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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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)
(949) 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
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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.
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 15, 1998 (based on the closing price on the NASDAQ
Small Cap Market on that date) was $16,595,566.
The number of shares outstanding of the Registrant's Common Stock as of
September 15, 1998 was 2,824,519.
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" or "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 (949)
476-0733.
RECAPITALIZATION AND FINANCING
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 of the Company, 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 (the "Carlyle
Warrants") to purchase up to 250,000 shares of InSight Common Stock at an
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 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 Convertible Preferred Stock, Series C of the Company, par value $0.001
per share ("Series C Preferred Stock"), initially convertible, at the option of
GE, in the aggregate into 835,821 shares of Common Stock, and (B) warrants (the
"GE Warrants") to purchase up to 250,000 shares of Common Stock at an exercise
price of $10.00 per share, and (ii) exchanged all of its Convertible Preferred
Stock, Series A of the Company, for an additional 20,953 shares of Series C
Preferred Stock, initially convertible, at the option of GE, in the aggregate
into 2,501,760 shares of Common
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Stock; and (c) the Company executed a Credit Agreement with NationsBank, N.A.
("NationsBank") pursuant to which NationsBank, as agent and lender, provided
a total of $125 million in senior secured credit financing, 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
with increasing amortization over a seven-year period, 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 (the "Bank
Financing"). Initial funding under the Bank Financing occurred on October
22, 1997 and, on December 19, 1997, the Bank Financing was increased to a
total of $150 million by converting $10 million of outstanding debt under the
acquisition facility to the seven-year tranche (which was thereby increased
to $40 million) and increasing the acquisition facility to $65 million.
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 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 (the "Preferred Stock Directors"), two are elected by
the holders of the Series B Preferred Stock and one 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,
originally purchased thereby, 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, originally purchased thereby, GE 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. The Board currently consists of eight directors, five of
whom are Common Stock Directors and three of whom are Preferred Stock Directors.
The vacancy created for the Joint Director has not yet been filled.
On June 12, 1998, the Company completed a refinancing of substantially all of
the Company's long-term debt through the issuance of $100 million of 9 5/8%
senior subordinated notes (the "Notes") due 2008. Concurrently with the
issuance of the Notes, the Company entered into an amendment to and restatement
of the Bank Financing, pursuant to which, the Company refinanced and
consolidated its prior $20 million tranche and $40 million tranche into a $50
million term loan facility with a six-year amortization, a $25 million revolving
working capital facility with a five-year maturity and a $75 million acquisition
facility with a six-year maturity.
CENTERS IN OPERATION
InSight provides diagnostic imaging, treatment and related management services
in 29 states throughout the United States. InSight's services are provided
through a network of 57 mobile magnetic resonance imaging ("MRI") facilities
("Mobile Facilities"), 35 fixed-site MRI facilities ("Fixed Facilities"), 16
multi-modality imaging centers ("Centers"), 5 mobile lithotripsy ("lithotripsy")
facilities, one Leksell Stereotactic Gamma Unit treatment center ("Gamma Knife
Center"), and one radiation oncology center. An additional radiation oncology
center is operated by the Company as part of one of its Centers. The Company's
operations are located throughout the United States, with a substantial presence
in California, Texas, New England, the Carolinas and the Midwest (Illinois,
Indiana and Ohio).
At its Centers, InSight offers other services in addition to MRI including
computed tomography ("CT"), diagnostic and fluoroscopic x-ray, mammography,
diagnostic ultrasound, lithotripsy, nuclear medicine, nuclear cardiology, 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)
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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.
MRI: InSight believes that the introduction of MRI technology into the health
care marketplace marked a significant advance in diagnostic medicine. Magnetic
resonance is a technique that utilizes low energy radiowaves to manipulate
protons (usually hydrogen) in the body. MRI systems place patients in a magnetic
field. Once in the magnetic field, the protons in a patient's body will tend to
align with the magnetic field. Radio frequency ("RF") waves, produced by a radio
antenna coil, which surrounds the body part to be imaged, are "pulsed" against
the magnetic field. The RF energy is then turned off, and the protons are
observed for different types of behavior, movement or "relaxation." Different
tissues have different relaxation times, depending on the amount of hydrogen or
water in each proton. The data on each proton's behavior is collected digitally
by the system's computer and then reconstructed into cross-sectional images in
three-dimensional planes of orientation. The resulting image reproduces soft
tissue anatomy (as found in the brain, spinal cord and interior ligaments of
body joints such as the knee) with superior clarity, not available by any other
currently existing imaging modality. A typical MRI examination takes from 20 to
45 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.
OPEN MRI: 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. Open MRI systems use permanent electromagnetic technology rather than
superconductivity magnets, substantially lowering both siting and service costs,
but do not provide images as efficiently as conventional large-bore MRI systems.
The open design allows for studies not normally possible in conventional MRI
systems, including exams of infants, pediatric patients, claustrophobic
patients, large or obese patients and patients suffering from post-traumatic
stress syndrome. Open MRI is also capable of conducting musculoskeletal exams
that require the patient to move or flex, such as kinematic knee studies. A
typical Open MRI non-kinematic exam takes from 45 to 90 minutes. 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.
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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 to 45 minutes,
depending on the complexity of the examination and number of individual
cross-sectional images required. The current selling prices of CT systems fall
in the range of $0.3 million to $1.5 million, depending upon the specific
performance characteristics of the systems. Based on the fact that CT systems
have been commercially marketed for approximately 20 years, InSight believes
that CT is a relatively mature technology and, therefore, not subject to
significant risk of obsolescence.
Certain CT examinations require the injection of an iodine-based contrast
material, allowing for better visualization of the anatomy. Although it is very
unusual, some patients may develop a significant adverse reaction to this
contrast material. Fatalities as a result of such reaction have occurred but are
rare. In an effort to scan only appropriate patients, all patients are required
to answer a questionnaire, which helps to identify those patients who may suffer
an adverse reaction to this contrast material.
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.
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.
RADIATION ONCOLOGY: Radiation oncology generally uses external beam radiation
from a linear accelerator to treat cancer with ionizing radiation of the same
type, but at higher doses, as for diagnostic x-rays. In addition to x-rays,
certain linear accelerators have the capacity to produce electrons. While x-ray
radiation can penetrate the body a certain distance before delivering its
maximum dose, and therefore can treat internal structures, electrons have less
penetrating ability and permit the clinician to treat superficial lesions.
Radiation oncology also includes brachytherapy, which implants radioactive
sources directly into or near a tumor.
LITHOTRIPSY: Lithotripsy is a non-invasive procedure for the treatment of
kidney stones, typically performed on an outpatient basis, that eliminates the
need for lengthy hospital stays and extensive recovery periods associated with
surgery. Lithotripters shatter kidney stones through the use of extracorporeal
shockwaves, following which the resulting kidney stone fragments pass out of the
body naturally.
GAMMA KNIFE: The Gamma Knife 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 individual Cobalt 60 sources 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 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. 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.
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BUSINESS STRATEGY
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 strategy is to further develop and expand regional diagnostic imaging
networks that emphasize quality of care, produce cost-effective diagnostic
information and provide superior service and convenience to its customers. The
strategy of InSight is focused on the following components: (i) to further
participate in the consolidation occurring in the diagnostic imaging industry by
continuing to build its market presence in its existing regional diagnostic
imaging networks through geographically disciplined acquisitions; (ii) to
develop or acquire additional regional networks in strategic locations where the
Company can offer a broad range of services to its customers and realize
increased economies of scale; (iii) to continue to market current diagnostic
imaging applications through its existing facilities to optimize and increase
overall procedure volume; (iv) to strengthen the regional diagnostic imaging
networks by focusing on managed care customers; (v) to implement a variety of
new products and services designed to further leverage its core business
strengths, including: Open MRI systems and the radiology co-source product
which involves the joint ownership and management of the physical and technical
operations of the multi-modality radiology department of a hospital or
multi-specialty physician group.
In fiscal 1998, InSight completed four acquisitions as follows: a Center in
Columbus, Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in
Redwood City, California; and a Center in Las Vegas, Nevada. In connection
with the purchase of the Center in Columbus, Ohio, InSight also acquired a
majority ownership interest in a new Center in Dublin, Ohio. In addition, on
May 18, 1998, the Company acquired all of the capital stock of Signal Medical
Services, Inc. ("Signal"), through the merger of Signal with and into a
wholly owned subsidiary of the Company. The Signal assets primarily
consisted of Mobile Facilities in the Northeastern and Southeastern United
States. The Company utilized its Bank Financing to fund the purchase price
of these acquisitions.
In addition, in fiscal 1998, InSight installed three Open MRI Fixed Facilities
in Atlanta, Georgia; Scarborough, Maine; and Santa Ana, California; and opened
its first radiology co-source outpatient Center in Oxnard, California, all of
which were financed through GE. Effective December 31, 1997, InSight terminated
its agreement to operate a Gamma Knife Center and entered into an agreement to
dissolve a partnership related to a Fixed Facility in Seattle, Washington.
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.
ANTI-KICKBACK STATUTES: The Company is subject to federal and state laws,
which govern financial and other arrangements between health care providers.
These include the federal anti-kickback statute which prohibits bribes,
kickbacks, rebates and any other direct or indirect remuneration in return for
or to induce the referral of an individual to a person for the furnishing,
directing or arranging of services, items or equipment for which payment may be
made in whole or in part under Medicare, Medicaid or other federal health care
programs. Violation of the anti-kickback statute may result in criminal
penalties and exclusion from the Medicare and other federal health care
programs. Many states have enacted similar statutes, which are not limited to
items and services paid for under Medicare or a federally funded health care
program. In recent years, there has been increasing scrutiny by law enforcement
authorities, the Department of Health and Human Services ("HHS"), the courts and
Congress of financial arrangements between health care providers and potential
sources of patient and similar referrals of business to ensure that such
arrangements are not designed as mechanisms to pay for patient referrals. HHS
interprets the anti-kickback statute broadly to apply, under certain
circumstances, to distributions of partnership and corporate profits to
investors who refer federal health care program patients to a corporation or
partnership in which they have an ownership interest and to payments for service
contracts and equipment leases that are designed to provide direct or indirect
remuneration for patient referrals or similar opportunities to furnish
reimbursable items or services. In July 1991, HHS issued "safe harbor"
regulations that set forth certain provisions which, if met, will assure that
health care providers and other parties who refer patients or other business
opportunities, or who provide reimbursable items or services, will be deemed not
to violate the anti-kickback statute. The Company is also subject
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to separate laws governing the submission of false claims. The Company believes
that its operations materially comply with the anti-kickback statutes.
STARK II; STATE PHYSICIAN SELF-REFERRAL LAWS: A federal law, commonly known as
the "Stark Law" or "Stark II," also imposes civil penalties and exclusions for
referrals for "designated health services" by physicians to certain entities
with which they have a financial relationship (subject to certain exceptions).
"Designated health services" include, among other things, radiology services,
including MRIs, CTs and ultrasound, and inpatient and outpatient hospital
services. The law applies only to services reimbursable by Medicare or Medicaid.
The Stark Law is self-effectuating and does not require implementing regulation;
however, while implementing regulations have been issued relating to referrals
for clinical laboratory services, final regulations have not been issued
regarding the other designated health services. In addition, several states in
which the Company operates have enacted or are considering legislation that
prohibits "physician self-referral" arrangements or requires physicians to
disclose to their patients any financial interest they may have with a health
care provider whom they recommend. Possible sanctions for violating these
provisions include loss of licensure and civil and criminal sanctions. Such
state laws vary from state to state and seldom have been interpreted by the
courts or regulatory agencies. Nonetheless, strict enforcement of these
requirements is likely. Although the Company believes its operations materially
comply with these federal and state physician self-referral laws, there can be
no assurance that Stark II or other regulations will not be interpreted or
changed in a manner that would have a material adverse effect on the Company's
business, financial condition or results of operations.
FDA PREMARKET APPROVALS: The U.S. Food and Drug Administration ("FDA") has
issued the requisite premarket approval for all of the MRI, CT, lithotripsy 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.
RADIOLOGIST LICENSING: 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.
LIABILITY INSURANCE: The hospitals and physicians who use the Company's
diagnostic imaging systems are involved in the delivery of health care services
to the public and, therefore, are exposed to the risk of liability claims. The
Company's position is that it does not engage in the practice of medicine. The
Company provides only the equipment and technical components of diagnostic
imaging, including certain limited nursing services, and has not experienced any
material losses due to claims for malpractice. Nevertheless, claims for
malpractice have been asserted against the Company in the past and any future
claims, if successful, could result in substantial damage awards to the
claimants, which may exceed the limits of any applicable insurance coverage.
The Company maintains professional liability insurance, in amounts it believes
are adequate for its business of providing diagnostic imaging, treatment and
management services. 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. Successful malpractice claims
asserted against the Company, to the extent not covered by the Company's
liability insurance, could have a material adverse effect on the Company's
business, financial condition and results of operations.
INDEPENDENT PHYSIOLOGICAL LABORATORIES; INDEPENDENT DIAGNOSTIC TREATMENT
FACILITIES: Under past Medicare policy, imaging centers generally participated
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 it's imaging
centers for Medicare purposes as IPLs. InSight believes that the designation of
its imaging centers as IPLs gave it greater operational control than it would
have had if its imaging centers were operated under the medical group model,
where InSight would function as a "manager".
The Health Care Financing Administration ("HCFA") has established a new category
of Medicare provider intended to replace IPLS, referred to as Independent
Diagnostic Treatment Facilities ("IDTFs"). HCFA has not yet implemented a
mechanism for processing IDTF applications, but the Company expects such
mechanisms to be put
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in place during calendar 1998. Under the regulations, it appears that imaging
centers will have the option to participate in the Medicare program as either
IDTFs or medical groups.
InSight believes that the impact of the IDTF regulations is likely to be
positive overall. Accordingly, InSight will convert some or all of its imaging
centers to IDTFs, except in those states where the medical group model is
required. Since the mechanism to be used to convert to IDTFs is still
undetermined, it is possible that such conversions will raise unanticipated
issues. In addition, since the IDTF designation is new, it is unclear to what
extent and in what manner IDTFs will be monitored by HCFA, but it is probable
that HCFA will exercise increased oversight of IDTFs compared to IPLs, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
CERTIFICATES OF NEED: Some states require hospitals and certain other health
care facilities to obtain a certificate of need ("CON") or similar regulatory
approval prior to the commencement of certain healthcare operations or services
and/or the acquisition of major medical equipment including MRI and Gamma Knife
systems. CON regulations may limit or preclude the Company from providing
diagnostics imaging services or systems in certain states. InSight believes
that it will not be required to obtain CONs in most of the states in which it
intends to operate, and in those states where a CON is required, the Company
believes it has complied or will comply with such requirements. Nevertheless, a
significant increase in the number of states regulating the Company's business
within the CON or state licensure framework could adversely affect the Company's
business, financial condition and results of operations. Conversely, repeal of
existing CON regulations in jurisdictions where the Company has obtained or
operates under a CON could also adversely affect the Company's business;
financial condition and results of operations as barriers to entry are reduced
or removed. This is an area of continuing legislative activity, and there can
be no assurance that the Company will not be subject to CON and licensing
statutes in other states in which it operates or may operate in the future.
REIMBURSEMENT OF HEALTH CARE COSTS
MEDICARE: 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 certain others.
Providers of service are paid by the federal government in accordance with
regulations promulgated by the HHS and generally 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
prospective payment to reimburse hospitals for inpatient treatment services
based upon the diagnosis of the patient. 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 schedules for some diagnostic
services. Recent congressional and regulatory action has also imposed
additional requirements on the eligibility of certain diagnostic services for
reimbursement by the Medicare program, including new requirements regarding
necessary documentation from ordering physicians and supervision by
radiologists. Such congressional and regulatory action reflects industry-wide
cost containment pressures, which InSight believes, will affect all health care
providers for the foreseeable future. Such reductions in reimbursement levels
may affect health care providers' ability to pay for services offered by the
Company and could indirectly adversely affect the Company's business, financial
condition and results of operations.
MEDICAID: 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, financial condition and results of operations.
MANAGED CARE: Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs") attempt to control the cost of health care services.
Managed care contracting has become very competitive and reimbursement schedules
are at or below Medicare reimbursement levels. The development and expansion of
HMOs, PPOs and other managed care organizations within the Company's regional
networks could have a negative impact on utilization of InSight's services in
certain markets and/or affect the revenue per procedure which the Company can
collect, since such organizations will exert greater control over patients'
access to diagnostic imaging services, the selection of the provider of such
services and the reimbursement thereof. InSight also expects that the excess
capacity of equipment in the United States may negatively impact operations
because of the competition
8
<PAGE>
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 affected. See "Customers and Fees".
PRIVATE INSURANCE: Private health insurance programs generally have authorized
the payment for the Company's services on satisfactory terms and the Health Care
Financing Administration ("HCFA") has authorized reimbursement under the federal
Medicare program for all diagnostic imaging and treatment 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.
SALES AND MARKETING
The Company selectively invests in marketing and sales resources and activities
for the purpose of obtaining new sources of revenues for the Company, expanding
business relationships, growing revenues at its existing facilities and
maintaining present business alliances and contractual agreements. Marketing
activities include efforts to contact physicians, education programs on new
applications and uses of technology, customer service programs and contracting
with insurance payors for volume discounts. Sales activities principally focus
on hospital customers who purchase Mobile Facility services from the Company or
enter into other more extensive relationships for Fixed Facility partnerships or
radiology department management services.
COMPETITION
The health care industry in general, and the market for diagnostic imaging
services in particular, are highly competitive. The Company competes principally
on the basis of its reputation for productive and cost-effective quality
services. 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, including with respect to its Mobile
Facilities, Alliance Imaging, Inc. and its affiliates. Some of the Company's
direct competitors that provide contract diagnostic imaging services may have
access to greater financial resources than the Company.
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, subject only to their decision to
acquire a diagnostic imaging system, assume the associated financial risk,
employ the necessary technologists and satisfy applicable CON and licensure
requirements, if any. Historically, smaller hospitals have been reluctant to
purchase imaging and treatment equipment. This reluctance, however, has
encouraged the entry of start-up ventures and more established business
operations into the diagnostic 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.
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 and are generally
paid pursuant to hospital contracts with a life span of up to five years for
Mobile Facilities and up to ten years for Fixed Facilities. Patient services
revenues are services billed directly to patients or third party payors
(generally managed care organizations, Medicare, Medicaid, commercial insurance
carriers and worker's compensation funds), on a fee-for-service basis and are
primarily earned through Centers and certain Fixed and Mobile Facilities.
The Company's Fixed Facility operations are principally dependent on the
Company's 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). The Company
currently has in excess of 400 contracts with
9
<PAGE>
managed care organizations for diagnostic imaging services provided at the
Company's Fixed Facilities primarily on a discounted fee-for-service basis.
Managed care contracting has become very competitive and reimbursement schedules
are at or below Medicare reimbursement levels. A significant decline in
referrals and/or reimbursement rates would adversely affect InSight's business,
financial condition and results of operations. See "Managed Care".
InSight's contract services revenues, represent approximately 46% of total
revenues. Each year approximately one-quarter to one-third of the contract
services agreements for Mobile Facilities 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, when such agreements have not been renewed, the Company has been able
to obtain replacement contracts. While some replacement accounts have initially
been smaller than the lost accounts, such replacement accounts' revenues have
generally increased over the term of the contract; however, new and renewal
contracts may not offset revenues from customers electing not to renew their
contracts with the Company. Although the non-renewal of a single customer
contract would not have a material impact on InSight's contract services
revenues, non-renewal of several contracts 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 hospital accounts with high
volume. If the future reimbursement levels of such hospitals were to decline or
cease or if such hospitals 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. No single source accounts for more than 10% of the Company's total
revenues.
DIAGNOSTIC IMAGING AND OTHER EQUIPMENT
The Company has estimated that it has invested approximately $50 million since
the Merger to replace and upgrade diagnostic imaging systems and to purchase new
systems. As a result, the Company has technologically advanced,
state-of-the-art diagnostic imaging equipment. The Company owns or leases 141
diagnostic imaging and treatment systems, of which 102 are conventional MRI
systems, 15 are Open MRI systems, 16 are CT systems, five are lithotripters, two
are radiation oncology systems and one is a Gamma Knife. The Company owns 80 of
its imaging and treatment systems and has operating leases for the remaining 61
systems. Of the Company's 102 conventional MRI systems, 40% have a magnet
strength of 1.5 Tesla and 39% have a magnet strength of 1.0 Tesla. Currently,
the industry standard magnet strength for fixed systems is 1.5 Tesla and the
industry standard magnet strength for mobile systems is 1.0 Tesla. The Company
is in the process of upgrading or replacing its remaining conventional MRI
systems from magnet strengths of less than 1.0 Tesla to magnet strengths of at
least 1.0 Tesla. Ten of the Company's Open MRI systems are less than one year
old.
The Company's master lease agreement with GE Medical Systems ("GEMS") includes a
variable lease arrangement for 17 of the Company's 61 leased imaging and
treatment systems, which can significantly reduce the Company's downside cash
flow risk. Under the Company's standard operating lease agreement with GEMS,
the Company pays approximately $30,000 per month to lease each system. Under
the variable rate election, the Company may choose to pay a monthly rental fee
averaging $18,000 per system, plus 40% of the operating profits generated by
such system, or to store idle systems at a fixed location for a monthly payment
to GEMS of $1,500 per system, representing approximately half of the monthly
maintenance costs for an idle system. The Company's variable lease arrangement
with GEMS covers most of the Company's older systems, which the Company either
has upgraded or expects to replace within the next 18 to 24 months. As of
September 1, 1998, the Company had elected the variable lease option with
respect to four of the 17 systems in the variable rate pool, each of which
requires total monthly payments of $13,000 or less. The option to elect the
variable lease structure in the future with respect to additional systems
provides the Company with downside cash flow protection in the event that any
particular MRI system experiences low utilization.
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 GEMS,
Hitachi Medical Systems, Phillips Medical Systems North America Company, Picker
International, Inc., and Siemens Medical Systems, Inc. InSight maintains good
working
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<PAGE>
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.
EMPLOYEES
As of September 15, 1998, InSight had approximately 800 full-time and 50
part-time employees. None of the Company's employees are covered by a
collective bargaining agreement. Management believes its employee relations to
be satisfactory.
FORWARD-LOOKING STATEMENTS DISCLOSURE
Except for the historical information contained in this report, certain
statements contained herein are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995, which involve a number of
risks and uncertainties, including, but not limited to, 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 (the "SEC").
ITEM 2. PROPERTIES
The Company leases approximately 12,800 square feet of office space for its
executive offices in Newport Beach, California, under a lease expiring in 2001,
and approximately 5,300 square feet of office space in Farmington, Connecticut,
under a lease expiring in 2002. The Company believes its facilities are
adequate for its reasonably foreseeable needs. In addition, the following table
sets forth the other principal properties used as imaging or treatment
facilities by the Company as of June 30, 1998:
<TABLE>
<CAPTION> APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ---------------- ----------- --------
<S> <C> <C>
OWNED:
Northern Indiana Oncology Center 3,500 Valparaiso, Indiana
Berwyn Magnetic Resonance Center (1) 3,800 Berwyn, Illinois
Garfield Imaging Center (1) 4,500 Monterey Park, California
LAC/USC Imaging Sciences Center (1) 8,500 Los Angeles, California
Maxum Diagnostic Center-Eighth Avenue 10,000 Ft. Worth, Texas
Diagnostic Outpatient Center (1) 13,800 Hobart, Indiana
Harbor/UCLA Diagnostic Imaging Center (1) 15,000 Torrance, California
Mountain Diagnostics 19,100 Las Vegas, Nevada
LEASED:
Buckhead Imaging 1,500 Atlanta, Georgia
Redwood City MRI 2,900 Redwood City, California
Dublin Imaging 3,900 Dublin, Ohio
Open MRI of Orange County 4,000 Santa Ana, California
Washington Magnetic Resonance Center 4,100 Whittier, California
Imaging Center at Murfreesboro 5,000 Murfreesboro, Tennessee
Marshwood Imaging 5,000 Scarborough, Maine
Maxum Diagnostic Center - Preston Road 5,800 Dallas/Plano, Texas
Open MRI of Hayward 6,400 Hayward, California
Central Maine Imaging Center 7,250 Lewiston, Maine
St. John's Regional Imaging Center 7,700 Oxnard, California
Ocean Medical Imaging Center 8,700 Tom's River, New Jersey
Broad Street Imaging Center 12,700 Columbus, Ohio
Maxum Diagnostic Center - Forest Lane 14,100 Dallas, Texas
Chattanooga Outpatient Center 14,700 Chattanooga, Tennessee
Fleet Services/Training/Applications 20,000 Winston-Salem, North Carolina
</TABLE>
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<PAGE>
(1) The Company owns the building and holds the related land under a long-term
lease.
On April 24, 1998, the Company completed the purchase of 77,690 square feet of
land in Ft. Worth, Texas, upon which the Company intends to build a Center to
which certain existing operations in Ft. Worth will be relocated.
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, financial condition and results of
operations.
On May 8, 1998, Medical Synergies, Inc. ("MSI") and its subsidiary, The Center
for Diagnostic Medical Services, Inc. ("CDMSI"), filed a complaint against IHC
and certain of its then current officers, E. Larry Atkins, Thomas V. Croal,
Glenn P. Cato, Robert N. LaDouceur and Michael A. Boylan, in the District Court
of Dallas County, Texas. Plaintiffs allege that they had a final and binding
agreement with IHC with respect to the acquisition by IHC of certain assets, and
assumption by IHC of certain liabilities, of MSI and CDMSI. Plaintiffs'
complaint includes claims of anticipatory repudiation of an alleged agreement,
fraud, negligent misrepresentation, tortious interference with contract,
tortious interference with prospective business relations and attorneys' fees
based on breach or repudiation of the alleged agreement. The complaint
requested a judgment for actual, compensatory and consequential damages in an
unspecified amount, punitive and exemplary damages in an unspecified amount,
pre-judgment and post-judgment interest, attorneys' fees, expenses, costs and
disbursements. The Company, IHC and the other defendants have answered the
complaint and the case has been removed to the U.S. Bankruptcy Court for the
Northern District of Texas, Dallas Division, since MSI and CDMSI filed, after
the filing of the complaint against the defendants, for protection under Chapter
11 of the federal bankruptcy law. The Company, IHC and the other defendants
believe that plaintiffs' claims are without merit and intend to vigorously
defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) - (d). On May 1, 1998 and May 15, 1998, the holders of each of Series B and
C Preferred Stock approved by written consent the acquisition of Signal and the
issuance of the Notes, respectively.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
InSight's Common Stock is traded on the national over-the-counter market and
quoted on the NASDAQ Small Cap Market under the symbol "IHSC". The following
table sets forth the high and low prices as reported by NASDAQ for InSight
Common Stock for the quarters indicated. 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.
<TABLE>
<CAPTION>
QUARTER ENDED LOW HIGH
- ------------- --- ----
<S> <C> <C>
September 30, 1997 4 1/4 7 3/4
December 31, 1997 6 1/2 17 3/4
March 31, 1998 10 1/2 18
June 30, 1998 10 3/4 14 3/8
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
</TABLE>
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 credit agreement with
its primary lender and the indenture governing publicly-issued debt securities
of the Company contain restrictions on its ability to pay dividends on its
Common Stock.
As of September 15, 1998, the Company's records indicate that there were in
excess of 2,400 beneficial holders of the Common Stock and approximately 500
stockholders of record.
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<PAGE>
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 years ended June 30,
1998 and 1997, the six months ended June 30, 1996 and 1995 (unaudited), and for
the years ended December 31, 1995, 1994 and 1993 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 years ended June 30, 1998 and 1997, the six months ended June 30,
1996 and for the year ended December 31, 1995 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this report.
<TABLE>
<CAPTION>
(Amounts in thousands, except shares and per share data)
SIX MONTHS ENDED
YEARS ENDED JUNE 30, ------------------------ YEARS ENDED DECEMBER 31,
------------------------- JUNE 30, JUNE 30, ------------------------------------
1998 1997 1996 (1) 1995(1)(7) 1995 (1) 1994 (1) 1993 (1)
------------ ----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 119,018 $ 92,273 $ 26,460 $ 24,434 $ 50,609 $ 45,868 $ 45,075
Operating income (loss) (2) 7,770 5,774 (2,949) (331) (1,193) (2,777) (6,040)
Interest expense, net 6,827 4,066 1,144 648 1,626 1,206 1,773
Net income (loss) (3) (4) (5) 512 1,281 (979) (979) (4,319) 4,156 (6,777)
Income (loss) per common and converted
preferred share (6):
Basic $ 0.06 $ 0.25 $ (0.70) $ (0.73) $ (3.21) $ 3.04 $ (3.89)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted $ 0.06 $ 0.24 $ (0.70) $ (0.73) $ (3.21) $ 2.96 $ (3.89)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------------------------------ ------------------------------------
1998 1997 1996 1995 (1) 1994 (1) 1993 (1)
----------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ 36,903 $ (6,162) $ (1,441) $ (2,228) $ 1,587 $ (8,594)
Property and equipment, net 71,814 34,060 29,349 12,386 5,272 9,791
Intangible assets 74,831 32,579 16,216 4,047 1,194 1,263
Total assets 228,260 97,271 69,313 28,306 22,592 23,566
Total long-term liabilities 153,104 59,205 39,839 19,723 9,575 7,967
Stockholders' equity (deficit) 37,858 6,685 5,404 (4,005) 300 (3,857)
</TABLE>
(1) The selected consolidated financial data represents historical data of
MHC only.
(2) Includes a provision for supplemental service fee termination of $6.3
million in 1998.
(3) Includes a provision for securities litigation settlement of $1.5
million in 1995.
(4) Includes a gain on sale of partnership interests of $4.9 million in
1994.
(5) Includes an extraordinary gain on debt extinguishment of $3.2 million,
$3.3 million and $1.0 million in 1996, 1994 and 1993, respectively.
(6) 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.
(7) Unaudited.
(8) No cash dividends have been paid on the Company's common stock for the
periods indicated above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this report that are not purely historical or which
might be considered an opinion or projection concerning the Company or its
business, whether express or implied, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include statements regarding the Company's expectations,
intentions, plans or strategies regarding the future, including statements
related to the Year 2000 Issue. All forward-looking statements included in this
report are based upon information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those described or implied in such forward-looking
statements because of certain factors which could affect the Company. Such
forward-looking statements should be evaluated in light of factors described in
the Company's periodic filings with the SEC, on Forms 10-K, 10-Q and 8-K (if
any) and the factors described under "Risk Factors"
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<PAGE>
in the Company's Registration Statement on Form S-4, filed with the SEC on
August 4, 1998, and any amendments thereto.
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.
InSight's strategy is to further develop and expand regional diagnostic imaging
networks that emphasize quality of care, produce cost-effective diagnostic
information and provide superior service and convenience to its customers. The
strategy of InSight is focused on the following components: (i) to further
participate in the consolidation occurring in the diagnostic imaging industry by
continuing to build its market presence in its existing regional diagnostic
imaging networks through geographically disciplined acquisitions; (ii) to
develop or acquire additional regional networks in strategic locations where the
Company can offer a broad range of services to its customers and realize
increased economies of scale; (iii) to continue to market current diagnostic
imaging applications through its existing facilities to optimize and increase
overall procedure volume; (iv) to strengthen the regional diagnostic imaging
networks by focusing on managed care customers; (v) to implement a variety of
new products and services designed to further leverage its core business
strengths, including: Open MRI systems and the radiology co-source product
which involves the joint ownership and management of the physical and technical
operations of the multi-modality radiology department of a hospital or
multi-specialty physician group. InSight believes that long-term viability is
contingent upon its ability to successfully execute its business strategy.
In fiscal 1997, InSight completed three acquisitions as follows: a Fixed
Facility in Hayward, California; Mobile Facilities in Maine and New Hampshire;
and a Center in Chattanooga, Tennessee. All three transactions included the
purchase of assets and assumption of certain equipment related liabilities. The
cumulative purchase price for these acquisitions was approximately $18.6
million.
In fiscal 1998, InSight completed four acquisitions as follows: a Center in
Columbus, Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in Redwood
City, California; and a Center in Las Vegas, Nevada. In connection with the
purchase of the Center in Columbus, Ohio, InSight also acquired a majority
ownership interest in a new Center in Dublin, Ohio. All transactions included
the purchase of assets and assumption of certain equipment related liabilities.
The cumulative purchase price for these acquisitions was approximately $18.4
million.
In fiscal 1998, InSight also acquired all of the capital stock of Signal
through the merger of Signal into a wholly owned subsidiary of InSight. The
purchase price was approximately $45.7 million. The Signal assets primarily
consisted of Mobile Facilities in the Northeastern and Southeastern United
States.
In addition, in fiscal 1998, InSight installed three Open MRI Fixed Facilities
in Atlanta, Georgia; Scarborough, Maine; and Santa Ana, California; and opened
its first radiology co-source outpatient Center in Oxnard, California, all of
which were financed through GE. Effective December 31, 1997, InSight terminated
its agreement to operate a Gamma Knife Center and entered into an agreement to
dissolve a partnership related to a Fixed Facility in Seattle, Washington.
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.
(See Item 1. "Business-Business Strategy").
InSight continues to pursue acquisition opportunities. InSight believes that
the expansion of its business through acquisitions is a key factor in
maintaining profitability. Generally, acquisition opportunities are aimed at
increasing
15
<PAGE>
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 or 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 eight acquisitions as discussed above.
As noted above (see Item 1. "Business-Recapitalization and Financing"), 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 Common Stock at an 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
pretax income, warrants to purchase 250,000 shares of Common Stock at an
exercise price of $10.00 per share, and an additional 20,953 shares of Series C
Preferred Stock in exchange for all of GE's shares of Series A Preferred
Stock; and (c) the Company executed a Credit Agreement with NationsBank which
included (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 with increasing amortization over a seven-year period, 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. Initial funding under the Bank Financing occurred on October 22, 1997
and, on December 19, 1997, the Bank Financing was increased to a total of $150
million by converting $10 million of outstanding debt under the acquisition
facility to the seven-year tranche (which was thereby increased to $40 million)
and increasing the acquisition facility to $65 million. The net proceeds from
the Carlyle investment were used to refinance a portion of the outstanding GE
indebtedness (approximately $20 million). At the initial funding of the Bank
Financing, all of the term loan facility was drawn down to refinance all of the
remaining GE indebtedness (approximately $50 million) and approximately $8
million of the revolving facility was drawn down for working capital purposes.
The terms of the Series B Preferred Stock and the Series C Preferred Stock, as
well as the Bank Financing, contain certain restrictions on InSight's ability to
act without first obtaining a waiver or consent from Carlyle, GE and
NationsBank.
On June 12, 1998, InSight completed a refinancing of substantially all of the
Company's debt through the issuance of $100 million of Notes. The Notes bear
interest at 9.625%, with interest payable semi-annually and mature in June 2008.
The Notes are redeemable at the option of InSight, in whole or in part, on or
after June 15, 2003. The Notes are unsecured senior subordinated obligations of
the Company and are subordinated in right of payment to all existing and future
senior indebtedness, as defined in the indenture, of the Company, including
borrowings under the Bank Financing.
Concurrently with the issuance of the Notes, the Company entered into an
amendment to, and restatement of the Bank Financing, pursuant to which, among
other things, the Company refinanced and consolidated its prior $20 million
tranche term loan and $40 million tranche term loan into a $50 million term
loan, with a six-year amortization. Borrowings under the $50 million term loan
bear interest at LIBOR plus 1.75%. The Company utilized a portion of the net
proceeds from the Notes, together with the net proceeds of the borrowing under
the term loan portion of the Bank Financing to repay outstanding indebtedness
under the Bank Financing. The remaining net proceeds of approximately $28.8
million are being used for general corporate purposes.
As part of the amendment to the Bank Financing, the Company has available a $25
million working capital facility with a five-year maturity and a $75 million
acquisition facility with a six-year maturity. Borrowings under both credit
facilities bear interest at LIBOR plus 1.75%. The Company is required to pay an
unused facility fee of between 0.375% and 0.5% on unborrowed amounts under both
facilities. There were no borrowings under either facility at June 30, 1998.
Net cash provided by operating activities was approximately $17.4 million for
the year ended June 30, 1998. Cash provided by operating activities resulted
primarily from net income before depreciation and amortization (approximately
$16.3 million) and the provision for supplemental service fee termination ($6.3
million), offset by an increase in accounts receivable (approximately $5.9
million). The increase in accounts receivable is due primarily to the Company's
acquisition activities.
Net cash used in investing activities was approximately $77.4 million for the
year ended June 30, 1998. Cash used in investing activities resulted primarily
from the Company purchasing new diagnostic imaging equipment or upgrading its
existing diagnostic imaging equipment (approximately $22.9 million) and from the
Company's acquisition activities, net of cash acquired (approximately $52.5
million).
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The Company generated approximately $97.8 million from financing activities,
primarily from (i) the Carlyle investment pursuant to the Recapitalization, (ii)
the issuance of $100 million of Notes and (iii) the Bank Financing. The
proceeds from the Recapitalization, Notes and Bank Financing were used to
refinance the Company's outstanding indebtedness.
The Company has committed to purchase or lease, at an aggregate cost of
approximately $22 million, 12 MRI systems for delivery during the year ending
June 30, 1999. The Company expects to use internal funds 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 $24 million,
including siting costs, 20 Open MRI systems for delivery and installation. As
of June 30, 1998, the Company had installed seven of such Open MRI systems:
two at existing Centers, three in newly opened Fixed Facilities, and two in
Mobile Facilities which operate in existing networks serviced by conventional
Mobile Facilities. 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 business strategy.
The Company believes that, based on proceeds from the issuance of the Notes,
current levels of operations and anticipated growth, its cash from operations,
together with other available sources of liquidity, including borrowings
available under the Bank Financing, will be sufficient over the next three
years to fund anticipated capital expenditures and make required payments of
principal and interest on its debt, including payments due on the Notes and
obligations under the Bank Financing. In addition, the Company continually
evaluates potential acquisitions and expects to fund such acquisitions from its
available sources of liquidity, including borrowings under the Bank Financing.
The Company's acquisition strategy, however, may require sources of capital in
addition to that currently available to the Company, and no assurance can be
given that the Company will be able to raise any such necessary additional funds
on terms acceptable to the Company or at all.
RESULTS OF OPERATIONS
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 YEARS ENDED JUNE 30, 1998 AND 1997 AND THE HISTORICAL
FINANCIAL DATA OF MHC ONLY FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995.
YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES: Revenues increased approximately 29.0% from approximately $92.2
million for the year ended June 30, 1997, to approximately $119.0 million for
the year ended June 30, 1998. This increase was due primarily to the
acquisitions discussed above (approximately $20.0 million) and an increase in
contract services, patient services and other revenues (approximately $8.2
million) at existing facilities.
Contract services revenues increased approximately 14.4% from approximately
$47.8 million for the year ended June 30, 1997, to approximately $54.7 million
for the year ended June 30, 1998. This increase was due primarily to the
acquisitions discussed above (approximately $4.0 million) and an increase at
existing facilities (approximately $2.9 million). The increase at existing
facilities was due to higher utilization (approximately 17%) offset by a decline
in reimbursement from customers, primarily hospitals (approximately 4%).
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 46% of total revenues for the year ended June 30,
1998. Each year approximately one-quarter to one-third of the contract services
agreements are subject to renewal. It is expected that some high volume
customer accounts will elect not to renew their agreements and instead will
purchase or lease their own diagnostic imaging equipment and some customers may
choose an alternative services provider. In the past where agreements have not
been renewed, the Company has been able to obtain replacement customer accounts.
While some replacement accounts have initially been smaller than the lost
accounts such replacement accounts revenues have generally increased over the
term of the agreement. The non-renewal of a single customer agreement would not
have a material impact on InSight's contract services revenues; however,
non-renewal of several agreements could have a material impact on contract
services revenues.
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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 42.5% from approximately $41.9
million for the year ended June 30, 1997, to approximately $59.7million for the
year ended June 30, 1998. This increase was due primarily to the acquisitions
discussed above (approximately $15.9 million) and an increase in revenues at
existing facilities (approximately $3.4 million). The increase at existing
facilities was due to higher utilization (approximately 11%), partially offset
by declines in reimbursement from third party payors (approximately 4%) and
reduced revenues from the termination of a Fixed Facility and a Gamma Knife
Center in fiscal 1998 (approximately $1.5 million).
Management believes that any future increases in revenues at existing facilities
can only be achieved by higher utilization and not by increases in procedure
prices; however, excess capacity of diagnostic imaging equipment, increased
competition, and the expansion of managed care may impact utilization and make
it difficult for the Company to achieve revenue increases in the future, absent
the execution of provider agreements with managed care companies and other
payors, and the execution of the Company's business strategy, particularly
acquisitions. 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 at or below Medicare reimbursement
levels, and a significant decline in referrals could have a material impact on
the Company's revenues.
COSTS OF OPERATIONS: Costs of operations increased approximately 21.5% from
approximately $79.6 million for the year ended June 30, 1997, to approximately
$96.7 million for the year ended June 30, 1998. This increase was due primarily
to an increase in costs due to the acquisitions discussed above (approximately
$14.7 million) and an increase in costs at existing facilities (approximately
$4.7 million), offset by the elimination of costs at the two terminated
facilities discussed above (approximately $2.3 million).
Costs of operations, as a percent of total revenues, decreased from
approximately 86.3% for the year ended June 30, 1997, to approximately 81.3% for
the year ended June 30, 1998. The decrease in percent is due primarily to
reduced costs in service supplies, equipment maintenance, and equipment lease
and depreciation costs as a result of the Company negotiating favorable supply
contracts and upgrading its existing diagnostic equipment. The decrease is
offset by higher salaries and benefits and marketing costs.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 20.3%, from approximately $7.4 million for the year ended June 30,
1997, to approximately $8.9 million for the year ended June 30, 1998. This
increase was due primarily to additional consulting, legal and travel costs
associated with the Company's acquisition activities. As noted below, the
Company anticipates incurring approximately $500,000 to $1,500,000 in connection
with its Year 2000 Issue, approximately $30,000 of which was incurred during the
year ended June 30, 1998.
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the
Recapitalization and Bank Financing, the Company issued to GE 7,000 shares of
Series C Preferred Stock to terminate GE's rights to receive supplemental
service fee payments equal to 14% of InSight's pretax income. The Series C
Preferred Stock was valued at $7.0 million and the Company recorded a one-time
provision of approximately $6.3 million, net of amounts previously accrued, to
account for the Preferred Stock issuance.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 65.9% from
approximately $4.1 million for the year ended June 30, 1997, to approximately
$6.8 million for the year ended June 30, 1998. This increase was due primarily
to additional debt related to (i) the acquisitions discussed above
(approximately $3.6 million), (ii) additional debt related to the issuance of
Notes discussed above, and (iii) additional debt related to the Company
upgrading its existing diagnostic imaging equipment, offset by reduced interest
as a result of (i) the reduction in interest rate and the extinguishment of
approximately $23.0 million in long-term debt relating to the Recapitalization
and Bank Financing (approximately $1.9 million) and (ii) amortization of
long-term debt.
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INCOME (LOSS) PER COMMON SHARE: On a diluted basis, net income per common share
was $0.06 for the year ended June 30, 1998, compared to net income per common
share of $0.24 for the same period in 1997. Excluding the one-time provision
for supplemental service fee termination, net income per common share on a
diluted basis would have been $0.83. The improvement in net income per common
share before provision for supplemental service fee termination is the result of
(i) increased gross profit and (ii) an increase in earnings from unconsolidated
partnerships, offset by (i) increased corporate operating expenses, (ii)
increased interest expense, and (iii) the provision for income taxes.
YEAR ENDED JUNE 30, 1997 AND SIX MONTHS ENDED JUNE 30, 1996
REVENUES: Revenues increased approximately $65.8 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 $37.9 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%).
Patient services revenues increased approximately $36.1 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 $29.7 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
approximately $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%).
COSTS OF OPERATIONS: Costs of operations increased approximately $52.2 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 $29.1 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 $35.0 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 $20.2 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.
Equipment leases and depreciation and amortization increased approximately $17.2
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 $9.0 million), increased costs due to the acquisitions
discussed above
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(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.
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.
INCOME (LOSS) PER COMMON SHARE: On a diluted basis, 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 was 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.
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 was
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.
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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
instrument.
NEW PRONOUNCEMENTS
In fiscal 1999, the Company will be required to adopt Statement of Financial
Accounting Standards ("SFAS") Nos. 130 and 131, "Reporting Comprehensive Income"
and "Disclosures about Segments of an Enterprise and Related Information." The
Company believes that adoption of these standards will not have a material
impact on the Company.
YEAR 2000 ISSUE
IMPACT OF YEAR 2000: The Year 2000 Issue exists because many computer systems
and applications currently use two-digit date fields to designate a year. As
the century date occurs, computer programs, computers and embedded
microprocessors controlling equipment with date-sensitive systems may recognize
Year 2000 as 1900 or not at all. This inability to recognize or properly treat
Year 2000 may result in computer system failures or miscalculations of critical
financial and operational information as well as failures of equipment
controlling date-sensitive microprocessors. In addition, there are two other
related issues, which could also lead to miscalculations or failures: (i) some
older systems' programming assigns special meaning to certain dates, such as
9/9/99 and (ii) the Year 2000 is a leap year.
STATE OF READINESS: The Company started to formulate a plan to address the
Year 2000 Issue in late 1995. To date, the Company's primary focus has been
on its own internal information technology systems, including all types of
systems in use by the Company in its operations, marketing, finance and human
resources departments, and to deal with the most critical systems first. The
Company is in the process of developing a Year 2000 Plan to address all of
its Year 2000 Issues. The Company has given its Vice President-Information
Technology specific responsibility for managing its Year 2000 Plan and a Year
2000 Committee has been established to assist in developing and implementing
the Year 2000 Plan. The Year 2000 Plan being developed will involve
generally the following phases: awareness, assessment, renovation, testing
and implementation.
Although the Company's assessment of the Year 2000 Issue is incomplete, the
Company has completed an assessment of approximately 75% of its internal
information technology systems. The Company estimates that it will complete the
assessment of its remaining internal information technology systems by December
31, 1998 and will establish a timetable for the renovation phase of the
remaining technology systems. The Company has already completed the renovation
of approximately 50% of its information technology systems, including modifying
and upgrading software and developing and purchasing new software, and continues
to renovate the portions of such systems for which assessment is complete. The
Company has not begun or established a timetable for the testing and
implementation phases. The Company's goal is to complete such phases by June
30, 1999. Although complications arising from unanticipated acquisitions might
cause some delay.
The Company has recently begun to assess the potential for Year 2000 problems
with the information systems of its customers and vendors. The Company is
preparing questionnaires that it expects to send to its customers, vendors and
other third parties with which the Company has a material relationship by
December 31, 1998. The Company
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expects to complete the assessment with respect to such parties by March 31,
1998, subject to their ability to provide requested information by February 28,
1999. The Company does not have sufficient information to provide an estimated
timetable for completion of renovation and testing that such parties with which
the Company has a material relationship may undertake. The Company is unable to
estimate the costs that it may incur to remedy the Year 2000 issues relating to
such parties.
The Company has received some preliminary information concerning the Year 2000
readiness of some of its customers, vendors and other third parties with which
the Company has a material relationship and expects to engage in discussions
with most of such parties during the balance of 1998 and through March 31, 1999
in an attempt to determine the extent to which the Company is vulnerable to
those parties' possible failure to become Year 2000 compliant.
All of the Company's diagnostic imaging equipment used to provide imaging
services have computer systems and applications, and in some cases embedded
microprocessors, that could be affected by Year 2000 issues. The Company has
begun to assess the impact on its diagnostic imaging equipment by contacting
the vendors of such equipment. The vendor with respect to the majority of
the MRI and CT equipment used by the Company has informed the Company that
(i) certain identified MRI and CT equipment is Year 2000 compliant, (ii) it
has developed software for functional workarounds to ensure Year 2000
compliance with respect to the balance of its noncompliant MRI and CT
equipment and (iii) remediation will be made during future regular
maintenance visits. The Company is in the process of contacting the other
vendors of its diagnostic imaging equipment. The Company expects to receive
information from such other vendors by December 31, 1998 with respect to
their assessment of the impact on the equipment that they provided to the
Company and the nature and timetable of the remediation that such vendors may
propose. The Company expects to complete its assessment by March 31, 1999
and that renovation will be completed by June 30, 1999. The Company expects
that its equipment vendors will propose timely remediation and will bear the
cost of modifying or otherwise renovating the Company's diagnostic imaging
equipment.
The Company has recently begun an assessment of the potential for Year 2000
problems with the embedded microprocessors in its other equipment, facilities
and corporate and regional offices, including telecommunications systems,
utilities, dictation systems, security systems and HVACS and expects to complete
the assessment by December 31, 1998.
COSTS TO ADDRESS YEAR 2000 ISSUE: The Company estimates on a preliminary basis
that the cost of assessment, renovation, testing and implementation of its
internal systems will range from approximately $500,000 to $1,500,000, of which
$30,000 has been incurred. The major components of these costs are:
consultants, additional personnel costs, programming, new software and hardware,
software upgrades and travel expenses. The Company expects that such costs
will be funded through operating cash flows. This estimate, based on currently
available information, will be updated as the Company continues its assessment
and proceeds with renovation, testing and implementation and may be adjusted
upon receipt of more information from the Company's vendors, customers and other
third parties and upon the design and implementation of the Company's
contingency plan. In addition, the availability and cost of consultants and
other personnel trained in this area and unanticipated acquisitions might
materially affect the estimated costs.
RISKS TO THE COMPANY: The Company's Year 2000 Issue involves significant
risks. There can be no assurance that the Company will succeed in implementing
the Year 2000 Plan it is developing. The following describes the Company's most
reasonably likely worst-case scenario, given current uncertainties. If the
Company's renovated or replaced internal information technology systems fail the
testing phase, or any software application or embedded microprocessors central
to the Company's operations are overlooked in the assessment or implementation
phases, significant problems including delays may be incurred in billing the
Company's major customers (Medicare, HMOs or private insurance carriers) for
services performed. If its major customers' systems do not become Year 2000
compliant on a timely basis, the Company will have problems and incur delays in
receiving and processing correct reimbursement. If the computer systems of
third parties with which the Company's systems exchange data do not become Year
2000 compliant both on a timely basis and in a manner compatible with continued
data exchange with the Company's information technology systems, significant
problems may be incurred in billing and reimbursement. If the systems on the
diagnostic imaging equipment utilized by the Company are not Year 2000
compliant, the Company may not be able to provide imaging services to patients.
If the Company's vendors or suppliers of the Company's necessary power,
telecommunications, transportation and financial services, fail to provide the
Company with equipment and services the Company will be unable to provide
services to its customers.
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If any of these uncertainties were to occur, the Company's business, financial
condition and results of operations would be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of the
effect on the Company.
CONTINGENCY PLAN: The Company has not yet established a contingency plan to
address unavoided or unavoidable Year 2000 risks with internal information
technology systems and with customers, vendors and other third parties, but it
expects to create such a plan by March 31, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
InSight's market risk exposure relates primarily to interest rates, where
InSight will periodically use interest rate swaps to hedge interest rates on
long-term debt under its Bank Financing. InSight does not engage in activities
using complex or highly leveraged instruments.
At June 30, 1998, InSight had outstanding an interest rate swap, converting the
majority of its $50 million term loan floating rate debt to fixed rate debt.
Since the majority of the Company's debt has historically been fixed-rate debt,
the impact of the interest rate swap has not been material on the Company's
weighted average interest rate.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
for the Years Ended June 30, 1998 and 1997, for
the Six Months Ended June 30,1996 and for the
Year Ended December 31, 1995
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 25
INDEPENDENT AUDITORS' REPORT 26
CONSOLIDATED BALANCE SHEETS 27-28
CONSOLIDATED STATEMENTS OF OPERATIONS 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 30
CONSOLIDATED STATEMENTS OF CASH FLOWS 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32-52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 59
SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 60
</TABLE>
24
<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, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 1998 and 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, 1998 and 1997, and results of their operations
and their cash flows for the years ended June 30, 1998 and 1997 and for the six
months ended June 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
September 25, 1998
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
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 the year ended December 31, 1995. Our audit 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of MHC's operations and its cash flows for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying 1995 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
26
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,740 $ 6,884
Trade accounts receivable, net 25,663 15,515
Other current assets 3,050 1,826
---------- ----------
Total current assets 73,453 24,225
---------- ----------
PROPERTY AND EQUIPMENT:
Vehicles 1,085 968
Land, building and leasehold improvements 16,547 9,114
Computer and office equipment 8,253 3,851
Diagnostic and related equipment 66,020 28,055
Equipment and vehicles under capital leases 6,025 8,086
---------- ----------
97,930 50,074
Less: Accumulated depreciation and amortization 26,116 16,014
---------- ----------
Property and equipment, net 71,814 34,060
---------- ----------
INVESTMENTS IN PARTNERSHIPS 1,523 939
---------- ----------
OTHER ASSETS 6,639 5,468
---------- ----------
INTANGIBLE ASSETS, net 74,831 32,579
---------- ----------
$ 228,260 $ 97,271
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
27
<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,
1998 1997
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 7,978 $ 11,901
Current portion of capital lease obligations 2,162 3,561
Accounts payable 6,946 1,688
Accrued equipment related costs 5,311 2,882
Other accrued expenses 8,979 7,834
Accrued payroll and related costs 5,174 2,521
---------- ----------
Total current liabilities 36,550 30,387
---------- ----------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 144,637 54,421
Capital lease obligations, less current portion 7,483 3,312
Other long-term liabilities 984 1,472
---------- ----------
Total long-term liabilities 153,104 59,205
---------- ----------
COMMITMENTS (Note 8)
MINORITY INTEREST 748 994
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 per value, 3,500,000 shares authorized:
Convertible Series A preferred stock,
2,501,760 shares outstanding at June 30, 1997 - 6,750
Convertible Series B preferred stock, 25,000 shares outstanding at
June 30, 1998, with a liquidation preference of $25,000 23,923 -
Convertible Series C preferred stock, 27,953 shares outstanding at
June 30, 1998, with a liquidation preference of $27,953 13,173 -
Common stock, $.001 par value, 25,000,000 shares authorized,
2,824,090 and 2,714,725 shares outstanding at June 30, 1998 and 1997,
respectively 3 3
Additional paid-in capital 23,415 23,100
Accumulated deficit (22,656) (23,168)
---------- ----------
Total stockholders' equity 37,858 6,685
---------- ----------
$ 228,260 $ 97,271
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
28
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
SIX
YEARS ENDED JUNE 30, MONTHS ENDED YEAR ENDED
----------------------------------- JUNE 30, DECEMBER 31,
REVENUES: 1998 1997 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Contract services $ 54,664 $ 47,827 $ 20,045 $ 38,976
Patient services 59,669 41,916 5,853 10,605
Other 4,685 2,530 562 1,028
------------- ------------- ------------- -------------
Total revenues 119,018 92,273 26,460 50,609
------------- ------------- ------------- -------------
COSTS OF OPERATIONS:
Costs of services 62,378 50,015 15,899 28,772
Provision for doubtful accounts 1,871 1,483 617 1,669
Equipment leases 17,023 18,396 6,957 14,464
Depreciation and amortization 15,441 9,740 3,947 3,873
------------- ------------- ------------- -------------
Total costs of operations 96,713 79,634 27,420 48,778
------------- ------------- ------------- -------------
GROSS PROFIT (LOSS) 22,305 12,639 (960) 1,831
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION 6,309 - - -
CORPORATE OPERATING EXPENSES 8,933 7,431 2,127 3,372
------------- ------------- ------------- -------------
INCOME (LOSS) FROM COMPANY OPERATIONS 7,063 5,208 (3,087) (1,541)
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 707 566 138 348
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 7,770 5,774 (2,949) (1,193)
OTHER EXPENSE:
Interest expense, net 6,827 4,066 1,144 1,626
Provision for securities litigation settlement - - - 1,500
------------- ------------- ------------- -------------
6,827 4,066 1,144 3,126
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 943 1,708 (4,093) (4,319)
PROVISION FOR INCOME TAXES 431 427 65 -
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 512 1,281 (4,158) (4,319)
EXTRAORDINARY ITEM - Net gain on debt extinguishment - - 3,179 -
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 512 $ 1,281 $ (979) $ (4,319)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
INCOME (LOSS) PER COMMON AND CONVERTED
PREFERRED SHARE:
Income (loss) before extraordinary item:
Basic $ 0.06 $ 0.25 $ (2.99) $ (3.21)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted $ 0.06 $ 0.24 $ (2.99) $ (3.21)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss):
Basic $ 0.06 $ 0.25 $ (0.70) $ (3.21)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted $ 0.06 $ 0.24 $ (0.70) $ (3.21)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
CONVERTED PREFERRED SHARES OUTSTANDING:
Basic 7,964,238 5,214,531 1,389,271 1,344,832
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted 8,271,298 5,440,315 1,389,271 1,344,832
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
INSIGHT HEALTH SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
<TABLE>
<CAPTION> Preferred Stock
-------------------------------------------------------------------------
Series A Series B Series C
----------------------- ------------------------ ----------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 - $ - - $ - - $ -
Stock issued under employee - - - - - -
purchase plan
Net loss - - - - - -
----------- ----------- ---------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 - - - - - -
Issuance of Series A preferred stock
and cancellation of common
stock warrant 1,250,880 3,375 - - - -
Acquisition of IHC 1,250,880 3,375 - - - -
Retirement of MHC's treasury stock - - - - - -
Reset the par value of InSight common
stock issued in exchange for
MHC's common stock - - - - - -
Net loss - - - - - -
----------- ----------- ---------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1996 2,501,760 6,750 - - - -
Stock options exercised - - - - - -
Net income - - - - - -
----------- ----------- ---------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1997 2,501,760 6,750 - - - -
Stock options and warrants exercised - - - - - -
Sale of Series B preferred stock - - 25,000 23,923 - -
Exchange of Series A for Series C
preferred stock (2,501,760) (6,750) - - 20,953 6,173
Supplemental service fee termination - - - - 7,000 7,000
Adjustment for fractional shares
on MHC and IHC exchange - - - - - -
Net income - - - - - -
----------- ----------- ---------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1998 - $ - 25,000 $ 23,923 27,953 $ 13,173
----------- ----------- ---------- ----------- ---------- -----------
----------- ----------- ---------- ----------- ---------- -----------
<CAPTION>
Common Stock Additional
------------------------------------ Paid-In Accumulated Treasury
Shares Amount Warrant Capital Deficit Stock Total
---------- ---------- ----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 2,953,415 $ 29 $ 7 $ 19,680 $ (19,151) $ (265) $ 300
Stock issued under employee 51,640 1 - 13 - - 14
purchase plan
Net loss - - - - (4,319) - (4,319)
----------- ---------- ---------- ----------- ----------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 3,005,055 30 7 19,693 (23,470) (265) (4,005)
Issuance of Series A preferred stock
and cancellation of common
stock warrant - - (7) - - - 3,368
Acquisition of IHC 1,349,908 1 - 3,644 - - 7,020
Retirement of MHC's treasury stock - - - (265) - 265 -
Reset the par value of InSight common
stock issued in exchange for
MHC's common stock (1,644,723) (28) - 28 - - -
Net loss - - - - (979) - (979)
BALANCE AT JUNE 30, 1996 2,710,240 3 - 23,100 (24,449) - 5,404
Stock options exercised 4,485 - - - - - -
Net income - - - - 1,281 - 1,281
----------- ---------- ---------- ----------- ----------- ---------- ----------
BALANCE AT JUNE 30, 1997 2,714,725 3 - 23,100 (23,168) - 6,685
Stock options and warrants exercised 110,372 - - 315 - - 315
Sale of Series B preferred stock - - - - - - 23,923
Exchange of Series A for Series C
preferred stock - - - - - - (577)
Supplemental service fee termination - - - - - - 7,000
Adjustment for fractional shares
on MHC and IHC exchange (1,007) - - - - - -
Net income - - - - 512 - 512
----------- ---------- ---------- ----------- ----------- ---------- ----------
BALANCE AT JUNE 30, 1998 2,824,090 $ 3 $ - $ 23,415 $ (22,656) $ - $ 37,858
----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ---------- ---------- ----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
30
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Six
Years Ended June 30, Months Ended Year Ended
----------------------------- June 30, December 31,
1998 1997 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 512 $ 1,281 $ (979) $ (4,319)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Total depreciation and amortization 15,749 9,740 4,022 4,060
Amortization of deferred gain on debt restructure (1,384) (1,047) - -
Provision for supplemental service fee termination 6,309 - - -
Gain on disposal of assets - (113) (133) (35)
Provision for securities litigation settlement - - - 1,500
Operating expenses financed by issuance of debt - - 1,015 2,330
Extraordinary gain on debt extinguishment - - (3,179) -
Cash provided by (used in) changes in
operating assets and liabilities:
Receivables (5,853) (1,518) (174) (524)
Other current assets (316) 160 (851) (110)
Accounts payable and other current liabilities 2,405 (1,138) 975 (1,089)
------------- ------------- ------------- -------------
Net cash provided by operating activities 17,422 7,365 696 1,813
------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Cash acquired in acquisitions 4,174 - 5,204 -
Acquisition of Centers and Mobile Facilities (56,720) (18,566) - (1,855)
Acquisition of customer contracts and intangibles - - - (2,108)
Proceeds from sales of assets - 347 369 745
Additions to property and equipment (22,850) (7,102) (960) (548)
Other (1,978) (4,943) 195 190
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities (77,374) (30,264) 4,808 (3,576)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 - - -
Stock options and warrants exercised 315 - - -
Payment of loan financing costs (6,483) - - -
Principal payments of debt and capital lease obligations (150,928) (10,998) (2,302) (6,020)
Proceeds from issuance of debt 231,480 33,728 1,507 2,689
Other 78 474 - 14
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 97,808 23,204 (795) (3,317)
------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 37,856 305 4,709 (5,080)
Cash, beginning of period 6,884 6,579 1,870 6,950
------------- ------------- ------------- -------------
Cash, end of period $ 44,740 $ 6,884 $ 6,579 $ 1,870
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
SUPPLEMENTAL INFORMATION (Note 14)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
31
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER AND RECAPITALIZATION
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 or 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 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 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 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
Common Stock outstanding at the effective time of the Merger (after giving
effect to such conversion).
Under an amended equipment maintenance service agreement, GE was also entitled
to receive for ten years an annual supplemental service fee equal to 14% of the
Company's pretax income, subject to certain adjustments. In connection with the
Company's recapitalization described below, GE surrendered its rights under the
amended equipment agreement to receive the supplemental service fee.
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 year ended December 31, 1995,
respectively, represent the operating results of MHC only.
On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC).
32
<PAGE>
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 of the Company, 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 an exercise price of $10.00 per
share; (b) GE (i) surrendered its rights under the amended equipment service
agreement to receive supplemental service fee payments equal to 14% of pretax
income in exchange for (A) the issuance of 7,000 shares of newly issued
Convertible Preferred Stock, Series C of the Company, par value $0.001 per share
(Series C Preferred Stock) initially convertible, at the option of GE, in the
aggregate into 835,821 shares of Common Stock , for which the Company recorded a
non-recurring expense of approximately $6.3 million, and (B) warrants (GE
Warrants) to purchase up to 250,000 shares of Common Stock at an exercise price
of $10.00 per share and (ii) exchanged all of its Series A Preferred Stock, for
an additional 20,953 shares of Series C Preferred Stock, initially convertible,
at the option of GE, 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 and lender, provided a total of $125 million in
senior secured credit financing (Bank Financing), 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 with increasing
amortization over a seven-year period, 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. Initial funding under the Bank
Financing occurred on October 22, 1997 and, on December 19, 1997, the Bank
Financing was increased to a total of $150 million by converting $10 million of
outstanding debt under the acquisition facility to the seven-year tranche (which
was thereby increased to $40 million) and increasing the acquisition facility to
$65 million.
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 Preferred Stock is
convertible into an aggregate of 6,322,656 shares of Common Stock.
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
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
32% of the Common Stock of the Company, on a fully diluted basis. Assuming the
conversion of all of the Series C Preferred Stock and the exercise of the GE
Warrants, GE would own approximately 36% 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, originally purchased thereby, 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, originally purchased thereby, GE 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. The Board currently consists of eight directors, five of
whom are Common Stock Directors and three of whom are Preferred Stock Directors.
The vacancy created for the Joint Director has not yet been filled.
33
<PAGE>
At any time after October 22, 1998, 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 is convertible into 6,322,660 shares of Common Stock.
Holders of the Preferred Stock also have a right of first offer with respect
to future sales of Common Stock 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.
On June 12, 1998 the Company completed a refinancing of substantially all of the
Company's long-term debt through the issuance of $100 million of 9 5/8% senior
subordinated notes (Notes) due 2008. Concurrent with the issuance of the Notes,
the Company entered into an amendment to and restatement of the Bank Financing,
pursuant to which the Company refinanced and consolidated its prior $20 million
tranche and $40 million tranche into a $50 million term loan facility with a
six-year amortization, (ii) a $25 million revolving working capital facility
with a five-year maturity and (iii) a $75 million acquisition facility with a
six-year maturity (see Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
InSight provides diagnostic imaging, treatment and related management
services in 29 states throughout the United States. InSight's services are
provided through a network of 57 mobile magnetic resonance imaging (MRI)
facilities (Mobile Facilities), 35 fixed-site MRI facilities (Fixed
Facilities), 16 multi-modality imaging centers (Centers), 5 mobile
lithotripsy facilities, one Leksell Stereotactic Gamma Knife treatment
center, and one radiation oncology center. An additional radiation
oncology center is operated by the Company as part of one of its Centers.
The Company's operations are located throughout the United States, with a
substantial presence in California, Texas, New England, the Carolinas and
the Midwest (Illinois, Indiana and Ohio).
At its Centers, InSight offers other services in addition to MRI including
computed tomography (CT), diagnostic and fluoroscopic x-ray, mammography,
diagnostic ultrasound, lithotripsy, nuclear medicine, nuclear cardiology,
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.
b. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of InSight and
its wholly owned subsidiaries, MHC, IHC and Signal Medical Services, Inc.
(Signal). The Company's investment interests in partnerships or limited
liability companies (Partnerships) are accounted for under the equity
method of accounting for ownership of 50 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 investment interests in Partnerships are
consolidated for ownership of 50 percent or greater owned entities when the
Company exercises significant control over the operations and is primarily
responsible for the associated long-term debt (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
34
<PAGE>
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 Fixed Facilities and 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:
<TABLE>
<S> <C>
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
</TABLE>
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):
<TABLE>
<S> <C>
Goodwill 5 to 20 years
Other 5 to 7 years
</TABLE>
h. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", which requires the asset and liability
method of accounting for income taxes.
35
<PAGE>
i. INCOME (LOSS) PER SHARE
The Company had adopted SFAS No. 128, "Earnings per Share (EPS)" (SFAS No.
128) in fiscal year 1998, which replaces primary EPS and fully diluted EPS
with basic EPS and diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed
in the same way as the previously used fully diluted EPS, except that the
calculation now uses the average share price for the reporting period to
compute dilution from options and warrants under the treasury stock method.
Prior period amounts have been restated to conform to the requirements of
SFAS No. 128.
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 June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130
and 131, "Reporting Comprehensive Income" and "Disclosures about Segments
of an Enterprise and Related Information. The Company will be required to
adopt these standards in fiscal 1999. The adoption of these standards will
not have a material impact on the Company.
l. RECLASSIFICATIONS
Reclassifications have been made to certain 1997, 1996 and 1995 amounts to
conform to the 1998 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 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 1997, InSight completed three acquisitions as follows: a Fixed Facility in
Hayward, California; Mobile Facilities in Maine and New Hampshire; and a Center
in Chattanooga, Tennessee. All three transactions included the purchase of
assets and assumption of certain equipment related liabilities. The cumulative
purchase price for these acquisitions was approximately $18.6 million.
In 1998, InSight completed four acquisitions as follows: a Center in Columbus,
Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in Redwood City,
California; and a Center in Las Vegas, Nevada. In connection with the purchase
of the Center in Columbus, Ohio, InSight also acquired a majority ownership
interest in a new Center in Dublin, Ohio. All transactions included the
purchase of assets and assumption of certain equipment related liabilities. The
cumulative purchase price for these acquisitions was approximately $18.4
million.
Additionally, in 1998, InSight acquired all of the capital stock of Signal,
through the merger of Signal into a wholly owned subsidiary of InSight. The
purchase price was approximately $45.7 million. The Signal assets primarily
consisted of Mobile Facilities in the Northeastern and Southeastern United
States.
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 July 1, 1996, are
summarized as follows (amounts in thousands):
36
<PAGE>
<TABLE>
<CAPTION>
Year Ended
---------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues $ 138,425 $ 126,876
Expenses 140,229 127,952
----------- -----------
Net loss $ (1,804) $ (1,076)
----------- -----------
----------- -----------
Basic loss per common and converted
preferred share $ (0.23) $ (0.21)
----------- -----------
</TABLE>
The pro forma results for 1998 and 1997 include $1.2 million and $2.4 million of
amortization of intangibles, respectively, and $2.5 million and $5.2 million of
interest expense, respectively, related to these acquisitions.
5. TRADE RECEIVABLES
Trade receivables are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Trade receivables $ 41,971 $ 25,941
Less: Allowances for doubtful accounts and
contractual adjustments 11,399 7,370
Allowances for professional fees 4,909 3,056
----------- -----------
Net trade receivables $ 25,663 $ 15,515
----------- -----------
----------- -----------
</TABLE>
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, 1998.
The Company reserves a contractually agreed upon percentage at several of its
Centers and Fixed Facilities, 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.
37
<PAGE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Intangible assets $ 79,546 $ 34,542
Less: Accumulated amortization 4,715 1,963
----------- -----------
$ 74,831 $ 32,579
----------- -----------
----------- -----------
Net intangible assets:
Goodwill $ 73,794 $ 32,111
Other 1,037 468
----------- -----------
$ 74,831 $ 32,579
----------- -----------
----------- -----------
</TABLE>
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 $2.8 million, $1.4
million, $1.9 million (including the $1.5 million discussed above), and $0.6
million for the years ended June 30, 1998 and 1997, for the six months ended
June 30, 1996 and for the year ended December 31, 1995, respectively.
38
<PAGE>
7. EQUIPMENT AND OTHER NOTES PAYABLE
Equipment and other notes payable consists of the following (amounts in
thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Unsecured senior subordinated notes payable, bearing interest at 9.625 percent,
interest payable semi-annually, principal due in June 2008. $ 100,000 $ -
Note payable to bank, bearing interest at LIBOR, plus 1.75 percent (7.41 percent at
June 30, 1998), principal and interest payable quarterly, maturing in June
2004. The note is secured by substantially all of the Company's assets. 50,000 -
Notes payable to GE, bearing interest at 8.75 percent, maturing at various dates
through May 2005. The notes are primarily secured by certain
buildings and diagnostic equipment.
1,360 62,329
Notes payable to banks and third parties bearing interest rates which range from
8.13 percent to 11 percent, maturing at various dates through June 2002.
The notes are primarily secured by certain buildings and diagnostic equipment. 1,255 3,993
---------- ----------
Total equipment and other notes payable 152,615 66,322
Less: Current portion 7,978 11,901
---------- ----------
Long-term equipment and other notes payable $ 144,637 $ 54,421
---------- ----------
---------- ----------
</TABLE>
Scheduled maturities of equipment and other notes payable at June 30, 1998,
are as follows (amounts in thousands):
<TABLE>
<S> <C>
1999 $ 7,978
2000 8,085
2001 7,757
2002 7,771
2003 10,227
Thereafter 110,797
----------
$ 152,615
----------
----------
</TABLE>
The Company has a $25 million revolving working capital five-year facility and a
$75 million acquisition six-year facility. Borrowings under both credit
facilities bear interest at LIBOR plus 1.75%. The Company is also required to
pay an unused facility fee of between .375% and .5% on unborrowed amounts under
both facilities. There were no borrowings under either facility at June 30,
1998.
The credit agreement related to Bank Financing and the indenture related to the
Notes contain limitations on additional borrowings, capital expenditures,
dividend payments and certain financial covenants. As of June 30, 1998, the
Company was in compliance with these covenants.
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,
1998 are as follows (amounts in thousands):
39
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
---------- -----------
<S> <C> <C>
1999 $ 2,932 $ 16,236
2000 2,448 11,968
2001 1,884 9,191
2002 1,795 6,672
2003 1,727 4,797
Thereafter 1,110 6,453
-------- ---------
Total minimum lease payments 11,896 $ 55,317
Less: Amounts representing interest 2,251 ---------
-------- ---------
Present value of capital lease obligations 9,645
Less: Current portion 2,162
--------
Long-term capital lease obligations $ 7,483
--------
--------
</TABLE>
As of June 30, 1998, certain 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 $39.3 million and $5.8 million, respectively.
Rental expense for diagnostic equipment and other equipment for the years ended
June 30, 1998 and 1997, for the six months ended June 30, 1996 and for the year
ended December 31, 1995, was $17.0 million, $18.3 million, $7.0 million and
$14.5 million, respectively. These amounts include contingent rental expense of
$0.1 million, $0.3 million, $0.2 million, and $0.5 million for the years ended
June 30, 1998 and 1997, for the six months ended June 30, 1996 and for the year
ended December 31, 1995, respectively.
The Company occupies office facilities under lease agreements expiring through
April 2009. Rental expense for these facilities for the years ended June 30,
1998 and 1997, for the six months ended June 30, 1996 and for the year ended
December 31, 1995, was $2.8 million, $1.9 million, $0.3 million and $0.6
million, respectively.
Under the terms of the amended equipment service agreement with GE, GE was
entitled to receive a supplemental service fee equal to 14% of pretax income.
GE surrendered its right to receive the supplemental service fees in connection
with the Recapitalization (see Note 1). During the years ended June 30, 1998
and 1997 the Company recorded provisions of approximately $0.4 million and $0.3
million, respectively, 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 the Company's business, financial condition and results of
operations.
On May 8, 1998, Medical Synergies, Inc. (MSI) and its subsidiary, The Center for
Diagnostic Medical Services, Inc. (CDMSI), filed a complaint against IHC and
certain of its then current officers, E. Larry Atkins, Thomas V. Croal, Glenn P.
Cato, Robert N. LaDouceur and Michael A. Boylan, in the District Court of Dallas
County, Texas. Plaintiffs allege that they had a final and binding agreement
with IHC with respect to the acquisition by IHC of certain assets, and
assumption by IHC of certain liabilities, of MSI and CDMSI. Plaintiffs'
complaint includes claims of anticipatory repudiation of an alleged agreement,
fraud, negligent misrepresentation, tortious interference with contract,
tortious interference with prospective business relations and attorneys' fees
based on breach or repudiation of the alleged agreement. The complaint
requested a judgment for actual, compensatory and consequential damages in an
unspecified amount, punitive and exemplary damages in an unspecified amount,
pre-judgment and post-judgment interest, attorneys' fees, expenses, costs and
disbursements. The Company, IHC and the other defendants have answered the
complaint and the case has been removed to the U.S. Bankruptcy Court for the
Northern District of Texas, Dallas Division, since MSI and CDMSI filed, after
the filing of the complaint against the defendants, for protection under Chapter
11 of the federal bankruptcy law. The Company, IHC and the other defendants
believe that plaintiffs' claims are without merit and intend to vigorously
defend the lawsuit.
9. CAPITAL STOCK
WARRANTS: During 1998, as part of the Recapitalization (see Note 1), InSight
issued to each of Carlyle and GE warrants to purchase 250,000 shares of its
common stock at an exercise price of $10.00 per
40
<PAGE>
share. InSight also issued to Carlyle and GE warrants to purchase 30,000 and
15,000 shares at exercise prices of $7.25 and $10.00 per share, respectively,
for each of Carlyle's and GE's representation on the Company's Board of
Directors. InSight also issued warrants to purchase 60,000 shares of its common
stock at an exercise price of $4.56 per share to certain directors of the
Company. 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, of which 7,183 are outstanding as of June 30, 1998.
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. All warrants have been
issued with an exercise price of at least the fair market value of its common
stock on the issuance date.
Of the 662,183 warrants outstanding at June 30, 1998, the characteristics for
these range as follows:
<TABLE>
<CAPTION>
Exercise Price Weighted Average Warrants Total Warrants Remaining Contractual
Range Exercise Price Exercisable Outstanding Life
----------------- ------------------ ------------ --------------- ----------------------
<S> <C> <C> <C> <C>
$4.56 - $5.64 $5.03 65,933 117,183 5.98 years
$7.25 - $10.00 $9.85 509,583 545,000 7.35 years
--------- ----------
575,516 662,183
--------- ----------
--------- ----------
</TABLE>
STOCK OPTIONS: The Company has four stock option plans, which provide for
the granting of incentive and nonstatutory stock options to key employees 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 seven 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 and non-employee
directors. 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.
As of June 30, 1998, the Company has 396,933 shares available for issuance
under its plans. A summary of the status of the Company's stock option plans
at June 30, 1998, 1997 and 1996 and changes during the periods then ended is
presented below:
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1996
------------------------------ --------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------ --------------- --------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 573,433 $ 3.98 369,918 $ 3.15 204,068 $ 3.04
Granted 975,000 8.59 233,000 6.19 195,850 3.23
Exercised 47,555 0.48 4,485 2.50 30,000 0.25
Forfeited 17,500 4.67 - - - -
Expired - - 25,000 13.85 - -
---------- ------------ ------- ------------ -------- ------------
Outstanding at end of period 1,483,378 $ 7.15 573,433 $ 3.98 369,918 $ 3.15
---------- ------------ ------- ------------ -------- ------------
---------- ------------ ------- ------------ -------- ------------
Exercisable at end of period 336,805 $ 3.65 296,416 $ 2.12 263,378 $ 4.25
---------- ------------ ------- ------------ -------- ------------
---------- ------------ ------- ------------ -------- ------------
Weighted average fair value of
options granted $ 6.39 $ 5.04 $ 2.61
</TABLE>
41
<PAGE>
Of the 1,483,378 options outstanding at June 30, 1998, the characteristics for
these range as follows:
<TABLE>
<CAPTION>
Exercise Price Weighted Average Options Total Options Remaining Contractual
Range Exercise Price Exercisable Outstanding Life
----------------- ------------------ ------------ --------------- ----------------------
<S> <C> <C> <C> <C>
$0.10 - $1.25 $0.64 182,390 182,390 6.06 years
$2.50 - $7.00 $5.22 122,783 523,800 8.04 years
$8.37 - $12.57 $9.78 6,944 752,500 9.54 years
$15.64 - $16.20 $15.78 24,688 24,688 3.68 years
--------- ----------
336,805 1,483,378
--------- ----------
--------- ----------
</TABLE>
The Company accounts for these plans and warrants issued to non-employee
directors under APB Opinion No. 25, under which no compensation cost has been
recognized. SFAS No. 123, "Accounting for Stock Based Compensation" (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 these plans and warrants issued to non-employee directors
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1998 1997
------------ --------------
<S> <S> <C> <C>
Net income (loss): As Reported $ 512,000 $ 1,281,000
Pro Forma (506,000) 966,000
Diluted EPS: As Reported 0.06 0.24
Pro Forma (0.06) 0.18
</TABLE>
The fair value of each option grant and warrants issued to non-employee
directors is estimated on the date of grant using the Black-Scholes pricing
model with the following assumptions used for the grants in the fiscal years
ended June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
Assumptions 1998 1997
------------------------- ------------- -------------
<S> <C> <C>
Risk-free interest rate 5.93% 6.75%
Volatility 79.46% 70.00%
Expected dividend yield 0.00% 0.00%
Estimated contractual life 6.51 years 10 years
</TABLE>
10. INCOME TAXES
The provision for income taxes for the years ended June 30, 1998 and 1997 was
computed using effective tax rates calculated as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Federal statutory tax rate 34.0% 34.0%
State income taxes, net of
federal benefit 1.2 1.2
Permanent items, including goodwill,
non-deductible merger costs 79.4 41.8
Utilization of deferred tax assets (68.9) (52.0)
--------- ---------
Net effective tax rate 45.7% 25.0%
--------- ---------
</TABLE>
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 six
months ended June 30, 1996 consisted of state income taxes. The provision for
income taxes for the years ended June 30, 1998 and 1997 consisted of the
following (amounts in thousands):
42
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1998 1997
--------- ----------
<S> <C> <C>
Current provision:
Federal $ 1,044 $ 1,268
State 36 47
-------- --------
1,080 1,315
-------- --------
Deferred taxes arising from temporary differences:
State income taxes (23) (31)
Accrued expenses 448 (629)
Deferred gain on debt restructure (519) (368)
Reserves 182 31
Depreciation and amortization (802) (216)
Other 65 325
-------- --------
(649) (888)
-------- --------
Total provision $ 431 $ 427
-------- --------
-------- --------
</TABLE>
The components of the Company's deferred tax asset as of June 30, 1998 and 1997,
respectively, which arise due to timing differences between financial and tax
reporting and net operating loss (NOL) carryforwards are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------
1998 1997
--------- ----------
<S> <C> <C>
Reserves $ 1,896 $ 1,714
Accrued expenses
(not currently deductible) 1,052 604
Deferred gain on debt restructure - 519
Depreciation and amortization (941) (139)
Other 54 550
NOL carryforwards 16,152 15,748
Valuation allowances (18,213) (18,996)
-------- --------
$ - $ -
-------- --------
-------- --------
</TABLE>
As of June 30, 1998, the Company had NOL carryforwards of approximately $45.9
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
approximately $0.4 million and $0.3 million were made for the years ended June
30, 1998 and 1997, respectively.
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
and $100,000 were made during the six months ended June 30, 1996 and the year
ended December 31, 1995, respectively.
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.
43
<PAGE>
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The Company has direct ownership in three Partnerships at June 30, 1998, all of
which operate Centers. In June 1996, MHC closed one of the Centers and is in
the process of formally dissolving the Partnership. The Company owns between 35
percent and 50 percent 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):
<TABLE>
<CAPTION>
June 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Combined Financial Position:
Current assets:
Cash $ 1,035 $ 695
Trade receivables, less allowances 1,539 859
Other 37 25
Property and equipment, net 667 570
Intangible assets, net 638 693
---------- ----------
Total assets 3,916 2,842
Current liabilities (510) (186)
Due (to) from the Company (142) 32
Long-term liabilities (35) (40)
---------- ----------
Net assets $ 3,229 $ 2,648
---------- ----------
---------- ----------
</TABLE>
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
Years Ended June 30, Months Ended Year Ended
------------------------- June 30, December 31,
1998 1997 1996 1995
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Operating Results:
Net revenues $ 5,723 $ 5,143 $ 2,346 $ 4,455
Expenses 4,058 3,793 2,002 3,636
-------- -------- -------- ---------
Net income $ 1,665 $ 1,350 $ 344 $ 819
-------- -------- -------- ---------
-------- -------- -------- ---------
Equity in earnings of Partnerships $ 707 $ 566 $ 138 $ 348
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
44
<PAGE>
The Company has direct ownership in two Partnerships, both of which operate
Centers. The Company transferred ownership of one Center in 1998 to its hospital
partner and is in process of dissolving the Partnership. The Company owns 50
percent of each of the Partnerships. 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 financial statements. Set forth
below is the summarized combined financial data of the Company's 50 percent
controlled entities, which are consolidated (amounts in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Condensed Combined Balance Sheet Data:
Current assets $ 1,825 $ 2,129
Total assets 1,896 2,700
Current liabilities 644 682
Long-term debt - 424
Minority interest equity 642 696
<CAPTION>
Years Ended June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Condensed Combined Statement
of Operations Data:
Net revenues $ 5,875 $ 6,316
Expenses 4,147 4,642
Provision for center profit distribution 864 837
---------- ----------
Net income $ 864 $ 837
---------- ----------
---------- ----------
</TABLE>
13. INCOME (LOSS) PER SHARE
The Company has adopted SFAS No. 128, which replaces primary EPS and fully
diluted EPS with basic EPS and diluted EPS. The number of shares used in
computing EPS is equal to the weighted average number of common and converted
preferred shares outstanding during the respective period. Since the Preferred
Stock has no stated dividend rate and participates in any dividends paid with
respect to the Common Stock, the as-if-converted amounts are included in the
computation of basic EPS. Dilution relating to options and warrants are not
included for the six months ended June 30, 1996 and the year ended December 31,
1995, due to their antidilutive effect. There were no adjustments to net income
(loss) (the numerator) for purposes of computing EPS.
A reconciliation of basic and diluted share computations is as follows:
<TABLE>
<CAPTION>
Years Ended June 30, Six Year Ended
-------------------------- Months Ended December 31,
1998 1997 June 30, 1996 1995
----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Average common stock outstanding 2,751,212 2,712,771 1,389,271 1,344,832
Effect of preferred stock 5,213,026 2,501,760 - -
---------- ---------- ---------- ----------
Denominator for basic EPS 7,964,238 5,214,531 1,389,271 1,344,832
Dilutive effect of stock options and warrants 307,060 225,784 - -
---------- ---------- ---------- ----------
8,271,298 5,440,315 1,389,271 1,344,832
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
14. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (amounts in thousands):
45
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30, Six Year Ended
----------------------- Months Ended December 31,
1998 1997 June 30, 1996 1995
---------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Interest paid $ 7,048 $ 5,114 $ 1,011 $ 1,411
Equipment additions under capital leases 4,979 1,779 238 8,117
Prepaid insurance premiums financed - - 208 555
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>
15. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the senior subordinated Notes (Note 7)
are guaranteed by certain of the Company's wholly owned subsidiaries (the
Guarantor Subsidiaries). Such guarantees are full, unconditional and joint and
several. Separate financial statements of the Guarantor Subsidiaries are not
presented because the Company's management has determined that they would not be
material to investors. The following supplemental financial information sets
forth, on an unconsolidated basis, balance sheets, statement of operations, and
statement of cash flows information for the Company (Parent Company Only), for
the Guarantor Subsidiaries and for the Company's other subsidiaries (the
Non-Guarantor Subsidiaries). The supplemental financial information reflects
the investments of the Company and the Guarantor Subsidiaries in the Guarantor
and Non-Guarantor Subsidiaries using the equity method of accounting. The
supplemental financial information is presented for the periods as of June 30,
1998 and 1997, and for the years ended June 30, 1998 and 1997 only, as the
Non-Guarantor Subsidiaries are not included in the consolidated financial
statements prior to that date.
46
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 43,250 $ 1,490 $ - $ 44,740
Trade accounts receivable, net - 22,909 2,754 - 25,663
Other current assets - 2,751 299 - 3,050
Intercompany accounts receivable 211,995 4,903 - (216,898) -
------------ ------------ ------------ ------------ ------------
Total current assets 211,995 73,813 4,543 (216,898) 73,453
Property and equipment, net - 68,363 3,451 - 71,814
Investments in partnerships - 1,523 - - 1,523
Investments in consolidated subsidiaries (24,137) 1,482 - 22,655 -
Other assets - 6,639 - - 6,639
Intangible assets, net - 74,711 120 - 74,831
------------ ------------ ------------ ------------ ------------
$ 187,858 $ 226,531 $ 8,114 $ (194,243) $ 228,260
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ 7,500 $ 2,497 $ 143 $ - $ 10,140
Accounts payable and other accrued expenses - 25,741 669 - 26,410
Intercompany accounts payable - 211,995 4,903 (216,898) -
------------ ------------ ------------ ------------ ------------
Total current liabilities 7,500 240,233 5,715 (216,898) 36,550
Equipment, capital leases and other notes,
less current portion 142,500 9,451 169 - 152,120
Other long-term liabilities - 984 - - 984
Minority interest - - 748 - 748
Stockholders' equity (deficit) 37,858 (24,137) 1,482 22,655 37,858
------------ ------------ ------------ ------------ ------------
$ 187,858 $ 226,531 $ 8,114 $ (194,243) $ 228,260
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
47
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 5,845 $ 1,039 $ - $ 6,884
Trade accounts receivable, net 12,888 2,627 - 15,515
Other current assets - 1,554 272 - 1,826
Intercompany accounts receivable 29,316 1,245 428 (30,989) -
------------- ------------- ------------- ------------- -------------
Total current assets 29,316 21,532 4,366 (30,989) 24,225
Property and equipment, net - 32,435 1,625 - 34,060
Investments in partnerships - 939 - - 939
Investments in consolidated subsidiaries (22,631) 2,138 - 20,493 -
Other assets - 5,468 - - 5,468
Intangible assets, net - 32,527 52 - 32,579
------------- ------------- ------------- ------------- -------------
$ 6,685 $ 95,039 $ 6,043 $ (10,496) $ 97,271
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases
and other notes $ - $ 15,149 $ 313 $ - $ 15,462
Accounts payable and other accrued expenses - 14,322 603 - 14,925
Intercompany accounts payable - 29,823 1,166 (30,989) -
------------- ------------- ------------- ------------- -------------
Total current liabilities - 59,294 2,082 (30,989) 30,387
Equipment, capital leases and other notes,
less current portion - 56,904 829 - 57,733
Other long-term liabilities - 1,472 - - 1,472
Minority interest - - 994 - 994
Stockholders' equity (deficit) 6,685 (22,631) 2,138 20,493 6,685
------------- ------------- ------------- ------------- -------------
$ 6,685 $ 95,039 $ 6,043 $ (10,496) $ 97,271
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
48
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ - $ 104,707 $ 14,311 $ - $ 119,018
Costs of operations - 84,021 12,692 - 96,713
------------- ------------- ------------- ------------- -------------
Gross profit - 20,686 1,619 - 22,305
Provision for supplemental service
fee termination - 6,309 - - 6,309
Corporate operating expenses - 8,933 - - 8,933
------------- ------------- ------------- ------------- -------------
Income from company operations - 5,444 1,619 - 7,063
Equity in earnings of unconsolidated partnerships - 707 - - 707
------------- ------------- ------------- ------------- -------------
Operating income - 6,151 1,619 - 7,770
Interest expense, net - 6,442 385 - 6,827
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes - (291) 1,234 - 943
Provision for income taxes - 431 - - 431
------------- ------------- ------------- ------------- -------------
Income (loss) before equity in income (loss) of
consolidated subsidiaries - (722) 1,234 - 512
Equity in income (loss) of consolidated subsidiaries 512 1,234 - (1,746) -
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 512 $ 512 $ 1,234 $ (1,746) $ 512
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
49
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ - $ 78,294 $ 13,979 $ - $ 92,273
Costs of operations - 67,505 12,129 - 79,634
------------- ------------- ------------- ------------- -------------
Gross profit - 10,789 1,850 - 12,639
Corporate operating expenses - 7,431 - - 7,431
------------- ------------- ------------- ------------- -------------
Income from company operations - 3,358 1,850 - 5,208
Equity in earnings of unconsolidated partnerships - 566 - - 566
------------- ------------- ------------- ------------- -------------
Operating income - 3,924 1,850 - 5,774
Interest expense, net - 3,946 120 - 4,066
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes - (22) 1,730 - 1,708
Provision for income taxes - 427 - - 427
------------- ------------- ------------- ------------- -------------
Income (loss) before equity in income (loss) of
consolidated subsidiaries - (449) 1,730 - 1,281
Equity in income (loss) of consolidated subsidiaries 1,281 1,730 - (3,011) -
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 1,281 $ 1,281 $ 1,730 $ (3,011) $ 1,281
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
50
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 512 $ 512 $ 1,234 $ (1,746) $ 512
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Total depreciation and amortization - 14,686 1,063 - 15,749
Amortization of deferred gain on debt restructure - (1,384) - - (1,384)
Provision for supplemental service fee termination - 6,309 - - 6,309
Equity in income (loss) of consolidated subsidiaries (512) (1,234) - 1,746 -
Cash provided by (used in) changes in operating assets
and liabilities:
Receivables - (5,726) (127) - (5,853)
Intercompany receivables, net (173,661) 171,307 2,354 - -
Other current assets - (289) (27) - (316)
Accounts payable and other current liabilities - 2,664 (259) - 2,405
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities (173,661) 186,845 4,238 - 17,422
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Cash acquired in acquisitions - 4,174 - - 4,174
Additions to property and equipment - (20,054) (2,796) - (22,850)
Acquisitions of Centers and Mobile Facilities - (56,720) - - (56,720)
Other - (1,817) (161) - (1,978)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities - (74,417) (2,957) - (77,374)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 - - - 23,346
Stock options and warrants exercised 315 - - - 315
Payments of loan financing costs - (6,483) - - (6,483)
Principal payments of debt and capital lease
obligations (70,900) (79,198) (830) - (150,928)
Proceeds from issuance of debt 220,900 10,580 - - 231,480
Other - 78 - - 78
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities 173,661 (75,023) (830) - 97,808
------------- ------------- ------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS - 37,405 451 - 37,856
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 5,845 1,039 - 6,884
------------- ------------- ------------- ------------- -------------
Cash, end of period $ - $ 43,250 $ 1,490 $ - $ 44,740
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
51
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 1,281 $ 1,281 $ 1,730 $ (3,011) $ 1,281
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Total depreciation and amortization - 9,511 229 - 9,740
Amortization of deferred gain on debt restructure - (1,047) - - (1,047)
Gain on disposal of assets - (113) - - (113)
Equity in income (loss) of consolidated subsidiaries (1,281) (1,730) - 3,011 -
Cash provided by (used in) changes in operating assets
and liabilities:
Receivables - (1,304) (214) - (1,518)
Intercompany receivables, net - 890 (890) - -
Other current assets - 141 19 - 160
Accounts payable and other current liabilities - (1,117) (21) - (1,138)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating activities - 6,512 853 - 7,365
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Additions to property and equipment - (6,693) (409) - (7,102)
Acquisitions of Centers and Mobile Facilities - (18,566) - - (18,566)
Proceeds from sale of assets - 347 - - 347
Other - (4,943) - - (4,943)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities - (29,855) (409) - (30,264)
------------- ------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease
obligations - (10,913) (85) - (10,998)
Proceeds from issuance of debt - 33,728 - - 33,728
Other - 819 (345) - 474
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities - 23,634 (430) - 23,204
------------- ------------- ------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS - 291 14 - 305
CASH AND CASH EQUIVALENTS:
Cash, beginning of period - 5,554 1,025 - 6,579
------------- ------------- ------------- ------------- -------------
Cash, end of period $ - $ 5,845 $ 1,039 $ - $ 6,884
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
52
<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 SEC 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 SEC 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 SEC 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 SEC 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
Independent Auditors' Report
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.
53
<PAGE>
ITEM 14 (a) (3). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION AND REFERENCES
- -------------- --------------------------
<S> <C>
*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.
*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.
*2.5 Agreement and Plan of Merger dated as of April 15, 1998, by
and among InSight, SMSI Acquisition Company, Signal Medical
Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W.
Crucitti and Todd Stowell, previously filed and incorporated
herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, filed
May 13, 1998.
*2.6 First Amendment to Agreement and Plan of Merger dated as of
May 15, 1998, by and among InSight, SMSI Acquisition Company,
Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P.
Stone, Thomas W. Crucitti and Todd Stowell, previously filed
and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
*2.7 Second Amendment to Agreement and Plan of Merger dated as of
May 18, 1998 by and among InSight, SMSI Acquisition Company,
Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P.
Stone, Thomas W. Crucitti and Todd Stowell, previously filed
and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
*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, previously
filed and incorporated herein by reference from the Company's
Annual Report on Form 10-K, filed October 14, 1997.
*3.3 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series C, of InSight, previously
filed and incorporated herein by reference from the Company's
Annual Report on Form 10-K, filed October 14, 1997.
*3.4 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series D, of InSight, previously
filed and incorporated herein by reference from the Company's
Annual Report on Form 10-K, filed October 14, 1997.
54
<PAGE>
*3.5 Amended and Restated Bylaws of InSight, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*4.1 Indenture dated as of June 1, 1998, by and among the Company,
the Subsidiary Guarantors (as defined therein) and State
Street Bank and Trust Company, N.A. as Trustee (includes forms
of the Outstanding Notes and Exchange Notes (as defined
therein)), previously filed and incorporated herein by
reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-60573), filed August 4, 1998.
*4.2 Purchase Agreement, dated as of June 9, 1998, by and among the
Company, the Subsidiary Guarantors (as defined therein) and
the Initial Purchasers (as defined therein), previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
*4.3 Registration Rights Agreement, dated as of June 12, 1998, by
and among the Company, the Subsidiary Guarantors (as defined
therein) and the Initial Purchasers (as defined therein),
previously filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
*10.1 Credit Agreement dated as of October 14, 1997, as amended
November 17, 1997, December 19, 1997, March 23, 1998 and
amended and restated as of June 12, 1998, among the Company,
the Subsidiary Guarantors (as defined therein), NationsBank,
N.A. as Agent and the Lenders (as defined therein), previously
filed and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
*10.2 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.
*10.3 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.
*10.4 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.
*10.5 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.
*10.6 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.
*10.7 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.
55
<PAGE>
*10.9 AHS 1987 Stock Option Plan, previously filed and incorporated
herein by reference from Post-Effective Amendment No. 4 on
Form S-1 to AHS's Registration Statement (Registration
No. 33-00088), filed September 5, 1985.
*10.10 AHS 1989 Stock Incentive Plan, previously filed and
incorporated herein by reference from AHS's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, filed
April 15, 1991.
*10.11 AHS 1992 Option and Incentive Plan, previously filed and
incorporated herein by reference from AHS's Registration
Statement on Form S-8 (Registration No. 33-51532), filed
September 1, 1992.
*10.12 MHC 1989 Stock Option Plan, Amended and Restated as of October
28, 1993, previously filed and incorporated herein by
reference from MHC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
*10.13 InSight's 1998 Employee Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333 60573), filed August 4, 1998.
10.14 Form of Stock Option Agreement between InSight and former
officers of Signal Medical Services, Inc. relative to
InSight's 1998 Employee Stock Option Plan, filed herewith.
*10.15 InSight's 1997 Management Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
10.16 Form of Stock Option Agreement between InSight and certain
senior officers of InSight relative to InSight's 1997
Management Stock Option Plan, filed herewith.
*10.17 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.
*10.18 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.
*10.19 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.
*10.20 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.
*10.21 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.
*10.22 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.
56
<PAGE>
*10.23 Warrant Certificate No. S-1 dated August 14, 1996 in the name
of Shattuck Hammond Partners, Inc., previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*10.24 Warrant Certificate No. L-1 dated March 11, 1997 in the name
of Anthony J. LeVecchio, previously filed and incorporated
herein by reference from the Company's Annual Report on Form
10-K, filed October 14, 1997.
*10.25 Form of Stock Option Agreement between InSight and
non-employee directors of InSight relative to InSight's 1996
Directors' Stock Option Plan, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*10.26 Form of Stock Option Agreement between InSight and employees
of InSight relating to InSight's 1996 Employee Stock Option
Plan, previously filed and incorporated herein by reference
from the Company's Annual Report on Form 10-K, filed October
14, 1997.
10.27 Executive Employment Agreement between InSight and Brian P.
Stone dated as of May 18, 1998, filed herewith.
10.28 Form of Warrant Certificate relative to the grants of warrants
to InSight's non-employee directors, filed herewith.
10.29 Form of Warrant Certificate relative to the grants of warrants
to Carlyle and GE in lieu of director stock options, filed
herewith.
21 Subsidiaries of InSight, filed herewith.
</TABLE>
* Previously filed.
ITEM 14(b). REPORTS ON FORM 8-K. The Company filed a Current Report on Form
8-K with the SEC on June 2, 1998, under Item 2 thereof, reporting
the acquisition of Signal Medical Services, Inc. and a Current
Report on Form 8-K with the SEC on May 14, 1998, under Item 5
thereof, reporting the issuance of $100 million of the Company's
senior subordinated notes.
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.
57
<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: September 28, 1998
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>
Director, President and September 28, 1998
/s/ E. Larry Atkins Chief Executive Officer
- -------------------------- (Principal Executive Officer)
E. Larry Atkins
Senior Executive Vice President, September 28, 1998
/s/ Thomas V. Croal Chief Operating Officer
- -------------------------- and Chief Financial Officer
Thomas V. Croal (Principal Accounting Officer)
Director September 28, 1998
/s/ Michael E. Aspinwall
- --------------------------
Michael E. Aspinwall
Director September 28, 1998
/s/ Grant R. Chamberlain
- --------------------------
Grant R. Chamberlain
Director September 28, 1998
/s/ David W. Dupree
- --------------------------
David W. Dupree
Director September 28, 1998
/s/ Frank E. Egger
- --------------------------
Frank E. Egger
Director September 28, 1998
/s/ Leonard H. Habas
- --------------------------
Leonard H. Habas
Director September 28, 1998
/s/ Ronald G. Pantello
- --------------------------
Ronald G. Pantello
Director September 28, 1998
/s/ Glenn A. Youngkin
- --------------------------
Glenn A. Youngkin
</TABLE>
58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements for INSIGHT HEALTH SERVICES CORP. included in this Form
10-K and have issued our report thereon dated September 25, 1998. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index to consolidated financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
September 25, 1998
59
<PAGE>
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1995
(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, 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 $ (78) (A)(B) $ 2,274
Allowance for contractual adjustments 1,548 3,440 429 (A)(B) 5,417
---------- ---------- ---------- ----------
Total $ 3,283 $ 4,057 $ 351 $ 7,691
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
June 30, 1997:
Allowance for doubtful accounts $ 2,274 $ 1,483 $ (1,435) (A) $ 2,322
Allowance for contractual adjustments 5,417 17,483 (17,852) (A) 5,048
---------- ---------- ---------- ----------
Total $ 7,691 $ 18,966 $ (19,287) $ 7,370
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
June 30, 1998:
Allowance for doubtful accounts $ 2,322 $ 1,871 $ (711) $ 3,482
Allowance for contractual adjustments 5,048 29,447 (26,578) 7,917
---------- ---------- ---------- ----------
Total $ 7,370 $ 31,318 $ (27,289) $ 11,399
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(A) Write offs of uncollectible accounts.
(B) In connection with the Merger, MHC acquired the valuation and qualifying
accounts related to IHC.
60
<PAGE>
10.14
INSIGHT HEALTH SERVICES CORP.
1998 EMPLOYEE STOCK OPTION PLAN
STOCK OPTION AGREEMENT
AGREEMENT is dated as of __________, ("Grant Date") between INSIGHT
HEALTH SERVICES CORP., a Delaware corporation ("Corporation") and __________
("Optionee").
The Board of Directors of the Corporation ("Board") has adopted the 1998
Employee Stock Option Plan ("Plan") of the Corporation for the purpose of
advancing the interests of the Corporation by providing certain individuals
an inducement essential to enter into executive employment agreements with
the Corporation and 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 individuals to remain in the employ
of the Corporation or any of its subsidiaries.
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 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 stock option
("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 $12.57 per share ("Option Price").
2. OPTION PERIOD. The Option shall be exercisable only during the Option
Period. Subject to Section 4, upon the termination of the Optionee's
employment, the Option shall terminate thirty (30) days after the date of such
termination of employment. In addition, upon the Expiration Date (as defined
below), the 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 __________ Option Shares each month commencing on the Grant Date for a
period of three (3) years and until fully vested, so long as continuously during
such time period the Optionee remains an employee of the Corporation or any of
its subsidiaries; provided however, that such vesting shall be accelerated in
the following circumstances:
(i) if there is a Change of Control pursuant to Section 13 of the
Plan; or
(ii) if the Optionee's employment with the Corporation is
terminated pursuant to either sections 4.01, 4.02, 4.04, 4.05 or 4.06 of the
Executive Employment Agreement (as defined below).
PAGE 1
<PAGE>
If the Optionee's employment terminates prior to the end of such three
(3) year period, other than pursuant to sections 4.01, 4.02, 4.04, 4.05 and
4.06 of the Executive Employment Agreement, 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 employment
with the Corporation is terminated pursuant to sections 4.01 or 4.02 of the
Executive Employment Agreement, 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 the Option, unless
earlier terminated in accordance with its terms. In the event of such
termination, the period for exercising the Option shall be a period of twelve
(12) months commencing with the date of such termination of employment,
provided that in no event shall the Option be exercisable at any time after
the Expiration Date.
5. TIMING AND METHOD OF EXERCISE. In order to exercise the Option
with respect to all or any part of the Option Shares for which the 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 6(a) of the Plan.
A form of exercise notice is attached hereto as Exhibit A.
6. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the successors, administrators,
heirs, devisees, legal representatives and permitted assigns of the Optionee
and the successors and assigns of the Corporation.
7. LIABILITY OF THE CORPORATION. The inability of the Corporation,
despite its best efforts, 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 the 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, but
shall not otherwise relieve the Corporation of its liability hereunder.
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 and warrants that the Optionee is
an accredited investor as defined in Regulation D under the Securities Act of
1933, as amended ("1933 Act") and understands that, in connection with
complying with California law, the Corporation (i) may issue Option Shares to
no more than thirty-five (35) purchasers in connection with an offering of
such Option Shares, excluding accredited investors and certain other persons
as provided under California law, (ii) the Optionee is not included in the
foregoing thirty-five (35) purchaser number and (iii) the Corporation is
granting the Option pursuant to this Agreement in part in reliance on
Optionee's representations made herein.
(b) 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
PAGE 2
<PAGE>
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, all or any
portion thereof), except pursuant to either (i) a Registration Statement on
an appropriate form under the 1933 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
1933 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 1933 Act is required with respect to such offer, sale,
distribution, pledge, grant or other disposition or transfer.
(c) 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 to an
exemption from the registration requirements in the 1933 Act until such time
as the Corporation shall file a Registration Statement under the 1933 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 1933 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 1933 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.
(d) 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.
(e) 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
Section is true as to the Optionee as of the date of such exercise.
(f) The Optionee understands that all certificates representing
shares transferred pursuant to this Agreement, unless made pursuant to an
appropriate Registration Statement under the 1933 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."
(g) If the legal counsel of the Corporation, at the request of
the Corporation, advises it that registration under the 1933 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,
PAGE 3
<PAGE>
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) "Executive Employment Agreement" means that Executive
Employment Agreement between Optionee and the Corporation dated May 18,
1998, as it may be amended from time to time.
(b) "Exercise Date" means the date on which the Corporation
receives written notice of the exercise of the Option together with payment
of the Option Price for the purchased Option Shares.
(c) "Exercise Price" means the Option Price multiplied by the
number of purchased Option Shares.
(d) "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.
(e) "Option Period" means the period commencing on the Grant Date
and, unless earlier terminated in accordance with Section 3 or 4, ending on
the close of business on the Expiration Date.
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:
- --------------------------- ------------------------------------
"Optionee Name" Leonard H. Habas, Co-Chairman of the
Compensation Committee
PAGE 4
<PAGE>
Exhibit 10.16
INSIGHT HEALTH SERVICES CORP.
1997 MANAGEMENT STOCK OPTION PLAN
STOCK OPTION AGREEMENT
AGREEMENT is dated as of November 7, 1997 ("Grant Date") between INSIGHT
HEALTH SERVICES CORP., a Delaware corporation ("Corporation") and
___________________ ("Optionee").
The Board of Directors of the Corporation ("Board") has adopted the 1997
Management Stock Option Plan ("Plan") of the Corporation for the purpose of
advancing the interests of the Corporation by providing certain 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 individuals to remain in the employ of the Corporation or any of
its subsidiaries.
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 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 stock option
("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 $8.375 per share ("Option Price").
2. OPTION PERIOD. The Option shall be exercisable only during the Option
Period. Subject to Section 4, upon the termination of the Optionee's
employment, the Option shall terminate three (3) months after the date of such
termination of employment. In addition, upon the Expiration Date (as defined
below), the Option shall cease to be exercisable and have no further force or
effect whatsoever.
3. VESTING AND EARLY TERMINATION.
(a) The Option shall vest and become exercisable with respect to
fifty percent (50%) of the Option Shares in equal increments on each of the
first three anniversary dates of the Grant Date and until fully vested, so long
as continuously during such time period the Optionee remains an employee of the
Corporation or any of its subsidiaries;
(b) The Option shall vest and become exercisable with respect to the
other fifty percent (50%) of the Option Shares in equal increments on each of
the seventh, eighth and ninth anniversary dates of the Grant Date and until
fully vested, so long as continuously during such time period the Optionee
remains an employee of the Corporation or any of its subsidiaries; provided,
however, that such vesting shall be accelerated in the following circumstances:
PAGE 1
<PAGE>
(i) if, as of any day ("1998 Target Date") from and including
November 7, 1998 to and including December 7, 1998, the Average Stock Price (as
defined below) for all trading days in the preceding thirty (30) days equals or
exceeds $11.25 per share ("1998 Target Price"), the portion of the Option which
otherwise vests on the seventh anniversary of the Grant Date shall instead vest
and become exercisable as of the 1998 Target Date;
(ii) if, as of any day ("1999 Target Date") from and including
November 7, 1999 to and including December 7, 1999, the Average Stock Price for
all trading days in the preceding thirty (30) days equals or exceeds $15.25 per
share ("1999 Target Price"), the portion of the Option which otherwise vests on
the eighth anniversary of the Grant Date, as well as the portion of the Option,
if any, the vesting of which did not accelerate pursuant to clause (i) above,
shall vest and become exercisable as of the 1999 Target Date; and
(iii) if, as of any day ("2000 Target Date") from and including
November 7, 2000 to and including December 7, 2000, the Average Stock Price for
all trading days in the preceding thirty (30) days equals or exceeds $20.00 per
share ("2000 Target Price"), the portion of the Option which otherwise vests on
the ninth anniversary of the Grant Date, as well as the portion of the Option,
if any, the vesting of which did not accelerate pursuant to clauses (i) or (ii)
above, shall vest and become exercisable as of the 2000 Target Date;
(iv) (a) if there is a Change of Control pursuant to Section
13 of the Plan; (b) as required pursuant to Section 12(c) of the Plan; or (c) if
the Optionee's employment with the Corporation or any of its subsidiaries is
terminated other than (1) due to the Optionee's death, (2) for cause (as defined
in the Optionee's Executive Employment Agreement (as defined below)) or (3)
voluntarily other than as a result of a change of control (as defined in the
Optionee's Executive Employment Agreement);
(v) "Average Stock Price" means, for the period in
question, the average of the closing prices of the Corporation's Common Stock
on all domestic securities exchanges on which such Common Stock 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 Common Stock is not
so listed, the average of the representative bid and asked prices quoted on
the Nasdaq Stock Market as of 4:00 PM., New York time, on such day, or, if on
any day such Common Stock is not quoted on the Nasdaq Stock Market, 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. If at any time
such Common Stock is not listed on any domestic securities exchange or quoted
on Nasdaq or the domestic over-the-counter market, the Average Stock Price
shall be the fair market value thereof determined by the Committee.
(vi) The 1998 Target Price, the 1999 Target Price and the 2000
Target Price shall be increased or decreased, as applicable, to account for any
stock split, stock dividend, merger, reorganization, recapitalization or other
business combination effectuated after the Grant Date.
(c) If the Optionee's employment terminates prior to the ninth
anniversary date of the Grant Date (i) due to the Optionee's death, (ii) for
cause (as defined in the Optionee's Executive Employment Agreement (as defined
below)) or (iii) voluntarily other than as a result of a change of control (as
defined in the Optionee's Executive Employment Agreement), and the Option has
not vested with respect to all Option Shares as of such date, 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.
PAGE 2
<PAGE>
4. DEATH OF AN OPTIONEE. If the Optionee's employment with the
Corporation is terminated as a result of the Optionee's death then 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 the Option only with
respect to Option Shares theretofor vested, unless earlier terminated in
accordance with its terms. In the event of such termination, the period for
exercising the Option shall be a period of twelve (12) months commencing with
the date of such termination of employment, provided that in no event shall the
Option be exercisable at any time after the Expiration Date.
5. TIMING AND METHOD OF EXERCISE. In order to exercise the Option with
respect to all or any part of the Option Shares for which the 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 6(a) of the Plan. A form of
exercise notice is attached hereto as Exhibit A.
6. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the successors, administrators, heirs,
devisees, legal representatives and permitted assigns of the Optionee and the
successors and assigns of the Corporation.
7. LIABILITY OF THE CORPORATION. The inability of the Corporation,
despite its best efforts, 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 the 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, but shall not otherwise
relieve the Corporation of its liability hereunder.
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, 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, 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 ("1933 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 1933 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
1933 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 to an exemption
from the registration requirements in the 1933 Act until such time as the
Corporation shall file a Registration Statement under the 1933 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
PAGE 3
<PAGE>
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 1933 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 1933 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
Section 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 1933 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 1933 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) "Executive Employment Agreement" means that Executive Employment
Agreement between the Optionee and the Corporation dated _______________, 199__,
as it may be amended from time to time.
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(b) "Exercise Date" means the date on which the Corporation receives
written notice of the exercise of the Option together with payment of the Option
Price for the purchased Option Shares.
(c) "Exercise Price" means the Option Price multiplied by the number
of purchased Option Shares.
(d) "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.
(e) "Option Period" means the period commencing on the Grant Date
and, unless earlier terminated in accordance with Section 3 or 4, ending on the
close of business on the Expiration Date.
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:
- ------------------------- ----------------------------------
[Optionee Name] Leonard H. Habas, Co-Chairman of the
Compensation Committee
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Exhibit 10.27
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT dated as of May 18, 1998 between INSIGHT HEALTH SERVICES CORP., a
Delaware corporation ("Company"), and BRIAN P. STONE, ("Executive").
Company wishes to employ Executive, and Executive wishes to accept such
employment, in each case subject to the terms and conditions hereof.
Accordingly, Company and Executive hereby agree as follows:
ARTICLE 1
TERM
Executive is to be employed by Company for rolling twelve (12) month
periods, whereby Executive's term of employment is twelve (12) months on a
continuing basis.
ARTICLE II
EMPLOYMENT
SECTION 2.01 EMPLOYMENT BY COMPANY. Company, for itself and its
affiliates, employs Executive for the term of this Agreement to render full time
services in such capacities as the Board of Directors of Company ("Board of
Directors") may assign and, in connection therewith, to perform such duties as
are reasonably consistent with Executive's initial appointment and as Company's
President and CEO and the Board of Directors shall reasonably direct. Executive
shall initially be appointed Senior Vice President-Operations, Eastern Region of
Company. Executive agrees to perform such duties as are reasonably consistent
with the duties normally pertaining to the office to which Executive has been
elected or appointed, subject always to the direction of Company's President and
CEO and the Board of Directors. Subject to Section 5.01 hereof, Executive's
expenditure of reasonable amounts of time for personal business, charitable or
professional activities will not be deemed a breach of Executive's undertaking
to provide full time services hereunder, provided that such activities do not
interfere materially with Executive's rendering of such services.
SECTION 2.02 ACCEPTANCE OF EMPLOYMENT BY EXECUTIVE. Executive accepts such
employment and shall render the services required by this Agreement to be
rendered by Executive. Executive shall also serve on request during all or any
part of the term of this Agreement as an officer of Company and of any of its
subsidiaries or affiliates without any compensation therefor other than as
specified in this Agreement. The parties agree that the April 3, 1995
Employment Agreement between Executive and Signal Medical Services, Inc.
("Signal") is terminated as of the date hereof.
SECTION 2.03 PLACE OF EMPLOYMENT. Executive's principal place of
employment shall be at 74 Batterson Park Road, Farmington, CT 06032. In the
event that the principal place of employment of Executive is relocated to a
site that is more than 50 miles from Executive's principal residence, subject
to Section 4.06(a) hereof, Company may require Executive to relocate
Executive's principal residence to within 50 miles of such site.
Notwithstanding the foregoing, Executive
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acknowledges that the duties to be performed by Executive hereunder are such
that Executive may be required to travel extensively, principally within the
United States, in connection with Company's Business (as defined below).
ARTICLE III
COMPENSATION
SECTION 3.01 SALARY, BONUS, LIFE INSURANCE. As compensation for the
services to be rendered pursuant to this Agreement, Company shall pay Executive,
and Executive shall accept, a salary of $165,000 per annum, subject to
adjustment in accordance with Section 3.02 hereof (as so adjusted, "Annual
Salary"), payable in accordance with the payroll policies of Company for senior
executives as from time to time in effect, less such amounts as may be required
to be withheld by applicable federal, state and local law and regulations.
In addition to the Annual Salary, Executive shall be eligible to receive
the bonus, if any, payable for the period from January 1, 1998 through June 30,
1998 under the Signal Executive Officer Incentive Bonus Plan. Thereafter,
Executive shall be eligible (no less frequently than annually beginning for the
fiscal year ending June 30, 1999) for such bonuses, if any, as the Board of
Directors may, from time to time, in its sole discretion award and pay under
Company's discretionary bonus program for senior executives, but only after
Company's annual report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC") each year.
Company shall purchase and maintain in full force and effect at all times
during the term of this Agreement a policy of term insurance on the life of
Executive payable to such beneficiary or beneficiaries as Executive may
designate in an amount equal to three (3) times the amount of the Annual Salary;
provided Executive shall comply with the issuing insurance company's
requirements for issuance of the policy.
SECTION 3.02 ANNUAL REVIEW. Commencing with the first renewal period, if
any, of the term of this Agreement and annually thereafter during the term of
this Agreement, the Annual Salary shall be reviewed by Company's President and
CEO and/or the Board of Directors and may be adjusted (but in no event to an
amount less than the Annual Salary then in effect) for the then upcoming year,
if the President and CEO and/or Board of Directors, in his/its sole discretion,
determines that such adjustment is warranted.
SECTION 3.03 PARTICIPATION IN EMPLOYEE BENEFIT PLANS. Executive shall be
entitled during the term of this Agreement, if and to the extent eligible, to
participate in any life insurance, medical, health and accident and disability
plan or program, pension plan or similar benefit plan of Company, which may be
available to senior executives of Company generally, on the same terms as such
other executives.
SECTION 3.04 EXPENSES. Subject to such policies as may from time to time
be established by Company for senior executives of Company generally, Company
shall pay or reimburse Executive for all reasonable business expenses actually
incurred or paid by Executive during the term of this Agreement in the
performance by Executive of services under this Agreement, upon presentation of
expense statements or vouchers or such other supporting information as Company
may reasonably require.
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SECTION 3.05 AUTOMOBILE ALLOWANCE. Company shall pay Executive $500 per
month and reimburse Executive for all reasonable expenses of operating and
maintaining (including reasonable repairs) an automobile.
SECTION 3.06 VACATION. Executive shall be entitled to four (4) weeks of
paid vacation each year during the term of this Agreement, which Executive may
accumulate up to eight (8) weeks, to be taken at a time or times which do not
unreasonably interfere with Executive's duties hereunder.
SECTION 3.07 NONDISCRETIONARY STAY BONUS. Company shall pay to Executive
a nondiscretionary stay bonus ("Stay Bonus") of $ 408,300, payable as follows:
(i) $102,075 on May 18, 1998;
(ii) $102,075 on May 18, 1999;
(iii) $102,075 on May 18, 2000;
(iv) $102,075 on May 18, 2001.
If Executive's employment with Company is terminated for any reason prior
to May 15, 2001, except by Company for Cause pursuant to Section 4.03 below,
Executive shall be paid on the effective date of termination any unpaid Stay
Bonus. In the event Executive is terminated for Cause prior to May 15, 2001,
Executive shall forfeit any unpaid Stay Bonus. The Stay Bonus will not effect
Executive's eligibility to participate in Company's discretionary bonus program
for senior executives for the fiscal year ending June 30, 1999 and thereafter.
SECTION 3.08 STOCK OPTIONS. As an inducement essential to Executive's
entering into this Agreement, the Compensation Committee of the Board of
Directors has awarded Executive an option to purchase 107,160 shares of
Company's common stock pursuant to the 1998 Employee Stock Option Plan at the
Exercise Price (as defined below) and in accordance with the terms of a Stock
Option Agreement executed on the date of this Agreement. For the purposes of
this Agreement, Exercise Price means an Exercise Price equal to the lower of
(i) $12.57 per share, or (ii) the average closing price of Company's common
stock for the 30 trading days immediately prior to the Closing (as defined in
the Agreement and Plan of Merger among Company, SMSI Acquisition Company,
Signal and its stockholders dated April 15, 1998).
ARTICLE IV
TERMINATION
SECTION 4.01 TERMINATION UPON DEATH. If Executive dies during the term of
this Agreement, this Agreement shall terminate as of the date of Executive's
death.
SECTION 4.02 TERMINATION UPON DISABILITY. Executive's employment may be
terminated by Company due to Executive's permanent and total disability (within
the meaning of section 22(e)(3) of the Internal Revenue Code of 1986, as
amended) ("Disability"), so that Executive is unable substantially to perform
Executive's services required by this Agreement to be rendered by Executive for
(i) a period of three (3) consecutive months or (ii) for shorter periods
aggregating three (3) months during any twelve (12) month period. Company may,
at any time after the last day of the three (3) consecutive months of Disability
or the day on which the shorter periods of Disability equal an aggregate of
three (3) months, by 30 days' written notice to Executive, terminate this
Agreement and Executive's employment hereunder. Any such determination of
Disability shall
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be made by a physician chosen by a majority of the members of the Board of
Directors in its sole and unfettered discretion. Nothing in this Section
4.02 shall be deemed to extend the term of this Agreement or of Executive's
employment hereunder, beyond the term specified in Article I hereof.
SECTION 4.03 TERMINATION FOR CAUSE. If the Board of Directors decides
that Cause (as defined below) exists, it may remove Executive for Cause and
terminate this Agreement and the term of Executive's employment hereunder on
the date specified in written notice to Executive. If terminated for Cause,
Executive shall have no right to receive any monetary compensation or benefit
hereunder with respect to any period after the date specified in such notice.
Such notice may also terminate Executive's right to enter Company's premises.
For purposes of this Agreement, the term "Cause" means any of the following:
(a) Executive has been convicted or pled guilty or no contest to any
crime or offense (other than any crime or offense relating to the operation of a
motor vehicle) which is likely to have a material adverse impact on the business
operations or financial or other condition of Company, or any felony offense for
any crime of moral turpitude;
(b) Executive has committed fraud or embezzlement;
(c) Executive has intentionally breached any of Executive's obligations
under this Agreement which is likely to have a material adverse impact on the
business operations or financial or other condition of Company and Executive has
failed to cure the breach within ten (10) business days following receipt of
written notice of such breach from Company;
(d) Company, after reasonable investigation, finds that Executive has
intentionally violated material written policies and procedures of Company,
including but not necessarily limited to, policies and procedures pertaining to
harassment and discrimination;
(e) Executive has failed to obey a specific written direction from the
Board of Directors or President and CEO (unless such specific written
instruction represents an illegal act), provided that (i) such failure
continues for a period of ten (10) business days after receipt of such specific
written direction, and (ii) such specific written direction includes a statement
that the failure to comply therewith will be a basis for termination hereunder.
SECTION 4.04 TERMINATION IN DISCRETION OF COMPANY. If the Board of
Directors determines in the reasonable exercise of its discretion that, for
reasons other than Cause, severance of Executive from Company is in the best
interests of Company, Company may, at any time thereafter by 30 days' written
notice to Executive, terminate this Agreement and the term of Executive's
employment hereunder, and Executive thereafter shall have only such rights to
receive monetary compensation or benefits hereunder in respect of any period
after the effective date of termination as are provided in Section 4.07
hereof. Such notice may also terminate Executive's right to enter
Company's premises.
SECTION 4.05 VOLUNTARY TERMINATION DUE TO CHANGE OF CONTROL. If there is
a Change of Control (as defined below) of Company, Executive shall have the
right, to terminate Executive's employment with Company, whereupon Executive
shall become entitled to receive compensation as provided in Section 4.07
hereof. Such right may be exercised at any time prior to the expiration of 180
days following the Change of Control by giving Company (or its successor) at
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least 30 days' written notice before the effective date of termination. For
purposes of this Agreement, "Change of Control" means if Company or its
stockholders enter into an agreement or agreements, in one or a series of
related transactions, to dispose of, whether by sale, exchange, merger,
consolidation, reorganization, recapitalization, dissolution or liquidation (a)
not less than 80% of the assets of Company or (b) a portion of the outstanding
common stock such that after the transaction or transactions one person or
"group" (as defined by the SEC) owns, of record or beneficially, 50% or more of
the outstanding capital stock of Company, or the right (by whatever means) or
the voting power to elect 50% or more of the directors of Company.
SECTION 4.06 VOLUNTARY TERMINATION FOR GOOD REASON. Executive shall have
the right, effective upon 60 days' written notice to Company to terminate
Executive's employment for Good Reason (as defined below), whereupon Executive
shall become entitled to receive compensation as provided in Section 4.07
hereof. For purposes of this Agreement, "Good Reason" means any of the
following:
(a) the movement by Company, without Executive's consent, of Executive's
principal place of employment to a site that is more than 50 miles from
Executive's principal residence;
(b) a reduction by Company, without Executive's consent, in Executive's
Annual Salary, duties and responsibilities, and title, as they may exist from
time to time;
(c) a failure by Company to comply with any material provisions of this
Agreement which has not been cured within 30 days after notice of such
noncompliance has been given by Executive to Company, or if such failure is not
capable of being cured in such time, a cure shall not have been diligently
initiated by Company within the 30 day period.
SECTION 4.07 COMPENSATION ON TERMINATION.
(a) If the term of Executive's employment hereunder is terminated
pursuant to Sections 4.02, 4.04, 4.05 or 4.06 hereof, Company shall (i) pay to
Executive all compensation accrued and unpaid up to the effective date of
termination, and (ii) pay to Executive additional compensation in an amount
equal to twelve (12) months of compensation at the Annual Salary rate then in
effect, payable within fifteen (15) days of the effective date of termination,
and (iii) maintain, at Company's expense, in full force and effect, for
Executive's continued benefit until the earlier of (x) twelve (12) months after
the effective date of termination or (y) Executive's commencement of full time
employment with a new employer, all life insurance, medical, health and
accident, and disability plans or programs, in which Executive was entitled to
participate immediately prior to the effective date of termination; provided,
that Executive's continued participation is permissible under the general terms
and provisions of such plans or programs. In the event that Executive's
participation in any such plan or program is prohibited, Company shall arrange
to provide Executive with benefits substantially similar to those which
Executive was entitled to receive under such plans or programs. Any amounts
paid by Company to Executive under (i) and (ii) above may be reduced, in the
case of termination pursuant to Section 4.02, by the amount which Executive is
entitled to receive under the terms of Company's long-term disability insurance
policy for senior executives as and if in effect at the effective date of
termination. Any payments made pursuant to this Section 4.07 shall be reduced
by such amounts as are required by law to be withheld or deducted.
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(b) The compensation rights provided for Executive in this Section
shall be Executive's sole and exclusive remedies in the event of a breach of
this Agreement by Company, and Executive shall not be entitled to any other
compensation, damages or relief.
ARTICLE V
CERTAIN COVENANTS OF EXECUTIVE
SECTION 5.01 COVENANTS AGAINST UNFAIR COMPETITION.
(a) ACKNOWLEDGMENTS. Executive acknowledges that, as of the date hereof
(i) the principal business of Company and its affiliates is the provision of
diagnostic imaging, treatment and related management services through a network
of mobile magnetic resonance imaging ("MRI") facilities, fixed-site MRI
facilities and multi-modality centers, at times, together with other healthcare
providers, utilizing the related equipment and computer programs and "software"
and various corporate investment structures ("Company Business"); (ii) Company
Business is primarily national in scope; (iii) the industry is highly
competitive; and (iv) Executive's duties hereunder will cause Executive to have
access to and be entrusted with various trade secrets not readily available to
the public or competitors, consisting of business accounts, lists of customers
and other business contacts, information concerning Company's relationships with
actual or potential clients or customers and the needs or requirements of such
clients or customers, budgets, business and financial plans, employee lists,
financial information, artwork, designs, graphics, marketing plans and
techniques, business strategy and development, know-how or other matters
connected with Company Business, computer software programs and specifications,
(some of which may be developed in part by Executive under this Agreement),
which items are owned exclusively by Company and used in the operation of
Company Business ("Trade Secrets"). Notwithstanding the foregoing, the
parties agree that the term "Trade Secrets" shall not include information
which (i) is or becomes generally available to the public, without violation of
any obligation of confidentiality by Executive, (ii) is or becomes available
from a third party on a non-confidential basis, provided that such third party
is not bound by a confidentiality agreement concerning the Trade Secrets and
(iii) is or has been independently acquired or developed by Executive without
violating the provisions of this Section.
Executive further acknowledges that the Trade Secrets will be disclosed to
Executive or obtained by Executive and received in confidence and trust for
the sole purpose of using the same for the sole benefit of Company Business.
Executive also acknowledges that such Trade Secrets are valuable to Company, of
a unique and special nature, and important to Company in competing in the
marketplace.
During and after the term of this Agreement (otherwise than in the
performance of this Agreement), without Company's prior written consent,
Executive shall not divulge or use all or any of the Trade Secrets to or for any
person or entity except (i) for the benefit of Company and as necessary to
perform Executive's services under this Agreement and (ii) when required by law,
and then only after consultation with Company or unless such information is in
the public domain. In the event that Executive, becomes or is legally compelled
(whether by deposition, interrogatories, request for documents, subpoena, civil
investigative demand or similar process) to disclose any Trade Secrets,
Executive shall provide Company with prompt, prior written notice of such
requirement so that Company may seek a protective order or other appropriate
remedy and/or waive compliance with the provisions of this Section.
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(b) BREACH. Executive understands and agrees that Executive's employment
with Company may be terminated if Executive breaches this Agreement or in any
way divulges such Trade Secrets. Executive further understands and agrees that
Company may be irreparably harmed by any violation or threatened violation of
this Agreement and, therefore, Company may be entitled to injunctive relief to
enforce its provisions.
(c) NON-COMPETE. During the period of Executive's employment, Executive
will not directly or indirectly, either as an employee, employer, consultant,
agent, principal, partner, stockholder, corporate officer, director, or in any
other individual or representative capacity, engage or participate in any
activity or business which Company shall determine in good faith to be in
competition in any substantial way with Company Business within any metropolitan
area in the United States or elsewhere in which Company is then engaged in
Company Business. The parties acknowledge that in California and some states
post-employment non-compete clauses may be generally unenforceable, but that
other states and jurisdictions permit such agreements. Executive hereby agrees
that Executive will not directly or indirectly, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director,
or in any other individual or representative capacity, engage or participate in
any activity or business which Company shall determine in good faith to be in
competition in any substantial way with Company Business as conducted at the
effective date of termination of Executive's employment by Company for a period
of twelve (12) months after the termination of Executive's employment and that
this Section will be enforceable to the greatest extent of the law; provided
however, that if Executive's employment is terminated pursuant to Sections 4.04
or 4.06 hereof, this Section (c) will have no force or effect.
(d) NO SOLICITATION OF EMPLOYEES. During Executive's employment and for a
period of twelve (12) months after the termination of Executive's employment,
Executive will not, either directly or indirectly, either alone or in concert
with others, solicit or entice or participate in the solicitation or attempt to
solicit or in any manner encourage employees of Company to leave Company or work
for anyone that is in competition in any substantial way with Company Business
(which in the case of the period following Executive's termination, shall mean
Company Business as conducted as of the effective date of termination of
Executive's employment with Company); provided however, that if Executive's
employment is terminated pursuant to Sections 4.04 or 4.06 hereof, this Section
(d) will have no force or effect; provided further, that the public listing,
advertising or posting of an available position shall not constitute
solicitation or an attempt to solicit hereunder and this Section shall not
preclude Executive from hiring an individual pursuant thereto.
(e) NO SOLICITATION OF CUSTOMERS. Executive will not during the course of
Executive's employment, or for twelve (12) months thereafter, either directly or
indirectly call on, solicit, or take away, or attempt to call on, solicit or
take away any of Company's customers on behalf of any business that is in
competition in any substantial way with Company. Executive promises and agrees
not to engage in any unfair competition with Company. During Executive's
employment, Executive agrees not to plan or otherwise take any preliminary
steps, either alone or in concert with others, to set up or engage in any
business enterprise that would be in competition with Company Business. In the
event of the termination of Executive's employment and for a period of twelve
(12) months thereafter, Executive will not accept any employment or engage in
any activities which Company shall determine in good faith to be competitive
with Company, if the fulfillment of the duties of the competitive employment or
activities would inherently require Executive to reveal
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Trade Secrets to which Executive has access or learned during Executive's
employment on behalf of any business that is in competition in any
substantial way with Company. Notwithstanding the foregoing, if Executive's
employment is terminated pursuant to Sections 4.04 or 4.06 hereof, this
Section (e) will have no force or effect.
(f) RETURN OF COMPANY PROPERTY. In the event of the termination of
Executive's employment, Executive will deliver to Company all devices,
records, sketches, reports, proposals, files, customer lists, mailing or
contact lists, correspondence, computer tapes, discs and design and other
document and data storage and retrieval materials (and all copies,
compilations and summaries thereof), equipment, documents, duplicates, notes,
drawings, specifications, research, tape or other electronic recordings,
programs, data and other materials or property of any nature belonging to
Company or relating to Company Business, and Executive will not take with
Executive or allow a third party to take, any of the foregoing or any
reproduction of any of the foregoing. Company property includes personal
property, made or compiled by Executive, in whole or in part and alone or
with others, or in any way coming into Executive's possession concerning
Company Business or other affairs of Company or any of its affiliates.
(g) DISCLOSURE AND ASSIGNMENT OF RIGHTS. (i) Executive shall promptly
disclose and assign to Company and its affiliates or its nominee(s), to the
maximum extent permitted by Section 2870 of the California Labor Code, as it
may be hereafter amended from time to time, all right, title and interest of
Executive in and to any and all ideas, inventions, discoveries, secret
processes and methods and improvements, together with any and all patents
that may be issued thereon in the United States and in all foreign countries,
which Executive may invent, develop or improve, or cause to be invented,
developed or improved, during the term of this Agreement or which are (1)
conceived and developed during normal working hours, and (2) which are
related to the scope of Company Business. As used in this Agreement, the
term "invent" includes "make", "discover", "develop", "manufacture" or
"produce", or any of them; "invention" includes the phrase "any new or useful
original art, machine, methods of manufacture, process, composition of
matter, design, or configuration of any kind"; "improvement" includes
"discovery" or "production"; and "patent" includes "Letters Patent" and "all
the extensions, renewals, modifications, improvements and reissues of such
patents".
(ii) Executive shall disclose immediately to duly authorized
representatives of Company any ideas, inventions, discoveries, secret
processes and methods and improvements covered by the provisions of paragraph
(i) above, and execute all documents reasonably required in connection with
the application for an issuance of Letters Patent in the United States and in
any foreign country and the assignment thereof to Company and its affiliates
or its nominee(s).
SECTION 5.02 RIGHTS AND REMEDIES UPON BREACH. If Executive breaches,
or threatens to breach, in any material respect any of the provisions of
Section 5.01 hereof ("Restrictive Covenants"), Company shall, in addition to
all its other rights hereunder and under applicable law and in equity, have
the right to seek specific enforcement of the Restrictive Covenants by any
court having jurisdiction, including, without limitation, the granting of a
preliminary injunction which may be granted without the posting of a bond or
other security, it being acknowledged that any such breach or threatened
breach may cause irreparable injury to Company and that money damages may not
provide an adequate remedy to Company.
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SECTION 5.03 SEVERABILITY OF COVENANTS. If any court of competent
jurisdiction determines that any of the Restrictive Covenants, or any part
thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants
shall not thereby be affected and shall be given full effect, without regard to
the invalid portions. If any court of competent jurisdiction construes any of
the Restrictive Covenants, or any part thereof, to be unenforceable because of
the duration or geographic scope of such provision or otherwise, such provision
shall be deemed amended to the minimum extent required to make it enforceable
and, in its reduced form, such provision shall then be enforceable and enforced.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 NOTICES. Any notice or other communication required or which
may be given hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or telecopied, or sent by certified, registered or express
mail, postage prepaid, and shall be deemed given when so delivered personally,
telegraphed, telexed or telecopied, or if mailed, two (2) days after the date of
mailing, as follows:
(i) If to Company,
addressed to it at: InSight Health Services Corp.
4400 MacArthur Blvd. - Suite 800
Newport Beach, CA 92660
Attention: General Counsel
(ii) If to Executive, addressed to Executive at such address as
Executive shall have filed with Company for such purpose, or at
such other address as Executive may from time to time specify by
giving notice to Company.
SECTION 6.02 ENTIRE AGREEMENT This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect thereto.
SECTION 6.03 WAIVERS AND AMENDMENTS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, amended, modified, superseded, canceled,
renewed or extended, only by a written instrument signed by Executive and
President and CEO or his designee. No waiver of any provision of this
Agreement shall be deemed to be a waiver of any other provision, whether or
not similar. No such waiver shall constitute a continuing waiver. No delay
on the part of either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part
of either party of any right, power or privilege hereunder, preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege hereunder.
SECTION 6.04 ASSIGNMENT. This Agreement is personal to Executive, and
Executive's rights and obligations hereunder may not be assigned by Executive.
Company may assign this Agreement and its rights, together with its obligations,
hereunder (i) in connection with any sale, transfer or other disposition of all
or substantially all of its assets or business(s), whether by merger,
consolidation or otherwise; or (ii) to any wholly owned subsidiary of Company,
provided that Company shall remain liable for all of its obligations under this
Agreement.
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SECTION 6.05 COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
SECTION 6.06 HEADINGS. The article and section headings in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
SECTION 6.07 NUMBER. Unless the context of this Agreement otherwise
requires, words using the singular or plural number will also include the plural
or singular number.
SECTION 6.08 GOVERNING LAW. This Agreement shall be governed and
interpreted in accordance with the laws of the State of California, without
giving effect to the provisions thereof relating to conflicts of law.
SECTION 6.09 (a) RESOLUTION OF DISPUTES. Executive and Company mutually
agree and understand that as an inducement for Company to enter into this
Agreement, Executive and Company agree and consent to the resolution by
arbitration of all claims or controversies, past, present or future, whether
arising out of the employment relationship (or its termination) or relating to
this Agreement that Company may have against Executive or that Executive may
have against Company or against its officers, directors, employees or agents in
their capacity as such or otherwise. The only claims that are arbitrable are
those that, in the absence of this arbitration provision, would have been
justiciable under applicable state or federal law. The claims covered by this
arbitration provision, include, but are not limited to, claims for wages or
other compensation due; claims for breach of any contract or covenant (express
or implied); tort claims; claims for discrimination, retaliation or harassment
(including, but not limited to, race, sex, sexual orientation, religion,
national origin, age, marital status, or medical condition, handicap or
disability); claims for benefits (except claims under an employee benefit or
pension plan that either (i) specifies that its claims procedure shall culminate
in an arbitration procedure different from this one, or (ii) is underwritten by
a commercial insurer which decides the claims); and claims for violation of any
federal, state, or other governmental law, statute, regulation or ordinance,
except claims excluded in Section (b) below.
Except as otherwise provided in this arbitration provision, both Company
and Executive agree that neither of them shall initiate or prosecute any lawsuit
or administrative action (other than an administrative charge of discrimination)
in any way related to any claim covered by this arbitration provision.
(b) CLAIMS EXCLUDED FROM ARBITRATION. Claims Executive may have for
workers' compensation or unemployment compensation benefits are not covered by
this arbitration provision. Also not covered are claims by Company for
injunctive and/or other equitable relief, including but not limited to those for
unfair competition and/or the use and/or unauthorized disclosure of Trade
Secrets or confidential information, as to which Executive understands and
agrees that Company may seek and obtain relief from a court of competent
jurisdiction.
(c) ARBITRATION PROCEDURES. Executive and Company understand and agree
that the arbitration will take place in Orange County, California, in accordance
with the California Employment Dispute Resolution Rules of the American
Arbitration Association then in effect in the
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State of California, and judgment upon such award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. The
decision of the arbitrator(s) shall be bound by generally accepted legal
principles, including, but not limited to, all rules of law and legal
principles concerning potential liability, burdens of proof, and measure of
damages found in all applicable California statutes and administrative rules
and codes, and all California case law.
SECTION 6.10 EXPENSES. Should either party institute arbitration to
enforce this Agreement or any provision hereof, or for damages by reason of
any alleged breach of this Agreement or any provisions hereof, Executive
shall be entitled to receive from Company Executive's reasonable travel and
living expenses, incurred by Executive in connection with preparation for
and participation in the arbitration proceeding if Executive is the
prevailing party or such portion thereof as the arbitrator(s) may award in
the event of a split decision.
SECTION 6.11 EFFECTIVE DATE. This Agreement shall be effective upon
execution of this Agreement by the parties who are signatories hereto.
IN WITNESS WHEREOF, the parties have executed this Executive Employment
Agreement as of the date first above written.
INSIGHT HEALTH SERVICES CORP.
By: /s/ E. Larry Atkins
----------------------------------
E. Larry Atkins, President & CEO
EXECUTIVE
/s/ Brian P. Stone
--------------------
Brian P. Stone
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Exhibit 10.28
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. TEMPLATE
Certificate for __________ 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 __________ 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 $4.56 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 ______ Warrants each
month commencing on __________ until fully vested so long as continuously
during such time period the Warrantholder remains a director of the Company.
The Warrants shall expire at 5:00 p.m. Newport Beach, California time, on the
earlier of (i) 90 days after the Warrantholder ceases to be a director of the
Company (other than by death or permanent or total disability within the
meaning of the Internal Revenue Code of 1986, as amended, ("Internal Revenue
Code")), (ii) twelve months after the Warrantholder's death or permanent or
total disability within the meaning of the Internal Revenue Code or (iii) on
__________ (the "Expiration Date"); provided however, that if the
Warrantholder ceases to be a director of the Company, other than by death or
permanent or total disability within the meaning of the Internal Revenue
Code, the Warrantholder shall have the right until the Expiration Date to
purchase from the Company the Common Shares issuable upon exercise of the
Warrants which shall have vested prior to such termination.
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(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 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 (l) 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
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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.
(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
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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.
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 canceled 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 canceled
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.
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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.
(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.
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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.
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
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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 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:
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(i) Keep such registration, qualification or compliance
fefective for a period of 120 days or until the Warrantholder has completed the
distribution described in the Registration Statement relating thereto, whichever
first occurs;
(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
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(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 stock 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.
(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 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 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
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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.
(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 a 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 not 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.
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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed.
INSIGHT HEALTH SERVICES CORP.
Attest:
By:
- ---------------------------- ---------------------------------
Tammy M. Morita Thomas V. Croal
Assistant Secretary Executive Vice President
and Chief Financial Officer
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Exhibit 10.29
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. TEMPLATE
Certificate for __________ 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 ______________________ or its 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 $_____ per share (the
"Exercise Price"), at any time prior to the Expiration Date (as defined
below) 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 __________ Warrants
each month commencing on __________ until fully vested so long as
continuously during such time period the __________, and/or its Affiliates
(as defined in the Securities Purchase Agreement dated __________ ("Purchase
Agreement") between the Company and __________) who are permitted transferees
under Section 6.14 of the Purchase Agreement, have the right ("Right"), by
virtue of their ownership of (i) at least a majority of the Common Shares or
the Company's Series _____ Preferred Stock or (ii) a portion of the Company's
Series ___ Preferred Stock, to elect or appoint at least __________ of the
Company's Board of Directors. The Warrants shall expire at 5:00 p.m. Newport
Beach, California time, on the earlier of (i) 90 days after the Right has
terminated or (ii) on __________ ("Expiration Date"); provided, however, that
if the Right has terminated for any reason, the Warrantholder shall have the
right until the Expiration Date, to purchase from the Company the Common
Shares issuable upon exercise of the Warrants which shall have vested prior
to such termination.
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(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 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 (l) 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 subsection (a), the holder of any Warrant thereafter exercised shall
become entitled to receive any additional Common
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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.
(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
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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.
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 canceled 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 canceled
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
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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.
(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
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amendment of such provision shall not affect the validity, legality or
enforceability of any other provision hereof.
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;
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(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 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.
(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;
(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;
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(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 its 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 stock 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.
(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
A-8
<PAGE>
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 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 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.
A-9
<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 an accredited investor as defined in
Regulation D under the Securities Act 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 accredited investors and certain other persons as
provided under California law, (ii) the Warrantholder is not 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
A-10
<PAGE>
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:
By:
- ------------------------------- ----------------------------------
Tammy M. Morita E. Larry Atkins
Assistant Secretary President and
Chief Executive Officer
A-11
<PAGE>
Exhibit 21
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
InSight Health Corp. Delaware
Mississippi Mobile Technology, Inc. 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
Signal Medical Services, Inc. Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 44,740
<SECURITIES> 0
<RECEIVABLES> 41,971
<ALLOWANCES> (16,308)
<INVENTORY> 0
<CURRENT-ASSETS> 73,453
<PP&E> 97,930
<DEPRECIATION> 26,116
<TOTAL-ASSETS> 228,260
<CURRENT-LIABILITIES> 36,550
<BONDS> 0
0
37,096
<COMMON> 3
<OTHER-SE> 759
<TOTAL-LIABILITY-AND-EQUITY> 228,260
<SALES> 114,333
<TOTAL-REVENUES> 119,018
<CGS> 0
<TOTAL-COSTS> 94,842
<OTHER-EXPENSES> 15,242
<LOSS-PROVISION> 1,871
<INTEREST-EXPENSE> 6,827
<INCOME-PRETAX> 943
<INCOME-TAX> 431
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 512
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
