Series C
Preferred Stock and the outstanding shares of Series A Preferred Stock, the
Company shall not take, and shall cause its Subsidiaries not to take, any of the
following actions without the affirmative vote of holders of at least
sixty-seven percent (67%) of the shares of the Series C Preferred Stock then
outstanding:
(a) alter, change or amend (by merger or otherwise) any of (i) the rights,
preferences and privileges of the Series C Preferred Stock or any other class of
Capital Stock, or (ii) the terms or provisions of any Option or Convertible
Security;
(b) enter into any transaction or event that could result in a Special
Corporate Event with respect to the Company or any Subsidiary;
(c) initiate any Liquidating Event with respect to the Company or any
Subsidiary;
(d) amend, restate, alter, modify or repeal (by merger or otherwise) the
Certificate of Incorporation or the Amended Bylaws of the Company, including,
without limitation, amendment, restating, modifying or repealing (by merger or
otherwise) any certificate of designation or preferences (as in effect from time
to time) relating to the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock or the Series D Preferred Stock, including, without
limitation, the filing by the Company of a certificate with the Secretary of
State of the State of Delaware, pursuant to Section 151(g) of the Delaware
General Corporation Law, setting forth a resolution or resolutions adopted by
the Board of Directors of the Company that none of the authorized shares of
Series D Preferred Stock are outstanding and that none will be issued subject to
the Series D Certificate of Designation;
(e) amend, restate, alter, modify or repeal (by merger or otherwise) or
permit any Subsidiary to amend, restate, alter, modify or repeal (by merger or
otherwise) the certificate of incorporation, other organizational documents, or
bylaws of any Subsidiary in any material respect;
(f) change the number of directors of the Company to a number less than
eight (8) or more than nine (9) or the manner in which the directors are
selected, as provided in the Certificate of Incorporation, Amended Bylaws,
Series B Preferred Stock Certificate of Designation, Series C Preferred Stock
Certificate of Designation and Series D Preferred Stock Certificate of
Designation;
(g) incur any Indebtedness, in the aggregate with respect to the Company
and its Subsidiaries, in excess of $15 million in any Fiscal Year; PROVIDED,
HOWEVER, that this provision shall not apply to draw-downs under any credit
facility as to which a credit agreement had been executed and delivered on or
prior to the Initial Issue Date;
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(h) become a party to Operating Leases during any Fiscal Year with respect
to which the present value of all payments due during the term of such Operating
Leases in the aggregate (determined using a discount rate of 10%) exceed $15
million;
(i) create, authorize or issue any shares of Series C Preferred Stock or
any class or series of Senior Securities, Parity Securities or Supervoting
Securities or shares of any such class or series;
(j) reclassify any authorized stock of the Company into Series C Preferred
Stock or any class or series of Senior Securities, Parity Securities,
Supervoting Securities or shares of such class or series;
(k) increase or decrease the authorized number of shares of Series C
Preferred Stock or any class or series of Senior Securities or Parity Securities
or shares of any such class or series;
(l) issue any equity security below either the then current Market Price
(without deduction for any underwriters' discount) or the then-applicable
Conversion Price other than for (A) management stock options currently
authorized and available for grant for not more than Three Hundred Thousand
(300,000) shares of Common Stock in the aggregate, in which senior management of
the Company shall not participate, (B) management stock options exercisable at
not less than the then-applicable Conversion Price per share of Common Stock
issued after October 14, 1997, exercisable for not more than Five Hundred
Thousand (500,000) shares of Common Stock in the aggregate, in which only
certain members of senior management of the Company shall participate, and
(C) the Common Stock underlying such management stock options and other stock
options outstanding as of October 14, 1997;
(m) declare or pay any dividend or make any distribution (including
without limitation by way of redemption, purchase or other acquisition) with
respect to shares of Capital Stock or any securities convertible into, or
exercisable, redeemable or exchangeable for, any share of Capital Stock
(including without limitation any Option or Convertible Security) directly or
indirectly, whether in cash, obligations or shares of the Company or other
property;
(n) acquire, in one or a series of related transactions, any equity
ownership interest or interests of any Person, where the aggregate consideration
payable in connection with such acquisition (including without limitation cash
consideration, the fair market value of any securities and the net present value
of any deferred consideration) is equal to or greater than $15 million;
(o) acquire any asset or assets of any Person in any transaction or
transactions, where the aggregate consideration payable in connection with any
single such transaction (including, without limitation, cash consideration, the
fair market value of any securities and the net present value of any deferred
consideration), whether such transaction is effected in a single transaction or
a series of related transactions, is greater than $15 million; PROVIDED,
HOWEVER, that this provision shall not apply to Capital Expenditures made by the
Company in the Ordinary Course of Business;
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(p) merge or consolidate with any Person, or permit any other Person to
merge into it, where (i) the stockholders of the Company immediately prior to
the consummation of such merger or consolidation shall, immediately after the
consummation of such merger or consolidation, hold securities possessing more
than 50% of either the total voting power of and the beneficial ownership
interests in the surviving entity of such merger or consolidation and (ii) the
equity holders of the subject Person immediately prior to the consummation of
such transaction shall receive (directly or indirectly) aggregate consideration
payable in connection with such transaction (including without limitation cash
consideration, the fair market value of any securities and the net present value
of any deferred consideration) equal to or greater than $15 million,
(q) cause or permit any Subsidiary to merge or consolidate with any Person
(other than the Company or a wholly-owned Subsidiary of the Company), or cause
or permit any other Person to merge into it, where: (i) the stockholders of such
Subsidiary immediately prior to the consummation of such merger or consolidation
shall, immediately after the consummation of such merger or consolidation, hold
securities possessing more than 50% of both the total voting power of and the
beneficial ownership interests in the surviving entity of such merger or
consolidation and (ii) the equity holders of the subject Person immediately
prior to the consummation of such transaction shall receive (directly or
indirectly) aggregate consideration payable in connection with such transaction
(including without limitation cash consideration, the fair market value of any
securities and the net present value of any deferred consideration) equal to or
greater than $15 million;
(r) substantially and materially engage in, either through acquisition or
internal development, any business other than the business of providing
diagnostic services to the healthcare industry;
(s) make or permit any of its Subsidiaries to make Capital Expenditures
any fiscal year in excess, in the aggregate, of two percent (2%) above the
approved Capital Budget Plan for such fiscal year of the Company unless such
expenditure is approved by the Executive Committee of the Board of Directors or
a Supermajority Vote of the Board of Directors of the Company;
(t) (i) sell, transfer, convey, lease or dispose of, outside the Ordinary
Course of Business, any assets or properties of the Company or any Subsidiary,
whether now or hereafter acquired, in any transaction or transactions, if (X)
the aggregate consideration payable in connection with any single such
transaction (including, without limitation, cash consideration, the fair market
value of any securities and the net present value of any deferred
consideration), is greater than $5 million or (Y) the aggregate consideration
payable in connection with all such transactions (including, without limitation,
cash consideration, the fair market value of any securities and the net present
value of any deferred consideration), consummated after the Initial Issue Date,
taken as a whole, is or would become as a result of such transaction greater
than $20 million; (ii) undergo or cause or permit any Subsidiary to undergo a
reorganization or recapitalization; (iii) merge or consolidate with any Person,
or permit any other Person to merge into it, where the stockholders of the
Company immediately prior to the consummation of such
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merger or consolidation shall, immediately after the consummation of such
merger or consolidation, hold securities possessing 50% or less of either the
total voting power of or the beneficial ownership interests in the surviving
entity of such merger or consolidation; or (iv) cause or permit any
Subsidiary to merge or consolidate with any other Person (other than the
Company or a wholly-owned Subsidiary of the Company), or cause or permit any
other Person to merge into such Subsidiary, where the stockholders of such
Subsidiary immediately prior to the consummation of such merger or
consolidation shall, immediately after the consummation of such merger or
consolidation, hold 50% or less of either the total voting power of or the
beneficial ownership interests in the surviving entity of such merger or
consolidation, if (X) the value of the assets of such Subsidiary is greater
than $5 million or (Y) the aggregate value of the assets of all such
Subsidiaries with respect to all such mergers or consolidations consummated
after the Initial Issue Date, taken as a whole, and including such
transaction, is greater than $20 million;
(u) permit any Subsidiary of the Company to issue or sell any share of
Capital Stock, Option or Convertible Security; PROVIDED, HOWEVER, that the
Company may form a new Subsidiary not all of the equity securities of which need
be owned directly or indirectly by the Company (a "PARTIAL SUBSIDIARY"), but
only if (i) at the time of creation of such Partial Subsidiary, such Partial
Subsidiary is designated as such in a written notice to the holders of the
shares of Series C Preferred Stock, and, (ii) cumulatively through time no more
than $5,000 of assets (in the aggregate) are transferred to such Partial
Subsidiary by the Company or any other Subsidiary, and (iii) no liabilities of
such Partial Subsidiary are ever assumed or guaranteed by the Company or any
other Subsidiary; or
(v) issue any share of Series D Preferred Stock, otherwise than pursuant
to a Type B Conversion.
The rights provided to holders of shares of Series C Preferred Stock in
this Section 11 shall be in addition to and not in lieu of the other rights and
protections granted to the holders of the shares of Series C Preferred Stock
hereunder.
SECTION 12. REISSUANCE OF SERIES C PREFERRED STOCK.
Shares of Series C Preferred Stock that have been issued and reacquired or
converted in any manner, including shares purchased, redeemed, exchanged, or
converted into shares of Common Equity, shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized but
unissued shares of preferred stock of the Company undesignated as to series and
may be designated or redesignated and issued or reissued, as the case may be, as
part of any series of preferred stock of the Company, provided that such shares
may not in any event be reissued as Series C Preferred Stock.
SECTION 13. BUSINESS DAY.
If any payment, redemption or exchange shall be required by the terms
hereof to be made on a day that is not a Business Day, such payment, redemption
or exchange shall be made on the immediately succeeding Business Day.
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SECTION 14. CERTAIN NOTIFICATION OBLIGATIONS.
The Company will notify the Initial Purchaser of each subsequent sale or
disposition of any assets or properties of either the Company or any Subsidiary
(other than in the Ordinary Course of Business) once the aggregate consideration
payable in connection with all such sales or dispositions for the Company and
its Subsidiaries outside the Ordinary Course of Business (including without
limitation cash consideration, the fair market value of any securities and the
net present value of any deferred consideration) exceeds $10,000,000 in any
fiscal year.
SECTION 15. PREEMPTIVE RIGHTS
(a) Subject to the terms and conditions specified in this Section 15, the
Company hereby grants to each holder of shares of Series C Preferred Stock a
right of first offer with respect to future sales in any transaction or proposed
transaction not involving a public offering by the Company of its shares of
Common Equity or any securities convertible or exchangeable, directly or
indirectly, into Common Equity (collectively, "PREEMPTIVE SECURITIES").
Preemptive Securities shall include, without limitation, all shares of Common
Stock and all Convertible Securities.
(b) Each time the Company proposes to offer any Preemptive Securities in a
transaction not involving a public offering of such Preemptive Securities, the
Company shall first make an offering of such Preemptive Securities to each
holder of shares of Series C Preferred Stock in accordance with the following
provisions:
(1) The Company shall deliver a notice by certified mail (the
"PREEMPTIVE NOTICE") to each holder of shares of Series C Preferred Stock
stating (i) its bona fide intention to offer Preemptive Securities, (ii)
the number of such Preemptive Securities to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Preemptive
Securities. In addition, the Preemptive Notice will contain all other
information which would be provided to prospective purchasers with respect
to the proposed offering.
(2) With respect to any Type A Offering of Preemptive Securities, by
written notification given by each holder of shares of Series C Preferred
Stock within 15 Business Days from the date of the Preemptive Notice, each
holder may elect to purchase or obtain, at the price and on the terms
specified in the Preemptive Notice, up to that portion of such Preemptive
Securities which equals the proportion that the number of shares of Common
Stock issuable upon conversion of the shares of Series C Preferred Stock
then held by such holder bears to the total number of shares of Common
Stock of the Company then outstanding (assuming full conversion of all
convertible securities, including without limitation the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock).
(3) With respect to any Type B Offering of Preemptive Securities, by
written notification given by each holder of shares of Series C Preferred
Stock within 15 Business Days from the date of the Preemptive Notice, each
holder may elect to purchase
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or obtain, at the price and on the terms specified in the Preemptive
Notice, up to that portion of such Preemptive Securities which equals the
proportion that the number of shares of Common Stock issuable upon
conversion of the shares of Series C Preferred Stock then held by such
holder bears to the number of shares of Common Stock of the Company into
which the outstanding shares of Series B Preferred Stock and the
outstanding shares of Series C Preferred Stock are then convertible.
(4) If any of the holders of Series B Preferred Stock decline to
exercise any right of refusal with respect to any offering to such holders
of Series B Preferred Stock of any Preemptive Securities, such holders (the
"DECLINING SERIES B HOLDERS") shall give written notification of such
election to decline to exercise such rights to the Company within 15
Business Days from the date of the Preemptive Notice. Within 3 Business
Days thereafter, the Company shall give written notification (the "DECLINED
PREEMPTIVE SECURITIES NOTICE") to each holder of Series C Preferred Stock
of the following: (i) the total number of shares of Preemptive Securities
which the Declining Series C Holders declined to purchase (collectively,
the "DECLINED PREEMPTIVE SECURITIES"), and (ii) the price and terms
specified in the Preemptive Notice relating to such Declined Preemptive
Securities.
(5) By written notification given by each holder of shares of Series
C Preferred Stock within 3 Business Days from the date of the Declined
Preemptive Securities Notice, each holder of Series C Preferred Stock may
elect to purchase or obtain, at the price and on the terms specified by the
Company for such sale of such Preemptive Securities, such Declined
Preemptive Securities at the price and on the terms specified in the
Preemptive Notice; PROVIDED, HOWEVER, that if the total number of Declined
Preemptive Securities so elected to be purchased by such holders of Series
C Preferred Stock pursuant hereto (collectively, the "ELECTING HOLDERS")
exceeds the total number of Declined Preemptive Securities, each such
Electing Holder shall purchase, and the Company shall sell to such Electing
Holder, that portion of the total number of Declined Preemptive Securities
which equals the proportion that the number of shares of Common Stock
issuable upon conversion of the shares of Series C Preferred Stock then
held by such holder bears to the number of shares of Common Stock of the
Company into which the outstanding shares of all Electing Holders are then
convertible.
(6) If all Preemptive Securities referred to in any Preemptive Notice
are not elected to be obtained as provided in Section 15(b)(2) or 15(b)(3),
or Section 15(b)(4) or 15(b)(5), as applicable, the Company may, at any
time after the latest date set forth above for the exercise of the right to
purchase any such Preemptive Securities by any holder of Series C Preferred
Stock (the "PREEMPTIVE RIGHT EXPIRATION DATE") to the date sixty (60) days
from the Preemptive Right Expiration Date offer the remaining unsubscribed
portion of such Preemptive Securities to any Person or Persons at a price
equal to the price specified in the relevant Preemptive Notice. If the
Company does not enter into an agreement for the sale of the Preemptive
Securities within sixty (60) days after the Preemptive Right Expiration
Date, or if such agreement is not consummated within ninety (90) days of
the Preemptive Right Expiration Date, the right provided under this
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Section 15 shall be deemed to be revived and such Preemptive Securities
shall not be offered unless first reoffered to each holder of shares of
Series C Preferred Stock in accordance herewith.
(7) The rights set forth in this Section 15 shall not be applicable
to the issuance or sale of shares of Common Stock pursuant to Options
approved by the Board to officers, directors and employees of the Company
for the primary purpose of soliciting or retaining their employment or
services.
SECTION 16. DEFINITIONS.
As used in this Certificate, the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa), unless the context otherwise requires:
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of a majority or more of the
voting securities of a Person shall be deemed to be control.
"AMENDED BYLAWS" means the Amended and Restated Bylaws of the Company, as
in effect from time to time.
"AGGREGATE VOTING LIMITATION" has the meaning set forth in Section 10(a).
"BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
"BOARD OBSERVER" has the meaning set forth in Section 10(g).
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL BUDGET PLAN" means, for each fiscal year of the Company, the
plan of the Company for making Capital Expenditures for such fiscal year
which has been approved for such fiscal year by either the Executive
Committee or a Supermajority Vote of the Board of Directors of the Company.
"CAPITAL EXPENDITURES" means, for any period, expenditures made by the
Company or any of its Subsidiaries to acquire or construct fixed assets,
plant and Fixtures and Equipment (including additions, improvements, upgrades
and replacements, but excluding repairs) during such period calculated in
accordance with GAAP.
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"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a lease that would
at such time be required to be capitalized on a balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
"CERTIFICATE OF INCORPORATION" means the certificate of incorporation (as
defined in Section 104 of the Delaware General Corporation Law) of the
Company in effect on the date hereof, including, without limitation, the
Series A, Series B, Series C and Series D Certificates of Designation.
"CHANGE OF CONTROL" with respect to a Person shall be deemed to have
occurred (i) at such time as any person (as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934) at any time shall directly or indirectly
acquire more than 40% in outstanding voting power of such Person, (ii) at
such time as during any one year period, individuals who at the beginning of
such period constitute such Person's Board of Directors or other governing
body cease to constitute at least a majority of such board or governing body
(provided, however, that a change in directors upon a Type B Event Date shall
not be deemed to cause a Change in Control pursuant to this clause (ii)),
(iii) upon consummation of a merger or consolidation of such Person into or
with another Person in which the shareholders of the subject Person
immediately prior to the consummation of such transaction shall own less than
Fifty Percent (50%) of the voting securities of the surviving Person (or the
parent corporation of the surviving Person where the surviving Person is
wholly-owned by the parent corporation) immediately following the
consummation of such transaction or (iv) the sale, transfer or lease of all
or substantially all of the assets of such Person, in any of cases (i), (ii),
(iii) or (iv) in a single transaction or series of related transactions;
PROVIDED, that no Change of Control hereunder with respect to the Company
shall be deemed to occur solely by reason of (x) the ownership by the Initial
Purchaser or any Affiliate thereof or the Majority Holders of the Series C
Preferred Stock or any Affiliate thereof of any Capital Stock of the Company
or (y) the conversion of shares of Series C Preferred Stock into either
Series D Preferred Stock (and any change in the Board of Directors incident
thereto) or Common Stock, or (z) the conversion of shares of Series D
Preferred Stock into Common Stock.
"COMMITTEES" has the meaning set forth in Section 10(e).
"COMMON EQUITY" means all shares now or hereafter authorized of any class
of common stock of the Company (including the Common Stock) and any other
stock of the Company, however designated, authorized after the date hereof,
which has the right (subject always to prior rights of any class or series of
preferred stock) to participate in any distribution of the assets or earnings
of the Company without limit as to per share amount.
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"COMMON STOCK" has the meaning set forth in Section 3(a).
"COMMON STOCK DIRECTOR" means, for any period prior to any Type B Event
Date, any director other than the Joint Director or a director elected by the
holders of the Series B Preferred Stock or the Series C Preferred Stock.
"COMPANY" means InSight Health Services Corp., a Delaware corporation.
"CONVERSION DATE" means (i) in the event of a Type A Conversion, the date
set forth in Section 5(a) (in the event of a partial conversion relating to a
Partial Conversion Event) or Section 5(b) (in the event of any other
conversion pursuant to Section 5), and (ii) in the event of a Type B
Conversion, the date of receipt by the Company of the relevant Type B
Conversion Notice.
"CONVERSION DIRECTORS" has the meaning set forth in Section 10.
"CONVERSION PRICE" has the meaning set forth in Section 8.
"CONVERTIBLE SECURITY" means any stock or securities, directly or
indirectly, convertible into or exchangeable for Common Equity, including
without limitation any exchangeable debt securities.
"CORPORATE CHANGE" has the meaning set forth in Section 8(e).
"CREDIT FACILITY" means a credit facility to which the Company is a party
with NationsBank, N.A.
"DECLINED PREEMPTIVE SECURITIES" has the meaning set forth in Section
15(b)(4).
"DECLINED PREEMPTIVE SECURITIES NOTICE" has the meaning set forth in
Section 15(b)(4).
"DECLINING SERIES B HOLDERS" has the meaning set forth in Section
15(b)(4).
"ELECTING HOLDERS" has the meaning set forth in Section 15(b)(5).
"ENCUMBRANCE" means any claim, lien, pledge, option, charge, easement,
security interest, right-of-way, encumbrance or other right of third parties,
and, with respect to any securities, any agreements, understandings or
restrictions affecting the voting rights or other incidents of record or
beneficial ownership pertaining to such securities.
"FIRST MEETING" means the meeting of the newly constituted Board of
Directors to be held two calendar days after a Type B Event Date, at the
principal offices of the Corporation.
"FISCAL YEAR" means each year ending June 30, or any other fiscal year as
approved by the Board of Directors.
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"FIXTURES AND EQUIPMENT" means all of the furniture, fixtures,
furnishings, machinery, equipment and other tangible assets owned by the
Company or any Subsidiary that are material to the conduct of their
businesses as currently conducted.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect as of the Initial
Issue Date.
"INDEBTEDNESS" means, as to any Person without duplication, (a) all items
which, in accordance with GAAP, would be included as a liability on the
balance sheet of such Person and its Subsidiaries (including any obligation
of such Person to the issuer of any letter of credit for reimbursement in
respect of any drafts drawn under such letter of credit), excluding
obligations in respect of deferred taxes and deferred employee compensation
and benefits, and anything in the nature of capital stock, surplus capital
and retained earnings; (b) the amount available for drawing under all letters
of credit issued for the account of such Person; (c) Capital Lease
Obligations of such Person; and (d) all obligations of other Persons that
such Person has guaranteed, including, without limitation, all obligations of
such Person consisting of recourse liabilities with respect to accounts
receivable sold or otherwise disposed of by such Person; provided, however,
that the term Indebtedness shall not include trade accounts payable (other
than for borrowed money) arising in, and accrued expenses incurred in, the
ordinary course of business of such Person, provided the same are not more
than sixty (60) days overdue or are being contested in good faith.
"INDEPENDENT" means any Person who is not an officer or employee of the
Company or any Subsidiary or other Affiliate of the Company or otherwise paid
any compensation or remuneration by the Company or any Subsidiary or other
Affiliate of the Company other than director's fees.
"INITIAL ISSUE DATE" means October 14, 1997.
"INITIAL PURCHASER" shall mean the Person to whom shares of Series C
Preferred Stock are initially issued by the Company.
"JOINT DIRECTOR" has the meaning set forth in Section 10(b)(4).
"JUNIOR SECURITIES" has the meaning set forth in Section 2.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the Company's principal place of business, the City of New
York or at a place of payment are authorized by law, regulation or executive
order to remain closed. If a payment date is a Legal Holiday at a place of
payment, payment may be made at that place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period.
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"LIEN" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale
or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"LIQUIDATING DIVIDEND" has the meaning set forth in Section 8(g).
"LIQUIDATING EVENT" has the meaning set forth in Section 4(b).
"LIQUIDATION PREFERENCE" has the meaning set forth in Section 4(a).
"MAJORITY HOLDERS," at any time, and with respect to any class or series
of Capital Stock of the Company, means holders of a majority of the shares of
such class or series then outstanding. If the term is used without reference
to a particular class or series of Capital Stock of the Company, it means
Majority Holders of the Series C Preferred Stock.
"MARKET PRICE" means as to any security the average of the closing prices
of any such security's sales on all domestic securities exchanges on which
such security may at the time be listed, or, if there have been no sales on
any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
security is not so listed, the average of the representative bid and asked
prices quoted in Nasdaq as of 4:00 P.M., New York time, on such day, or, if
on any day such security is not quoted in Nasdaq, the average of the highest
bid and lowest asked prices on such day in the domestic over-the-counter
market as reported by the National Quotation Bureau, Incorporated, or any
similar successor organization, in each such case averaged over a period of
twenty-one (21) Business Days consisting of the day as of which "Market
Price" is being determined and the twenty (20) consecutive Business Days
prior to such day; provided that if such security is listed on any domestic
securities exchange the term "Business Days" as used in this sentence means
business days on which such exchange is open for trading. If at any time
such security is not listed on any domestic securities exchange or quoted in
Nasdaq or the domestic over-the-counter market, the "Market Price" shall be
the fair value thereof determined by the Company and approved by the Majority
Holders; provided that if such parties are unable to reach agreement within a
reasonable period of time, such fair value shall be determined by an
appraiser jointly selected by the Company and the Majority Holders. The
determination of such appraiser shall be final and binding on the Company and
holders of the shares of Series C Preferred Stock, and the fees and expenses
of such appraiser shall be paid by the Company.
"OPERATING LEASE" shall mean any lease with respect to which the
obligations of the lessee thereunder are, at the time any determination
thereof is to be made, not required to be capitalized on the lessee's balance
sheet in accordance with GAAP.
"OPTION" shall mean any rights or options to subscribe for or purchase
Common Equity or Convertible Securities.
"ORDINARY COURSE OF BUSINESS" shall mean the ordinary course of business
for a company engaged in the business of providing diagnostic services to the
healthcare industry as so provided by the Company as of the Initial Issue
Date; provided, that all sales by the Company or any
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Subsidiary, as the case may be, of inventory and sales of Fixtures and
Equipment no longer used or useful in such business shall be deemed to be in
the Ordinary Course of Business.
"PARITY SECURITIES" has the meaning set forth in Section 2.
"PARTIAL CONVERSION EVENT" means (i) the consummation of the sale by any
holder of its shares of Series C Preferred Stock to a third party at any time
approved by the Board, (ii) the consummation of a public offering of the
Common Stock at any time and (iii) at any time following April 14, 1999, the
consummation of a private sale of Common Stock.
"PARTIAL SUBSIDIARY" has the meaning set forth in Section 11(u).
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization or government or agency or political subdivision
thereof (including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"PREEMPTIVE NOTICE" has the meaning set forth in Section 15(b).
"PREEMPTIVE RIGHT EXPIRATION DATE" has the meaning set forth in Section
15(b)(6).
"PREEMPTIVE SECURITIES" has the meaning set forth in Section 15(a).
"PREFERRED STOCK DIRECTORS" means the Series B Director and the Series C
Directors.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement
dated as of October 14, 1997 between the Company and the Initial Purchaser.
"SENIOR SECURITIES" has the meaning set forth in Section 2.
"SERIES A PREFERRED STOCK" has the meaning set forth in Section 2.
"SERIES B DIRECTOR" has the meaning set forth in Section 10.
"SERIES B PREFERRED STOCK" has the meaning set forth in Section 1.
"SERIES C DIRECTOR" has the meaning set forth in Section 10.
"SERIES C PREFERRED STOCK" has the meaning set forth in Section 2.
"SERIES D PREFERRED STOCK" has the meaning set forth in Section 2.
"SPECIAL CORPORATE EVENT" with respect to a Person shall be deemed to
have occurred (i) at such time as any person (as defined in Section 13(d)(3)
of the Securities and Exchange Act of 1934) at any time shall directly or
indirectly acquire more than 20% in outstanding voting power of such Person,
(ii) at such time as during any one year period, individuals who at the
beginning of such period constitute such Person's Board of Directors or other
governing body cease to
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constitute at least a majority of such board or governing body (provided,
however, that a change in directors upon a Type B Event Date shall not be
deemed to cause a Special Corporate Event pursuant to this clause (ii)),
(iii) upon consummation of a merger or consolidation of such Person into or
with another Person in which the shareholders of the subject Person
immediately prior to the consummation of such transaction shall own less than
Fifty Percent (50%) of the voting securities of the surviving Person (or the
parent corporation of the surviving Person where the surviving Person is
wholly-owned by the parent corporation) immediately following the
consummation of such transaction or (iv) the sale, transfer or lease of all
or substantially all of the assets of such Person, in any of cases (i), (ii),
(iii) or (iv) in a single transaction or series of related transactions;
provided, that no Special Corporate Event hereunder with respect to the
Company shall be deemed to occur solely by reason of the ownership by the
Initial Purchaser or any Affiliate thereof or the Majority Holders of the
Series C Preferred Stock or any Affiliate thereof of any Capital Stock of the
Company.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of
which at least a majority in interest of the outstanding voting stock (having
by the terms thereof voting power under ordinary circumstances to elect a
majority of the directors of such corporation, irrespective of whether or not
at the time stock of any other class or classes of such corporation shall
have or might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, owned or controlled by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more of its Subsidiaries, or (b) any corporate or non-corporate entity
in which such Person, one or more Subsidiaries of such Person, or such person
and one or more Subsidiaries of such Person, directly or indirectly, at the
date of determination thereof, has an ownership interest and one hundred
percent (100%) of the revenue of which is included in the consolidated
financial reports of such Person consistent with GAAP.
"SUPERMAJORITY VOTE" means the affirmative vote of six (6) directors of
the Company with respect to the matter subject to such vote.
"SUPERVOTING SECURITIES" means any class or series of the Company's
Capital Stock the holders of which have the right to cast more than one vote
per share and/or have the right to elect one or more members of the Board of
Directors, voting as a class or series.
"TYPE A CONVERSION" means a conversion of shares of Series C Preferred
Stock into shares of Common Stock pursuant to Section 5 hereof.
"TYPE A OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by
the Company of Preemptive Securities in which the proposed sale price
reflects a price per share of Common Stock at or above the higher of (i) the
Market Price per share of Common Stock, determined as of the date of the
Preemptive Notice relating to such offering and (ii) $8.375 per share of
Common Stock.
"TYPE B CONVERSION" means a conversion of shares of Series C Preferred
Stock into shares of Series D Preferred Stock pursuant to Section 6 hereof.
"TYPE B CONVERSION NOTICE" has the meaning set forth in Section 6(b).
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"TYPE B EVENT DATE" has the meaning set forth in Section 6(b).
"TYPE B OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by
the Company of Preemptive Securities in which the proposed sale price
reflects a price per share of Common Stock below the higher of (i) the Market
Price per share of Common Stock, determined as of the date of the Preemptive
Notice relating to such offering and (ii) $8.375 per share of Common Stock.
"TYPE B TRIGGER DATE" means the date one year after the initial borrowing
of funds under the Credit Facility.
IN WITNESS WHEREOF, InSight Health Services Corp. has caused this
Certificate to be executed by its Executive Vice President and Secretary this
14th day of October, 1997.
INSIGHT HEALTH SERVICES CORP.
By: /s/ Thomas V. Croal
----------------------------------
Name: Thomas V. Croal
Office: Executive Vice President
and Secretary
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INSIGHT HEALTH SERVICES CORP.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF CONVERTIBLE PREFERRED STOCK, SERIES D
(Pursuant to Section 151(g) of the General Corporation
Law of the State of Delaware.)
InSight Health Services Corp., a corporation organized and existing under
the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY
CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of
the Company (the "Board") by the certificate of incorporation of the Company,
as amended, the Board unanimously adopted the following resolutions on
October 14, 1997 authorizing the issuance of the Series D Convertible
Preferred Stock of the Company, which resolutions are still in full force and
effect and are not in conflict with any provisions of the certificate of
incorporation or bylaws of the Company:
RESOLVED, that pursuant to authority vested in the Board by the
Certificate of Incorporation, the Board does hereby establish a series of
preferred stock of the Company from the Company's authorized class of
3,500,000 shares of $.001 par value preferred shares, such series to consist
of 632,266 shares, and does hereby fix and state the voting rights,
designation, powers, preferences and relative participating, optional or
other special rights and the qualifications, limitations or restrictions
thereof, as follows:
SECTION 1. DESIGNATION.
The Preferred Stock created and authorized hereby shall be designated as
the "Convertible Preferred Stock, Series D" (hereinafter called the "SERIES D
PREFERRED STOCK"). The number of shares of Series D Preferred Stock shall be
632,266 and no more, provided, however, that the Board of Directors of the
Company may increase the number of shares of Series D Preferred Stock
pursuant to Section 151(g) of the Delaware General Corporation Law, but only
in accordance with the provisions of Section 7(c) of the Series B Certificate
of Designation and Section 7(c) of the Series C Certificate of Designation.
SECTION 2. RANK.
The Series D Preferred Stock shall, with respect to dividend
distributions and distributions upon the liquidation, winding up and
dissolution of the Company, rank senior to all classes of Common Equity of
the Company, and to each other class or series of Capital Stock of the
Company (except for the Convertible Preferred Stock, Series A (hereinafter
called the "SERIES A PREFERRED STOCK")) the terms of which do not expressly
provide that it ranks senior to or on a parity with the Series D Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding up and dissolution of the Company (collectively referred to with the
Common Equity of the Company as "JUNIOR SECURITIES"). The Series D Preferred
Stock shall, with respect to dividend distributions and distributions upon
the liquidation, winding up and dissolution of the Company, rank on a parity
with any class or series of Capital Stock hereafter
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created which expressly provides that it ranks on a parity with the Series D
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding up and dissolution of the Company (shares of such a
class or series, together with shares of the Series A Preferred Stock, shares
of the Convertible Preferred Stock, Series B (the "SERIES B PREFERRED
STOCK"), and shares of the Convertible Preferred Stock, Series C (the "SERIES
C PREFERRED STOCK") are, collectively, the "PARITY SECURITIES"). The Series
D Preferred Stock shall, with respect to dividend distributions and
distributions upon the liquidation, winding up and dissolution of the
Company, rank junior to each class or series of Capital Stock hereafter
issued in accordance with Section 10 hereof and which expressly provides that
it ranks senior to the Series D Preferred Stock as to dividend distributions
or distributions upon the liquidation, winding up and dissolution of the
Company ("SENIOR SECURITIES"). Any purported Supervoting Securities that were
not created, authorized or issued in accordance with Section 10 hereof shall
be deemed for all purposes related to voting rights to be identical to Common
Stock, including, without limitation, as to voting rights with respect to the
election of directors and all other matters submitted to a vote of
stockholders.
SECTION 3. DIVIDENDS.
(a) The Company may (when, as and if declared by the Board of Directors
of the Company) declare and pay dividends, out of the entire assets and funds
of the Company legally available therefor, to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock and the common stock, $.001 par value per share,
of the Company (the "COMMON STOCK") ratably based on the number of shares of
Common Stock held by each such Holder (assuming full conversion of all such
shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock into Common Stock).
(b) Holders of shares of the Series D Preferred Stock shall be entitled
to receive the dividends provided for in Section 3(a) hereof in preference to
and in priority over any dividends upon any of the Junior Securities, except
for the Common Stock.
(c) Holders of shares of the Series D Preferred Stock shall be entitled
to receive the dividends provided for in Section 3(a) hereof on a pro rata
basis with respect to any dividends upon any Parity Securities.
SECTION 4. LIQUIDATION PREFERENCE.
(a) Upon any Liquidating Event with respect to the Company, the Holders
of shares of Series D Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, $.001 per share of Series D Preferred Stock (the "LIQUIDATION
PREFERENCE"), plus an amount in cash equal to any declared but unpaid
dividends thereon, before any payment shall be made or any assets distributed
to the holders of any of the Junior Securities, including, without
limitation, Common Stock. In addition, holders of shares of Series D
Preferred Stock shall be entitled to receive any distribution in the event of
liquidation, dissolution or winding up of the affairs of the Company pari
passu with shares of Common Stock, on a pro rata basis (assuming full
conversion of all shares of Series D Preferred Stock into Common Stock). If
the assets of the Company are not sufficient to pay in full the
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liquidation payments payable to the holders of outstanding shares of the
Series D Preferred Stock and all Parity Securities, then the holders of all
such shares shall share equally and ratably in such distribution of assets of
the Company in accordance with the amounts which would be payable on such
distribution if the amount to which the holders of outstanding shares of
Series D Preferred Stock and the holders of outstanding shares of all Parity
Securities are entitled were paid in full.
(b) "LIQUIDATING EVENT" shall mean, with respect to any Person, any of
the following events: (i) the commencement by such Person of a voluntary
case under the bankruptcy laws of the United States, as now or hereafter in
effect, or the commencement of an involuntary case against such Person with
respect to which the petition shall not be controverted within 15 days, or be
dismissed within 60 days, after commencement thereof; (ii) the appointment of
a custodian for, or the taking charge by a custodian of, all or substantially
all of the property of such Person; (iii) the commencement by such Person of
any proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any jurisdiction whether now or hereafter in effect relating to such Person;
(iv) the commencement against such Person of any proceeding set forth in the
preceding clause (iii), which is not controverted within 10 days thereof and
dismissed within 60 days after the commencement thereof; (v) the adjudication
of such Person insolvent or bankrupt, or the adoption by such Person of a
plan of liquidation; (vi) the occurrence of any Change of Control with
respect to such Person or (vii) the filing of a certificate of dissolution in
respect of the Company with the Secretary of State of the State of Delaware;
in any of cases (i) through (vi) above, in a single transaction or series of
related transactions.
SECTION 5. CONVERSION
(a) Each holder of Series D Preferred Stock shall have the right, at its
option, to convert, subject to the terms and provisions of this Section 5,
all or any part of its Series D Preferred Stock then outstanding into such
number of fully paid and non-assessable shares of Common Stock as results
from multiplying the number of shares of Series D Preferred Stock to be
converted by the Conversion Multiple. The person or persons entitled to
receive the shares of Common Stock upon conversion of such shares of Series D
Preferred Stock shall be treated for all purposes as having become the record
holder or holders of such shares of Common Stock on the date such holder or
holders deliver certificates representing the shares of Series D Preferred
Stock to be converted to the Company as set forth in Section 5(b) below (the
"CONVERSION DATE").
(b) In order to convert all or any portion of its outstanding Series D
Preferred Stock into shares of Common Stock, the holder of such Series D
Preferred Stock shall deliver certificates representing the shares of Series
D Preferred Stock to be converted to the Company at its principal office,
together with written notice that it elects to convert those shares of Series
D Preferred Stock into shares of Common Stock in accordance with the
provisions of this Section 5. Such notice shall specify the number of shares
of Series D Preferred Stock to be converted and the name or names in which
the holder wishes the certificates for shares of Common Stock to be
registered.
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SECTION 6. GENERAL PROVISIONS RELATING TO CONVERSION
The following provisions shall be applicable to any conversion pursuant
to Section 5 hereof.
(a) As promptly as practicable after the surrender as hereinabove
provided of certificates representing shares of Series D Preferred Stock
converted or to be converted into shares of Common Stock, the Company shall
deliver or cause to be delivered to the holder, or the holder's designee,
certificates representing the number of fully paid and non-assessable shares
of Common Stock into which the shares of Series D Preferred Stock are
converted, and, if less than the entire number of shares of Series D
Preferred Stock represented by the certificate or certificates surrendered is
to be converted, a new certificate for the number of shares of Series D
Preferred Stock not so converted. So long as any shares of Series D
Preferred Stock remain outstanding, the Company shall not close its Common
Stock transfer books. The issuance of certificates representing shares of
Common Stock issued upon the conversion of shares of Series D Preferred Stock
shall be made without charge to the holder of Series D Preferred Stock for
any tax in respect of the issuance of such certificates (other than any
transfer, withholding or other tax if the shares of Common Stock are to be
registered in a name different from that of the registered holder of Series D
Preferred Stock).
(b) No fractional shares of Common Stock or scrip representing
fractional shares of Common Stock shall be issued upon any conversion of any
shares of Series D Preferred Stock, and the number of shares of Common Stock
to be issued shall be rounded up to a whole share.
(c) The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of shares of Series D Preferred Stock and the
exercise of the Warrants and the GE Warrants, the full number of whole shares
of Common Stock then deliverable upon the conversion of all shares of Series
D Preferred Stock then outstanding and the issuance of Common Stock in
respect of the Warrants and the GE Warrants. The Company shall take at all
times such corporate action as shall be necessary in order that the Company
may validly and legally issue fully paid and non-assessable shares of Common
Stock upon the conversion of shares of Series D Preferred Stock and the
exercise of the then outstanding Warrants and GE Warrants. If at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series D Preferred Stock and the exercise of all the then outstanding
Warrants and GE Warrants, in addition to such other remedies as shall be
available to the holders of the Series B Preferred Stock, Series C Preferred
Stock, and Series D Preferred Stock, the Company shall forthwith take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such numbers of shares as shall be sufficient for
such purpose, including but not limited to promptly calling and holding a
meeting of the Company's stockholders, at which the Company's stockholders
shall vote on a proposed amendment to the Certificate of Incorporation that
would so increase the number of authorized shares of Common Stock, a
favorable vote for which amendment shall have been recommended to the
Company's stockholders by the Board of Directors, pursuant to a duly and
validly adopted resolution of the Board of Directors setting forth the
amendment proposed and
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declaring its advisability, all in accordance with Section 242 of the
Delaware General Corporation Law.
(d) If any shares of Common Stock to be reserved for the purpose of
conversion of Series D Preferred Stock require registration or listing with,
or approval of, any governmental authority, stock exchange, NASD, Inc.,
Nasdaq or other regulatory body under any federal or state law, federal or
state regulation, rule of NASD, Inc., Nasdaq or otherwise, before such shares
may be validly issued or delivered upon conversion, the Company shall, in
good faith and as expeditiously as practicable, endeavor to secure such
registration, listing or approval, as the case may be.
(e) All shares of Common Stock that may be issued upon conversion of the
Series D Preferred Stock shall upon issuance by the Company be validly
issued, fully paid and non-assessable and free from all taxes, liens and
charges with respect to the issuance thereof.
(f) In the event of any taking by the Company of a record of the holders
of any class of Capital Stock for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of Capital
Stock or any other securities or property, or to receive any other right, the
Company shall mail to each holder of Series D Preferred Stock, at least 20
days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(g) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any
other action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but shall at
all times in good faith assist in the carrying out of all the provisions of
this Section 6 and Sections 5 and 7 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of
the holders of the shares of Series D Preferred Stock against impairment of
any kind.
SECTION 7. CONVERSION MULTIPLE.
(a) As used herein, the "CONVERSION MULTIPLE" shall initially be ten
(10), subject to adjustment as set forth below.
(b) If the Company at any time subdivides (by any stock split, stock
dividend, reclassification, recapitalization or otherwise) one or more
classes or series of its outstanding shares of Common Equity into a greater
number of shares, the Conversion Multiple in effect immediately prior to such
subdivision shall be proportionately increased. If the Company at any time
combines (by reverse stock split or otherwise) one or more classes or series
of its outstanding shares of Common Stock into a smaller number of shares,
the Conversion Multiple in effect immediately prior to such combination shall
be proportionately decreased.
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<PAGE>
(c) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's
assets or other transaction, in each case which is effected in such a way
that the holders of Common Equity are entitled to receive (either directly or
upon subsequent liquidation) stock, securities, cash, debt instruments or
assets with respect to or in exchange for Common Equity is referred to herein
as a "CORPORATE CHANGE." In case of any Corporate Change, each share of
Series D Preferred Stock then outstanding will become convertible only into
the kind and amount of securities, cash and other property receivable upon
such Corporate Change by the holder of the number of shares of Common Stock
into which such share of Series D Preferred Stock was convertible immediately
prior thereto (assuming such holder of Common Stock failed to exercise any
rights of election). The Company shall not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor
entity (if other than the Company) resulting from such consolidation or
merger or the entity purchasing such assets assumes by written instrument the
obligation to deliver to the holders of shares of Series D Preferred Stock
such shares of stock, securities, cash, debt instruments or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
(d) If any event occurs of the type contemplated by the provisions of
this Section 7 but not expressly provided for by such provisions, then the
Company's Board of Directors shall make an appropriate adjustment in the
Conversion Multiple so as to protect the rights of the holders of the shares
of Series D Preferred Stock; provided that no such adjustment shall decrease
the Conversion Multiple obtainable as otherwise determined pursuant to this
Section 7.
(e) If the Company declares or pays a dividend upon the Common Equity
payable otherwise than out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles, consistently
applied) except for a stock dividend payable in shares of Common Stock (a
"LIQUIDATING DIVIDEND"), then the Company shall pay to each holder of a share
of Series D Preferred Stock at the time of payment thereof the Liquidating
Dividend which would have been paid to such holder on the Common Stock such
holder would have owned had such holder fully exercised its right to convert
the shares of Series D Preferred Stock into shares of Common Stock
immediately prior to the date on which a record is taken for such Liquidating
Dividend, or, if no record is taken, the date as of which the record holders
of Common Equity entitled to such dividends are to be determined.
SECTION 8. NO REDEMPTION.
The shares of Series D Preferred Stock shall not be subject to
mandatory redemption by the Company.
SECTION 9. VOTING RIGHTS AND RELATED PROVISIONS.
(a) Shares of Series D Preferred Stock (i) shall only be issuable to
holders of shares of Series B Preferred Stock and Series C Preferred Stock
and (ii) shall only be issuable upon the terms and conditions set forth in
the Series B Certificate of Designation and Series C Certificate of
Designation. The holders of shares of the Series D Preferred Stock shall have
the right to vote with the holders of Common Stock with respect to all
matters submitted to a shareholder vote (except for the election of
directors, which will be governed by Sections 9(b) through 9(f)
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below), with each share of Series D Preferred Stock having the number of
votes equal to the number of shares of Common Stock into which such share of
Series D Preferred Stock then is convertible.
(b) Upon a Type B Event Date, without any action on the part of the
Company or the Board, the number of members of the Board shall be increased
automatically by the smallest whole number that will result in at least the
Type B Percentage (but less than 66 2/3%) of the members of the Board being
Series D Directors. Immediately following such Type B Event Date, the
holders of Series D Preferred Stock shall have the right to elect all of such
number of new directors (the "CONVERSION DIRECTORS"), such election to occur
pursuant to the Series D Selection Procedure. The Conversion Directors shall
immediately upon such election become members of the Board of Directors as
Series D Directors. The term of the Conversion Directors shall run until the
third annual meeting of stockholders following the Type B Event Date.
"SERIES D DIRECTORS" shall mean, collectively, any Preferred Stock Directors
and any Conversion Directors. After a Type B Event Date and until the
expiration of the terms of office of directors serving as members of the
board of directors immediately prior to the second annual meeting of
stockholders following a Type B Event Date, the board of directors shall
comprise: (i) one Joint Director; (ii) three Preferred Stock Directors;
(iii) not less than four (4) nor more than five (5) additional directors
elected by holders of shares of Common Equity and (iv) the Conversion
Directors. At and after the second annual meeting of stockholders after the
Type B Event Date, upon expiration of the term of any director, such position
shall be subject to election by holders of shares of Common Stock and Series
D Preferred Stock, voting as a class, with each share of Series D Preferred
Stock having the number of votes equal to the number of shares of Common
Stock into which such share of Series D Preferred Stock then is convertible;
the directors so elected shall not be designated as to series or class of
Capital Stock. Upon the expiration of the terms of the Conversion Directors,
their successors shall be classified into three (3) classes as nearly equal
in number as possible, with appropriate terms of office.
(c) Immediately following a Type B Event Date, any Preferred Stock
Director already serving as a member of the Board shall continue to serve in
such position until the expiration of his term and the election and
qualification of a successor, or until his earlier death, resignation or
retirement. Any vacancy, for any reason, in the position of a Series D
Director prior to the second annual meeting of stockholders after a Type B
Event Date, shall be filled by majority vote of the Series D Directors then
serving. Until the second annual meeting following a Type B Event Date,
election of Series D Directors to succeed those whose terms expire prior to
such second annual meeting shall be solely by holders of the Series D
Preferred Stock, and shall follow the Series D Selection Procedure. A Series
D Director may be removed, with or without cause, by the holders of Series D
Preferred Stock, in compliance with the requirements of Section 141(k)(2) of
the Delaware General Corporation Law. A Series D Director shall not be
removed, with or without cause, otherwise than as described in this Section
9(c).
(d) Until the second annual meeting after the Type B Event Date, upon
expiration of the term of the Joint Director, such position shall be subject
to nomination, approval by the board of directors and election by the holders
of Common Stock in the same fashion as provided in the Series B and C
Certificates of Designation for the period before a Type B Event Date, except
that
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until the second annual meeting after the Type B Event Date, such nomination
shall be by holders of a majority of the then outstanding shares of Series D
Preferred Stock. Until the second annual meeting after the Type B Event
Date, any vacancy in the position of Joint Director shall be filled in the
same fashion as provided in the Series B and C Certificates of Designation
for the period before a Type B Event Date.
(e) Until the second annual meeting after the Type B Event Date, upon
expiration of the term of any director who is neither a Series D Director nor
the Joint Director, such position shall be subject to election by holders of
shares of Common Stock only.
(f) Shares of Series D Preferred Stock shall be deemed to be shares
"entitled to vote" or entitled to vote in the election of directors" for
purposes of the provisions of the Certificate of Incorporation that employ
such terms, and, for purposes of such provisions at any time, each
outstanding share of Series D Preferred Stock shall count as such number of
shares of Common Stock into which such share of Series D Preferred Stock is
then convertible pursuant to Sections 5 and 6 hereof.
(g) If a Type B Event Date occurs prior to October 14, 1999, then the
following provisions shall apply:
(1) From such Type B Event Date until the second subsequent annual
stockholders meeting of the Company after such Type B Event Date, none of
the following actions or transactions shall be effected by the Company or
approved by the Company as a stockholder of any Subsidiary of the Company,
and neither the Initial Purchaser nor any other holder of shares of
Series D Preferred Stock (other than a holder pursuant to either a transfer
permitted under Rule 144 under the Securities Act of 1933, as amended, or a
transfer pursuant to a registered offer under registration rights from the
Company) shall engage in, or be a party to, any of the following actions or
transactions involving the Company or any Subsidiary of the Company, if, as
of the record date for the determination of the stockholders entitled to
vote thereon, or consent thereto, any other Person which obtained its
equity interest in the Company as a result of a transfer of securities from
the Initial Purchaser or any other Person referred to in clauses (A)
through (D) of this sentence beneficially owns or controls, directly or
indirectly, five percent (5%) or more of the outstanding shares of the
Company entitled to vote:
(A) any merger or consolidation of the Company or any of its
Subsidiaries with or into such other Person;
(B) any sale, lease, exchange or other disposition of all or any
substantial part of the assets of the Company or any of its
Subsidiaries to such other Person;
(C) the issuance or delivery of any voting securities of the
Company or any of its Subsidiaries to such other Person in exchange
for cash, other assets or securities, or a combination thereof; or
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(D) any dissolution or liquidation of the Company;
PROVIDED, HOWEVER, that such prohibition shall not apply with respect to
any such action or transaction approved by (I) the affirmative vote of not
less than eighty percent (80%) of the outstanding shares of the Company
entitled to vote or (II) at least two-thirds (2/3) of the directors of the
Company (which must include either (i) the Joint Director, if either (x)
such Joint Director served in such position as of the Type B Event Date of
(y) such Joint Director has been approved by a majority of the directors
who were Common Stock Directors as of the Type B Event Date or (ii) at
least one director who was a Common Stock Director prior to the Type B
Event Date, unless neither the Joint Director, nor any of such Common Stock
Directors continue to serve on the Board of Directors at such time). For
purposes of this Section 9(g) a Person shall be deemed to own or control,
directly or indirectly, any outstanding shares of stock of the Company (A)
which it has the right to acquire pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or otherwise, or (B)
which are beneficially owned, directly or indirectly (including shares
deemed owned through application of clause (A) above), by any other
corporation, person or other entity (x) with which it or its "affiliate" or
"associate" (as defined below) has any agreement, arrangement, or
understanding for the purpose of acquiring, holding, voting or disposing of
stock of the Company or (y) which is its "affiliate" or "associate" as
those terms are defined under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
No transfer of Series D Preferred Stock may be made by a Person who obtained
shares of Series D Preferred Stock upon conversion of Series B Preferred
Stock or Series C Preferred Stock, unless prior thereto, the transferee in
such transfer shall have entered into an agreement in form and substance
reasonably satisfactory to the Company, agreeing to be bound by the terms of
this Section 9(g). Notwithstanding anything to the contrary contained in
this Section 9(g), such Person shall not need any approval by any directors,
the Board of Directors or any stockholders under this Section 9 in order to
transfer, sell or assign any of its Series D Conversion Shares in any of the
following transactions (i) a transfer to an Initial Purchaser Affiliate (as
defined in the Series B Certificate of Designation) or an Affiliate of the
Initial Purchaser (as defined in the Series C Certificate of Designation, in
either case as of the Initial Issue Date, (provided that prior to any such
transfer such Initial Purchaser Affiliate or such Affiliate of the Initial
Purchaser shall have delivered to the Company its written agreement to be
bound by the terms of this Section 9(g); (ii) a transfer permitted under Rule
144 under the Securities Act of 1933, as amended; or (iii) a transfer
pursuant to a registered offering under registration rights from the Company.
SECTION 10. PROTECTIVE PROVISIONS.
Without limiting the provisions of any other Series of Preferred Stock,
the Company shall not take, and shall cause its Subsidiaries not to take, any
of the following actions without the affirmative vote of holders of at least
sixty-seven percent (67%) of the shares of the Series D Preferred Stock then
outstanding:
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(a) create, authorize or issue any shares of Series D Preferred Stock or
any class or series of Supervoting Securities or shares of any such class or
series;
(b) reclassify any authorized stock of the Company into Series D
Preferred Stock or any class or series of Supervoting Securities or shares of
such class or series;
(c) increase or decrease the authorized number of shares of Series D
Preferred Stock or any class or series of Supervoting Securities or shares of
any such class or series.
The rights provided to holders of shares of Series D Preferred Stock in
this Section 10 shall be in addition to and not in lieu of the other rights
and protections granted to the holders of the shares of Series D Preferred
Stock hereunder.
SECTION 11. REISSUANCE OF SERIES D PREFERRED STOCK.
Shares of Series D Preferred Stock that have been issued and reacquired
or converted in any manner, including shares purchased, redeemed, exchanged,
or converted into shares of Common Equity, shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized
but unissued shares of preferred stock of the Company undesignated as to
series and may be designated or redesignated and issued or reissued, as the
case may be, as part of any series of preferred stock of the Company,
provided that such shares may not in any event be reissued as Series D
Preferred Stock.
SECTION 12. BUSINESS DAY.
If any payment, redemption or exchange shall be required by the
terms hereof to be made on a day that is not a Business Day, such payment,
redemption or exchange shall be made on the immediately succeeding Business
Day.
SECTION 13. DEFINITIONS.
As used in this Certificate, the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa), unless the context otherwise requires:
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of a majority or more of the
voting securities of a Person shall be deemed to be control.
"AMENDED BYLAWS" means the Amended and Restated Bylaws of the Company, as
in effect from time to time.
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"BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
"CERTIFICATE OF INCORPORATION" means the certificate of incorporation (as
defined in Section 104 of the Delaware General Corporation Law) of the
Company in effect on the date hereof, including, without limitation, the
Series A, Series B, Series C and Series D Certificates of Designation.
"CHANGE OF CONTROL" with respect to a Person shall be deemed to have
occurred (i) at such time as any person (as defined in Section 13(d)(3) of
the Securities and Exchange Act of 1934) at any time shall directly or
indirectly acquire more than 40% in outstanding voting power of such Person,
(ii) at such time as during any one year period, individuals who at the
beginning of such period constitute such Person's board of directors or other
governing body cease to constitute at least a majority of such board or
governing body (provided, however, that a change in directors upon a Type B
Event Date shall not be deemed to cause a Change in Control pursuant to this
clause (ii)), (iii) upon consummation of a merger or consolidation of such
Person into or with another Person in which the shareholders of the subject
Person immediately prior to the consummation of such transaction shall own
less than Fifty Percent (50%) of the voting securities of the surviving
Person (or the parent corporation of the surviving Person where the surviving
Person is wholly-owned by the parent corporation) immediately following the
consummation of such transaction or (iv) the sale, transfer or lease of all
or substantially all of the assets of such Person, in any of cases (i), (ii),
(iii) or (iv) in a single transaction or series of related transactions;
PROVIDED, that no Change of Control hereunder with respect to the Company
shall be deemed to occur solely by reason of (x) the ownership by the
Majority Holders of the Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or any Affiliate thereof of any Capital Stock of the
Company or (y) the conversion of shares of Series D Preferred Stock into
Common Stock.
"COMMON EQUITY" means all shares now or hereafter authorized of any class
of common stock of the Company (including the Common Stock) and any other
stock of the Company, however designated, authorized after the date hereof,
which has the right (subject always to prior rights of any class or series of
preferred stock) to participate in any distribution of the assets or earnings
of the Company without limit as to per share amount.
"COMMON STOCK" has the meaning set forth in Section 3(a).
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"COMMON STOCK DIRECTOR" means, for any period prior to any Type B Event
Date, any director other than the Joint Director or a director elected by the
holders of the Series B Preferred Stock or the Series C Preferred Stock.
"COMPANY" means InSight Health Services Corp., a Delaware corporation.
"CONVERSION DATE" has the meaning set forth in Section 5(a).
"CONVERSION MULTIPLE" has the meaning set forth in Section 7(a).
"CONVERSION DIRECTORS" has the meaning set forth in Section 9(b).
"CORPORATE CHANGE" has the meaning set forth in Section 7(c).
"FISCAL YEAR" means each year ending June 30, or any other fiscal year as
approved by the Board of Directors.
"INITIAL ISSUE DATE" means October 14, 1997.
"INITIAL PURCHASER" means the Initial Purchasers of the Series B
Preferred Stock and the Series C Preferred Stock (as defined in the
respective Certificates of Designation).
"JOINT DIRECTOR" has the meaning set forth in the Series B Certificate of
Designation and the Series C Certificate of Designation.
"JUNIOR SECURITIES" has the meaning set forth in Section 2.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the Company's principal place of business, the City of New
York or at a place of payment are authorized by law, regulation or executive
order to remain closed. If a payment date is a Legal Holiday at a place of
payment, payment may be made at that place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period.
"LIQUIDATING DIVIDEND" has the meaning set forth in Section 7(e).
"LIQUIDATING EVENT" has the meaning set forth in Section 4(b).
"LIQUIDATION PREFERENCE" has the meaning set forth in Section 4(a).
"MAJORITY HOLDERS," at any time, and with respect to any class or series
of Capital Stock of the Company, means holders of a majority of the shares of
such class or series then outstanding. If the term is used without reference
to a particular class or series of Capital Stock of the Company, it means
Majority Holders of the Series D Preferred Stock.
"PARITY SECURITIES" has the meaning set forth in Section 2.
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"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization or government or agency or political subdivision
thereof (including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"PREFERRED STOCK DIRECTORS" means the Series B Directors and the Series C
Director.
"SENIOR SECURITIES" has the meaning set forth in Section 2.
"SERIES A CERTIFICATE OF DESIGNATION" means the Certificate of
Designation, Preferences and Rights of the Series A Preferred Stock.
"SERIES A PREFERRED STOCK" has the meaning set forth in Section 2.
"SERIES B CERTIFICATE OF DESIGNATION" means the Certificate of
Designation, Preferences and Rights of the Series B Preferred Stock.
"SERIES B DIRECTOR" has the meaning set forth in the Series B Certificate
of Designation.
"SERIES B PREFERRED STOCK" has the meaning set forth in Section 1.
"SERIES C CERTIFICATE OF DESIGNATION" means the Certificate of
Designation, Preferences and Rights of the Series C Preferred Stock.
"SERIES C DIRECTOR" has the meaning set forth in the Series C Certificate
of Designation.
"SERIES C PREFERRED STOCK" has the meaning set forth in Section 2.
"SERIES D CERTIFICATE OF DESIGNATION" means this document.
"SERIES D DIRECTOR" has the meaning set forth in Section 9(b).
"SERIES D PREFERRED STOCK" has the meaning set forth in Section 1.
"SERIES D SELECTION PROCEDURE" shall mean selection of the Series D
Directors by the holders of the shares of Series D Preferred Stock, which
election shall employ cumulative voting of the shares of Series D Preferred
Stock.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of
which at least a majority in interest of the outstanding voting stock (having
by the terms thereof voting power under ordinary circumstances to elect a
majority of the directors of such corporation, irrespective of whether or not
at the time stock of any other class or classes of such corporation shall
have or might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, owned or controlled by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more of its Subsidiaries, or (b) any corporate or non-corporate entity
in which such Person, one or more Subsidiaries of such Person, or such person
and one or more Subsidiaries of such Person, directly or indirectly, at the
date of determination thereof, has an
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ownership interest and one hundred percent (100%) of the revenue of which is
included in the consolidated financial reports of such Person consistent with
GAAP.
"SUPERMAJORITY VOTE" means the affirmative vote of six (6) directors of
the Company with respect to the matter subject to such vote.
"SUPERVOTING SECURITIES" means any class or series of the Company's
Capital Stock the holders of which have the right to cast more than one vote
per share and/or have the right to elect one or more members of the Board of
Directors, voting as a class or series.
"TYPE B EVENT DATE" has the meaning set forth in Section 6 of the Series
C Certificate of Designation and the Series B Certificate of Designation.
"TYPE B PERCENTAGE" means a percentage equal to (i) the number of shares
of Common Stock held by all holders of Series B Preferred Stock and Series C
Preferred Stock as of a Type B Event Date (assuming full conversion of all
such shares of Series B Preferred Stock and Series C Preferred Stock into
Common Stock) divided by (ii) the total number of shares of Common Stock
outstanding as of a Type B Event Date (assuming full conversion of all
convertible shares of Preferred Stock as of such Type B Event Date);
PROVIDED, HOWEVER, that the maximum Type B Percentage shall be sixty-four
percent (64%).
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IN WITNESS WHEREOF, InSight Health Services Corp. has caused this
Certificate to be executed by its Executive Vice President and Secretary this
14th day of October, 1997.
INSIGHT HEALTH SERVICES CORP.
By: /s/ Thomas V. Croal
----------------------------------
Name: Thomas V. Croal
Office: Executive Vice President
and Secretary
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AMENDED AND RESTATED BYLAWS
OF
INSIGHT HEALTH SERVICES CORP.
A Delaware Corporation
PREAMBLE
These bylaws are subject to, and governed by, the General Corporation Law
of the State of Delaware (the "Delaware General Corporation Law") and the
certificate of incorporation of InSight Health Services Corp., a Delaware
corporation (the "Corporation"). References herein to the certificate of
incorporation shall be interpreted and construed to mean the certificate of
incorporation of the Corporation, as in existence from time to time, including
any amendments thereto, restatements thereof and certificates of designations in
effect at such times. In the event of a direct conflict between the provisions
of these bylaws and the provisions of the Delaware General Corporation Law or
the provisions of the certificate of incorporation, such provisions of the
Delaware General Corporation Law or the certificate of incorporation, as the
case may be, will be controlling.
ARTICLE 1: OFFICES
1.1 REGISTERED OFFICE AND AGENT. The registered office of the Corporation
in the state of Delaware shall be located at 1013 Centre Road, Wilmington,
Delaware 19805-1297. The name of the Corporation's registered agent at such
address shall be CSC Networks/Prentice Hall Corporate Services. The registered
office and registered agent of the Corporation shall be as designated from time
to time by action of the Board of Directors and by the appropriate filing by the
Corporation in the office of the Secretary of State of the State of Delaware.
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places, both within and without the State of Delaware, as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE 2: MEETINGS OF STOCKHOLDERS
2.1 ANNUAL MEETING. An annual meeting of stockholders of the Corporation
shall be held each calendar year on such date and at such time as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting or in a duly executed waiver of notice of such meeting. At such
meeting, the stockholders shall elect directors and transact such other business
as may properly be brought before the meeting.
2.2 SPECIAL MEETING. A special meeting of the stockholders may be called
at any time by the Board of Directors, the chairman of the board, or the
President, and shall be called by the President or the Secretary at the request
in writing of the stockholders of record of shares entitled to cast not less
than ten percent (10%) of all votes entitled to be cast at such meeting or as
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otherwise provided by the certificate of incorporation. A special meeting
shall be held on such date and at such time as shall be designated by the
person(s) calling the meeting and stated in the notice of the meeting or in a
duly executed waiver of notice of such meeting. Only such business shall be
transacted at a special meeting as may be stated or indicated in the notice
of such meeting or in a duly executed waiver of notice of such meeting.
2.3 PLACE OF MEETINGS. An annual meeting of stockholders may be held at
any place within or without the State of Delaware designated by the Board of
Directors. A special meeting of stockholders may be held at any place within
or without the State of Delaware designated in the notice of the meeting or a
duly executed waiver of notice of such meeting. Meetings of stockholders
shall be held at the principal office of the Corporation unless another place
is designated for meetings in the manner provided herein.
2.4 NOTICE. Written or printed notice stating the place, day, and time
of each meeting of the stockholders and, in case of a special meeting, the
purpose or purposes for which the meeting is called shall be delivered not
less than ten (10) nor more than sixty (60) days before the date of the
meeting, either personally or by mail, by or at the direction of the
President, the Secretary, or the officer or person(s) calling the meeting, to
each stockholder of record entitled to vote at such meeting. If such notice
is to be sent by mail, it shall be directed to such stockholder at his
address as it appears on the records of the Corporation, unless he shall have
filed with the Secretary of the Corporation a written request that notices to
him be mailed to some other address, in which case it shall be directed to
him at such other address. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in
person or by proxy and shall not, at the beginning of such meeting, object to
the transaction of any business because the meeting is not lawfully called or
convened, or who shall, either before or after the meeting, submit a signed
waiver of notice, in person or by proxy.
2.5 VOTING LIST. At least ten (10) days before each meeting of
stockholders, the Secretary or other officer of the Corporation who has
charge of the Corporation's stock ledger, either directly or through another
officer appointed by him or through a transfer agent appointed by the Board
of Directors, shall prepare a complete list of stockholders entitled to vote
thereat, arranged in alphabetical order and showing the address of each
stockholder and number of shares registered in the name of each stockholder.
For a period of ten (10) days prior to such meeting, such list shall be kept
on file at a place within the city where the meeting is to be held, which
place shall be specified in the notice of meeting or a duly executed waiver
of notice of such meeting or, if not so specified, at the place where the
meeting is to be held and shall be open to examination by any stockholder
during ordinary business hours. Such list shall be produced at such meeting
and kept at the meeting at all times during such meeting and may be inspected
by any stockholder who is present.
2.6 QUORUM. The holders of shares entitled to cast a majority of the
votes entitled to be cast on a matter, present in person or by proxy, shall
constitute a quorum at any meeting of stockholders, except as otherwise
provided by law, the certificate of incorporation, or these bylaws. If a
quorum shall not be present, in person or by proxy, at any meeting of
stockholders, the stockholders entitled to vote thereat who are present, in
person or by proxy, or, if no
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stockholder entitled to vote is present, any officer of the Corporation may
adjourn the meeting from time to time, without notice other than announcement
at the meeting (unless the Board of Directors, after such adjournment, fixes
a new record date for the adjourned meeting), until a quorum shall be
present, in person or by proxy. At any adjourned meeting at which a quorum
shall be present, in person or by proxy, any business may be transacted which
may have been transacted at the original meeting had a quorum been present;
provided that, if the adjournment is for more than thirty (30) days or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned meeting.
2.7 REQUIRED VOTE: WITHDRAWAL OF QUORUM. When a quorum is present at
any meeting, the vote of the holders of shares entitled to cast at least a
majority of the votes entitled to be cast by holders who are present, in
person or by proxy, shall decide any question brought before such meeting,
unless the question is one on which, by express provision of statute,
applicable stock exchange, NASD, Inc. or Nasdaq rules, the certificate of
incorporation, or these bylaws, a different vote is required, in which case
such express provision shall govern and control the decision of such
question. The stockholders present at a duly constituted meeting may
continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
2.8 METHOD OF VOTING: PROXIES. Except as otherwise provided in the
certificate of incorporation or by law, each outstanding share, regardless of
class, shall be entitled to one (1) vote on each matter submitted to a vote
at a meeting of stockholders. Elections of directors need not be by written
ballot. At any meeting of stockholders, every stockholder having the right to
vote may vote either in person or by a proxy executed in writing by the
stockholder or by his duly authorized attorney-in-fact. Each such proxy
shall be filed with the Secretary of the Corporation before or at the time of
the meeting. No proxy shall be valid after three (3) years from the date of
its execution, unless otherwise provided in the proxy. If no date is stated
in a proxy, such proxy shall be presumed to have been executed on the date of
the meeting at which it is to be voted. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power or unless otherwise made
irrevocable by law.
2.9 RECORD DATE. (a) For the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion, or exchange of stock or for the purpose
of any other lawful action, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, for any such
determination of stockholders, such date in any case to be not more than
sixty (60) days and not less than ten (10) days prior to such meeting nor
more than sixty (60) days prior to any other action. If no record date is
fixed:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the
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day on which notice is given or, if notice is waived, at the close of
business on the day next preceding the day on which the meeting is held.
(ii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(iii) A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a
new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the
Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which date shall not be more than ten (10) days after
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of
Directors, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is required by law or these bylaws, shall be the first
date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office in the State of Delaware or principal place
of business shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by law or
these bylaws, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the
close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
2.10 CONDUCT OF MEETING. The Chairman shall preside at all meetings of
stockholders. The Secretary shall keep the records of each meeting of
stockholders. In the absence or inability to act of any such officer, such
officer's duties shall be performed by the officer given the authority to act
for such absent or non-acting officer under these bylaws or by some person
appointed by the meeting.
2.11 INSPECTORS. The Board of Directors may, in advance of any meeting
of stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the chairman of the meeting shall, or if inspectors shall not
have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his
ability. The inspectors shall determine the number of shares of capital
stock of the Corporation outstanding and the voting power of each, the number
of shares represented at the meeting, the existence of a quorum, and the
validity and effect of proxies and
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shall receive votes, ballots, or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and
tabulate all votes, ballots, or consents, determine the results, and do such
acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting, the inspectors
shall make a report in writing of any challenge, request, or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as an
inspector of an election of directors. Inspectors need not be stockholders.
2.12 ACTION BY WRITTEN CONSENT. Unless otherwise provided in the
certificate of incorporation, any action required to be taken at any annual
or special meeting of stockholders of the Corporation, or any action which
may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken and bearing
the dates of signature of the stockholders who signed the consent or
consents, shall be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation by delivery to
its registered office in the State of Delaware, or the Corporation's
principal place of business, or an officer or agent of the Corporation having
custody of the book or books in which proceedings of meetings of the
stockholders are recorded. Delivery made to the Corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. All consents properly delivered in accordance with this section
shall be deemed to be recorded when so delivered. No written consent shall
be effective to take the corporate action referred to therein unless, within
sixty (60) days of the earliest dated consent delivered to the Corporation as
required by this section, written consents signed by the holders of a
sufficient number of shares to take such corporate action are so recorded.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have
not consented in writing and who, if the action had been taken at a meeting,
would have been entitled to notice of the meeting if the record date for such
meeting had been the date that written consents signed by a sufficient number
of holders were delivered to the Corporation. Any action taken pursuant to
such written consent or consents of the stockholders shall have the same
force and effect as if taken by the stockholders at a meeting thereof.
2.13 NOTICE OF STOCKHOLDER NOMINEES.
(a) Only persons who are nominated in accordance with the
procedures set forth in this Section 2.13 shall be eligible for election as
directors of the Corporation. Nominations of persons for election to the
Board of Directors may be made at a meeting of the Corporation's stockholders
(i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of the
director so nominated at such meeting who complies with the procedures set
forth in this Section 2.13.
(b) All nominations by stockholders shall be made pursuant to
timely notice in proper written form to the Secretary of the Corporation. To
be timely, a stockholder's notice shall be delivered to or mailed and
received at the principal executive offices of the Corporation
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not less than 50 days nor more than 75 days before the meeting; provided,
however, that if less than 65 days' notice or prior public disclosure of the
date of the meeting is given or made to the stockholders, notice by the
stockholder must be received at the principal executive offices of the
Corporation not later than the close of business on the 15th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made, whichever occurs first.
(c) Such stockholder's notice shall set forth (i) as to each person
whom such stockholder proposes to nominate for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation l4A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (ii) as to the stockholder
giving the notice (x) the name and address, as they appear on the
Corporation's books of such stockholder and (y) the class and number of
shares of the Corporation which are beneficially owned by such stockholder;
and (iii) as to the beneficial owner, if any, on whose behalf the nomination
is made, (x) the name and address of such person and (y) the class and number
of shares of the Corporation which are beneficially owned by such person. At
the request of the Board of Directors any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee.
(d) No person shall be eligible for election as a director unless
nominated in accordance with the procedures set forth in these Bylaws of the
Corporation. The chairman of the stockholders' meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made
in accordance with the procedures prescribed by these Bylaws, and if he shall
so determine, he shall announce such determination to the meeting and the
defective nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Bylaw, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder
with respect to the matters set forth in this Bylaw.
(e) (i) Sections 2.13(a), (b), (c) and (d) shall not have any
application or effect whatsoever with respect to the nomination or election
of any director who, pursuant to the terms of the certificate of
incorporation: (A) is to be elected by the holders of shares of either the
Corporation's Series B Preferred Stock or Series C Preferred Stock (the
"Preferred Stock Directors"), (B) is to be nominated (subject to approval of
such nominee by the Board of Directors) jointly by the holders of shares of
Series B Preferred Stock and Series C Preferred Stock (the "Joint Director";
prior to a Type B Event Date, all directors other than the Joint Director and
the Preferred Stock Directors are the "Common Stock Directors") or (C) after
a Type B Event Date is to be elected by holders of shares of the Series D
Preferred Stock to a newly created directorship ("Conversion Directors").
(ii) With respect to the nomination and election of any
Preferred Stock Director, the holders of shares of Series B Preferred Stock
or of Series C Preferred Stock, as appropriate, shall give written notice to
the Secretary of the Corporation of the identity of the
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person or persons nominated and elected as a director or directors by such
holders. Such written notice shall be executed, manually or by photocopy or
facsimile, in any number of counterparts, by holders of a majority of the
then outstanding shares of Series B Preferred Stock or Series C Preferred
Stock, as appropriate. The person so elected shall become a Preferred Stock
Director immediately upon delivery to the Company of such notice, or at such
other time as is specified therein. No nominations for such director shall
be made or received other than as described in this Section 2.13(e)(ii).
(iii) With respect to the nomination and election of any
Conversion Directors, on or after a Type B Event Date, the holders of shares
of Series D Preferred Stock shall give written notice to the Secretary of the
Corporation of the identity of the persons nominated and elected as a
director by such holders. Such written notice shall be executed, manually or
by photocopy or facsimile, in any number of counterparts, by holders of a
majority of the then outstanding shares of Series D Preferred Stock. The
persons so elected shall become Conversion Directors immediately upon
delivery to the Company of such notice, or at such other time as is specified
therein. Election of such directors shall be by cumulative voting by the
holders of the shares of Series D Preferred Stock. No nominations for such
director shall be made or received other than as described in this Section
2.13(e)(iii).
ARTICLE 3: DIRECTORS
3.1 MANAGEMENT. The business and property of the Corporation shall be
managed by or under the direction of the Board of Directors subject to the
restrictions and delegations of power and authority contained in the
certificate of incorporation or these bylaws. Subject to the restrictions
imposed by law, the certificate of incorporation, or these bylaws, the Board
of Directors may exercise all the powers of the Corporation.
3.2 NUMBER: QUALIFICATION: ELECTION: TERM. Prior to a Type B Event
Date, the number of directors shall be no less than eight (8) nor more than
nine (9) (the exact number within such range to be determined by the Board of
Directors), of which one member shall be the Joint Director, up to three
members (the exact number to be determined in accordance with the certificate
of incorporation) shall be Preferred Stock Directors, and the remainder shall
be Common Stock Directors. After a Type B Event Date, the Board of Directors
shall comprise: (i) one Joint Director, until the expiration of his term, as
provided in the certificate of incorporation; (ii) three Preferred Stock
Directors, until the expiration of their respective terms, after which time
such positions previously elected by holders of the series of Preferred Stock
that gave the Type B Conversion Notice shall be subject to election by
holders of shares of Series D Preferred Stock, subject to the limitations
contained in the Series D Certificate of Designation; (iii) not less than
four (4) nor more than five (5) additional directors elected by holders of
shares of Common Equity and Series D Preferred Stock, subject to the
limitations contained in the Series D Certificate of Designation; and (iv)
the Conversion Directors.
3.3 MEETINGS OF DIRECTORS. The directors may hold their meetings and
may have an office and keep the books of the Corporation, except as otherwise
provided by statute, in such place or places within or without the State of
Delaware as the Board of Directors may from time
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to time determine or as shall be specified in the notice of such meeting or
duly executed waiver of notice of such meeting.
3.4 FIRST MEETING. Each newly elected Board of Directors shall hold its
first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as
the annual meeting of stockholders, and the newly constituted Board of
Directors shall meet at the principal offices of the Corporation two calendar
days after the delivery to the Company of the notice provided for in Section
2.13(e)(iii)(in either case, such first meeting is the "First Meeting").
3.5 ELECTION OF OFFICERS. At each First Meeting, the Board of Directors
shall select the officers of the Corporation.
3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held at such times and places as shall be designated from time to time by
resolution of the Board of Directors, but no less frequently than once per
fiscal quarter. Notice of such regular meetings shall not be required.
3.7 SPECIAL MEETINGS. Special meetings of the Board of Directors shall
be held whenever called by or at the request of the chairman of the board,
the President, any director, or as designated from time to time by resolution
of the Board of Directors.
3.8 NOTICE. The Secretary shall give notice of each special meeting and
of any First Meeting following a Type B Event Date, to each director at least
24 hours before the meeting, either personally, by telephone, by mail, or by
telegraph (facsimile). Notice of any such meeting need not be given to any
director who shall, either before or after the meeting, submit a signed
waiver of notice or who shall attend such meeting without protesting, prior
to or at its commencement, the lack of notice to him. The business to be
transacted at, and the purpose of, any regular or special meeting of the
Board of Directors shall be specified in the notice or waiver of notice of
such meeting.
3.9 QUORUM: MAJORITY VOTE.
(a) A majority of the total number of directors then in office shall
constitute a quorum for the transaction of business, provided, that in no
event shall a quorum consist of less than one third of the total number of
directors established pursuant to Section 3.2 of this Article 3. The vote of
a majority of directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, unless the question is one upon
which by express provisions of an applicable law or of the certificate of
incorporation or in this Section 3.9 or elsewhere in these bylaws a different
vote is required, in which case such express provision shall govern and
control the decision of such question.
(b) If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
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(c) Section 6.14(c) of that certain Securities Purchase Agreement dated
as of October 10, 1997 by and among the Corporation and certain entities
providing, among other things, for the issuance and sale of shares of Series
B Preferred Stock, and Section 6.14(c) of that certain Securities Purchase
Agreement dated as of October 14, 1997 by and among the Corporation and
certain entities providing, among other things, for the issuance and sale of
shares of Series C Preferred Stock, contain provisions relating to the size
of the stockholder or Board of Directors majority vote required for approval
of certain transactions described in such Sections 6.14(c). Notwithstanding
any other provision of this Section 3.9, the approval of any waiver, consent,
modification or any other action taken by or on behalf of the Corporation
with respect to such provisions shall require the affirmative vote of a
majority of the Common Stock Directors.
3.10 COMPENSATION. The Board of Directors shall have the authority to
fix the compensation, including fees and reimbursement of expenses, paid to
directors for attendance at regular or special meetings of the Board of
Directors or any committee thereof; provided, that nothing contained herein
shall be construed to preclude any director from serving the Corporation in
any other capacity or receiving compensation therefor.
3.11 TELEPHONE MEETINGS. Members of the Board of Directors or any
committee thereof may participate in and act at any meeting of such board or
committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.
3.12 WAIVER OF NOTICE AND PRESUMPTION OF ASSENT. Any member of the Board
of Directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not
lawfully called or convened. Such member shall be conclusively presumed to
have assented to any action taken unless his or her dissent shall be entered
in the minutes of the meeting or unless his or her written dissent to such
action shall be filed with the person acting as the secretary of the meeting
before the adjournment thereof or shall be forwarded by registered mail to
the Secretary of the Corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to any member who voted in
favor of such action
3.13 ACTION BY WRITTEN CONSENT. Unless otherwise restricted by the
certificate of incorporation, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be
taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
ARTICLE 4: COMMITTEES
4.1 DESIGNATION The following committees of the Board of Directors are
hereby created, and the Board of Directors shall appoint the following
committees of the Board of Directors with the respective duties, membership and
voting requirements stated below. After such appointment and until a Type B
Event Date, the following matters shall be deemed
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approved by the Board of Directors only upon receiving the affirmative vote
of a majority of the Board of Directors and a majority of the directors
elected by the holders of the Series B Preferred Stock and the Series C
Preferred Stock: (A) a decision to eliminate or discharge the Audit
Committee, Compensation Committee, Executive Committee or the Acquisitions
Committee, as described more fully below (such committees are the
"Committees"), (B) a decision to reduce, narrow, attenuate or otherwise
weaken the delegation of powers by the Board of Directors to any of the
Committees, unless such reduction, narrowing, attenuation or other weakening
is the transfer of delegated powers from the Compensation Committee or the
Acquisitions Committee to the Executive Committee, (C) a decision to change
the number of members of any Committee, the identity of the persons or
entities entitled to select each of the members of any Committee, the size of
the required vote for approval by any Committee and the size of the required
vote of the Board of Directors necessary to approve actions that failed to
obtain the required approval vote on the appropriate Committee; and (D) a
decision to create any new committee. If the holders of the Series B
Preferred Stock or the holders of the Series C Preferred Stock shall cease to
have the right to nominate and elect any director at all, otherwise than as a
result of the conversion of their respective shares of Series B Preferred
Stock or Series C Preferred Stock in a Type B Conversion, then such holders
shall no longer have the right to select any member of any of the committees
set forth below and the member or members of such committees selected by such
holders shall automatically cease to be a member or members of such
committees.
(1) COMPENSATION COMMITTEE. The Compensation Committee shall
consist of three (3) members, at least one (1) of whom shall be
selected jointly by the Series B Directors and the director elected by
holders of the Series C Preferred Stock (the "SERIES C DIRECTOR"), and
who shall be a director. An affirmative vote of at least two (2)
members of the Compensation Committee shall be required for approval
of matters considered by the Compensation Committee. The Compensation
Committee shall ensure that the representative on the Compensation
Committee nominated by the Series B Directors and the Series C
Director shall receive adequate notice of and an opportunity to
participate in any meetings of the Compensation Committee;
(2) AUDIT COMMITTEE. The Audit Committee shall consist of three
(3) directors, including as many Independent directors as are
available, not to exceed three (3). An affirmative vote of at least
two (2) members of the Audit Committee shall be required for approval
of matters considered by the Audit Committee.
(3) EXECUTIVE COMMITTEE. The Executive Committee shall consist
of four (4) members, one (1) of whom shall be selected by the Series B
Directors (and shall be a Series B Director), one (1) of whom shall be
the Series C Director and two (2) of whom shall be selected by the
Board of Directors. The members selected by the Series B Directors
and the Series C Director may be removed only by the Series B
Directors and the Series C Director, respectively. The Executive
Committee shall, in addition to the customary duties of an executive
committee, have the right to approve any financing activity, including
but not limited to the Capital Budget Plan. An affirmative vote of at
least three (3) members of the
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Executive Committee shall be required for approval of any matters
considered by the Executive Committee. Each financing activity not
approved by the Executive Committee may be referred to the Board of
Directors for approval, which approval shall require a Supermajority
Vote; and
(4) ACQUISITIONS COMMITTEE. The Acquisitions Committee shall
consist of four (4) members, one (1) of whom shall be selected by the
Series B Directors (and shall be a Series B Director), one (1) of whom
shall be the Series C Director, and two (2) of whom shall be selected
by the Board of Directors (and shall be directors). The Acquisitions
Committee shall have the right to approve any transaction of the types
described in Sections 11(n), (o), (p) and (q) of the Series B
Certificate of Designation with respect to which transaction the
aggregate consideration payable in connection with such transaction
(including, without limitation, cash consideration, the fair market
value of any securities and the net present value of any deferred
consideration) is less than $15 million. A unanimous vote of the
Acquisitions Committee shall be required for approval of any matters
considered by the Acquisitions Committee. Except as described in
Section 4.1(5) below, each matter considered but not unanimously
approved by the Acquisitions Committee may be referred to the Board of
Directors for approval, which approval shall require a majority vote
of the Board of Directors.
(5) CERTAIN TRANSACTIONS. The unanimous approval of the
Acquisitions Committee or the unanimous approval of the Board of
Directors shall be required before the Corporation or any of its
Subsidiaries engage in a transaction of the types described in Section
11(n), (o) (which, only for purposes of this clause, shall also apply
to Capital Expenditures made by the Corporation in the ordinary course
of business), (p) and (q) of the Series B Certificate of Designation,
in which transaction: (A) the aggregate consideration payable in
connection with such transaction (including, without limitation, cash
consideration, the fair market value of any securities and the net
present value of any deferred consideration) is less than $15 million;
and (B) the Corporation is to issue its Common Equity at an implicit
or explicit price of less than $8.375 per share. Such implicit price
shall be determined in an appraisal approved unanimously by the
Acquisitions Committee or unanimously by the Board of Directors, such
appraisal to be performed by an independent appraiser selected
unanimously by the Acquisitions Committee or unanimously by the Board
of Directors.
4.2 TERM. Each committee member shall serve as such until the earliest
of (a) the expiration of his term as director, (b) his resignation as a
committee member or as a director, or (c) his removal as a committee member
or as a director. A Committee member elected to such Committee by the Board
of Directors, and, after a Type B Event Date, any Committee member elected to
such Committee by one or more Preferred Stock Directors, may be removed as a
Committee member by a majority of the Board of Directors. Prior to a Type B
Event Date, a Committee member elected to such Committee by either the Series
B Directors or the Series C
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Director, or by both, shall not be removed as a Committee member except by
the director or directors who elected such Committee member to such Committee.
4.3 AUTHORITY. Each committee, to the extent expressly provided in
these bylaws or in the resolution establishing such committee, shall have and
may exercise all of the authority of the Board of Directors in the management
of the business and property of the Corporation except to the extent
expressly restricted by law, the certificate of incorporation, or these
bylaws.
4.4 COMMITTEE CHANGES. The Board of Directors shall have the power at
any time to fill vacancies in the committees, but only to the extent the
Board of Directors would have the power, pursuant to Section 4.2 hereof, to
remove a member who was occupying the committee position that is vacant.
4.5 ALTERNATE MEMBERS OF COMMITTEES. The person or entity with the
power to select a particular member of a Committee (but such person or entity
only, and no other) may designate one or more directors as alternate members
of such Committee and any such alternate member may replace the absent or
disqualified member for whom he is the alternate member at any meeting of
such Committee.
4.6 REGULAR MEETINGS. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time
by the committee and communicated to all members thereof.
4.7 SPECIAL MEETINGS. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee
member at least two days before such special meeting. The business to be
transacted at, and the purpose of, any special meeting of any committee shall
be specified in the notice or waiver of notice of any special meeting.
4.8 QUORUM: MAJORITY VOTE. At meetings of any committee, a majority of
its membership shall constitute a quorum for the transaction of business. If
a quorum is not present at a meeting of any committee, a majority of the
members present may adjourn the meeting from time to time, without notice
other than an announcement at the meeting, until a quorum is present. The
act of a majority of the members present at any meeting at which a quorum is
in attendance shall be the act of a committee, unless the act of a greater
number is required by law, the certificate of incorporation, or these bylaws.
4.9 MINUTES. Each committee shall cause minutes of its proceedings to
be prepared and shall report the same to the Board of Directors upon the
request of the Board of Directors. The minutes of the proceedings of each
committee shall be delivered to the Secretary of the Corporation for
placement in the minute books of the Corporation.
4.10 COMPENSATION. Committee members may, by resolution of the Board of
Directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
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4.11 COMMITTEE RULES. Each committee of the Board of Directors may fix
its own rules or procedures and shall hold its meetings as provided by such
rules, except as may otherwise be provided in the certificate of
incorporation, these bylaws or by a resolution of the Board of Directors
designating such committee. ARTICLE 5: NOTICE
5.1 METHOD. Whenever by statute, the certificate of incorporation, or
these bylaws, notice is required to be given to any committee member,
director, or stockholder and no provision is made as to how such notice shall
be given, personal notice shall not be required and any such notice may be
given (a) in writing, by mail, postage prepaid, addressed to such committee
member, director, or stockholder at his address as it appears on the books or
(in the case of a stockholder) the stock transfer records of the Corporation,
or (b) by any other method permitted by law (including but not limited to
overnight courier service, telegram, telex, or facsimile). Any notice
required or permitted to be given by mail shall be deemed to be delivered and
given at the time when the same is deposited in the United States mail as
aforesaid. Any notice required or permitted to be given by overnight courier
service shall be deemed to be delivered and given at the time delivered to
such service with all charges prepaid and addressed as aforesaid and shall be
deemed to be received two business days after such delivery to such service.
Any notice required or permitted to be given by telegram, telex, or facsimile
shall be deemed to be delivered and given at the time transmitted with all
charges prepaid and addressed as aforesaid.
5.2 WAIVER. Whenever any notice is required to be given to any
stockholder, director, or committee member of the Corporation by statute, the
certificate of incorporation, or these bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or
after the time stated therein, shall be equivalent to the giving of such
notice. Attendance of a stockholder, director, or committee member at a
meeting shall constitute a waiver of notice of such meeting, except where
such person attends for the express purpose of objecting at the beginning of
the meeting to the transaction of any business relevant on the ground that
the meeting is not lawfully called or convened.
ARTICLE 6: OFFICERS
6.1 NUMBER: TITLES: TERM OF OFFICE. The officers of the Corporation
shall be a President, a Secretary, and such other officers as the Board of
Directors may from time to time elect or appoint, including one or more Vice
Presidents (with each Vice President to have such descriptive title, if any,
as the Board of Directors shall determine), and a Treasurer. The officers of
the Corporation shall be elected by the Board of Directors at the First
Meetings, or as soon thereafter as conveniently may be. Each officer shall
hold office until his successor shall have been duly elected and shall have
qualified, until his death, or until he shall resign or shall have been
removed in the matter hereinafter provided. Any two or more offices may be
held by the same person. None of the officers need be a stockholder or a
director of the Corporation or a resident of the State of Delaware. In its
discretion, the Board of Directors may choose not to fill any office for any
period of time as it may deem advisable.
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6.2 REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment
the best interests of the Corporation would be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent shall not
of itself create contract rights.
6.3 VACANCIES. Any vacancy occurring in any office of the Corporation
because of death, resignation, removal, disqualification or otherwise may be
filled by the Board of Directors for the unexpired portion of the term by the
Board of Directors then in office.
6.4 AUTHORITY. Officers shall have such authority and perform such
duties in the management of the Corporation as are provided in these bylaws
or as may be determined by resolution of the Board of Directors not
inconsistent with these bylaws.
6.5 COMPENSATION. The compensation, if any, of officers and agents
shall be fixed from time to time by the Board of Directors. No officer shall
be prevented from receiving such compensation by virtue of his also being a
director of the Corporation.
6.6 DUTIES OF CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the Board of Directors and shall perform such
other duties and have such other powers as may be prescribed from time to
time by the Board of Directors.
6.7 DUTIES OF VICE CHAIRMAN OF THE BOARD. The Vice Chairman shall, in
the absence or disability of, or in the event of a vacancy in the office of,
the Chairman of the Board, perform the duties and exercise the powers of such
Chairman of the Board. The Vice Chairman of the Board shall perform such
other duties and have such other powers as may be prescribed from time to
time by the Board of Directors.
6.8 DUTIES OF PRESIDENT. The President shall be the chief executive
officer of the Corporation. The President shall be responsible for the
general and active management of the business of the Corporation and shall
ensure that all orders and resolutions of the Board of Directors and the
Committees are carried into effect. The President shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except when required or permitted by law to be otherwise signed
and executed and except when the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent
of the Corporation. The President shall, in the absence or disability of, or
in the event of a vacancy in the office of, the Vice Chairman of the Board,
perform the duties and exercise the powers of such Vice Chairman of the
Board. The President shall perform such other duties and have such other
duties as may be prescribed from time to time by the Board of Directors.
6.9 DUTIES OF THE VICE PRESIDENTS. The Vice Presidents shall, in the
order of their organizational ranking, in the absence or disability, or in
the event of a vacancy in the office, of the President, perform the duties
and exercise the powers of the President, and shall perform such other duties
and have such other powers as may from time to time be prescribed by the
Board of Directors.
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6.10 DUTIES OF THE SECRETARY. The Secretary shall keep, or cause to be
kept, in books provided for that purpose, the minutes of the meetings of the
stockholders, the Board of Directors, or any committee thereof, and shall see
that all notices are duly given in accordance with the provisions of these
bylaws. As required by law, the Secretary shall be the custodian of the
records of the Corporation. The Secretary shall keep the seal of the
Corporation in safe custody and, when authorized by the Board of Directors,
affix such seal to any document requiring it, and when so affixed, it shall
be attested by his signature or by the signature of the Treasurer or an
Assistant Secretary. The Secretary shall perform such other duties and have
such other powers as may be prescribed from time to time by the Board of
Directors.
6.11 DUTIES OF THE TREASURER. The Treasurer shall have charge and
custody of, and shall be responsible for, all funds and securities of the
Corporation and shall deposit such funds in the name of the Corporation in
such banks, trust companies and other depositories as shall be designated by
the Board of Directors. The Treasurer shall perform such other duties and
have such other powers as may be prescribed from time to time by the Board of
Directors.
6.12 OTHER OFFICERS, ASSISTANT OFFICERS AND AGENTS. Officers, assistant
officers and agents, if any, other than those whose duties are provided for
in these bylaws, shall have such authority and perform such duties as may
from time to time be prescribed by resolution of the Board of Directors.
6.13 ABSENCE OR DISABILITY OF OFFICERS. In the case of the absence or
disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any
other person whom it may select.
ARTICLE 7: INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
7.1 NATURE OF INDEMNITY. Each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he, or a person of whom
he is the legal representative, is or was a director or officer, of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee,
fiduciary, or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, shall be indemnified and held harmless by the
Corporation to the fullest extent which it is empowered to do so by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding) and such indemnification shall inure to the benefit of his heirs,
executors and administrators; provided, however, that, except as provided in
Section 7.2 hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the Board of Directors. The Corporation may,
by action of its Board of Directors, provide indemnification to
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employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
7.2 PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. Any
indemnification of a director or officer of the Corporation under Section 7.2
of this Article 7 or advance of expenses under Section 7.5 of this Article 7
shall be made promptly, and in any event within thirty (30) days, upon the
written request of the director or officer. If a determination by the
Corporation that the director or officer is entitled to indemnification
pursuant to this Article 7 is required, and the Corporation fails to respond
within sixty (60) days to a written request for indemnity, the Corporation
shall be deemed to have approved the request. If the Corporation denies a
written request for indemnification or advancing of expenses, in whole or in
part, or if payment in full pursuant to such request is not made within
thirty (30) days, the right to indemnification or advances as granted by this
Article 7 shall be enforceable by the director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in
connection with successfully establishing his right to indemnification, in
whole or in part, in any such action shall also be indemnified by the
Corporation. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any proceeding
in advance of its final disposition where the required undertaking, if any,
has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation
Law of the State of Delaware for the Corporation to indemnify the claimant
for the amount claimed, but the burden of such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he has met the
applicable standard of conduct set forth in the General Corporation Law of
the State of Delaware, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
7.3 ARTICLE NOT EXCLUSIVE. The rights to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article 7 shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
7.4 INSURANCE. The Corporation may purchase and maintain insurance on
its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the Corporation or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, whether or not the Corporation would have the power to indemnify
such person against such liability under this Article 7.
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7.5 EXPENSES. Expenses incurred by any person described in Section 7.1
of this Article 7 in defending a proceeding shall be paid by the Corporation
in advance of such proceeding's final disposition upon receipt of any
undertaking required by applicable law by or on behalf of the director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the Board of Directors deems appropriate.
7.6 EMPLOYEES AND AGENTS. Persons who are not covered by the foregoing
provisions of this Article 7 and who are or were employees or agents of the
Corporation, or who are or were serving at the request of the Corporation as
employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time
or from time to time by the Board of Directors.
7.7 CONTRACT RIGHTS. The provisions of this Article 7 shall be deemed
to be a contract right between the Corporation and each director or officer
who serves in any such capacity at any time while this Article 7 and the
relevant provisions of the General Corporation Law of the State of Delaware
or other applicable law are in effect, and any repeal or modification of this
Article 7 or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceedings then existing.
7.8 MERGER OR CONSOLIDATION. For purposes of this Article 7, references
to "the Corporation" shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this Article 7 with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
ARTICLE 8: CERTIFICATES AND STOCKHOLDERS
8.1 CERTIFICATES FOR SHARES. Certificates for shares of stock of the
Corporation shall be in such form as shall be approved by the Board of
Directors. Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by or in the name of the Corporation. The certificates
shall be signed by the chairman of the board, the President or a Vice President
and also by the Secretary or an Assistant Secretary or by the Treasurer or an
Assistant Treasurer. Any and all signatures on the certificate may be a
facsimile and may be sealed with the seal of the Corporation or a facsimile
thereof. If any officer, transfer agent, or registrar who has signed, or whose
facsimile signature has been placed upon, a certificate has ceased to be such
officer, transfer agent, or registrar before such certificate is issued, such
certificate may be issued by the Corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date
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of issue. The certificates shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued and shall exhibit
the holder's name and the number of shares.
8.2 REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. The Board of
Directors may direct a new certificate or certificates to be issued in place
of a certificate or certificates theretofore issued by the Corporation and
alleged to have been lost or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate or certificates representing
shares to be lost or destroyed. When authorizing such issue of a new
certificate or certificates the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative,
to advertise the same in such manner as it shall require and/or to give the
Corporation a bond with a surety or sureties satisfactory to the Corporation
in such sum as it may direct as indemnity against any claim, or expense
resulting from a claim, that may be made against the Corporation with respect
to the certificate or certificates alleged to have been lost or destroyed.
8.3 TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, the Corporation
or its transfer agent shall issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its
books. The Board of Directors may appoint a bank or trust company organized
under the laws of the United States or any state thereof to act as its
transfer agent or registrar, or both in connection with the transfer of any
class or series of securities of the Corporation.
8.4 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except
as otherwise provided by law.
8.5 REGULATIONS. The Board of Directors shall have the power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer, and registration or the replacement of
certificates for shares of stock of the Corporation.
8.6 LEGENDS. The Board of Directors shall have the power and authority
to provide that certificates representing shares of stock bear such legends
as the Board of Directors deems appropriate to assure that the Corporation
does not become liable for violations of federal or state securities laws or
other applicable law.
8.7 SUBSCRIPTIONS FOR STOCK. Unless otherwise provided for in the
subscription agreement, subscriptions for shares shall be paid in full at
such time, or in such installments and at such times, as shall be determined
by the Board of Directors. Any call made by the Board of Directors for
payment on subscriptions shall be uniform as to all shares of the same class
or as to
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all shares of the same series. In case of default in the payment of any
installment or call when such payment is due, the Corporation may proceed to
collect the amount due in the same manner as any debt due the Corporation.
ARTICLE 9: MISCELLANEOUS PROVISIONS
9.1 DIVIDENDS. Subject to provisions of law and the certificate of
incorporation, dividends upon the capital stock of the Corporation, may be
declared by the Board of Directors at any regular or special meeting and may
be paid in cash, in property, or in shares of the capital stock of the
Corporation. Subject to provisions of law and the certificate of
incorporation, such declaration and payment shall be at the discretion of the
Board of Directors.
9.2 RESERVES. There may be created by the Board of Directors out of
funds of the Corporation legally available therefor such reserve or reserves
as the directors from time to time, in their discretion, consider proper to
provide for contingencies, to equalize dividends, or to repair or maintain
any property of the Corporation, or for such other purpose as the Board of
Directors shall consider beneficial to the Corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it
was created.
9.3 BOOKS AND RECORDS. The Corporation shall keep correct and complete
books and records of account, shall keep minutes of the proceedings of its
stockholders and Board of Directors and shall keep at its registered office
or principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of
all stockholders and the number and class of the shares held by each. Any
stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during
the usual hours of business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books
and records, and to make copies or extracts therefrom. A proper purpose
shall mean any purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent shall be the
person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing which authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand
under oath shall be directed to the Corporation at its registered office in
the state of Delaware or at its principal place of business.
9.4 CHECKS, DRAFTS OR ORDERS. All checks, drafts, or other orders for
the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be
signed by such officer or officers, agent or agents of the Corporation, and
in such manner, as shall be determined by resolution of the Board of
Directors or a duly authorized committee thereof.
9.5 CONTRACTS. Subject to the limitations contained in the certificate
of incorporation, the Board of Directors or the appropriate Committee may
authorize any officer or officers, or any agent or agents, of the Corporation
to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation, and such authority may be general
or confined to specific instances.
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9.6 LOANS. Subject to the limitations contained in the certificate of
incorporation, the Corporation may lend money to, or guarantee any obligation
of, or otherwise assist any officer or other employee of the Corporation or
of its subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors,
such loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. Subject to the limitations contained in the certificate of
incorporation, the loan, guaranty or other assistance may be with or without
interest, and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Subject to the limitations contained in the
certificate of incorporation, nothing contained in this section shall be
deemed to deny, limit or restrict the powers of guaranty or warranty of the
Corporation at common law or under any statute.
9.7 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
the Board of Directors; provided, that if such fiscal year is not fixed by
the Board of Directors and the selection of the fiscal year is not expressly
deferred by the Board of Directors, the fiscal year shall be the calendar
year.
9.8 SEAL. The Board of Directors shall provide a corporate seal which
shall be in the form of a circle and shall have inscribed thereon the name of
the Corporation and the words "Corporate Seal, Delaware". The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
9.9 RESIGNATIONS. Any director, committee member, or officer may resign
by so stating at any meeting of the Board of Directors or by giving written
notice to the Board of Directors, the President, or the Secretary. Such
resignation shall take effect at the time specified therein or, if no time is
specified therein, immediately upon its receipt. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
9.10 VOTING SECURITIES OWNED BY CORPORATION. Voting securities in any
other corporation held by the Corporation shall be voted by the President,
unless the Board of Directors specifically confers authority to vote with
respect thereto, which authority may be general or confined to specific
instances, upon some other person or officer. Any person authorized to vote
securities shall have the power to appoint proxies, with general power of
substitution.
9.11 MORTGAGES, ETC. With respect to any deed, deed of trust, mortgage,
or other instrument executed by the Corporation through its duly authorized
officer or officers, the attestation to such execution by the Secretary of
the Corporation shall not be necessary to constitute such deed, deed of
trust, mortgage, or other instrument a valid and binding obligation against
the Corporation unless the resolutions, if any, of the Board of Directors
authorizing such execution expressly state that such attestation is necessary.
9.12 HEADINGS. The headings used in these bylaws have been inserted for
administrative convenience only and shall not be given any substantive effect
in limiting or otherwise construing any provision herein.
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9.13 REFERENCES. Whenever herein the singular number is used, the same
shall include the plural where appropriate, and words of any gender should
include each other gender where appropriate. All capitalized terms not
otherwise defined herein shall have the meaning assigned such terms in the
certificate of incorporation.
9.14 INCONSISTENT PROVISIONS. In the event that any provision of these
bylaws is or becomes inconsistent with any provision of the certificate of
incorporation, the General Corporation Law of the State of Delaware or any
other applicable law, the provision of these bylaws shall not be given any
effect to the extent of such inconsistency but shall otherwise be given full
force and effect.
9.15 AMENDMENTS. Except as otherwise provided in the certification of
incorporation, these bylaws may be altered, amended, or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors at any
regular or special meeting of the stockholders or the Board of Directors, but
only if such alteration, amendment, repeal, or adoption has been approved:
(i) in case of adoption by the Board of Directors prior to the First
Meeting following a Type B Event Date, by a majority of the Preferred Stock
Directors and either (A) a majority of the entire Board of Directors (if such
alteration, amendment, repeal, or adoption does not increase the number of
directors) or (B) by at least 80% of the members of the entire Board of
Directors (if such alteration, amendment, repeal, or adoption does increase
the number of directors);
(ii) in case of adoption by the Board of Directors at or after the First
Meeting following a Type B Event Date, by either (A) a majority of the entire
Board of Directors (if such alteration, amendment, repeal, or adoption
neither increases the number of directors nor amends or repeals Section
3.9(c) of these bylaws) or (B) by at least 80% of the members of the entire
Board of Directors (if such alteration, amendment, repeal, or adoption does
increase the number of directors or does amend or repeal Section 3.9(c) of
these bylaws);
(iii) in case of adoption by the stockholders at any meeting of
stockholders (other than the first meeting of stockholders following a Type B
Event Date) with a record date on or prior to a Type B Conversion Date, by
holders of at least eighty percent (80%) of the outstanding shares of the
Corporation entitled to vote in the election of directors, voting as one
class, and by holders of a majority of the shares, outstanding as of such
record date, of whichever (or both) of Series B Preferred Stock and Series C
Preferred Stock continued (as of such record date) to have the right under
the certificate of incorporation to elect one or more Preferred Stock
Directors; or
(iv) in case of adoption by the stockholders at the first meeting of
stockholders following a Type B Event Date or at any meeting of stockholders
with a record date after a Type B Conversion Date, by holders of at least
eighty percent (80%) of the outstanding shares of the Corporation entitled to
vote in the election of directors, voting as one class.
For the avoidance of doubt, all Series D Preferred Stock of the
Corporation issued pursuant to a Type B Conversion Event shall be deemed to
be "entitled to vote in the election of
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directors" at any time after such issuance, for all purposes of this Section
9.15. If the holders of Series B Preferred Stock no longer have the right to
elect any Series B Directors at all under the certificate of incorporation,
then the requirement of approval by the holders of shares of Series B
Preferred Stock contained in Section 9.15(iii) shall not apply. If the
holders of Series C Preferred Stock no longer have the right to elect a
Series C Director under the certificate of incorporation, then the
requirement of approval by the holders of shares of Series C Preferred Stock
contained in Section 9.15(iii) shall not apply. If the holders of neither
Series B Preferred Stock nor Series C Preferred Stock continue to have the
right to elect any Preferred Stock Directors at all under the certificate of
incorporation, then the requirement of approval by the Preferred Stock
Directors contained in Section 9.15(i) shall not apply. Notice of such
proposed alteration, amendment, repeal, or adoption shall be contained in the
notice of such meeting.
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THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
OFFERED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
No. S-1
Certificate for 35,000 Warrants
EXERCISABLE COMMENCING ON THE DATE OF ISSUANCE
HEREOF AND ENDING
5:00 P.M., NEWPORT BEACH, CALIFORNIA TIME, ON THE EXPIRATION DATE
INSIGHT HEALTH SERVICES CORP.
WARRANT CERTIFICATE
THIS CERTIFIES that Shattuck Hammond Partners, Inc. or registered assigns
is the registered holder (the "Warrantholder") of the number of warrants (the
"Warrants") set forth above, each of which represents the right to purchase one
fully paid and non-assessable share of common stock, par value $.001 per share
(the "Common Shares"), of InSight Health Services Corp., a Delaware corporation
(the "Company"), at the exercise price of $5.50 per share (the "Exercise
Price"), at any time prior to the Expiration Date hereinafter referred to, by
surrendering this Warrant Certificate, with the form of Election to Purchase set
forth hereon duly executed, at the Company's principal executive office, 4400
MacArthur Boulevard, Newport Beach, California 92660 (the "Office"), and by
paying in full the Exercise Price, plus transfer taxes, if any, in United States
currency by certified check, bank cashier's check or money order payable to the
order of the Company.
SECTION 1. DURATION AND EXERCISE OF WARRANTS.
(a) The Warrants represented by this Warrant Certificate shall vest
cumulatively and be exercisable at the rate of 2,072 Warrants on August 1, 1996,
and 2,058 Warrants each month thereafter commencing on September 1, 1996, and
shall expire at 5:00 p.m. Los Angeles time, on July 1, 2000 (the "Expiration
Date"); PROVIDED, HOWEVER, that if the Warrantholder's engagement under the
August 14, 1996 letter agreement between the Warrantholder and the Company is
terminated (the "Termination Date") at any time prior to December 31, 1997,
those Warrants which are vested and exercisable as of the Termination Date shall
remain vested and exercisable, but any unvested Warrants shall be cancelled on
the Termination Date. Any Warrant Certificate not surrendered to the Company for
exercise prior to the close of business on the Expiration Date shall be void.
(b) Subject to the provisions of this Warrant Certificate, after the
date of this Warrant Certificate and prior to the close of business on the
Expiration Date, the Warrantholder shall have the right to purchase from the
Company the number of Common Shares specified above at the Exercise Price. In
order to exercise such right, the Warrantholder shall surrender the Warrant
Certificate(s) evidencing such Warrants to the Company at the Office with the
form of Election to Purchase set forth hereon duly
<PAGE>
completed and signed, and shall tender payment in full to the Company for the
Company's account of the Exercise Price, together with such taxes as are
specified in Section 4 hereof, for each Common Share with respect to which such
Warrants are being exercised. Such Exercise Price and taxes shall be paid in
full by certified check, bank cashier's check or money order, payable in United
States currency to the order of the Company. In addition, if the Common Shares
deliverable upon exercise have not been registered pursuant to the Securities
Act, the Warrantholder shall deliver a duly executed certificate substantially
in the form of Exhibit A hereto.
(c) The Warrants evidenced by this Warrant Certificate shall be
exercisable only in multiples of one (1) Warrant. If less than all of the
Warrants evidenced by this Warrant Certificate are exercised at any time prior
to the close of business on the Expiration Date, a new Warrant Certificate(s)
shall be issued to the Warrantholder, or its duly authorized assigns, by the
Company for the remaining number of Warrants evidenced by the Warrant
Certificate so surrendered.
SECTION 2. ISSUANCE OF SHARE CERTIFICATES. Upon surrender of this Warrant
Certificate and payment of the Exercise Price, and, if the Common Shares
deliverable on exercise have not been registered under the Securities Act, upon
delivery of a certificate in the form of Exhibit A hereto, the Company shall
issue certificates representing Common Shares ("Share Certificates") for the
number of full Common Shares to which the holder of such Warrants is entitled,
registered in accordance with the instructions set forth in the Election to
Purchase. If such Common Shares have not been registered under the Securities
Act, the Share Certificates shall bear a legend substantially similar to the
legend on this Warrant Certificate.
SECTION 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF COMMON SHARES
PURCHASABLE PER NUMBER OF WARRANTS. The Exercise Price and the number of Common
Shares purchasable upon the exercise of each Warrant are subject to adjustment
from time to time upon the occurrence of the events specified in this Section 3:
(a) If the Company at any time after the date of this Warrant
Certificate (i) declares a dividend or makes a distribution on the outstanding
Common Shares payable in Common Shares, (ii) subdivides or reclassifies the
outstanding Common Shares into a greater number of shares or (iii) combines or
reclassifies the outstanding Common Shares into a smaller number of Common
Shares, the Exercise Price in effect immediately after the record date for such
dividend or distribution or at the effective date of such subdivision,
combination or reclassification, shall be adjusted to equal the quotient
obtained by multiplying the Exercise Price in effect immediately prior to such
date by a fraction, the numerator of which shall be the number of Common Shares
outstanding immediately prior to such dividend, distribution, subdivision,
combination or reclassification, and the denominator of which shall be the
number of Common Shares outstanding immediately after such dividend,
distribution, subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) If at any time, as a result of an adjustment made pursuant to
paragraph (a), the holder of any Warrant thereafter exercised shall become
entitled to receive any additional Common Shares (the "New Shares"), thereafter
the number of such New Shares so receivable upon exercise of any Warrant shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Shares
contained in paragraph (a), and the provisions of this Warrant Certificate with
respect to the Common Shares shall apply on like terms to any such New Shares.
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(c) All calculations of the Exercise Price under this Section 3 shall
be made to the nearest one hundredth of a cent. No adjustment in the Exercise
Price in accordance with the provisions of paragraph (a) hereof need be made if
such adjustment, together with other adjustments carried forward pursuant to
this paragraph (c), would amount to a change in such Exercise Price of less than
1%; PROVIDED, HOWEVER, that the amount by which any adjustment is not made by
reason of this paragraph (c) shall be carried forward and taken into account at
the time of any subsequent adjustment in the Exercise Price.
(d) Unless the Company shall have exercised its election as provided
in paragraph (e), upon each adjustment of the Exercise Price as a result of the
calculations made in paragraph (a), each Warrant outstanding immediately prior
to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price that number of Common Shares obtained
by (i) multiplying (A) the number of Common Shares purchasable upon exercise of
a Warrant immediately prior to such adjustment of the Exercise Price by (B) the
Exercise Price in effect immediately prior to such adjustment of the Exercise
Price and (ii) dividing the product so obtained by the Exercise Price in effect
immediately after such adjustment of the Exercise Price.
(e) The Company may elect, on or after the date of any adjustment of
the Exercise Price, to adjust the number of Warrants in substitution for an
adjustment in the number of Common Shares purchasable upon the exercise of a
Warrant as provided in paragraph (d).
(f) In case of any reorganization of the Company, or in case of the
consolidation or merger of the Company with or into any other legal entity or of
the sale of the properties and assets of the Company as, or substantially as, an
entirety to any other legal entity (collectively, "Reorganization"), all vested
Warrants shall be exercisable, and any unvested Warrants shall become
immediately exercisable, after such Reorganization, upon the terms and
conditions specified in this Warrant Certificate, for the stock or other
securities or property (including cash) to which a holder of the number of
Common Shares purchasable (at the time of such Reorganization) upon exercise of
such Warrant would have been entitled upon such Reorganization if such Warrant
had been exercised in full immediately prior to such Reorganization; and in any
such case, if necessary, the provisions set forth in this Section 3 with respect
to the rights and interests thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any such stock or other securities or property thereafter deliverable upon
exercise of the Warrants. The Company shall not effect any such Reorganization
unless prior to or simultaneously with the consummation thereof the successor
(if other than the Company) resulting from such Reorganization or the legal
entity purchasing such assets shall assume, by written instrument executed and
delivered to the holder of each Warrant, the obligation to deliver to the holder
of each Warrant such stock, securities or assets as, in accordance with the
foregoing provisions, such holders may be entitled to purchase, and the other
obligations under this Warrant Certificate.
SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes that may be imposed by the United States of America or any state or
territory thereof ("Taxes") attributable to the initial issuance of Common
Shares upon the exercise of Warrants prior to the close of business on the
Expiration Date; PROVIDED, HOWEVER, that the Company shall not be required to
pay any Taxes which may be payable in respect of any transfer involved in the
issuance of any Warrant Certificates or any Share Certificates in a name other
than that of the Warrantholder of record surrendered upon the exercise of a
Warrant, and the Company shall not be required to issue or deliver such Share
Certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such Taxes or shall have
established to the satisfaction of the Company that such Taxes have been paid.
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SECTION 5. REGISTRATION.
(a) This Warrant Certificate shall be registered in the name of the
record holder to whom it is distributed; and the Company shall maintain a list
showing the name, address and number of Warrants held by each of the
Warrantholders of record.
(b) The Company may deem and treat the Warrantholder of record as the
absolute owner of this Warrant Certificate (notwithstanding any notation of
ownership or other writing thereon made by anyone) for the purpose of any
exercise thereof and any distribution to the holder thereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
SECTION 6. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of this Warrant
Certificate upon the records to be maintained by it for that purpose, upon
surrender of this Warrant Certificate accompanied (if so required by the
Company) by (i) a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder(s) thereof
or by the duly appointed legal representative thereof or by a duly authorized
attorney, and (ii) an opinion of counsel, reasonably satisfactory to the
Company, that such transfer is exempt from registration under the Securities
Act. Upon any such registration or transfer, a new Warrant Certificate shall be
issued to the transferee, and the surrendered Warrant Certificate shall be
cancelled by the Company.
(b) This Warrant Certificate may be exchanged at the option of the
holder, when surrendered to the Company at the Office, for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a like number of Warrants. Warrant Certificates surrendered for
exchange, transfer or exercise shall be cancelled by the Company.
SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case this Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Company shall
issue and deliver, in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and substitution for any Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor
and representing an equivalent number of Warrants, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of such
Warrant Certificate and an indemnity or bond, if requested, also satisfactory to
the Company. Applicants for such substitute Warrant Certificate shall also
comply with such other reasonable charges as the Company may prescribe.
SECTION 8. NOTICES.
(a) Any notice or demand authorized by this Warrant Certificate to be
given or made by the Warrantholder to or on the Company shall be in writing and
shall be sufficiently given or made if personally delivered or sent by mail or
by telegram or telex confirmed by letter addressed (until another address is
given in writing by the Company) to the Office.
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(b) Any notice pursuant to this Warrant Certificate to be given by the
Company to the Warrantholder shall be in writing and shall be sufficiently given
if personally delivered or sent by mail or telegram or telex confirmed by
letter, addressed (until another address is filed in writing by the
Warrantholder with the Company) to the address specified in the Warrant register
maintained by the Company.
SECTION 9. RIGHTS OF WARRANTHOLDERS: VOTING. Nothing contained in this
Warrant Certificate shall be construed as conferring upon the Warrantholder any
of the rights of a stockholder of the Company, including without limitation the
right to vote, to receive dividends and other distributions, to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company.
SECTION 10. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time
supplement or amend this Warrant Certificate without the consent or concurrence
of the Warrantholder in order to cure any ambiguity, manifest error or other
mistake in this Warrant Certificate, or to make provision in regard to any
matters or questions arising hereunder which the Company may deem necessary or
desirable and which shall not adversely affect, alter or change the interests of
the Warrantholder.
SECTION 11. WARRANT AGENT. The Company may, by written notice to the
Warrantholder, appoint an agent for the purpose of issuing Common Shares on the
exercise of the Warrants, exchanging Warrants, replacing Warrants or any of the
foregoing, and thereafter any such issuance, exchange or replacement shall be
made at such office by such agent.
SECTION 12. SUCCESSORS. All the representations, warranties, covenants and
provisions of this Warrant Certificate by or for the benefit of the Company or
the Warrantholder shall bind and inure to the benefit of their respective
successors and assigns hereunder.
SECTION 13. GOVERNING LAW. This Warrant Certificate shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be governed in accordance with the laws of said State, regardless of the laws
that might be applied under applicable principles of conflicts of laws.
SECTION 14. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant
Certificate shall be construed to give to any person or entity other than the
Company and the Warrantholder any legal or equitable right, remedy or claim
under this Warrant Certificate, and this Warrant Certificate shall be for the
sole and exclusive benefit of the Company and the Warrantholder.
SECTION 15. INTERPRETATION. The headings contained in this Warrant
Certificate are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Warrant Certificate.
SECTION 16. INVALIDITY OF PROVISIONS. If any provision of this Warrant
Certificate is or becomes invalid, illegal or unenforceable in any respect, such
provision shall be amended to the extent necessary to cause it to express the
intent of the parties and be valid, legal and enforceable. The amendment of such
provision shall not affect the validity, legality or enforceability of any other
provision hereof.
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SECTION 17. REGISTRATION RIGHTS.
(a) If at any time or from time to time the Company proposes to file a
registration statement on any appropriate form (a "Registration Statement")
(other than in connection with an exchange offer or a registration statement on
Form S-4 or S-8 or otherwise unsuitable registration statements) under the
Securities Act with respect to any Common Shares, whether or not for sale for
its own account, on a form and in a manner which would permit registration of
Common Shares received upon exercise of the Warrants ("Warrant Shares") for sale
to the public under the Securities Act, the Company shall
(i) promptly give to the Warrantholder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities law); and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Warrant Shares specified in a written request or requests, made
within 20 days after receipt of such written notice from the Company, by the
Warrantholder.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Warrantholder as a part of the written notice given pursuant to
Section 17(a)(i). In such event the right of the Warrantholder to registration
pursuant to this Section 17 shall be conditioned upon the Warrantholder's
participation, as a selling security holder, in such underwriting and the
inclusion of the Warrant Shares in the underwriting to the extent provided
herein. The Warrantholder shall (together with the Company and the other holders
of Common Shares distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriters selected
for such underwriting by the Company. The Warrantholder shall not be required to
make any representations or warranties to the Company or the underwriters other
than those relating to the Warrantholder, the Warrant Shares and the intended
method of distribution and information about the Warrantholder provided by the
Warrantholder for use in the Registration Statement.
(c) Notwithstanding any other provision of this Section 17:
(i) subject to clause (iii) below, if the registration is an
underwritten primary registration on behalf of the Company and the managing
underwriters of such offering determine in good faith that the aggregate amount
of Common Shares which the Warrantholder and the Company propose to include in
such Registration Statement exceeds the maximum amount of Common Shares that
could practicably be included therein, the Company will include in such
registration, first, the Common Shares which the Company proposes to sell, and
second, the Warrant Shares and the Common Shares of any holders of other
piggyback registration rights, if any, which can practicably be included
therein, pro rata among all such holders, taken together, on the basis of the
relative amount of Common Shares owned by the Warrantholder and such other
holders who have requested that Common Shares owned by them be included;
(ii) subject to clause (iii) below, if the registration is an
underwritten secondary registration on behalf of any of the other security
holders of the Company and the managing underwriters determine in good faith
that the aggregate amount of Common Shares which the Warrantholder and such
security holders propose to include in such registration exceeds the maximum
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amount of Common Shares that could practicably be included therein, the Company
will include in such registration, first, the Common Shares to be sold for the
account of any other holders entitled to demand registration and, second, the
Warrant Shares and other Common Shares to be sold for the account of other
holders electing to include (but not being entitled to demand inclusion of)
Common Shares in such registration, pro rata among all such holders, taken
together, on the basis of the relative amount of Common Shares owned by the
Warrantholder and such other holders who have requested that Common Shares owned
by them be included; and
(iii) in the event of a conflict between the rights of the
Warrantholder set forth in this Section 17 and the registration rights of
General Electric Company, the rights hereunder shall be subordinate to such
other rights and the Company's obligations shall be limited to those that can be
performed without violating the terms of such other registration rights.
(d) The Company may withdraw any Registration Statement at any time
before it becomes effective, or postpone the offering of Common Shares, without
obligation or liability to the Warrantholder.
(e) With respect to a Registration Statement in which any of the
Warrant Shares are included, the Warrantholder agrees, if requested by the
managing underwriters in an underwritten offering, not to effect any public sale
or distribution of Common Shares, including a sale pursuant to Rule 144 under
the Securities Act (except as part of such registration), during the 180-day
period beginning on the effective date of such Registration Statement; PROVIDED,
HOWEVER, that such agreement shall be applicable only to the first three such
Registration Statements which cover Common Shares (or other securities) to be
sold on the Company's behalf to the public in an underwritten offering.
(f) All Registration Expenses (as defined below) incurred in
connection with any registration, qualification or compliance pursuant to this
Section 17 shall be borne by the Company. All Selling Expenses (as defined
below) incurred in connection with any registrations hereunder shall be borne by
the holders of the Common Shares so registered pro rata on the basis of the
number of shares so registered. For purposes of this Section 17, (i)
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in
complying with this Section 17, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel for the
Company, reasonable fees and disbursements of a single special counsel for the
Warrantholder and all other holders of Common Shares to be registered, blue sky
fees and expenses, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of the Company's
regular employees which shall be paid in any event by the Company) and (ii)
"SELLING EXPENSES" shall mean all underwriting discounts and selling commissions
applicable to the sale.
(g) In the case of each registration, qualification or compliance
effected by the Company pursuant to this Section 17, the Company will keep the
Warrantholder advised in writing as to the qualification and compliance and as
to the completion thereof. At its expense the Company will:
(i) Keep such registration, qualification or compliance effective
for a period of 120 days or until the Warrantholder has completed the
distribution described in the Registration Statement relating thereto, whichever
first occurs;
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<PAGE>
(ii) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
the requisite period;
(iii) Furnish such number of prospectuses and other documents
incident thereto as the Warrantholder from time to time may reasonably request;
(iv) Use its reasonable efforts to register or qualify such
Warrant Shares under the securities or blue sky laws of such jurisdictions as
the Warrantholder reasonably requests and do any and all other acts and things
which may be reasonably necessary or advisable to enable the Warrantholder to
consummate the disposition in such jurisdictions of the Warrant Shares owned by
the Warrantholder (PROVIDED that the Company will not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 17, (B) subject itself to taxation in
any such jurisdiction, (C) consent to general service of process in any such
jurisdiction, or (D) qualify such Warrant Shares in a given jurisdiction where,
in the sole discretion of the Company, expressions of investment interest are
not sufficient in such jurisdiction to reasonably justify the expense of
qualification in that jurisdiction or where such qualification would require the
Company to register as a broker or dealer in such jurisdiction);
(v) Notify the Warrantholder at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event known to the Company as a result of which the prospectus
included in such Registration Statement contains an untrue statement of a
material fact or omits any material fact necessary to make the statements
therein not misleading, and in such event, at the request of the Warrantholder,
the Company will prepare a supplement or amendment to such prospectus so that,
as thereafter delivered to the purchasers of such Warrant Shares, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(vi) Cause all such Warrant Shares to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and qualify such Warrant Shares for trading on each system on which
similar securities issued by the Company are from time to time qualified;
(vii) Provide a transfer agent and registrar for all such Warrant
Shares not later than the effective date of such Registration Statement and
thereafter maintain such a transfer agent and registrar;
(viii) Permit the Warrantholder, if in the Company's sole and
exclusive judgment, such holder might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
Rregistration Statement and to require the insertion therein of material,
furnished to the Company in writing, which in the reasonable judgment of such
holder and it's counsel should be included; and
(ix) In the event of the issuance of any stop order suspending
the effectiveness of a Registration Statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Shares included in such Registration Statement for sale in any
jurisdiction, the Company will use its reasonable efforts promptly to obtain the
withdrawal of such order.
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<PAGE>
(h) The Warrantholder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Sections 17(g)(v)
or (ix), such holder will forthwith discontinue disposition of Warrant Shares
pursuant to a registration hereunder until receipt of the copies of an
appropriate supplement or amendment to the prospectus under Section 17(g)(ii) or
until the withdrawal of such order under Section 17(g)(ix).
(i) No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Common Shares on
the basis provided in any underwriting arrangements approved by the persons
entitled to approve such arrangements, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements and
(iii) furnishes to the Company such information regarding such person and the
distribution proposed by such person as the Company may request in writing and
as shall be required in connection with any registration, qualification or
compliance referred to in this Section 17.
(j) The Company agrees to indemnify, to the extent permitted by law,
the Warrantholder, its officers, directors and trustees and each person who
controls (within the meaning of the Securities Act) such holder against all
losses, claims, damages, liabilities and expenses caused by any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein or by such holder's failure to deliver a copy of the Registration
Statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company will indemnify
such underwriters, their officers and directors and each person who controls
(within the meaning of the Securities Act) such underwriters at least to the
same extent as provided above with respect to the indemnification of the
Warrantholder.
(k) In connection with any Registration Statement in which
Warrantholder is participating, such Warrantholder will furnish to the Company
in writing such information as the Company reasonably requests for use in
connection with any such Registration Statement or prospectus and, to the extent
permitted by law, will indemnify the Company, its directors and officers and
each person who controls (within the meaning of the Securities Act) the Company
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent that such untrue statement or omission is
contained in any information so furnished in writing by such Holder; PROVIDED
that the obligation to indemnify will be limited to the net amount of proceeds
received by such holder from the sale of Warrant Shares pursuant to such
Registration Statement. In connection with an underwritten offering, such holder
will indemnify such underwriters, their officers and directors and each person
who controls (within the meaning of the Securities Act) such underwriters at
least to the same extent as provided above with respect to the indemnification
of the Company.
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<PAGE>
(l) Any person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(m) The indemnification provided for under this Section 17 will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason. The Warrantholder also agrees to make such
provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event such holder's indemnification is
unavailable for any reason.
(n) The provisions of this Section 17 shall apply until such time as
all Warrant Shares that have not been resold to the public may be resold
pursuant to Rule 144 under the Securities Act within a three month period.
SECTION 18. CERTAIN REPRESENTATIONS.
The Warrantholder, by its acceptance of this Warrant Certificate, as
evidenced by delivery of the Warrant Certificate to the Warrantholder, has made
the following representations to the Company and agreed as follows:
The Warrantholder is not an executive officer or director of the
Company and understands that, in connection with complying with California
law, the Company (i) may issue Warrants to no more than thirty-five (35)
purchasers in connection with an offering of such Warrants, excluding
executive officers and directors of the Company and certain other persons
as provided under California law, (ii) the Warrantholder is included in the
foregoing thirty-five (35) purchaser number, and (iii) the Company, in
compliance with California law, is granting the Warrants pursuant to this
Warrant Certificate in part in reliance on Warrantholder's representations
made herein. The Warrantholder represents that the Warrantholder either has
a preexisting personal or business relationship with the Company or any of
its partners, officers, directors or controlling persons, or, by reason of
the Warrantholder's business or financial experience or the business or
financial experience of the Warrantholder's professional advisor is
unaffiliated with and who is not compensated by the Company or any
affiliate or selling agent of the Company, directly or indirectly, the
Warrantholder can be reasonably assumed by the Company to have the capacity
to protect the Warrantholder's interests in connection with the issuance of
Warrants pursuant to this Warrant Certificate. The Warrantholder
understands that in making the foregoing representation the term
"preexisting personal or business
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<PAGE>
relationship" includes any relationship consisting of personal or
business contacts of a nature and duration such as would enable a
reasonably prudent purchasers to be aware of the character, business
acumen and general business and financial circumstances of the person
with whom such relationship exists, and that a relationship of
employer-employee, or as a security holder of the Company does not
necessarily involve contacts of a nature which are sufficient to
establish a preexisting personal or business relationship as required
under California law.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
INSIGHT HEALTH SERVICES CORP.
Attest:
/s/ Thomas V. Croal By: /s/ E. Larry Atkins
- -------------------------------- ---------------------------------
Thomas V. Croal, Secretary Name: E. Larry Atkins
Title: President and Chief Executive Officer
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<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise___________of the
Warrants represented by this Warrant Certificate and to purchase the Common
Shares issuable upon the exercise of said Warrants, and requests that
Certificates for such shares be issued and delivered as follows:
ISSUE TO:
(Name)
(Address, Including Zip Code)
(Social Security or Tax Identification Number)
DELIVER TO:
(Name)
at
(Address, Including Zip Code)
If the number of Warrants hereby exercised is less than all the Warrants
represented by this Warrant Certificate, the undersigned requests that a new
Warrant Certificate representing the number of full Warrants not exercised be
issued and delivered as set forth above or otherwise as the undersigned shall
direct in writing.
In full payment of the purchase price with respect to the Warrants exercised and
transfer taxes, if any, the undersigned hereby tenders payment of $________ by
certified check, bank cashier's check or money order payable in United States
currency to the order of the Company.
Dated: , 19
__________________ ______
Signature
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate)
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER OF HOLDER
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<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned represented
by the within Warrant Certificate, with respect to the number of Warrants set
forth below:
Name of Social Security No. No. of
Assignee or Tax I.D. Address Warrants
----------- -------------------- ---------- -----------
and does hereby irrevocably constitute and appoint ___________________________
Attorney,to make such transfer on the books of InSight Health Services Corp.
maintained for that purpose, with full power of substitution in the premises.
Dated: , 19
_________________ ____
Signature
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate}
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<PAGE>
EXHIBIT A
FORM OF STOCKHOLDERS CERTIFICATE
The undersigned (the "Purchaser") is exercising the warrants (the
"Warrants") tendered with this certificate, and in connection with such
exercise, hereby certifies to InSight Health Services Corp. (the "Company") that
the Purchaser understands and agrees that:
1. The shares of common stock of the Company (the "Common Shares")
deliverable upon exercise of the Warrants are not registered pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), and the offering and
sale of the Common Shares is intended to be exempt from registration under the
Securities Act;
2. The Common Shares to be acquired by the Purchaser pursuant to exercise
of the Warrants are being acquired for its own account and without a view to the
distribution of such Common Shares or any interest therein; PROVIDED that (i)
this representation shall not prejudice the Purchaser's right at all times to
sell or otherwise dispose of all or any part of the Common Shares so acquired by
the Purchaser pursuant to a registration under the Securities Act or an
exemption from such registration available under the Securities Act and (ii) the
disposition of the Purchaser's property shall be at all times within its
control;
3. The Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Common Shares and the Purchaser is capable of bearing the
economic risks of such investment and is able to bear a complete loss of its
investment in the Common Shares;
4. The Purchaser represents and warrants that the Company has made
available to the Purchaser or its agents all documents and information relating
to an investment in Common Shares requested by or on behalf of the Purchaser;
and
5. All Common Shares issued on delivery of this certificate shall bear the
legend set forth on page 1 of the Warrant Certificate.
In witness whereof, the Purchaser has caused this Certificate to be duly
executed on this_____________day of______________, 19____.
[Name of Purchaser]
By:
Name:
Title:
A-1
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
OFFERED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
No. L-1
Certificate for 15,000 Warrants
EXERCISABLE COMMENCING ON THE DATE OF ISSUANCE
HEREOF AND ENDING
5:00 P.M., NEWPORT BEACH, CALIFORNIA TIME, ON THE EXPIRATION DATE
INSIGHT HEALTH SERVICES CORP.
WARRANT CERTIFICATE
THIS CERTIFIES that Anthony J. LeVecchio, or his registered assigns is the
registered holder (the "Warrantholder") of the number of warrants (the
"Warrants") set forth above, each of which represents the right to purchase one
fully paid and non-assessable share of common stock, par value $.001 per share
(the "Common Shares"), of InSight Health Services Corp., a Delaware corporation
(the "Company"), at the exercise price of $5.50 per share (the "Exercise
Price"), at any time prior to the Expiration Date hereinafter referred to, by
surrendering this Warrant Certificate, with the form of Election to Purchase set
forth hereon duly executed, at the Company's principal executive office, 4400
MacArthur Boulevard, Suite 800, Newport Beach, California 92660 (the "Office"),
and by paying in full the Exercise Price, plus transfer taxes, if any, in United
States currency by certified check, bank cashier's check or money order payable
to the order of the Company.
SECTION 1. DURATION AND EXERCISE OF WARRANTS.
(a) The Warrants represented by this Warrant Certificate shall vest
cumulatively and be exercisable at the rate of 5,000 Warrants on each of March
11, 1998, March 11, 1999 and March 11, 2000 and shall expire at 5:00 p.m.
Newport Beach, California time, on March 11, 2001 ("Expiration Date").
(b) Subject to the provisions of this Warrant Certificate, after the
date of this Warrant Certificate and prior to the close of business on the
Expiration Date, the Warrantholder shall have the right to purchase from the
Company the number of Common Shares specified above at the Exercise Price. In
order to exercise such right, the Warrantholder shall surrender the Warrant
Certificate(s) evidencing such Warrants to the Company at the Office with the
form of Election to Purchase set forth hereon duly completed and signed, and
shall tender payment in full to the Company for the Company's account of the
Exercise Price, together with such taxes as are specified in Section 4
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<PAGE>
hereof, for each Common Share with respect to which such Warrants are being
exercised. Such Exercise Price and taxes shall be paid in full by certified
check, bank cashier's check or money order, payable in United States currency to
the order of the Company. In addition, if the Common Shares deliverable upon
exercise have not been registered pursuant to the Securities Act, the
Warrantholder shall deliver a duly executed certificate substantially in the
form of Exhibit A hereto.
(c) The Warrants evidenced by this Warrant Certificate shall be
exercisable only in multiples of one (1) Warrant. If less than all of the
Warrants evidenced by this Warrant Certificate are exercised at any time prior
to the close of business on the Expiration Date, a new Warrant Certificate(s)
shall be issued to the Warrantholder, or his duly authorized assigns, by the
Company for the remaining number of Warrants evidenced by the Warrant
Certificate so surrendered.
SECTION 2. ISSUANCE OF SHARE CERTIFICATES. Upon surrender of this Warrant
Certificate and payment of the Exercise Price, and, if the Common Shares
deliverable on exercise have not been registered under the Securities Act, upon
delivery of a certificate in the form of Exhibit A hereto, the Company shall
issue certificates representing Common Shares ("Share Certificates") for the
number of full Common Shares to which the holder of such Warrants is entitled,
registered in accordance with the instructions set forth in the Election to
Purchase. If such Common Shares have not been registered under the Securities
Act, the Share Certificates shall bear a legend substantially similar to the
legend on this Warrant Certificate.
SECTION 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF COMMON SHARES
PURCHASABLE PER NUMBER OF WARRANTS. The Exercise Price and the number of Common
Shares purchasable upon the exercise of each Warrant are subject to adjustment
from time to time upon the occurrence of the events specified in this Section 3:
(a) If the Company at any time after the date of this Warrant
Certificate (i) declares a dividend or makes a distribution on the outstanding
Common Shares payable in Common Shares, (ii) subdivides or reclassifies the
outstanding Common Shares into a greater number of shares or (iii) combines or
reclassifies the outstanding Common Shares into a smaller number of Common
Shares, the Exercise Price in effect immediately after the record date for such
dividend or distribution or at the effective date of such subdivision,
combination or reclassification, shall be adjusted to equal the quotient
obtained by multiplying the Exercise Price in effect immediately prior to such
date by a fraction, the numerator of which shall be the number of Common Shares
outstanding immediately prior to such dividend, distribution, subdivision,
combination or reclassification, and the denominator of which shall be the
number of Common Shares outstanding immediately after such dividend,
distribution, subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) If at any time, as a result of an adjustment made pursuant to
subsection (a), the holder of any Warrant thereafter exercised shall become
entitled to receive any additional Common Shares (the "New Shares"), thereafter
the number of such New Shares so receivable upon exercise of any Warrant shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Shares
contained in paragraph (a), and the provisions of this Warrant Certificate with
respect to the Common Shares shall apply on like terms to any such New Shares.
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<PAGE>
(c) All calculations of the Exercise Price under this Section 3 shall
be made to the nearest one hundredth of a cent. No adjustment in the Exercise
Price in accordance with the provisions of subsection (a) hereof need be made if
such adjustment, together with other adjustments carried forward pursuant to
this subsection (c), would amount to a change in such Exercise Price of less
than 1%; PROVIDED, HOWEVER, that the amount by which any adjustment is not made
by reason of this subsection (c) shall be carried forward and taken into account
at the time of any subsequent adjustment in the Exercise Price.
(d) Unless the Company shall have exercised its election as provided
in subsection (e), upon each adjustment of the Exercise Price as a result of the
calculations made in subsection (a), each Warrant outstanding immediately prior
to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price that number of Common Shares obtained
by (i) multiplying (A) the number of Common Shares purchasable upon exercise of
a Warrant immediately prior to such adjustment of the Exercise Price by (B) the
Exercise Price in effect immediately prior to such adjustment of the Exercise
Price and (ii) dividing the product so obtained by the Exercise Price in effect
immediately after such adjustment of the Exercise Price.
(e) The Company may elect, on or after the date of any adjustment of
the Exercise Price, to adjust the number of Warrants in substitution for an
adjustment in the number of Common Shares purchasable upon the exercise of a
Warrant as provided in subsection (d).
(f) In case of any reorganization of the Company, or in case of the
consolidation or merger of the Company with or into any other legal entity or of
the sale of the properties and assets of the Company as, or substantially as, an
entirety to any other legal entity (collectively, "Reorganization"), all vested
Warrants shall be exercisable, and any unvested Warrants shall become
immediately exercisable, after such Reorganization, upon the terms and
conditions specified in this Warrant Certificate, for the stock or other
securities or property (including cash) to which a holder of the number of
Common Shares purchasable (at the time of such Reorganization) upon exercise of
such Warrant would have been entitled upon such Reorganization if such Warrant
had been exercised in full immediately prior to such Reorganization; and in any
such case, if necessary, the provisions set forth in this Section 3 with respect
to the rights and interests thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any such stock or other securities or property thereafter deliverable upon
exercise of the Warrants. The Company shall not effect any such Reorganization
unless prior to or simultaneously with the consummation thereof the successor
(if other than the Company) resulting from such Reorganization or the legal
entity purchasing such assets shall assume, by written instrument executed and
delivered to the holder of each Warrant, the obligation to deliver to the holder
of each Warrant such stock, securities or assets as, in accordance with the
foregoing provisions, such holders may be entitled to purchase, and the other
obligations under this Warrant Certificate.
SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes that may be imposed by the United States of America or any state or
territory thereof ("Taxes") attributable to the initial issuance of Common
Shares upon the exercise of Warrants prior to the close of business on the
Expiration Date; PROVIDED, HOWEVER, that the Company shall not be required to
pay any Taxes which may be payable in respect of any transfer involved in the
issuance of any Warrant Certificates or any Share Certificates in a name other
than that of the Warrantholder of record surrendered upon the exercise of a
Warrant, and the Company shall not be required to issue or deliver such Share
Certificates unless or until
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<PAGE>
the person or persons requesting the issuance thereof shall have paid to the
Company the amount of such Taxes or shall have established to the satisfaction
of the Company that such Taxes have been paid.
SECTION 5. REGISTRATION.
(a) This Warrant Certificate shall be registered in the name of the
record holder to whom it is distributed, and the Company shall maintain a list
showing the name, address and number of Warrants held by each of the
Warrantholders of record.
(b) The Company may deem and treat the Warrantholder of record as the
absolute owner of this Warrant Certificate (notwithstanding any notation of
ownership or other writing thereon made by anyone) for the purpose of any
exercise thereof and any distribution to the holder thereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
SECTION 6. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of this Warrant
Certificate upon the records to be maintained by it for that purpose, upon
surrender of this Warrant Certificate accompanied (if so required by the
Company) by (i) a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder(s) thereof
or by the duly appointed legal representative thereof or by a duly authorized
attorney, and (ii) an opinion of counsel, reasonably satisfactory to the
Company, that such transfer is exempt from registration under the Securities
Act. Upon any such registration or transfer, a new Warrant Certificate shall be
issued to the transferee, and the surrendered Warrant Certificate shall be
cancelled by the Company.
(b) This Warrant Certificate may be exchanged at the option of the
holder, when surrendered to the Company at the Office, for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a like number of Warrants. Warrant Certificates surrendered for
exchange, transfer or exercise shall be cancelled by the Company.
SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case this Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Company shall
issue and deliver, in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and substitution for any Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor
and representing an equivalent number of Warrants, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of such
Warrant Certificate and an indemnity or bond, if requested, also satisfactory to
the Company. Applicants for such substitute Warrant Certificate shall also
comply with such other reasonable charges as the Company may prescribe.
SECTION 8. NOTICES.
(a) Any notice or demand authorized by this Warrant Certificate to be
given or made by the Warrantholder to or on the Company shall be in writing and
shall be sufficiently given or made if personally delivered or sent by mail or
by telegram or telex confirmed by letter addressed (until another address is
given in writing by the Company) to the Office.
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<PAGE>
(b) Any notice pursuant to this Warrant Certificate to be given by the
Company to the Warrantholder shall be in writing and shall be sufficiently given
if personally delivered or sent by mail or telegram or telex confirmed by
letter, addressed (until another address is filed in writing by the
Warrantholder with the Company) to the address specified in the Warrant register
maintained by the Company.
SECTION 9. RIGHTS OF WARRANTHOLDERS; VOTING. Nothing contained in this
Warrant Certificate shall be construed as conferring upon the Warrantholder any
of the rights of a stockholder of the Company, including without limitation the
right to vote, to receive dividends and other distributions, to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company.
SECTION 10. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time
supplement or amend this Warrant Certificate without the consent or concurrence
of the Warrantholder in order to cure any ambiguity, manifest error or other
mistake in this Warrant Certificate, or to make provision in regard to any
matters or questions arising hereunder which the Company may deem necessary or
desirable and which shall not adversely affect, alter or change the interests of
the Warrantholder.
SECTION 11. WARRANT AGENT. The Company may, by written notice to the
Warrantholder, appoint an agent for the purpose of issuing Common Shares on the
exercise of the Warrants, exchanging Warrants, replacing Warrants or any of the
foregoing, and thereafter any such issuance, exchange or replacement shall be
made at such office by such agent.
SECTION 12. SUCCESSORS. All the representations, warranties, covenants and
provisions of this Warrant Certificate by or for the benefit of the Company or
the Warrantholder shall bind and inure to the benefit of their respective
successors and assigns hereunder.
SECTION 13. GOVERNING LAW. This Warrant Certificate shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be governed in accordance with the laws of said State, regardless of the laws
that might be applied under applicable principles of conflicts of laws.
SECTION 14. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant
Certificate shall be construed to give to any person or entity other than the
Company and the Warrantholder any legal or equitable right, remedy or claim
under this Warrant Certificate, and this Warrant Certificate shall be for the
sole and exclusive benefit of the Company and the Warrantholder.
SECTION 15. INTERPRETATION. The headings contained in this Warrant
Certificate are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Warrant Certificate.
SECTION 16. INVALIDITY OF PROVISIONS. If any provision of this Warrant
Certificate is or becomes invalid, illegal or unenforceable in any respect, such
provision shall be amended to the extent necessary to cause it to express the
intent of the parties and be valid, legal and enforceable. The amendment of such
provision shall not affect the validity, legality or enforceability of any other
provision hereof.
-5-
<PAGE>
SECTION 17. REGISTRATION RIGHTS.
(a) If at any time or from time to time the Company proposes to
file a registration statement on any appropriate form (a "Registration
Statement") (other than in connection with an exchange offer or a
registration statement on Form S-4 or S-8 or otherwise unsuitable
registration statements) under the Securities Act with respect to any Common
Shares, whether or not for sale for its own account, on a form and in a
manner which would permit registration of Common Shares received upon
exercise of the Warrants ("Warrant Shares") for sale to the public under the
Securities Act, the Company shall
(i) promptly give to the Warrantholder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities law); and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Warrant Shares specified in a written request or requests, made
within 20 days after receipt of such written notice from the Company, by the
Warrantholder.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Warrantholder as a part of the written notice given pursuant to
Section 17(a)(i). In such event the right of the Warrantholder to registration
pursuant to this Section 17 shall be conditioned upon the Warrantholder's
participation, as a selling security holder, in such underwriting and the
inclusion of the Warrant Shares in the underwriting to the extent provided
herein. The Warrantholder shall (together with the Company and the other holders
of Common Shares distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriters selected
for such underwriting by the Company. The Warrantholder shall not be required to
make any representations or warranties to the Company or the underwriters other
than those relating to the Warrantholder, the Warrant Shares and the intended
method of distribution and information about the Warrantholder provided by the
Warrantholder for use in the Registration Statement.
(c) Notwithstanding any other provision of this Section 17:
(i) subject to subsection (iii) below, if the registration is an
underwritten primary registration on behalf of the Company and the managing
underwriters of such offering determine in good faith that the aggregate
amount of Common Shares which the Warrantholder and the Company propose to
include in such Registration Statement exceeds the maximum amount of Common
Shares that could practicably be included therein, the Company will include
in such registration, first, the Common Shares which the Company proposes to
sell, and second, the Warrant Shares and the Common Shares of any holders of
other piggyback registration rights, if any, which can practicably be
included therein, pro rata among all such holders, taken together, on the
basis of the relative amount of Common Shares owned by the Warrantholder and
such other holders who have requested that Common Shares owned by them be
included;
(ii) subject to subsection (iii) below, if the registration is an
underwritten secondary registration on behalf of any of the other security
holders of the Company and the managing
-6-
<PAGE>
underwriters determine in good faith that the aggregate amount of Common Shares
which the Warrantholder and such security holders propose to include in such
registration exceeds the maximum amount of Common Shares that could practicably
be included therein, the Company will include in such registration, first, the
Common Shares to be sold for the account of any other holders entitled to demand
registration and, second, the Warrant Shares and other Common Shares to be sold
for the account of other holders electing to include (but not being entitled to
demand inclusion of) Common Shares in such registration, pro rata among all such
holders, taken together, on the basis of the relative amount of Common Shares
owned by the Warrantholder and such other holders who have requested that Common
Shares owned by them be included; and
(iii) in the event of a conflict between the rights of the
Warrantholder set forth in this Section 17 and the registration rights of
General Electric Company, the rights hereunder shall be subordinate to such
other rights and the Company's obligations shall be limited to those that can be
performed without violating the terms of such other registration rights.
(d) The Company may withdraw any Registration Statement at any time
before it becomes effective, or postpone the offering of Common Shares, without
obligation or liability to the Warrantholder.
(e) With respect to a Registration Statement in which any of the
Warrant Shares are included, the Warrantholder agrees, if requested by the
managing underwriters in an underwritten offering, not to effect any public sale
or distribution of Common Shares, including a sale pursuant to Rule 144 under
the Securities Act (except as part of such registration), during the 180-day
period beginning on the effective date of such Registration Statement; PROVIDED,
HOWEVER, that such agreement shall be applicable only to the first three such
Registration Statements which cover Common Shares (or other securities) to be
sold on the Company's behalf to the public in an underwritten offering.
(f) All Registration Expenses (as defined below) incurred in
connection with any registration, qualification or compliance pursuant to this
Section 17 shall be borne by the Company. All Selling Expenses (as defined
below) incurred in connection with any registrations hereunder shall be borne by
the holders of the Common Shares so registered pro rata on the basis of the
number of shares so registered. For purposes of this Section 17, (i)
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in
complying with this Section 17, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel for the
Company, reasonable fees and disbursements of a single special counsel for the
Warrantholder and all other holders of Common Shares to be registered, blue sky
fees and expenses, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of the Company's
regular employees which shall be paid in any event by the Company) and (ii)
"SELLING EXPENSES" shall mean all underwriting discounts and selling commissions
applicable to the sale.
(g) In the case of each registration, qualification or compliance
effected by the Company pursuant to this Section 17, the Company will keep the
Warrantholder advised in writing as to the qualification and compliance and as
to the completion thereof. At its expense the Company will:
(i) Keep such registration, qualification or compliance effective
for a period of 120 days or until the Warrantholder has completed the
distribution described in the Registration Statement relating thereto, whichever
first occurs;
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<PAGE>
(ii) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
the requisite period;
(iii) Furnish such number of prospectuses and other documents
incident thereto as the Warrantholder from time to time may reasonably request;
(iv) Use its reasonable efforts to register or qualify such
Warrant Shares under the securities or blue sky laws of such jurisdictions as
the Warrantholder reasonably requests and do any and all other acts and things
which may be reasonably necessary or advisable to enable the Warrantholder to
consummate the disposition in such jurisdictions of the Warrant Shares owned by
the Warrantholder (PROVIDED that the Company will not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 17, (B) subject itself to taxation in
any such jurisdiction, (C) consent to general service of process in any such
jurisdiction, or (D) qualify such Warrant Shares in a given jurisdiction where,
in the sole discretion of the Company, expressions of investment interest are
not sufficient in such jurisdiction to reasonably justify the expense of
qualification in that jurisdiction or where such qualification would require the
Company to register as a broker or dealer in such jurisdiction);
(v) Notify the Warrantholder at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event known to the Company as a result of which the prospectus
included in such Registration Statement contains an untrue statement of a
material fact or omits any material fact necessary to make the statements
therein not misleading, and in such event, at the request of the Warrantholder,
the Company will prepare a supplement or amendment to such prospectus so that,
as thereafter delivered to the purchasers of such Warrant Shares, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(vi) Cause all such Warrant Shares to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and qualify such Warrant Shares for trading on each system on which
similar securities issued by the Company are from time to time qualified;
(vii) Provide a transfer agent and registrar for all such Warrant
Shares not later than the effective date of such Registration Statement and
thereafter maintain such a transfer agent and registrar;
(viii) Permit the Warrantholder, if in the Company's sole and
exclusive judgment, such holder might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
Registration Statement and to require the insertion therein of material,
furnished to the Company in writing, which in the reasonable judgment of such
holder and his counsel should be included; and
(ix) In the event of the issuance of any stop order suspending
the effectiveness of a Registration Statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Shares included in such Registration Statement
-8-
<PAGE>
for sale in any jurisdiction, the Company will use its reasonable efforts
promptly to obtain the withdrawal of such order.
(h) The Warrantholder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Sections 17(g)(v)
or (ix), such holder will forthwith discontinue disposition of Warrant Shares
pursuant to a registration hereunder until receipt of the copies of an
appropriate supplement or amendment to the prospectus under Section 17(g)(ii) or
until the withdrawal of such order under Section 17(g)(ix).
(i) No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Common Shares on
the basis provided in any underwriting arrangements approved by the persons
entitled to approve such arrangements, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements and
(iii) furnishes to the Company such information regarding such person and the
distribution proposed by such person as the Company may request in writing and
as shall be required in connection with any registration, qualification or
compliance referred to in this Section 17.
(j) The Company agrees to indemnify, to the extent permitted by law,
the Warrantholder and each person who controls (within the meaning of the
Securities Act) such holder against all losses, claims, damages, liabilities
and expenses caused by any untrue or alleged untrue statement of a material
fact contained in any Registration Statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing
to the Company by such holder expressly for use therein or by such holder's
failure to deliver a copy of the Registration Statement or prospectus or any
amendments or supplements thereto after the Company has furnished such holder
with a sufficient number of copies of the same. In connection with an
underwritten offering, the Company will indemnify such underwriters, their
officers and directors and each person who controls (within the meaning of
the Securities Act) such underwriters at least to the same extent as provided
above with respect to the indemnification of the Warrantholder.
(k) In connection with any Registration Statement in which
Warrantholder is participating, such Warrantholder will furnish to the Company
in writing such information as the Company reasonably requests for use in
connection with any such Registration Statement or prospectus and, to the extent
permitted by law, will indemnify the Company, its directors and officers and
each person who controls (within the meaning of the Securities Act) the Company
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent that such untrue statement or omission is
contained in any information so furnished in writing by such Holder; PROVIDED
that the obligation to indemnify will be limited to the net amount of proceeds
received by such holder from the sale of Warrant Shares pursuant to such
Registration Statement. In connection with an underwritten offering, such holder
will indemnify such underwriters, their officers and directors and each person
who controls (within the meaning of the Securities Act) such underwriters at
least to the same extent as provided above with respect to the indemnification
of the Company.
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<PAGE>
(l) Any person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(m) The indemnification provided for under this Section 17 will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason. The Warrantholder also agrees to make such
provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event such holder's indemnification is
unavailable for any reason.
(n) The provisions of this Section 17 shall apply until such time as
all Warrant Shares that have not been resold to the public may be resold
pursuant to Rule 144 under the Securities Act within a three month period.
SECTION 18. CERTAIN REPRESENTATIONS.
The Warrantholder, by his acceptance of this Warrant Certificate, as
evidenced by delivery of the Warrant Certificate to the Warrantholder, has made
the following representations to the Company and agreed as follows:
The Warrantholder is not an executive officer or director of the
Company and understands that, in connection with complying with
California law, the Company (i) may issue Warrants to no more than
thirty-five (35) purchasers in connection with an offering of such
Warrants, excluding executive officers and directors of the Company and
certain other persons as provided under California law, (ii) the
Warrantholder is included in the foregoing thirty-five (35) purchaser
number, and (iii) the Company, in compliance with California law, is
granting the Warrants pursuant to this Warrant Certificate in part in
reliance on Warrantholder's representations made herein. The
Warrantholder represents that the Warrantholder either has a preexisting
personal or business relationship with the Company or any of his
partners or controlling persons, or, by reason of the Warrantholder's
business or financial experience or the business or financial experience
of the Warrantholder's professional advisor is unaffiliated with and who
is not compensated by the Company or any affiliate or selling agent of
the Company, directly or indirectly, the Warrantholder can be reasonably
assumed by the Company to have the capacity to protect the
Warrantholder's
-10-
<PAGE>
interests in connection with the issuance of Warrants pursuant to this
Warrant Certificate. The Warrantholder understands that in making the
foregoing representation the term "preexisting personal or business
relationship" includes any relationship consisting of personal or business
contacts of a nature and duration such as would enable a reasonably prudent
purchaser to be aware of the character, business acumen and general
business and financial circumstances of the person with whom such
relationship exists, and that a relationship of employer-employee, or as a
security holder of the Company does not necessarily involve contacts of a
nature which are sufficient to establish a preexisting personal or business
relationship as required under California law.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
INSIGHT HEALTH SERVICES CORP.
Attest:
/s/ Thomas V. Croal BY. /s/ Larry Atkins
- ------------------------------- -----------------------------------
Thomas V. Croal, Secretary Name: E. Larry Atkins
Title: President and Chief Executive
Officer
-11-
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise _________________ of
the Warrants represented by this Warrant Certificate and to purchase the Common
Shares issuable upon the exercise of said Warrants, and requests that
Certificates for such shares be issued and delivered as follows:
ISSUE TO:
(Name)
(Address, Including Zip Code)
(Social Security or Tax Identification Number)
DELIVER TO:
(Name)
at
(Address, Including Zip Code)
If the number of Warrants hereby exercised is less than all the Warrants
represented by this Warrant Certificate, the undersigned requests that a new
Warrant Certificate representing the number of full Warrants not exercised be
issued and delivered as set forth above or otherwise as the undersigned shall
direct in writing.
In full payment of the purchase price with respect to the Warrants exercised and
transfer taxes, if any, the undersigned hereby tenders payment of $______ by
certified check, bank cashier's check or money order payable in United States
currency to the order of the Company.
Dated:____________ , 19__
Signature
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate)
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER OF HOLDER
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<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned represented
by the within Warrant Certificate, with respect to the number of Warrants set
forth below:
Name of Social Security No. No. of
Assignee or Tax I.D. Address Warrants
-------- ---------- ------- --------
and does hereby irrevocably constitute and appoint _________________ Attorney,
to make such transfer on the books of InSight Health Services Corp. maintained
for that purpose, with full power of substitution in the premises.
Dated:___________________, 19__
Signature
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate)
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<PAGE>
INSIGHT HEALTH SERVICES CORP.
1996 DIRECTORS' STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
<PAGE>
INSIGHT HEALTH SERVICES CORP.
1996 DIRECTORS' STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of ("Grant Date"), by and between
INSIGHT HEALTH SERVICES CORP., a Delaware corporation ("Corporation") and
("Optionee").
WITNESSETH
RECITALS
A. The stockholders and the Board of Directors of the Corporation ("Board")
have adopted the 1996 Directors' Stock Option Plan ("Plan") of the Corporation
for the purpose of attracting and retaining highly qualified individuals to
serve as members of the Board, who are not officers or employees of the
Corporation or any of its subsidiaries.
B. The Optionee is a director of the Corporation or its subsidiaries, and
this Agreement is executed pursuant to, and is intended to carry out the
purposes of, the Plan in connection with the grant by the Corporation of a
nonstatutory stock option to the Optionee.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement and the Plan, a copy of which is attached hereto, the
Corporation hereby grants to the Optionee, as of the Grant Date, a
nonstatutory stock option to purchase up to ___ shares ("Option Shares") of
the common stock, par value $0.001 per share, of the Corporation ("Common
Stock") from time to time during the Option Period (as defined below) at the
price of $ per share ("Option Price").
2. OPTION PERIOD. This option shall be exercisable only during the Option
Period. Termination of the Optionee's services as a director for any reason
shall not cause this option to terminate; however, upon the Expiration Date or
upon its earlier termination under Paragraph 4, this option shall cease to be
exercisable and have no further force or effect whatsoever.
3. VESTING AND EARLY TERMINATION. The Option Shares shall vest each month
following the Grant Date on a pro rata basis over a three (3) year period
following the Grant Date until fully vested, so long as continuously during such
time period the Optionee remains a director, or is an employee or independent
contractor of the Corporation or any of its subsidiaries or is a director of one
of the Corporation's subsidiaries.
<PAGE>
If the Optionee's services terminate prior to the end of such three (3)
year period, then the vested Option Shares shall be fixed at such time, and
should the calculation result in a fractional share, it shall be rounded down to
the nearest whole number of shares.
4. DEATH OR DISABILITY OF AN OPTIONEE. If the Optionee's services to the
Corporation are terminated as a result of the Optionee's death or disability,
then the Optionee, or the executors or administrators of the Optionee's estate
or the Optionee's heirs or legatees (as the case may be) shall have the right to
exercise this option with respect to all options theretofore granted to such
Optionee, unless earlier terminated in accordance with their terms. In the event
of such termination, the period for exercising this option shall be a period of
twelve (12) months commencing with the date of such termination of services,
provided that in no event shall this option be exercisable at any time after the
Expiration Date. For purposes of this section, "disability" shall mean an
Optionee's inability to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which 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 twelve (12) months.
5. TIMING AND METHOD OF EXERCISE. In order to exercise this option with
respect to all or any part of the Option Shares for which this option is at the
time exercisable, the Optionee (or in the case of exercise after the Optionee's
death, the Optionee's executor, administrator, heir or legatee, as the case may
be) must comply with the provisions of Section 10 of the Plan. A form of
exercise notice is attached hereto as Exhibit A.
6. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 4, the provisions of this Agreement shall inure to the benefit of, and
be binding upon, the successors, administrators, heirs, devisees, legal
representatives and assigns of the Optionee and the successors and assigns of
the Corporation.
7. LIABILITY OF CORPORATION. The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock pursuant to
this option shall relieve the Corporation of any liability in respect of the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained.
8. CONSTRUCTION. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan.
9. GOVERNING LAW. The interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the state of Delaware.
2
<PAGE>
10. WARRANTIES AND OBLIGATIONS OF THE OPTIONEE.
(a) The Optionee represents, warrants and agrees that the Optionee
will acquire and hold the Option Shares for the Optionee's own account for
investment and not with the view to the resale or distribution thereof, except
for resales or distributions in accordance with federal and state securities
laws, and that the Optionee will not, at any time or times, directly or
indirectly, offer, sell, distribute, pledge or otherwise grant a security
interest in or otherwise dispose of or transfer all, any portion of or any
interest in, any Option Shares (or solicit an offer to buy, take in pledge or
otherwise acquire or receive, allow all or any portion thereof), except pursuant
to either (i) a Registration Statement on an appropriate form under the
Securities Act of 1933, as amended ("Act"), which Registration Statement has
become effective and is current with respect to the shares being offered or
sold, or (ii) a specific exemption from the registration requirements of the
Act, the availability of which exemption shall be the subject matter of an
opinion of counsel reasonably acceptable to the Corporation that no registration
under the Act is required with respect to such offer, sale, distribution,
pledge, grant or other disposition or transfer.
(b) The Optionee acknowledges that the Optionee understands that (i)
the option has been granted and the shares to be sold to the Optionee upon
exercise of the option will be sold to the Optionee pursuant exemptions from the
registration requirements in the Act until such time as the Corporation shall
file a Registration Statement under the Act which has become effective and is
current with respect to the shares being offered or sold and in this connection
the Corporation is relying in part on the representations set forth in this
Agreement; (ii) such shares must be held indefinitely unless they are registered
or an exemption from registration becomes available under the Act and the
securities laws of any state; (iii) the Corporation is under no obligation to
register such shares or to comply with any exemption from such registration,
including those portions of Rule 144 under the Act to be complied with by the
Corporation; (iv) if Rule 144 is available for sales of such shares, and there
is no assurance that the Optionee will ever be able to sell under Rule 144, such
sales in reliance upon Rule 144 may be made only after the shares have been held
for the requisite holding period and then only in limited amounts in accordance
with the conditions of that Rule, all of which must be met; and (v) the Optionee
must, therefore, continue to bear the economic risks of the investment in such
shares for an indefinite period of time after the exercise of the option.
(c) The Optionee acknowledges that the Optionee has had the
opportunity to ask questions of, and receive answers from, the officers and
representatives of the Corporation concerning all material information
concerning the Corporation and the terms and conditions of the transactions in
which the Optionee is acquiring the option and may subsequently acquire Option
Shares. The Optionee further acknowledges that the Optionee understands that the
Corporation may use the proceeds from the exercise of the option for general
corporate purposes.
(d) Immediately prior to the exercise of all or any portion of the
option, the Optionee shall deliver to the Corporation a signed statement, in a
form satisfactory to the
3
<PAGE>
Corporation, confirming that each of the representations, warranties,
acknowledgments and agreements contained in this Paragraph is true as to the
Optionee as of the date of such exercise.
(e) The Optionee understands that all certificates representing shares
transferred pursuant to this Agreement, unless made pursuant to an appropriate
Registration Statement under the Act, will bear the following restrictive
legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be transferred or hypothecated without prior registration under said
Act or an exemption therefrom established to the satisfaction of the
issuer."
(f) If the legal counsel of the Corporation, at the request of the
Corporation, advises it that registration under the Act of the shares
deliverable upon the exercise of the option is required prior to delivery
thereof, or that listing of such shares on any exchange is required prior to
delivery thereof, the Corporation shall not be required to issue or deliver such
shares unless and until such legal counsel shall advise that such registration
and/or listing has been completed and is then effective, or is not required.
11. SEVERABILITY. In the event that any provision of this Agreement is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision was not contained herein.
12. DEFINITIONS. Capitalized terms used but not defined herein shall have
the meanings ascribed to them in the Plan. For purposes of interpreting this
Agreement, the following definitions shall also apply:
(a) "Exercise Date" means the date on which the Corporation receives
written notice of the exercise of this option together with payment of the
Option Price for the purchased shares.
(b) "Exercise Price" means the Option Price multiplied by the number
of purchased shares.
(c) "Expiration Date" means, unless earlier terminated pursuant to
the terms of this Agreement or the Plan, the day immediately preceding the tenth
anniversary of the Grant Date.
(d) "Option Period" means the period commencing on the Grant Date
and, unless earlier terminated in accordance with Paragraph 4, ending on the
close of business on the Expiration Date.
4
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in duplicate on its behalf and the Optionee has also executed this
Agreement in duplicate, all as of the date first above written.
OPTIONEE INSIGHT HEALTH SERVICES CORP.
By:
- ----------------------------------- ---------------------------------
5
<PAGE>
INSIGHT HEALTH SERVICES CORP.
1996 EMPLOYEE STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
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INSIGHT HEALTH SERVICES CORP.
1996 EMPLOYEE STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of ("Grant Date") by and between
INSIGHT HEALTH SERVICES CORP., a Delaware corporation ("Corporation") and
("Optionee").
WITNESSETH
RECITALS
A. The stockholders and the Board of Directors of the Corporation ("Board")
have adopted the 1996 Employee Stock Option Plan ("Plan") of the Corporation for
the purpose of advancing the interests of the Corporation by providing eligible
individuals with an opportunity to develop a proprietary interest in the
Corporation, which will thereby create strong performance incentives for such
individuals to maximize the growth and success of the Corporation and its
subsidiaries and will encourage such eligible individuals to remain in the
employ of the Corporation or any of its subsidiaries.
B. The Optionee is a full-time employee of the Corporation or its
subsidiaries, and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the grant by the
Corporation of a nonstatutory stock option to the Optionee.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement and the Plan, a copy of which is attached hereto, the
Corporation hereby grants to the Optionee, as of the Grant Date, a nonstatutory
stock option to purchase up to ( ) shares ("Option Shares") of the common
stock, par value $0.001 per share, of the Corporation ("Common Stock") from time
to time during the Option Period (as defined below) at the price of $ per
share ("Option Price").
2. OPTION PERIOD. This option shall be exercisable only during the
Option Period. Subject to Paragraph 5, upon the termination of the Optionee's
employment, this option shall terminate three (3) months after the date of such
termination of employment. In addition, upon the Expiration Date, this option
shall cease to be exercisable and have no further force or effect whatsoever.
3. VESTING AND EARLY TERMINATION. The Option Shares shall vest at the
rate of 25% each year following the Grant Date for a period of four (4) years
and until fully vested, so long as continuously during such time period the
Optionee remains an employee or independent contractor of the Corporation or any
of its subsidiaries.
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If the Optionee's employment terminates prior to the end of such four (4)
year period, then the vested Option Shares shall be fixed at such time, and
should the calculation result in a fractional share, it shall be rounded
down to the nearest whole number of shares.
4. DEATH OR DISABILITY OF AN OPTIONEE. If the Optionee's services to
the Corporation are terminated as a result of the Optionee's death or
"permanent or total disability" (within the meaning of Section 22(e)(3) of
the Internal Revenue Code of 1986, as amended), then the Optionee, or the
executors or administrators of the Optionee's estate or the Optionee's heirs
or legatees (as the case may be) shall have the right to exercise this option
with respect to all options theretofore granted to such Optionee, unless
earlier terminated in accordance with their terms. In the event of such
termination, the period for exercising this option shall be a period of
twelve (12) months commencing with the date of such termination of services,
provided that in no event shall this option be exercisable at any time after
the Expiration Date.
5. TIMING AND METHOD OF EXERCISE. In order to exercise this option
with respect to all or any part of the Option Shares for which this option is
at the time exercisable, the Optionee (or in the case of exercise after the
Optionee's death, the Optionee's executor, administrator, heir or legatee, as
the case may be) must comply with the provisions of Section 10 (c) of the
Plan. A form of exercise notice is attached hereto as Exhibit A.
6. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraph 4, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs, devisees,
legal representatives and assigns of the Optionee and the successors and
assigns of the Corporation.
7. LIABILITY OF CORPORATION. The inability of the Corporation to
obtain approval from any regulatory body having authority deemed by the
Corporation to be necessary to the lawful issuance and sale of any Common
Stock pursuant to this option shall relieve the Corporation of any liability
in respect of the non-issuance or sale of the Common Stock as to which such
approval shall not have been obtained.
8. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan.
9. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the state of Delaware.
10. WARRANTIES AND OBLIGATIONS OF THE OPTIONEE.
(a) The Optionee represents, warrants and agrees that the
Optionee will acquire and hold the Option Shares for the Optionee's own
account for investment and not with the view to the resale or distribution
thereof, except for resales or distributions in accordance with federal and
state securities laws, and that the Optionee will not, at any time or times,
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directly or indirectly, offer, sell, distribute, pledge or otherwise grant a
security interest in or otherwise dispose of or transfer all, any portion of
or any interest in, any Option Shares (or solicit an offer to buy, take in
pledge or otherwise acquire or receive, allow all or any portion thereof),
except pursuant to either (i) a Registration Statement on an appropriate form
under the Securities Act of 1933, as amended ("Act"), which Registration
Statement has become effective and is current with respect to the shares
being offered or sold, or (ii) a specific exemption from the registration
requirements of the Act, the availability of which exemption shall be the
subject matter of an opinion of counsel reasonably acceptable to the
Corporation that no registration under the Act is required with respect to
such offer, sale, distribution, pledge, grant or other disposition or
transfer.
(b) The Optionee acknowledges that the Optionee understands that
(i) the option has been granted and the shares to be sold to the Optionee
upon exercise of the option will be sold to the Optionee pursuant exemptions
from the registration requirements in the Act until such time as the
Corporation shall file a Registration Statement under the Act which has
become effective and is current with respect to the shares being offered or
sold and in this connection the Corporation is relying in part on the
representations set forth in this Agreement; (ii) such shares must be held
indefinitely unless they are registered or an exemption from registration
becomes available under the Act and the securities laws of any state; (iii)
the Corporation is under no obligation to register such shares or to comply
with any exemption from such registration, including those portions of Rule
144 under the Act to be complied with by the Corporation; (iv) if Rule 144 is
available for sales of such shares, and there is no assurance that the
Optionee will ever be able to sell under Rule 144, such sales in reliance
upon Rule 144 may be made only after the shares have been held for the
requisite holding period and then only in limited amounts in accordance with
the conditions of that Rule, all of which must be met; and (v) the Optionee
must, therefore, continue to bear the economic risks of the investment in
such shares for an indefinite period of time after the exercise of the
option.
(c) The Optionee acknowledges that the Optionee has had the
opportunity to ask questions of, and receive answers from, the officers and
representatives of the Corporation concerning all material information
concerning the Corporation and the terms and conditions of the transactions
in which the Optionee is acquiring the option and may subsequently acquire
Option Shares. The Optionee further acknowledges that the Optionee
understands that the Corporation may use the proceeds from the exercise of
the option for general corporate purposes.
(d) Immediately prior to the exercise of all or any portion of
the option, the Optionee shall deliver to the Corporation a signed statement,
in a form satisfactory to the Corporation, confirming that each of the
representations, warranties, acknowledgments and agreements contained in this
Paragraph is true as to the Optionee as of the date of such exercise.
(e) The Optionee understands that all certificates representing
shares transferred pursuant to this Agreement, unless made pursuant to an
appropriate Registration Statement under the Act, will bear the following
restrictive legend:
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"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred or hypothecated without prior registration under said Act or
an exemption therefrom established to the satisfaction of the issuer."
(f) If the legal counsel of the Corporation, at the request of
the Corporation, advises it that registration under the Act of the shares
deliverable upon the exercise of the option is required prior to delivery
thereof, or that listing of such shares on any exchange is required prior to
delivery thereof, the Corporation shall not be required to issue or deliver
such shares unless and until such legal counsel shall advise that such
registration and/or listing has been completed and is then effective, or is
not required.
11. SEVERABILITY. In the event that any provision of this Agreement
is found to be invalid or otherwise unenforceable under any applicable law,
such invalidity or unenforceability shall not be construed as rendering any
other provisions contained herein invalid or unenforceable, and all such
other provisions shall be given full force and effect to the same extent as
though the invalid and unenforceable provision was not contained herein.
12. DEFINITIONS. Capitalized terms used but not defined herein shall
have the meanings ascribed to them in the Plan. For purposes of interpreting
this Agreement, the following definitions shall also apply:
(a) "Exercise Date" means the date on which the Corporation
receives written notice of the exercise of this option together with payment
of the Option Price for the purchased shares.
(b) "Exercise Price" means the Option Price multiplied by the
number of purchased shares.
(c) "Expiration Date" means, unless earlier terminated pursuant
to the terms of this Agreement or the Plan, the day immediately preceding the
tenth anniversary of the Grant Date.
(d) "Option Date" means the period commencing on the Grant Date
and, unless earlier termined in accordance with Paragraph 4, ending on the
close of business on the Expiration Date.
13. HOLDING PERIOD FOR OPTIONEES. Because the grant of this option
has been approved in advance by the Board, the requirement set forth in
Section 15 (c) of the Plan is hereby eliminated as no longer necessary for
compliance with Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended.
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IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in duplicate on its behalf and the Optionee has also executed this
Agreement in duplicate, all as of the date first above written.
OPTIONEE INSIGHT HEALTH SERVICES CORP.
By:
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EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
InSight Health Corp. Delaware
Radiosurgery Centers, Inc. Delaware
Maxum Health Corp. Delaware
Quest Financial Services, Inc. Delaware
Maxum Health Services Corp. Delaware
DiagnosTemps, Inc. Delaware
Diagnostic Solutions Corp. Delaware
Maxum Health Services of North Texas, Inc. Texas
Maxum Health Services of Arlington, Inc. Texas
Maxum Health Services of Dallas, Inc. Texas
MTS Enterprises, Inc. Texas
NDDC, Inc. Texas
Open MRI, Inc. Delaware
Radiology Services Corp. Delaware
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<PAGE>
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