<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 organization) Identification 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)
N/A
--------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------------- ---------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 2,808,923 shares of Common
Stock as April 30, 1998.
The number of pages in this Form 10-Q is 21.
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and June 30, 1997 3-4
Condensed Consolidated Statements of Operations (unaudited)
for the nine months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 31, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13-19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,650 $ 7,135
Trade accounts receivable, net 21,674 15,645
Other receivables, net 330 358
Other current assets 2,149 1,554
--------- ---------
Total current assets 33,803 24,692
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $26,989 and $16,203, respectively 46,745 34,488
INVESTMENT IN PARTNERSHIPS 495 402
OTHER ASSETS 2,471 5,468
INTANGIBLE ASSETS, net 43,273 33,272
--------- ---------
$ 126,787 $ 98,322
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDER EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 5,706 $ 15,462
Accounts payable and other accrued expenses 14,905 14,970
--------- ---------
Total current liabilities 20,611 30,432
--------- ---------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 67,781 57,733
Other long-term liabilities 680 1,472
--------- ---------
Total long-term liabilities 68,461 59,205
--------- ---------
MINORITY INTEREST 1,871 2,000
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par 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 as March 31, 1998 23,932 -
Convertible Series C preferred stock,
27,953 shares outstanding at March 31, 1998 13,173 -
Common stock, $.001 par value, 25,000,000 shares authorized:
2,799,463 and 2,714,725 shares outstanding at March 31, 1998
and June 30, 1997, respectively 3 3
Additional paid-in capital 23,366 23,100
Accumulated deficit (24,621) (23,168)
--------- ---------
Total stockholders' equity 35,844 6,685
--------- ---------
$ 126,787 $ 98,322
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Contract services $ 39,186 $ 35,186
Patient services 43,855 31,153
Other 2,632 1,790
--------- ---------
Total revenues 85,673 68,129
--------- ---------
COSTS OF OPERATIONS:
Costs of services 44,513 37,386
Provision of doubtful accounts 1,525 1,116
Equipment leases 12,983 13,822
Depreciation and amortization 10,670 7,203
--------- ---------
Total costs of operations 69,691 59,527
--------- ---------
GROSS PROFIT 15,982 8,602
CORPORATE OPERATING EXPENSES 6,510 5,343
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION 6,309 -
--------- ---------
INCOME FROM COMPANY OPERATIONS 3,163 3,259
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 480 364
--------- ---------
OPERATING INCOME 3,643 3,623
INTEREST EXPENSE, net 4,665 2,741
--------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,022) 882
PROVISION FOR INCOME TAXES 431 134
--------- ---------
NET INCOME (LOSS) $ (1,453) $ 748
--------- ---------
--------- ---------
INCOME (LOSS) PER COMMON AND PREFERRED SHARE:
Basic $ (0.19) $ 0.14
--------- ---------
--------- ---------
Diluted $ (0.19) $ 0.14
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING:
Basic 7,589,549 5,213,882
--------- ---------
--------- ---------
Diluted 7,589,549 5,444,308
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Contract services $ 12,846 $ 11,596
Patient services 15,056 10,695
Other 657 742
--------- ---------
Total revenues 28,559 23,033
--------- ---------
COSTS OF OPERATIONS:
Costs of services 14,745 12,647
Provision for doubtful accounts 480 258
Equipment leases 3,981 4,732
Depreciation and amortization 3,905 2,471
--------- ---------
Total costs of operations 23,111 20,108
--------- ---------
GROSS PROFIT 5,448 2,925
CORPORATE OPERATING EXPENSES 2,254 1,688
--------- ---------
INCOME FROM COMPANY OPERATIONS 3,194 1,237
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 156 120
--------- ---------
OPERATING INCOME 3,350 1,357
INTEREST EXPENSE, net 1,420 947
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,930 410
PROVISION FOR INCOME TAXES - 30
--------- ---------
NET INCOME $ 1,930 $ 380
--------- ---------
--------- ---------
INCOME (LOSS) PER COMMON AND PREFERRED SHARE:
Basic $ 0.21 $ 0.07
--------- ---------
--------- ---------
Diluted $ 0.20 $ 0.07
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING:
Basic 9,075,693 5,216,485
--------- ---------
--------- ---------
Diluted 9,493,304 5,438,545
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,453) $ 748
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Total depreciation and amortization 10,786 7,360
Amortization of deferred gain on debt restructure (1,355) (797)
Provision for supplemental service fee termination 6,309 -
Cash provided by (used in) changes in operating working capital:
Receivables, net (4,720) (466)
Other current assets (695) (490)
Accounts payable and other current liabilities 1,189 281
--------- ---------
Net cash provided by operating activities 10,061 6,636
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (15,233) (2,407)
Acquisitions of imaging centers (12,890) (2,766)
Other (988) 351
--------- ---------
Net cash used in investing activities (29,111) (4,822)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 -
Stock options and warrants exercised 266 -
Payment of loan fees (2,210) -
Payments on debt and capital lease obligations (82,985) (7,727)
Proceeds from issuance of debt 83,277 5,139
Other (129) 414
--------- ---------
Net cash provided by (used in) financing activities 21,565 (2,174)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,515 (360)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,135 6,864
--------- ---------
End of period $ 9,650 $ 6,504
--------- ---------
--------- ---------
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,476 $ 1,969
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited))
1. MERGER AND RECAPITALIZATION
InSight Health Services Corp. (InSight or 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, 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 (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 ten (10) shares of 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
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 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. At the effective time of the Merger, Maxum
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 was convertible into such number of shares of 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 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 service 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 was treated as
the acquiror for accounting purposes.
On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC).
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
8
<PAGE>
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 (i) 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, (ii) warrants (GE Warrants) to purchase up to 250,000 shares of
Common Stock at an exercise price of $10.00 per share, and (iii) exchanged
all of its InSight 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. 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 at an initial conversion price of $8.375 per share.
For so long as Carlyle and its affiliates own at least 33% of the Series B
Preferred Stock or GE and its affiliates own at least 33% of the Series C
Preferred Stock, respectively, the approval of at least 67% of the holders of
such series of Preferred Stock is required before the Company may take
certain actions including, but not limited to, amending its certificate of
incorporation or bylaws, changing the number of directors or the manner in
which directors are selected, incurring indebtedness in excess of $15 million
in any fiscal year, issuing certain equity securities below the then current
market price or the then applicable conversion price, acquiring equity
interests or assets of entities for consideration equal to or greater than
$15 million, and engaging in mergers for consideration equal to or greater
than $15 million. The Preferred Stock will vote with the Common Stock on an
as-if-converted basis on all matters, except the election of directors,
subject to an aggregate maximum Preferred Stock percentage of 37% of all
votes entitled to be cast on such matters. Assuming the conversion of all of
the Series B Preferred Stock into Common Stock and the exercise of all of the
Carlyle Warrants, Carlyle would own approximately 31% of the Common Stock of
the Company, on a fully diluted basis. Assuming the conversion of all of the
Series C Preferred Stock and the exercise of the GE Warrants, GE would own
approximately 34% of the Common Stock of the Company, on a fully diluted
basis.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the Board) is currently fixed at
nine. Six directors (Common Stock Directors) are to be elected by the common
stockholders, one of whom (Joint Director) is to be proposed by Carlyle and GE
and approved by a majority of the Board in its sole discretion. Of the three
remaining directors (Preferred Stock Directors), two are to be elected by the
holders of the Series B Preferred Stock and one is to be elected by the holders
of the Series C Preferred Stock, in each case acting by written consent and
without a meeting of the common stockholders. As long as Carlyle and certain
affiliates thereof own an aggregate of at least 50% of the Series B Preferred
Stock, 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 be initially appointed by the
Board, and 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.
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 of the Company, 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
9
<PAGE>
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 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.
2. INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Company
included herein have been prepared in accordance with generally accepted
accounting principles for interim financial statements and do not include all
of the information and disclosures required by generally accepted accounting
principles for annual financial statements. These financial statements
should be read in conjunction with the consolidated financial statements and
related footnotes included as part of the Company's Annual Report on Form
10-K for the period ended June 30, 1997 filed with the Securities and
Exchange Commission (SEC) on October 14, 1997. In the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for fair
presentation of results for the period have been included. The results of
operations for the nine months ended March 31, 1998, are not necessarily
indicative of the results to be achieved for the full fiscal year.
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
3. INVESTMENTS IN PARTNERSHIPS
Set forth below is the summarized income statement data of the Company's
unconsolidated partnerships (amounts in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 3,685 $ 3,211 $ 1,205 $ 1,059
Expenses 2,567 2,376 847 784
--------- --------- --------- ---------
Net income $ 1,118 $ 835 $ 358 $ 275
--------- --------- --------- ---------
--------- --------- --------- ---------
Equity in earnings
of partnerships $ 480 $ 364 $ 156 $ 120
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
10
<PAGE>
Set forth below is the summarized combined financial data of the Company's three
50% or less, owned and controlled entities, which are consolidated (amounts in
thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- ----------
(Unaudited)
<S> <C> <C>
Condensed Combined Balance Sheet Data:
Current assets $ 3,197 $ 2,596
Total assets 4,494 4,288
Current liabilities 1,149 727
Long-term debt 240 424
Minority interest equity 1,699 1,702
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Condensed Combined Statement
of Operations Data:
Total revenues $ 4,988 $ 5,310 $ 1,340 $ 1,823
Costs of operations 3,614 3,825 1,040 1,269
Provision for center profit distribution 700 771 158 290
--------- --------- --------- ---------
Gross profit $ 674 $ 714 $ 142 $ 264
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The provision for center profit distribution shown above represents the minority
interest in the income of these combined entities.
4. INCOME (LOSS) PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), Earnings Per Share (EPS). SFAS No. 128 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.
The number of shares used in computing EPS is equal to the weighted average
number of common and preferred shares outstanding during the respective
period. Since the Preferred Stock has no stated dividend rate and
participates in any cash dividends paid with respect to the Common Stock, the
convertible amounts are included in the computation of basic EPS. Dilution
relating to options and warrants are not included for the nine months ended
March 31, 1998 due to their antidilutive effect. There were no adjustments
to net income (loss) (the numerator) for purposes of computing EPS.
11
<PAGE>
A reconciliation of basic and diluted share computations is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Average common stock outstanding 2,731,105 2,712,122 2,753,037 2,714,725
Effect of preferred stock 4,858,444 2,501,760 6,322,656 2,501,760
---------- ---------- ---------- ----------
Denominator for basic EPS 7,589,549 5,213,882 9,075,693 5,216,485
Dilutive effect of stock options
and warrants - 230,426 417,611 222,060
---------- ---------- ---------- ----------
7,589,549 5,444,308 9,493,304 5,438,545
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CENTERS IN OPERATION
InSight provides diagnostic imaging, treatment and related management services
in 25 states throughout the United States. As of April 1, 1998, InSight's
services were provided through a network of 36 mobile magnetic resonance imaging
("MRI") facilities ("Mobile Facilities"), 28 fixed-site MRI facilities ("Fixed
Facilities"), 13 multi-modality imaging centers ("Centers"), one Leksell
Stereotactic Gamma Unit treatment center ("Gamma Knife"), and one radiation
oncology center. An additional radiation oncology center is operated by the
Company as part of one of its Centers. The Company's operations are located
throughout the United States, with a substantial presence in California, Texas,
New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio).
At its Centers, InSight offers other services in addition to MRI including
diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear
medicine, nuclear cardiology, computed tomography ("CT") and cardiovascular
services. The Company offers additional services through a variety of
arrangements including equipment rental, technologist services and
training/applications, marketing, radiology management services, patient
scheduling, utilization review and billing and collection services.
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. The business strategy of
InSight is primarily focused on the following components: (i) expanding its
existing regional networks through geographically disciplined acquisitions; (ii)
pursuing opportunities within its existing regional networks to optimize
utilization and increase overall utilization; (iii) broadening its range of
services to managed care organizations; and (iv) introducing new products,
including development of a network of open MRI systems within its regional
networks and development of a radiology co-source product where InSight will
provide management services for radiology departments within hospitals and
multi-specialty physician groups. 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.
For the nine months ended March 31, 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.
On April 15, 1998, InSight signed a definitive agreement to purchase Signal
Medical Services, Inc. ("Signal") through the merger of Signal into a wholly
owned subsidiary of InSight. The transaction is subject to the satisfaction of
certain customary closing conditions, including the expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Bank
Financing will be used to finance the purchase price of approximately $46.0
million.
In addition, in fiscal 1998, InSight installed an open MRI Fixed Facility in
Atlanta, Georgia. This Fixed Facility was 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.
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<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES: Revenues increased approximately 25.8% from approximately $68.1
million for the nine months ended March 31, 1997, to approximately $85.7
million for the nine months ended March 31, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $13.0 million)
and an increase in contract services, patient services and other revenues
(approximately $4.6 million) at existing facilities.
Contract services revenues increased approximately 11.4% from approximately
$35.2 million for the nine months ended March 31, 1997, to approximately
$39.2 million for the nine months ended March 31, 1998. This increase was
due primarily to the acquisitions discussed above (approximately $1.4
million) and an increase at existing facilities (approximately $2.6 million).
The increase at existing facilities was due to higher utilization
(approximately 6%) offset by nominal declines in reimbursement from
customers, primarily hospitals.
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 46% of total revenues for the nine months ended
March 31, 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.
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. No single source accounts for more than 10% of InSight's revenues.
Patient services revenues increased approximately 40.8% from approximately
$31.2 million for the nine months ended March 31, 1997, to approximately
$43.9 million for the nine months ended March 31, 1998. This increase was
due primarily to the acquisitions discussed above (approximately $11.5
million) and an increase in revenues at existing facilities (approximately
$1.8 million). The increase at existing facilities was due to higher
utilization (approximately 12%), partially offset by nominal declines in
reimbursement from third party payors and reduced revenues from the
termination of a Fixed Center and a Gamma Knife center in fiscal 1998
(approximately $0.6 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 17.1% from
approximately $59.5 million for the nine months ended March 31, 1997, to
approximately $69.7 million for the nine months ended March 31, 1998. This
increase was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $8.9 million) and an increase in costs at
existing facilities (approximately $2.7 million), offset by
14
<PAGE>
the elimination of costs at the two terminated facilities discussed above
(approximately $1.4 million). The increase at existing facilities was due
primarily to increases in costs of services and depreciation and amortization.
Costs of services, including the provision for doubtful accounts, increased
approximately 19.6% from approximately $38.5 million for the nine months
ended March 31, 1997, to approximately $46.0 million for the nine months
ended March 31, 1998. This increase was due primarily to the acquisitions
discussed above (approximately $6.7 million) and an increase in costs at
existing facilities (approximately $1.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $1.0
million). The increase in costs at existing facilities was due primarily to
(i) salaries and benefits, (ii) occupancy and (iii) marketing costs, offset
by reduced costs in service supplies and equipment maintenance.
Equipment leases and depreciation and amortization increased approximately
12.5% from approximately $21.0 million for the nine months ended March 31,
1997, to approximately $23.7 million for the nine months ended March 31,
1998. This increase was due primarily to the acquisitions discussed above
(approximately $2.2 million) and an increase in costs at existing facilities
(approximately $0.8 million), offset by the elimination of costs at the two
terminated facilities discussed above (approximately $0.3 million). The
increase at existing facilities was due primarily to the Company upgrading
its existing diagnostic imaging equipment.
GROSS PROFIT: Gross profit increased approximately 85.8% from approximately
$8.6 million for the nine months ended March 31, 1997, to approximately $16.0
million for the nine months ended March 31, 1998. This increase was due to
the acquisitions discussed above (approximately $4.1 million), an increase at
existing facilities (approximately $2.5 million) and the elimination of
losses at the two terminated facilities discussed above (approximately $0.8
million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 21.8%, from approximately $5.3 million for the nine months
ended March 31, 1997, to approximately $6.5 million for the nine months ended
March 31, 1998. This increase was due primarily to additional consulting,
legal and travel costs associated with the Company's acquisition activities.
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the
Recapitalization and Bank Financing discussed below, 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 pre-tax 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 70.2% from
approximately $2.7 million for the nine months ended March 31, 1997, to
approximately $4.7 million for the nine months ended March 31, 1998. This
increase was due primarily to additional debt related to the acquisitions
discussed above (approximately $2.4 million) and 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 discussed below (approximately $1.2
million) and (ii) amortization of long-term debt.
PROVISION FOR INCOME TAXES: For the nine months ended March 31, 1998, the
Company recorded a provision for income taxes of approximately $0.4 million.
The provision was due primarily to increased income from the Company's
operations and reflects the anticipated tax rate for the full fiscal year.
INCOME (LOSS) PER COMMON SHARE: On a diluted basis, net (loss) per common share
was ($0.19) for the nine months ended March 31, 1998, compared to net income per
common share of $0.14 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 $0.62. 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.
15
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES: Revenues increased approximately 24.0% from approximately $23.0
million for the three months ended March 31, 1997, to approximately $28.6
million for the three months ended March 31, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $5.1 million)
and an increase in contract services, patient services and other revenues
(approximately $0.5 million) at existing facilities.
Contract services revenues increased approximately 10.8% from approximately
$11.6 million for the three months ended March 31, 1997, to approximately $12.8
million for the three months ended March 31, 1998. This increase was due
primarily to the acquisitions discussed above (approximately $0.4 million) and
an increase in revenues at existing facilities (approximately $0.8 million).
The increase at existing facilities was due to higher utilization (approximately
9%) offset by nominal declines in reimbursement from customers, primarily
hospitals.
Patient services revenues increased approximately 40.8% from approximately
$10.7 million for the three months ended March 31, 1997, to approximately
$15.1 million for the three months ended March 31, 1998. This increase was
due primarily to the acquisitions discussed above (approximately $4.6
million) and an increase in revenues at existing facilities (approximately
$0.7 million), offset by the elimination of revenues at the two terminated
facilities discussed above (approximately $0.9 million). The increase at
existing facilities was due to higher utilization (approximately 12%),
partially offset by nominal declines in reimbursement from third party payors.
COSTS OF OPERATIONS: Costs of operations increased approximately 14.9% from
approximately $20.1 million for the three months ended March 31, 1997, to
approximately $23.1 million for the three months ended March 31, 1998. This
increase was due primarily to an increase in costs due to the acquisitions
discussed above (approximately $3.7 million), an increase in costs at
existing facilities (approximately $0.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $1.5
million). The increase at existing facilities was due primarily to increases
in costs of services and depreciation expense, primarily related to the
Company upgrading its existing diagnostic imaging equipment.
Costs of services, including the provision for doubtful accounts, increased
approximately 18.0% from approximately $12.9 million for the three months
ended March 31, 1997, to approximately $15.2 million for the three months
ended March 31, 1998. This increase was due primarily to the acquisitions
discussed above (approximately $2.8 million), an increase in costs at
existing facilities (approximately $0.8 million), offset by the elimination
of costs at the two terminated facilities discussed above (approximately $1.3
million). The increase in costs at existing facilities was due primarily to
(i) salaries and benefits and (ii) marketing costs, offset by reduced costs
in service supplies and equipment maintenance.
Equipment leases and depreciation and amortization increased approximately
9.5% from approximately $7.2 million for the three months ended March 31,
1997, to approximately $7.9 million for the three months ended March 31,
1998. This increase was due primarily to the acquisitions discussed above
(approximately $0.9 million), offset by the elimination of costs at the two
terminated facilities discussed above (approximately $0.2 million).
GROSS PROFIT: Gross profit increased approximately 86.3% from approximately
$2.9 million for the three months ended March 31, 1997, to approximately $5.4
million for the three months ended March 31, 1998. The increase was due to the
acquisitions discussed above (approximately $1.4 million), an increase at
existing facilities (approximately $0.4 million) and the elimination of losses
at the two terminated facilities discussed above (approximately $0.7 million).
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 33.5% from approximately $1.7 million for the three months ended
March 31, 1997, to approximately $2.3 million for the three months ended March
31, 1998. The increase was primarily due to (i) additional consulting and
travel costs associated with the Company's acquisition activities and (ii)
salaries and benefits.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 49.9%
from approximately $0.9 million for the three months ended March 31, 1997, to
approximately $1.4 million for the three months ended March 31, 1998. The
increase was due primarily to additional debt related to the acquisitions
discussed above (approximately $0.9 million) and additional debt related to the
Company upgrading its existing diagnostic imaging
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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 discussed below
(approximately $0.7 million) and (ii) amortization of long-term debt.
PROVISION FOR INCOME TAXES: During the three months ended March 31, 1998, the
Company did not record a provision for income taxes due to the loss resulting
from the provision for supplemental service fee termination. The Company's
provision for income taxes reflects the anticipated tax rate for the full fiscal
year.
INCOME PER COMMON SHARE: On a diluted basis, net income per common share was
$0.20 for the three months ended March 31, 1998, compared to net income per
common share of $0.07 for the same period in 1997. The improvement in net
income per common share is the result of (i) increased gross profit, (ii) an
increase in earnings from unconsolidated partnerships, and (iii) a reduction in
the provision for income taxes, offset by (i) increased corporate operating
expenses and (ii) increased interest expense.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
InSight operates in a capital intensive, high fixed cost industry that requires
significant amounts of working capital to fund operations, particularly the
initial start-up and development expenses of new operations, and yet is
constantly under external pressure to contain costs and reduce prices. Revenues
and cash flows have been adversely affected by an increased collection cycle,
competitive pressures and major restructurings within the health care industry.
This adverse effect on revenues and cash flow is expected to continue,
especially in the mobile diagnostic imaging business. Management believes that
InSight's long-term success is based upon its ability to successfully execute
its business strategy.
InSight continues to pursue acquisition opportunities. InSight believes that
the expansion of its business through acquisitions is a key factor in achieving
and maintaining profitability. Generally, acquisition opportunities are aimed
at increasing revenues and profits, and maximizing utilization of existing
capacity. Incremental operating profit resulting from future acquisitions will
vary depending on geographic location, whether facilities are Mobile 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 the seven acquisitions discussed above.
On April 15, 1998, InSight signed a definitive agreement to purchase Signal
through the merger of Signal into a wholly owned subsidiary of InSight. The
transaction is subject to the satisfaction of certain customary closing
conditions, including the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Bank Financing will
be used to finance the purchase price of approximately $46.0 million.
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 was consummated on October 22, 1997 and 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. 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 $23 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 $47 million)
and approximately $10 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
17
<PAGE>
the Bank Financing, contain certain restrictions on InSight's ability to act
without first obtaining a waiver or consent from Carlyle, GE and NationsBank.
Working capital increased to approximately $13.2 million at March 31, 1998 from
a deficit of approximately $5.7 million at June 30, 1997. This increase in
working capital of approximately $18.9 million is primarily due to (i) net
income before depreciation and amortization, (ii) the repayment of approximately
$23.0 million in long-term debt, and (iii) and the reclassification of the
current portion of debt to long-term debt as a result of the Bank Financing,
offset by (i) the current portion of additional debt incurred as a result of the
Company's acquisition activities and (ii) principal payments on long-term debt.
As part of the Bank Financing, the Company has a $25 million working capital
facility, of which approximately $16.8 million was available to the Company as
of March 31, 1998. As discussed above, InSight has an acquisition facility in
the amount of $65 million, of which, after the amounts utilized to purchase
Signal discussed above, approximately $30.0 million will remain available to the
Company.
Cash and cash equivalents increased to approximately $9.6 million at March
31, 1998 from approximately $7.1 million at June 30, 1997. This increase of
approximately $2.5 million resulted primarily from the Company's operating
activities (approximately $10.0 million) and financing activities
(approximately $21.6 million), offset by a reduction in cash and cash
equivalents from investing activities (approximately $29.1 million).
Cash provided by operating activities for the nine months ended March 31,
1998 resulted primarily from net income before depreciation and amortization
and the provision for supplemental service fee termination (approximately
$15.6 million), offset by an increase in accounts receivable (approximately
$4.7 million). The increase in accounts receivable is due primarily to the
Company's acquisition activities.
Cash used in investing activities for the nine months ended March 31, 1998
resulted primarily from the Company's acquisition activities (approximately
$12.9 million) and the Company purchasing new diagnostic imaging equipment or
upgrading its existing diagnostic imaging equipment (approximately $15.2
million).
The Company generated approximately $21.6 million from financing activities
for the nine months ended March 31, 1998, primarily from the Carlyle
investment, which was used to refinance a portion of the Company's
outstanding indebtedness as discussed above. The decrease in cash from the
refinancing of debt was offset primarily by increased debt incurred in
connection with the Company's acquisition activities.
The Company has committed to purchase or lease, at an aggregate cost of
approximately $11.3 million, six MRI systems for delivery during the six
months ending September 30, 1998. The Bank Financing is expected to be used
to finance the purchase of such equipment. In addition, the Company has
committed to purchase or lease from GE, at an aggregate cost of approximately
$24.0 million, including siting costs, 20 open MRI systems for delivery and
installation over the next two years. As of March 31, 1998, the Company had
installed three of the open MRI systems, one at an existing Center, one at an
existing Fixed Facility and one in a newly opened Fixed Facility, and siting
improvements were under construction for installation of three other open MRI
systems. 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 current levels of operations and
anticipated growth, its cash from operations, together with other available
sources of liquidity, including borrowings under the Bank Financing, will be
sufficient over the next several years to fund anticipated capital
expenditures and make required payments of principal and interest on its
debt, including its 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. In order to implement the Company's business
strategy with respect to acquisitions, the Company will require additional
sources of capital in addition to that currently available to the Company.
To that end, the Company is currently negotiating an amendment to the Bank
Financing and intends to raise approximately $100.0 million pursuant to a
private placement of senior subordinated notes, subject to market and other
conditions. The Company intends to use the proceeds to pay certain
outstanding indebtedness under its Bank Financing. Amounts used to pay such
indebtedness may be reborrowed for general corporate purposes, including
acquisitions; however, no assurance can be given that the amendment to the
Bank Financing and the private placement will be completed.
The Company has assessed and continues to assess the impact of the Year 2000
Issue on its reporting systems and operations. 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, date sensitive systems
may recognize the Year 2000 as 1900 or not at all. This inability to recognize
or properly treat Year 2000 may cause the Company's systems to
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process critical financial and operational information incorrectly. The
Company has developed a plan to modify existing computer systems and
applications. The Company has not determined the final amounts necessary to
modify existing computer systems and applications but believes such amounts
will not be material. If the Company's remediation plan is not successful,
there could be a significant disruption of the Company's ability to transact
business with its customers, third party payors and suppliers.
Certain statements contained in this report are forward-looking statements
that involve a number of risks and uncertainties. The factors that could
cause actual results to differ materially include the following: availability
of financing; limitations and delays in reimbursement by third party payors;
contract renewals and financial stability of customers; technology changes;
governmental regulation; conditions within the health care environment; Year
2000 issues; adverse utilization trends for certain diagnostic imaging
procedures; aggressive competition; general economic factors; InSight's
inability to carry out its business strategy; and the risk factors listed
from time to time in InSight's filings with the SEC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The following is a list of securities sold by the Company during
the period covered by this report on Form 10-Q which, pursuant to the
exemption provided under Section 4(2) of the Securities Act of 1933,
as amended ("Securities Act"), were not registered under the
Securities Act:
1. On January 26, 1998, the Company issued to Philip Green and
Elizabeth Cobbs, pursuant to the exercise of warrants and in
consideration of a cash payment of $8,528, 1,512 shares of Common
Stock.
2. On March 4, 1998, the Company issued to Roz Kovens, pursuant to
the exercise of warrants and in consideration of a cash payment
of $189,758, 33,645 shares of Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On February 17, 1998, the Company held its annual meeting of
stockholders at which the single matter to be acted upon was the
election of one director, E. Larry Atkins, as a Class I director
to serve for a three year term.
(b) Inapplicable.
(c) 2,409,855 shares were cast in favor of the election of Mr. Atkins
and 17,350 shares were withheld.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.32 Agreement and Plan of Merger dated as of April 15, 1998
among the Company, SMSI Acquisition Company, Signal
Medical Services, Inc. and its stockholders, filed
herewith.
(b) REPORTS ON FORM 8-K.
On February 17, 1998, the Company filed with the SEC a current
report on Form 8-K describing the Recapitalization under Item 5.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSIGHT HEALTH SERVICES CORP.
/S/ E. Larry Atkins
----------------------------------
E. Larry Atkins
President and Chief Executive Officer
/S/ Thomas V. Croal
----------------------------------
Thomas V. Croal
Executive Vice President,
Chief Financial Officer and Secretary
Date: May 13, 1998
20
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EXHIBIT INDEX
TO FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 1998
EXHIBIT NO. DESCRIPTION AND REFERENCE
----------- -------------------------
10.32 Agreement and Plan of Merger dated as of April 15, 1998
among the Company, SMSI Acquisition Company, Signal Medical
Services, Inc. and its stockholders, filed herewith.
21
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
INSIGHT HEALTH SERVICES CORP.,
SMSI ACQUISITION COMPANY,
SIGNAL MEDICAL SERVICES, INC.
AND ITS STOCKHOLDERS
DATED AS OF APRIL 15, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1-
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1-
1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . .-2-
1.3 Effect of the Merger . . . . . . . . . . . . . . . . . . . . . . . . .-2-
1.4 Charter, By-laws, Officers and Directors of Surviving Corporation. . .-2-
1.5 Taking of Necessary Action . . . . . . . . . . . . . . . . . . . . . .-2-
1.6 Authorization of the Merger, this Agreement and the Certificate of
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2-
1.7 The Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-3-
ARTICLE II EFFECT OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . .-3-
2.1 Effect on Capital Stock. . . . . . . . . . . . . . . . . . . . . . . .-3-
2.2 Surrender of Certificates; Delivery of Funds; Adjustment to Merger
Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . .-4-
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE MINORITY STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . .-6-
3.1 Organization, Power, Authority and Good Standing. . . . . . . . . . .-6-
3.2 Authorization, Execution and Enforceability. . . . . . . . . . . . . .-7-
3.3 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-7-
3.4 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . .-7-
3.5 Subsidiaries; Investments. . . . . . . . . . . . . . . . . . . . . . .-8-
3.6 Financial Information. . . . . . . . . . . . . . . . . . . . . . . . .-8-
3.7 Absence of Changes. . . . . . . . . . . . . . . . . . . . . . . . . -10-
3.8 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
3.9 Title to Assets, Properties and Rights and Related Matters. . . . . -12-
3.10 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
3.11 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . -14-
3.12 Material Contracts. . . . . . . . . . . . . . . . . . . . . . . . . -14-
3.13 Litigation, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
3.14 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . . . . -15-
3.15 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
3.16 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
3.17 ERISA Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . -17-
3.18 Certain Additional Regulatory Matters. . . . . . . . . . . . . . . . -19-
3.19 Medicare/Medicaid Participation; Accreditation . . . . . . . . . . . -20-
3.20 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . -21-
3.21 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
</TABLE>
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<TABLE>
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3.22 Related Party Transactions.. . . . . . . . . . . . . . . . . . . . . -21-
3.23 Accounts and Notes Receivable. . . . . . . . . . . . . . . . . . . . -22-
3.24 Bank Accounts; Powers of Attorney. . . . . . . . . . . . . . . . . . -22-
3.25 Customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
3.26 Guarantees; Powers of Attorney. . . . . . . . . . . . . . . . . . . -22-
3.27 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
3.28 Cumulative Exceptions. . . . . . . . . . . . . . . . . . . . . . . . -22-
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SMSI . . . . . . . . . . . . . . . -23-
4.1 Organization; Corporate Authority. . . . . . . . . . . . . . . . . . -23-
4.2 Corporate Action; Authority; No Conflict. . . . . . . . . . . . . . -23-
4.3 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
4.4 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
4.5 Company Representations. . . . . . . . . . . . . . . . . . . . . . . -24-
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE MINORITY
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
5.1 Authority; No Conflict. . . . . . . . . . . . . . . . . . . . . . . -24-
5.2 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
5.3 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF INSIGHT AND
NEWCO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
6.1 Organization; Corporate Authority. . . . . . . . . . . . . . . . . . -25-
6.2 Corporate Action; Authority; No Conflict. . . . . . . . . . . . . . -25-
6.3 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
6.4 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
6.5 Investment Intent. . . . . . . . . . . . . . . . . . . . . . . . . . -26-
ARTICLE VII COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . -26-
7.1 Access to Records and Properties of the Company. . . . . . . . . . -26-
7.2 Conduct of the Company. . . . . . . . . . . . . . . . . . . . . . . -26-
7.3 Anthem Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
7.4 Efforts to Consummate. . . . . . . . . . . . . . . . . . . . . . . . -28-
7.5 Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
7.6 Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . -29-
7.7 Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
</TABLE>
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<TABLE>
<CAPTION>
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7.8 Stock Option Plans. . . . . . . . . . . . . . . . . . . . . . . . . -29-
7.9 Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
7.10 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
7.11 General Release. . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
7.12 Cooperation and Access to Information. . . . . . . . . . . . . . . . -31-
7.13 Amendment of the Company's 401(k) Plan . . . . . . . . . . . . . . . -31-
ARTICLE VIII CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
8.1 Conditions to Each Party's Obligation to Effect the Merger. . . . . -32-
8.2 Conditions to the Company's Obligation to Effect the Merger. . . . -32-
8.3 Conditions to InSight's and Newco's Obligations to Effect the Merger -33-
ARTICLE IX TERMINATION; EFFECT OF TERMINATION . . . . . . . . . . . . . . . . . -34-
9.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
9.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . -35-
ARTICLE X SURVIVAL AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . -35-
10.1. Survival of Representations. . . . . . . . . . . . . . . . . . . . . -35-
10.2. Indemnification by the Company and the Minority Stockholders . . . . -35-
10.3. Indemnification by SMSI. . . . . . . . . . . . . . . . . . . . . . . -36-
10.4. Indemnification by InSight and Newco . . . . . . . . . . . . . . . . -36-
10.5. Procedures for Third Party Indemnification . . . . . . . . . . . . . -36-
10.6. Notice of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
10.7. Limitations on Indemnification by the Stockholders . . . . . . . . . -37-
10.8 Tax Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
10.9. Indemnified Losses . . . . . . . . . . . . . . . . . . . . . . . . . -38-
10.10 Indemnification Threshold. . . . . . . . . . . . . . . . . . . . . . -38-
10.11 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
ARTICLE XI MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . -39-
11.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
11.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
11.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
11.4 Benefits of Agreement. . . . . . . . . . . . . . . . . . . . . . . . -40-
11.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
11.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
11.7 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
11.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
</TABLE>
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11.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
11.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
11.11 Incorporation of Exhibits and Schedules. . . . . . . . . . . . . . . -42-
11.12 Independence of Covenants and Representations and Warranties . . . . -42-
11.13 Interpretation; Construction . . . . . . . . . . . . . . . . . . . . -43-
11.14 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . -43-
</TABLE>
Annex I Definitions
Exhibit A Form of Certificate of Merger
Exhibit B Form of Anthem Guaranty
Exhibit C Form of Option Agreements
Exhibit D Form of Option Settlement Agreements
Exhibit E Form of Employment Agreements and Amendment to Employment
Agreement
Exhibit F Form of Escrow Agreement
SCHEDULES
2.2(b) Assumed Debt Adjustment Schedule
3.1 Good Standing of the Company
3.2 Violations
3.3 Consents
3.4(a) Capitalization
3.4(b) Options
3.5 Subsidiaries; Investments
3.6(a) Financial Information
3.6(c) Indebtedness; Cash and Cash Equivalents
3.6(d) Fixed Asset Schedule; Commitments List
3.7 Changes since Latest Balance Sheet Date
3.8(a) Tax Returns and Reserves
3.8(b) Tax Audits
3.8(d) Tax Matters
3.9(a) Personal Property
3.9(b) Personal Property Leases
3.10 Leased Property
3.11 Intellectual Property
3.12(a) Material Contracts
3.12(b) Breaches of Contracts
3.13(a) Litigation
3.13(b) Criminal Sanctions and Payments
3.14 Permits
3.15 Insurance
3.16(a) Employees
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<PAGE>
3.16(b) Options
3.17 Employee Plans
3.20(c) Environmental Matters
3.22 Related Party Transactions
3.23 Accounts and Notes Receivable
3.24 Bank Accounts
3.25 Customers
3.26 Guarantees; Powers of Attorney
7.2 Employee Bonuses in Addition to Option Settlements
8.3(e) Required Consents
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of April 15,
1998, by and among (i) InSight Health Services Corp., a Delaware corporation
("InSight"), (ii) SMSI Acquisition Company, a Delaware corporation and a wholly-
owned subsidiary of InSight ("Newco"), (iii) Signal Medical Services, Inc., a
Delaware corporation (the "Company"), (iv) SMSI Holdings, Inc., a Connecticut
corporation ("SMSI") and (v) Brian P. Stone ("Stone"), Thomas W. Crucitti
("Crucitti") and Todd Stowell ("Stowell") (Stone, Crucitti and Stowell are
sometimes collectively referred to herein as the "Minority Stockholders" and,
with SMSI, as the "Stockholders"). Certain capitalized terms used herein are
defined on ANNEX I hereto.
WHEREAS, the Boards of Directors of InSight and Newco have determined that
it is fair and in the best interests of their respective stockholders for the
Company to merge with and into Newco (the "Merger") pursuant to Section 251 of
the Delaware General Corporation Law (the "Delaware Statute") upon the terms and
subject to the conditions set forth herein;
WHEREAS, the Company's Board of Directors and the Stockholders have adopted
resolutions approving the Merger, this Agreement and the transactions to which
the Company and the Stockholders are parties contemplated hereby, upon the terms
and subject to the conditions set forth herein;
WHEREAS, the parties have agreed (subject to the terms and conditions of
this Agreement) to effect the Merger, as more fully described herein; and
WHEREAS, InSight, Newco, the Company and the Stockholders desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual benefits to
be derived from this Agreement and the representations, warranties, covenants,
agreements and conditions hereinafter set forth, the parties hereby agree as
follows:
ARTICLE I
GENERAL
1.1 THE MERGER. In accordance with, and subject to, the provisions of this
Agreement, the Certificate of Merger and the Delaware Statute, the Company shall
be merged with and into Newco, which, at and after the Effective Time, shall be
and is hereinafter sometimes referred to as the "Surviving Corporation." Newco
and the Company are hereinafter sometimes collectively referred to as the
"Constituent Corporations."
<PAGE>
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective on the
Closing Date at the time of the filing by the Surviving Corporation of the
Certificate of Merger with the Secretary of State of the State of Delaware (or
at such later time as is specified in the Certificate of Merger). The
Certificate of Merger shall be executed and delivered in the manner provided
under the Delaware Statute. The time when the Merger shall become effective is
referred to herein as the "Effective Time."
1.3 EFFECT OF THE MERGER. Except as specifically set forth herein or in the
Certificate of Merger, at the Effective Time, the identity, existence, corporate
organization, purposes, powers, objects, franchises, privileges, rights,
immunities, restrictions, debts, liabilities and duties (collectively, the
"Corporate Rights") of Newco shall continue in effect and be unimpaired by the
Merger, and the Corporate Rights of the Company shall be merged with and into
Newco, which shall, as the Surviving Corporation, be fully vested therewith. At
the Effective Time, the separate existence and corporate organization of the
Company shall cease, and the Company shall be merged with and into the Surviving
Corporation.
1.4 CHARTER, BY-LAWS, OFFICERS AND DIRECTORS OF SURVIVING CORPORATION. From
and after the Effective Time, Newco's certificate of incorporation ("Newco's
Charter") shall be the certificate of incorporation of the Surviving Corporation
until altered, amended or repealed as provided in the Delaware Statute except
that Newco's Charter shall be amended to change Newco's name to Signal Medical
Services, Inc.; the by-laws of Newco ("Newco's By-Laws") shall be the by-laws of
the Surviving Corporation, unless and until altered, amended or repealed as
provided in the Delaware Statute, Newco's Charter or Newco's By-Laws; and the
officers and directors of Newco shall be the officers and directors of the
Surviving Corporation, respectively, unless and until removed or until their
respective terms of office shall have expired in accordance with the Delaware
Statute, Newco's Charter or Newco's By-Laws, as applicable.
1.5 TAKING OF NECESSARY ACTION. Prior to the Effective Time, and subject to
the terms and conditions contained in this Agreement, the parties hereto shall
take or cause to be taken all such actions as may be necessary or appropriate to
effectuate, as expeditiously as reasonably practicable, the Merger.
1.6 AUTHORIZATION OF THE MERGER, THIS AGREEMENT AND THE CERTIFICATE OF MERGER.
(a) Prior to or simultaneously with the execution and delivery of this
Agreement, all of the members of the Company's Board of Directors, an authorized
officer of SMSI, on behalf of SMSI as a stockholder of the Company, and the
Minority Stockholders shall execute and deliver to InSight and Newco a joint
written consent in lieu of a meeting, which written consent shall include
resolutions approving and adopting the Merger, this Agreement, the Certificate
of Merger and the Related Documents and consummation of the transactions
contemplated hereby, as required by the Delaware Statute.
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<PAGE>
(b) Prior to or simultaneously with the execution and delivery of this
Agreement, all of the members of the Boards of Directors of InSight and Newco,
and an authorized officer of InSight, on behalf of InSight as the sole
stockholder of Newco, shall execute written consents in lieu of a meeting, which
written consents shall include resolutions approving and adopting the Merger,
this Agreement, the Certificate of Merger and the Related Documents and
consummation of the transactions contemplated hereby, as required by the
Delaware Statute.
(c) The parties shall take as promptly as practicable all such other
actions as may be necessary or advisable under the Delaware Statute and any
other applicable law or regulation in connection with this Agreement, the Merger
or the Certificate of Merger.
1.7 THE CLOSING. The closing of the transactions contemplated hereby (the
"Closing") will take place as promptly as practicable after satisfaction or
waiver of the conditions set forth in Article VIII or such other date (the
"Closing Date") to be mutually agreed upon by the parties. On the Closing Date,
the Surviving Corporation shall file the Certificate of Merger with the
Secretary of State of the State of Delaware pursuant to Section 1.2. The
Closing shall take place at the offices of Shipman & Goodwin LLP in Hartford,
Connecticut, unless another place is agreed to by the parties.
ARTICLE II
EFFECT OF MERGER
2.1 EFFECT ON CAPITAL STOCK.
(a) The manner and basis of converting, exchanging or canceling the shares
of capital stock of each of the Constituent Corporations into or for cash (or
the contingent right to receive cash) or securities of the Surviving Corporation
shall be as follows:
(i) each share of common stock, par value $.001 per share, of Newco
issued and outstanding immediately prior to the Effective Time shall remain
issued and outstanding after the Effective Time;
(ii) each Share issued and outstanding immediately prior to the
Effective Time and owned directly or indirectly by the Company (whether as
treasury stock or otherwise) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be canceled and no consideration shall
be delivered in exchange therefor;
(iii) Each Merger Share shall, by virtue of the Merger and without
any action on the part of the holders thereof, cease to be outstanding and be
converted into the right to receive, subject to the terms and conditions of this
Agreement, an amount in cash equal to the Merger Consideration; and
-3-
<PAGE>
(iv) each Share authorized but unissued immediately prior to the
Effective Time shall be canceled.
2.2 SURRENDER OF CERTIFICATES; DELIVERY OF FUNDS; ADJUSTMENT TO MERGER
CONSIDERATION.
(a) Promptly after the Effective Time, Newco shall pay to (1) the Escrow
Agent the sum of $1,500,000 (the "Escrow Amount") to be held in accordance with
the terms of the Escrow Agreement, and (2) each holder of an outstanding
certificate or certificates which prior thereto represented Merger Shares (each,
a "Certificate"), upon surrender of such Certificate or Certificates duly
endorsed in blank to Newco, cash in an amount equal to the Closing Merger
Payment, as determined pursuant to Section 2.2(b), multiplied by the percentage
of all Merger Shares that the Merger Shares represented by such holder's
Certificate(s) comprise. Until surrendered as contemplated by this Section
2.2(a), each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive (i) upon such surrender, the Closing Merger
Payment multiplied by the percentage of all Merger Shares that the Merger Shares
represented by such Certificate comprise, (ii) in accordance with Section
2.2(d), the Final Adjustment, if applicable, multiplied by the percentage of all
Merger Shares that the Merger Shares represented by such Certificate comprise,
and (iii) such portion of the Escrow Amount as is determined pursuant to the
Escrow Agreement, if and when payable in accordance with the terms of the Escrow
Agreement.
(b) At or prior to the Closing, the Company shall cause to be prepared and
delivered to InSight and Newco, at the Company's expense, an estimated
consolidated unaudited balance sheet of the Company and its subsidiaries as of
the Closing Date (the "Estimated Closing Balance Sheet"), which shall be
prepared in accordance with GAAP and on a basis consistent with the methods,
principles, practices and policies employed in the preparation and presentation
of the Latest Balance Sheet, together with the workpapers used in the
preparation thereof. The "Closing Merger Payment" shall equal $25,519,936 (1)
increased dollar-for-dollar to the extent that (A) cash or Net Noncash Working
Capital as shown on the Estimated Closing Balance Sheet is greater than cash or
Net Noncash Working Capital as shown on the Latest Balance Sheet and (B) the
amount of Assumed Debt, as calculated based upon the Estimated Closing Balance
Sheet (as adjusted as provided in the definition of Assumed Debt), is less than
$20,809,064 and (2) decreased dollar-for-dollar to the extent that (A) cash or
Net Noncash Working Capital as shown on the Estimated Closing Balance Sheet is
less than cash or Net Noncash Working Capital as shown on the Latest Balance
Sheet and (B) the amount of Assumed Debt, as calculated based upon the
Estimated Closing Balance Sheet (as adjusted as provided in the definition of
Assumed Debt), is greater than $20,809,064.
(c) As soon as practicable, but in no event later than 60 days following
the Closing Date, InSight and Newco shall cause to be prepared and delivered to
the Stockholders, at InSight's and Newco's expense, an unaudited consolidated
balance sheet of the Company and its subsidiaries as of the Closing Date (the
"Closing Balance Sheet"), which shall be prepared in
-4-
<PAGE>
accordance with GAAP and on a basis consistent with the methods, principles,
practices and policies employed in the preparation and presentation of the
Latest Balance Sheet, together with the workpapers used in the preparation
thereof.
(d) InSight and Newco shall deliver a copy of the Closing Balance Sheet to
the Stockholders promptly after it has been prepared. After receipt of the
Closing Balance Sheet, the Stockholders shall have 30 days to review the Closing
Balance Sheet, together with the workpapers used in the preparation thereof.
Unless the Stockholders deliver written notice to InSight and Newco on or prior
to the 30th day after the Stockholders' receipt of the Closing Balance Sheet
stating that the Stockholders have objections to the Closing Balance Sheet, the
Stockholders shall be deemed to have accepted and agreed to the Closing Balance
Sheet. If the Stockholders so notify InSight and Newco of objections to the
Closing Balance Sheet, the Stockholders and InSight and Newco shall, within 30
days (or such longer period as they may agree) following such notice (the
"Resolution Period"), attempt to resolve their differences and any resolution by
them as to any disputed amounts shall be final, binding and conclusive.
(e) Any amounts remaining in dispute at the conclusion of the Resolution
Period ("Unresolved Changes") shall be submitted to Coopers & Lybrand, LLP (the
"Neutral Auditors") within five business days after the expiration of the
Resolution Period. The Stockholders and Newco will execute, if requested by the
Neutral Auditors, a reasonable engagement letter. All fees and expenses
relating to the work, if any, to be performed by the Neutral Auditors shall be
borne pro rata by the Stockholders and Newco in proportion to the allocation of
the dollar amount of the Unresolved Changes between the Stockholders, on the one
hand, and InSight and Newco, on the other hand, made by the Neutral Auditors
such that the prevailing party (or parties) pay a lesser proportion of the fees
and expenses. The Neutral Auditors shall act as an arbitrator to determine,
based on the provisions of this Section 2.2(e), only the Unresolved Changes.
The Neutral Auditors' determination of the Unresolved Changes shall be made
within 45 days of the submission of the Unresolved Changes thereto, shall be set
forth in a written statement delivered to the Stockholders and InSight and Newco
and shall be final, binding and conclusive. The term "Adjusted Closing Balance
Sheet," as used in this Agreement, shall mean the definitive Closing Balance
Sheet agreed to (or deemed agreed to) by the Stockholders, InSight and Newco
under Section 2.2(d) or, if Unresolved Changes are submitted to the Neutral
Auditors, such definitive Closing Balance Sheet, as adjusted to reflect the
determination of the Neutral Auditors under this Section 2.2(e).
(f) The Closing Merger Payment shall be (1) increased dollar-for-dollar to
the extent that (A) cash or Net Noncash Working Capital as shown on the Adjusted
Closing Balance Sheet is greater than cash or Net Noncash Working Capital as
shown on the Estimated Closing Balance Sheet and (B) Assumed Debt, as calculated
based upon the Adjusted Closing Balance Sheet (as adjusted as provided in the
definition of Assumed Debt), is less than Assumed Debt, as calculated based upon
the Estimated Closing Balance Sheet (as adjusted as provided in the definition
of Assumed Debt), and (2) decreased dollar-for-dollar to the extent that (A)
cash or Net Noncash Working Capital as shown on the Adjusted Closing Balance
Sheet is less than cash
-5-
<PAGE>
or Net Noncash Working Capital as shown on the Estimated Closing Balance
Sheet and (B) Assumed Debt, as calculated based upon the Adjusted Closing
Balance Sheet (as adjusted as provided in the definition of Assumed Debt), is
greater than Assumed Debt, as calculated based upon the Estimated Closing
Balance Sheet (as adjusted as provided in the definition of Assumed Debt).
Any such adjustment to the Closing Merger Payment made pursuant to this
Section 2.2(f) (the "Final Adjustment") shall be paid by wire transfer of
immediately available funds to a bank account specified by the party (or
parties) to which such payment is owed. If the Final Adjustment is agreed to
(or deemed agreed to) by the Stockholders and InSight and Newco before or
during the Resolution Period, then payment thereof shall be made within five
business days after the date of such agreement (or deemed agreement). If
there are Unresolved Changes at the end of the Resolution Period, then (i)
the minimum amount which the Stockholders and InSight and Newco agree is owed
pursuant to this Section 2.2(f) shall be paid within five business days after
the end of the Resolution Period and any additional amounts owing with
respect to the Unresolved Changes shall be paid within five business days
after the resolution thereof by the Neutral Auditors or (ii) in all other
cases, any and all payments shall be made within five business days after the
resolution of the Unresolved Changes by the Neutral Auditors.
(g) All payments made pursuant to Section 2.2(f) shall be accompanied by
interest at the Applicable Rate from the Closing Date through the date of
payment.
(h) All cash paid upon the surrender for exchange of Certificates in
accordance with the terms of this Article II shall be deemed to have been paid
in full satisfaction of all rights pertaining to the Merger Shares exchanged for
cash theretofore represented by such Certificates. If any Certificates shall not
have been surrendered prior to 360 days after the Effective Time, any such cash
in respect of such Certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE MINORITY
STOCKHOLDERS
The Company and each Minority Stockholder, jointly and severally, represent
and warrant to Newco and InSight as follows:
3.1 ORGANIZATION, POWER, AUTHORITY AND GOOD STANDING. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite power and
authority (corporate and otherwise) to own, lease and operate its assets and
properties and to carry on its business as presently conducted. The Company is
duly qualified and in good standing to transact business as a foreign
corporation in those jurisdictions set forth on Schedule 3.1, which constitute
all the jurisdictions in which the character of the property owned, leased or
operated by such entity or the nature of the business or
-6-
<PAGE>
activities conducted by such entity makes such qualification necessary,
except where the failure to so qualify would not have a Material Adverse
Effect. InSight has been furnished with true, correct and complete copies of
the Company's Charter, certified by the Secretary of State of the State of
Delaware, and the Company's By-Laws, certified by the Secretary or an
Assistant Secretary of the Company, in each case as amended and in effect on
the date hereof. The Company's Charter and the Company's By-Laws are in full
force and effect and the Company is not in violation of any of the provisions
thereof.
3.2 AUTHORIZATION, EXECUTION AND ENFORCEABILITY. The Company has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and each Related Document to which it is a party and to
consummate the transactions contemplated hereby and thereby. The Company's
execution and delivery of this Agreement and each Related Document to which it
is a party, and performance by the Company of its obligations hereunder and
thereunder have been duly and validly authorized by all requisite action on the
part of the Company and its Stockholders (who have unanimously voted to approve
the Merger), and this Agreement and each Related Document to which the Company
is or will be a party has been, or upon the execution and delivery thereof will
be, duly and validly executed and delivered by the Company and constitutes, or
upon its execution and delivery will constitute, a valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
except that such enforcement is subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other similar laws affecting
generally the enforcement of creditors' rights. Except as set forth on Schedule
3.2 or as otherwise contemplated by this Agreement, neither the Company's
execution and delivery of, and/or performance of its obligations under, this
Agreement or the Related Documents to which it is or will be a party, nor the
consummation of the transactions contemplated hereby or thereby will (a) violate
in any material respect, or result in the creation of an Encumbrance upon any of
the Company's assets as a result of, any Laws applicable to the Company or any
of its properties or assets or (b) violate the Company's Charter or the
Company's By-Laws.
3.3 CONSENTS. Except as set forth on Schedule 3.3 or as required pursuant to
the HSR Act, no consent, approval, Permit, Order or authorization of,
registration, declaration or filing with, or notification to any Person is
required in connection with the execution, delivery and performance by the
Company of this Agreement or the Related Documents to which it is a party or the
consummation of the transactions contemplated hereby or thereby, except such
consents, approvals, Permits, Orders, authorizations, registrations,
declarations or filings the lack of which would not have a Material Adverse
Effect.
3.4 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 110,000 duly
authorized Shares, of which 75,920 Shares are outstanding and 17,580 Shares are
held in the Company's treasury, and 60,000 duly authorized Preferred Shares.
All of the Company's
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outstanding Shares are validly issued, fully paid and nonassessable and held
of record by the Persons and in the amounts set forth on Schedule 3.4(a).
Prior to the date of the Letter of Intent, SMSI was the record and beneficial
owner for state corporate law purposes of at least 80% of the issued and
outstanding Shares and has remained (and will remain) the record and
beneficial owner for state corporate law purposes of at least 80% of the
issued and outstanding Shares until the Effective Time. The Company has
delivered to InSight originals or copies of all agreements, including summary
descriptions of any oral agreements and instruments, relating to SMSI's
acquisition or ownership of such Shares.
(b) Except as set forth on Schedule 3.4(b), there are no Options presently
outstanding. There are no voting trusts or other agreements or understandings
to which the Company is bound with respect to the voting of the Company's
capital stock. There are no stock appreciation rights, phantom stock rights or
similar rights or arrangements outstanding. Except as set forth on Schedule
3.4(b) or as otherwise contemplated by this Agreement, there are no Contracts,
commitments, arrangements, understandings or restrictions to which the Company
is bound relating in any way to any shares of capital stock or other securities
of the Company.
(c) All securities issued by the Company have been issued in transactions
exempt from registration under the Securities Act and the rules and regulations
promulgated thereunder and all applicable state securities or "blue sky" laws,
and the Company has not violated the Securities Act or any applicable state
securities or "blue sky" laws in connection with the issuance of any such
securities.
3.5 SUBSIDIARIES; INVESTMENTS. Except as set forth on Schedule 3.5, the
Company does not own or hold, directly or indirectly, any equity or partnership
interest in any Person. Except as set forth on Schedule 3.5, the Company has
neither any right nor any option to acquire any equity, partnership or joint
venture interest in any person and the Company is not a participant, as a
partner or otherwise, in any joint venture or common or pooled risk business
enterprise. Except as set forth on Schedule 3.5, all of the equity,
partnership or other interests set forth on Schedule 3.5 are owned of record and
beneficially by the Company, free and clear of all Encumbrances. Except as set
forth on Schedule 3.5, since the Latest Balance Sheet Date, no equity interests
of any Subsidiary were issued, reserved for issuance, issuable or have been
outstanding. All equity interests of the Subsidiaries are fully paid,
nonassessable and not subject to preemptive rights. The authorized capital
stock or equity interests of each Subsidiary is as set forth in Schedule 3.5.
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3.6 FINANCIAL INFORMATION.
(a) Schedule 3.6(a) contains true, correct and complete copies of the
audited consolidated balance sheets of the Company as of December 31, 1995, 1996
and 1997, and the related audited consolidated statements of operations,
stockholders' equity and cash flows of the Company for the fiscal years then
ended, including the footnotes thereto, as audited by (and together with the
report of their audit) KPMG Peat Marwick (all of foregoing being hereinafter
collectively called the "Financial Statements").
(b) The Financial Statements were prepared in accordance with GAAP applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present, in all material respects, the
consolidated financial position of the Company and its Subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended. Except as set forth on Schedule 3.6(a) and except for Liabilities shown
on the Latest Balance Sheet, the Assumed Debt Schedule or incurred in the
ordinary course of business consistent with past practice since the Latest
Balance Sheet Date, neither the Company nor any of its Subsidiaries has any
Liabilities required by GAAP to be set forth on a balance sheet or in the notes
thereto. Management of the Company has no reason to believe that with respect
to its long-lived assets and intangible assets which are subject to Financial
Accounting Standards No. 121, as of December 31, 1997, the undiscounted future
cash flows related to such assets did not exceed the carrying values thereof
recorded as of such date, as required by GAAP.
(c) Schedule 3.6(c) sets forth, as of the close of business on December
31, 1997, (A) the consolidated indebtedness owed by the Company and its
Subsidiaries to all third parties, separately identifying the portion of such
indebtedness incurred in respect of (i) any Magnetic Resonance Imaging unit
(each, an "MRI Unit") owned, leased or on order by the Company or any
Subsidiary, including mobile and fixed site MRI Units, (ii) any equipment owned,
leased or on order by the Company or any Subsidiary, which equipment is used to
provide computed axial tomography services and imaging systems (each a "CT
Unit"), including mobile and fixed CT Units, (iii) any equipment owned, leased
or on order by the Company or any Subsidiary, which equipment is used to provide
lithotripsy procedures (each a "LI Unit"), including mobile and fixed LI Units,
(iv) any equipment owned, leased or on order by the Company or any Subsidiary,
which equipment is used to provide multi-modality imaging procedures (each an
"MMI Unit"), including mobile and fixed MMI Units and (v) the construction
costs incurred in respect of any fixed site location, and (B) the Company's
aggregate consolidated cash and cash equivalents, in the case of clauses (A) and
(B), each calculated in accordance with GAAP, consistently applied. The term
"indebtedness" shall include indebtedness for borrowed money, reimbursement
obligations with respect to letters of credit and similar instruments,
obligations incurred, issued or assumed as the deferred purchase price of
property or services (other than accounts payable incurred in the ordinary
course of business consistent with past practice), obligations of others secured
by (or, for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured) any Lien on property or assets of the
Company or any Subsidiary, capital lease obligations, and obligations in respect
of guarantees of any of the foregoing or any
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"keep well" or other agreement to maintain any financial statement condition
of another person, in each case, whether or not matured, liquidated, fixed,
contingent, or disputed.
(d) Schedule 3.6(d) sets forth, (i) as of December 31, 1997, a fixed asset
schedule that includes a general description of each MRI Unit, CT Unit, LI Unit
and MMI Unit (including type, purchase price (to the extent available), age,
vendor and upgrades thereto) owned or subject to capital lease or operating
lease obligations by the Company or any Subsidiary as of that date, and (ii) as
of the date of this Agreement, a list (the "Commitments List") of all
outstanding Contracts of the Company or any Subsidiary to purchase an MRI Unit,
CT Unit, LI Unit or MMI Unit (including type, vendor, upgrades and delivery date
thereto), indicating for each such Contract, the purchase price as indicated on
the purchase order therefor placed with the manufacturer or other seller of such
unit.
3.7 ABSENCE OF CHANGES. Except as set forth on Schedule 3.7, since the Latest
Balance Sheet Date, the Company has been operated in the ordinary course,
consistent with past practice, and the Company has not:
(a) suffered any change in its business, operations, assets, financial
condition, operating results or Liabilities which has had or is reasonably
likely to have a Material Adverse Effect on the Company and its Subsidiaries
(taken as a whole) or any material casualty loss or damage or destruction to the
assets of the Company (taken as a whole), whether or not covered by insurance (a
"Material Adverse Change");
(b) declared or made or agreed to declare or make any distributions of any
assets of any kind whatsoever to any shareholder as a dividend, in redemption or
as the purchase price of any Shares or Options or in discharge or cancellation,
whether in part or in whole, of any indebtedness (whether in payment of
principal, interest or otherwise) owing to any of them, or for any other
purpose, except the payment of normal compensation and the reimbursement of bona
fide business expenses in the ordinary course of operating the Company
consistent with past practices;
(c) issued or sold or contracted to issue or sell any Shares or Options or
rights to purchase any Shares or Options;
(d) mortgaged, pledged, hypothecated or otherwise encumbered any of its
material assets, tangible or intangible;
(e) sold or transferred any of its assets, property or rights, or canceled
or agreed to cancel any of its debts or claims, except for fair value in the
ordinary course of business;
(f) suffered any change in its Business, its relationships with its
customers, or its contracts with customers or suppliers which has a Material
Adverse Effect;
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(g) incurred any commitment (through negotiations or otherwise) or any
Liability to any labor organization or been involved in any labor dispute;
(h) materially increased the amount of its indebtedness, obligations or
liabilities outside the ordinary course of business;
(i) entered or agreed to enter into any agreement or arrangement granting
any preferential rights to purchase a material part of its assets, property or
rights;
(j) placed any orders for materials, merchandise or supplies in
exceptional or unusual quantities, based upon past operating practices;
(k) made any material change in the accounting practices or methods
followed by it;
(l) been involved in any event or experienced any condition of any
character that, either individually or in the aggregate, has had or is likely to
have a Material Adverse Effect; or
(m) entered into any agreement, whether in writing or otherwise, to take
any of the actions specified in the foregoing clauses (a) through (l).
3.8 TAX MATTERS.
(a) Except as set forth on Schedule 3.8(a), the Company has duly complied
with, or made adequate reserves for, all requirements imposed on it by all
statutes, requirements, orders, provisions, directions or conditions relating to
Taxes, and has filed all returns, reports and other forms related to Taxes
required to be filed on or before the Closing Date with respect to the Company
in accordance with all applicable laws (after taking into account extensions
duly obtained), and no penalties or other charges have been asserted against the
Company or are due or will become due with respect to the late filing of any
such return, report or form. All Taxes and estimated Taxes shown to be due on
such returns, reports and forms have been paid or provided for in reserves of
the Company. The Company shall make adequate reserves for all Taxes related to
operations through the Closing Date (other than Taxes related to the Merger)
and the Estimated Closing Balance Sheet and the Adjusted Closing Balance Sheet
shall reflect such reserves.
(b) Schedule 3.8(b) describes all Tax audits of the Company that have
occurred within the three years preceding the Closing, including the outcome of
each such audit. Except as set forth on Schedule 3.8(b), no audit of any such
return, report or form is pending or, to the Company's Knowledge, threatened.
The Company is not a party to any pending action or proceeding by any
Governmental Entity for assessment or collection of Taxes, and no claim for
assessment or collection of Taxes has been asserted or, to the Company's
Knowledge, threatened against the Company. Complete copies of the informational
or other income tax returns of the Company for the three fiscal years ending in
1995 and 1996, as filed with the appropriate Governmental Entity, have been
supplied to InSight. Except as set forth on Schedule 3.8(b), no
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waivers of statutes of limitations have been given or requested with respect
to the Company which remain outstanding. In connection with any Tax audit
set forth on Schedule 3.8(b), the Company has supplied to InSight copies of
any no change letters, examination reports and, in the case of any ongoing
audits, any written requests for information or documents.
(c) The Company was not a Tax Affiliate of any other entity at any time
prior to January 1, 1998 and was not party to any consolidated Tax Return for
any period beginning prior to January 1, 1998.
(d) Since December 31, 1993, except as set forth on Schedule 3.8(d):
(i) neither the Company nor any Subsidiary has any liability in
respect of any Tax sharing agreement with any Person and all Tax sharing
agreements to which either the Company or any Subsidiary has been bound have
been terminated;
(ii) the Company has not incurred any Liability to make or possibly
make any payments either alone or in conjunction with any other payments that:
(A) shall be non-deductible under, or would otherwise constitute
a "parachute payment" within the meaning of Section 280G of the Code (or any
corresponding provision of state, local or foreign income Tax Law); or
(B) are or may be subject to the imposition of an excise Tax
under Section 4999 of the Code;
(iii) no claim has been made within the last three years by any
taxing authority in a jurisdiction in which the Company does not file Tax
Returns that the Company is or may be subject to taxation by that jurisdiction.
(e) The Company is not currently, nor has it been at any time during the
previous five years, a "U.S. real property holding corporation" and, therefore,
the Shares are not "U.S. real property interests," as such terms are defined in
Section 897 of the Code.
3.9 TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS.
(a) The Company has good and marketable title to, or valid, enforceable
and sufficient leases to use and possess, all of the personal properties and
interests in properties reflected on the Latest Balance Sheet or acquired after
the Latest Balance Sheet Date (except inventory or other property sold or
otherwise disposed of since the Latest Balance Sheet Date in the ordinary course
of business and accounts receivable and notes receivable to the extent collected
subsequent to the Latest Balance Sheet Date), free and clear of all Encumbrances
or other defects, except as set forth on Schedule 3.9(a) and Permitted
Encumbrances. Such assets comprise all of the personal assets necessary for the
conduct of the Business as currently conducted. Schedule 3.9(a) sets forth a
description of all material tangible personal property,
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indicating whether such property is owned or leased. Such material tangible
personal property is in good operating condition and repair (ordinary wear
and tear excepted) and is not subject to any condition which materially
interferes with the use thereof. THE COMPANY DISCLAIMS ALL OTHER WARRANTIES
REGARDING THE CONDITION OF THE TANGIBLE PERSONAL PROPERTY OF THE COMPANY,
EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
(b) The leases and other agreements or instruments under which the Company
holds, leases, subleases or is entitled to the use of any personal property, or
under which any Person holds, leases, subleases or is entitled to use any
personal property owned or leased by the Company, are reflected on the Latest
Balance Sheet or are described on Schedule 3.9(b) and are in full force and
effect. No material default or event of default by the Company exists and no
event which, with notice or lapse of time or both, would constitute a default by
the Company has occurred and is continuing under the terms or provisions of any
such lease, agreement or other instrument, nor has the Company received notice
of any claim of such default.
3.10 REAL PROPERTY.
(a) The Company does not own any real property. Schedule 3.10 contains a
list by address of all of the real property leased by the Company subject to one
or more leases (the "Leased Property"), including the names of the lessor and
the lessee. The Leased Property constitutes all real property occupied by the
Company in connection with its operations.
(b) With respect to the Leased Property, except as set forth on Schedule
3.10: (i) no portion thereof is subject to any pending condemnation Proceeding
or Proceeding by any Governmental Entity and to the Company's Knowledge there is
no threatened condemnation or Proceeding with respect thereto; (ii) the physical
condition of the Leased Property (absent latent defect, as to which the Company
makes no representation) is sufficient to permit the conduct of the Business as
presently conducted subject to the provision of usual and customary maintenance
and repair performed in the ordinary course; (iii) the Company is the owner and
holder of all the leasehold estates purported to be granted by such leases; (iv)
there are no Contracts to which the Company or any Affiliate thereof is a party
granting to any party or parties the right of use or occupancy of any portion of
the parcels of the Leased Property; (v) there are no parties (other than the
Company or their lessees disclosed pursuant to clause (iv) above) in possession
of the Leased Property; and (vi) no notice of any increase in the assessed
valuation of the Leased Property and no notice of any contemplated special
assessment has been received by the Company. Except as set forth on Schedule
3.10, the leases and other agreements or instruments under which the Company
holds, leases, subleases or is entitled to the use of any of the Leased Property
are in full force and effect. No material default or event of default by the
Company exists and no event which, with notice or lapse of time or both, would
constitute an event of default by the Company has occurred and is continuing
under the terms or provisions of any such lease, agreement or other instrument,
nor has the Company received notice of any claim of such event of default.
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3.11 INTELLECTUAL PROPERTY.
Schedule 3.11 sets forth a list and description of all patents, patent
applications, trademarks, trademark registrations, applications for trademark
registration, service marks, service mark registrations, applications for
service mark registration, trade names and registered copyrights (collectively,
"Intellectual Property") which are owned or licensed by the Company and stating
which are owned and which are licensed (and in the case of licensed Intellectual
Property, Schedule 3.11 identifies and describes such licenses). The Company is
the sole, unencumbered, legal and beneficial owner of that Intellectual Property
identified as "owned" on Schedule 3.11. The Company has the right to either
transfer, sell or license all owned or licensed Intellectual Property. Except
as described on Schedule 3.11, there are no pending or, to the Company's
Knowledge, threatened claims against the Company by any Person with respect to
any of the items, or their use, listed on Schedule 3.11, nor has any of the
Intellectual Property been infringed, and, to the Company's Knowledge, no Person
has threatened any such infringement.
3.12 MATERIAL CONTRACTS.
(a) Set forth on Schedule 3.12(a) are all Contracts of the Company or any
of its Subsidiaries which are material to the Business as it is conducted by the
Company or any of its Subsidiaries or which involve payment obligations of the
Company or any of its Subsidiaries equal to or in excess of $50,000 for any
single year or which involve payment obligations payable to the Company or any
of its Subsidiaries equal to or in excess of $200,000 for any single year
("Material Contracts"), each of which was entered into, arrived at or conducted
on behalf of the Company or any of its Subsidiaries with appropriate authority
in accordance with the Company's or such Subsidiary's customary practices.
Except as set forth on Schedule 3.12(a), the Company or its Subsidiary, as
applicable, is not and, to the Company's Knowledge, no other party is in
violation of or in default under (nor does there exist any condition affecting
the Company or, to the Company's Knowledge, other parties to such Contracts
which upon the passage of time or the giving of notice or both would reasonably
be expected to cause such a violation of or default under) any Material Contract
to which it is a party or by which it or any of its properties or assets is
bound. Each Material Contract constitutes a valid and binding obligation of the
Company or its Subsidiary, as applicable, and to the Company's Knowledge each
other party thereto, enforceable against such other party in accordance with its
terms. To the Company's Knowledge, no customer, supplier or vendor of the
Company or any of its Subsidiaries has given any notice or made any threat or
otherwise revealed an intent to cancel or otherwise terminate its relationship
with the Company or any of its Subsidiaries or to decrease, limit or otherwise
adversely modify the services, supplies or materials it provides to or receives
from the Company or any of its Subsidiaries. Except as set forth on Schedule
3.12(a), the Company has not within the last three years engaged in any business
other than the Business or used any other trade name or assumed names.
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(b) Except as set forth on Schedule 3.12(b) or as otherwise contemplated
by this Agreement, neither the Company's execution and delivery of, and/or
performance of its obligations under, this Agreement or the Related Documents to
which it is or will be a party, nor the consummation of the transactions
contemplated hereby or thereby will result in any material violation or breach
of any of the terms, conditions or provisions of, or constitute (with due notice
or lapse of time, or both) a material default or give rise to any right of
contingent payment, termination, cancellation or acceleration, or result in the
creation of any Encumbrance upon any of the properties or assets of the Company
or any of its Subsidiaries under, any Material Contract.
3.13 LITIGATION, ETC.
(a) Except as disclosed on Schedule 3.13(a), there are no (i) Proceedings
pending or, to the Company's Knowledge, threatened against or affecting the
business or assets of the Company or any of its Subsidiaries or seeking to
prevent or postpone the consummation of any of the transactions contemplated by
this Agreement or any of the Related Documents, whether at law or in equity,
whether civil or criminal in nature, or (ii) Orders of any Governmental Entity
or arbitrator with respect to, involving or against the Business or assets of
the Company or any of its Subsidiaries.
(b) Schedule 3.13(b) lists each matter of the type described in clauses
(i) or (ii) of Section 3.13(a) that was in existence within the last three
years that resulted in any criminal sanctions or payments in excess of $10,000
by the Company or any of its Subsidiaries (whether as a result of a judgment,
civil fine, settlement or otherwise).
(c) No director or officer of the Company has, since December 31, 1995,
made any claim against the Company for indemnification or advancement of
expenses or claims under any director and officer liability insurance policy in
connection with any threatened, pending or completed Proceeding in which such
director or officer is or was a party or threatened to be made a party, whether
civil, criminal, administrative or investigative, and, to the Knowledge of the
Company and the Minority Stockholders, no reasonable basis for assertion against
the Company or against any insurance company issuing any such director and
officer liability insurance policy exists.
3.14 COMPLIANCE WITH LAWS. The Company and each of its Subsidiaries have all
Permits necessary in the conduct of its Business (all of which are listed on
Schedule 3.14). All such Permits are in full force and effect, no material
violations with respect to any thereof have occurred or are or have been
recorded and no Proceeding is pending or, to the Company's Knowledge, threatened
to revoke or limit any thereof. No notice of investigation or review by any
Governmental Entity with respect to the Company has been received by the Company
or any of its Subsidiaries, nor has any Governmental Entity notified the Company
or any of its Subsidiaries of its intention to conduct the same. The Company
and each of its Subsidiaries have
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conducted the Business, and properly filed all necessary reports, in
accordance with applicable Laws the violation of which might have a Material
Adverse Effect.
3.15 INSURANCE.
(a) Schedule 3.15 contains a true and complete list of all policies of
liability, theft, fidelity, life, fire, product liability, workmen's
compensation, health and other forms of insurance held by the Company and each
Subsidiary (specifying the insurer, amount of coverage and type of insurance).
The Company and each Subsidiary has maintained such insurance coverage at all
times during the course of the operation of the Business. The Company and each
Subsidiary is insured against all risks usually insured against by Persons
conducting similar businesses and operating similar properties in the localities
where the Business is conducted and the properties of the Company and each
Subsidiary are located, under policies of such types, scope and coverage, and in
such amounts, as are reasonable in light of existing conditions. The Company
and its Subsidiaries have not exhausted the insurance coverage available under
the Company's currently existing insurance policies.
(b) Except as set forth on Schedule 3.15, with respect to each policy of
insurance listed on Schedule 3.15: (i) all premiums with respect thereto are
currently paid and are not subject to adjustment, no Person is in default in any
respect with respect to its obligations under such policy, and no basis exists
that would give any insurer under any such policy the right to cancel or
unilaterally reduce or limit the stated coverages contained in such policy; (ii)
there are no outstanding claims currently pending under such policy that could
be expected to cause an increase in the insurance rates of the Company, and no
facts or circumstances exist that might reasonably be expected to relieve the
insurer under such policy of its obligations to satisfy in full any claim
thereunder; and (iii) neither the Company nor any Subsidiary has received any
notice that such policy has been or shall be canceled or terminated or will not
be renewed on substantially the same terms as are now in effect or the premium
on such policy shall be materially increased on the renewal thereof.
3.16 EMPLOYEES.
(a) Except as described on Schedule 3.16(a), the Company does not have any
written or oral Contracts of employment with any employee of the Company, and
the Company is not a party to or subject to any collective bargaining agreements
and has not been a party to or subject to any collective bargaining agreement or
collective bargaining plan during the last five (5) years. The Company is not a
party to any pending or, to the Company's Knowledge, threatened labor dispute
affecting the Business. The Company has complied and is in compliance in all
material respects with all applicable Laws relating to the employment of labor,
including but not limited to the provisions thereof relative to wages, hours,
collective bargaining, payment of social security, unemployment and withholding
taxes and ensuring equality of opportunity for employment and advancement of
minorities and women. The Company is not liable for any arrears of wages or any
Taxes for failure to comply with any of the foregoing. The
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Company has not entered into and is not obligated to enter into any agreement
relating to the payment of vacation pay to any employee and the Company does
not have any obligation to any employee to pay for vacation time, except for
vacation pay in the ordinary course of business. A true and correct
statement of the names, employment status, rates of compensation (including
salaries, wages, commissions and bonuses), accrued paid absence time and
employment commencement dates of all employees of the Company is set forth on
Schedule 3.16(a). To the extent any such employee is on a leave of absence,
Schedule 3.16(a) indicates the nature of such leave of absence and such
employee's anticipated date of return to active employment. To the Company's
Knowledge, none of the key management employees listed on Schedule 3.16(a)
has any plans or intends to terminate his or her employment or engagement
with the Company. No former key management employee has left the service of
the Company within the last six months.
(b) Schedule 3.16(b) sets forth a list of all outstanding Options as of
the date hereof, showing for each such Option: (i) the number of Merger Shares
issuable, (ii) the number of vested Merger Shares, (iii) the date of grant, (iv)
the exercise price and (v) the holder thereof.
3.17 ERISA COMPLIANCE.
(a) Schedule 3.17(a) contains a true, complete and correct list of all
Employee Benefit Plans of the Company (collectively, the "Employee Plans") (i)
that cover any employees, contract employees or former employees of the Company
or any spouses, family members or beneficiaries thereof (A) that are maintained,
sponsored or contributed to by any entity or (B) with respect to which the
Company is obligated to contribute or has any actual or potential Liability, or
(ii) with respect to which the Company has any actual or potential Liability or
obligation on account of the maintenance or sponsorship thereof or contribution
thereto by any present or former ERISA Affiliate (as defined below) of the
Company.
(b) Except as set forth on Schedule 3.17(b), with respect to each Employee
Plan:
(i) each Employee Plan has been established, maintained, operated and
administered in accordance with its terms and in compliance in all material
respects with, if applicable, ERISA, the Code, and other applicable Laws
(including with respect to reporting and disclosure);
(ii) all required, declared or discretionary (in accordance with
historical practices) payments, premiums, contributions, reimbursements or
accruals for all periods ending prior to or as of the date hereof have been made
or properly accrued on the Latest Balance Sheet, or with respect to accruals
properly made after the Latest Balance Sheet Date, on the books and records of
the Company and all amounts withheld from employees have been timely deposited
into the appropriate trust or account;
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(iii) there is no unfunded actual or potential Liability relating
to such Employee Plan which is not reflected on the Latest Balance Sheet, or
with respect to accruals properly made after the Latest Balance Sheet Date, on
the books and records of the applicable entity;
(iv) neither the Company nor any other "disqualified person" or "party
in interest" (as such terms are defined in Section 4975 of the Code and Section
3(14) of ERISA, respectively) with respect to such Employee Plan, has breached
the fiduciary rules of ERISA or engaged in a prohibited transaction that could
subject any of the foregoing Persons to any tax or penalty imposed under Section
4975 of the Code of Section 502(i), (j) or (l) of ERISA;
(v) no Proceedings (other than routine claims for benefits) are
pending or, to the Company's Knowledge, threatened against or relating to any
Employee Plan or any fiduciary thereof, and there is, to the Company's
Knowledge, no basis for any such Proceeding against any Employee Plan;
(vi) each Employee Plan intended to be "qualified" within the meaning
of Section 401(a) of the Code has been determined by the Internal Revenue
Service to be so qualified in form and no event has occurred since the date of
determination that has or could reasonably be expected to adversely affect such
qualification;
(vii) except as may be required under Laws of general application
(including Section 4980B of the Code), no Employee Plan obligates the Company to
provide any employee or former employee, or their spouses, family members or
beneficiaries, any post-employment or post-retirement health or life insurance,
accident or other "welfare-type" benefits;
(viii) if such Employee Plan is a "group health plan" within the meaning
of Section 5000 of the Code, such Employee Plan has been maintained in
compliance with Section 4980B of the Code and Title I, Subtitle B, Part 6 of
ERISA and no tax payable on account of Section 4980B of the Code has been or
is expected to be incurred; and
(ix) the Company does not currently maintain nor has it ever
maintained or been obligated to contribute to a Multiemployer Plan (as defined
in Section 3(37) of ERISA), a Multiple Employer Plan (as defined in Section 413
of the Code) or a Defined Benefit Pension Plan (as defined in Section 3(35) of
ERISA);
(c) InSight has been provided with true and complete copies, to the extent
applicable, of all documents pursuant to which such Employee Plan is maintained
and administered, the most recent annual report (Form 5500 and attachments) and
financial statements therefor, all governmental rulings, notices,
determinations, and opinions (and pending requests therefor), and, if such
Employee Plan provides post-employment or post-retirement health and life
insurance, accident or other "welfare-type" benefits, the most recent valuation
of the present and future obligations under such Employee Plan; and the
foregoing documents
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accurately reflect all of the terms of such Employee Plan (including, without
limitation, any agreement or provision which would limit the ability of any
entity to make any prospective amendments or terminate such Employee Plan).
(d) Except as set forth in Schedule 3.17(d), no actual or potential
Liability (including the obligation to pay any excise Tax, penalty, or claim for
benefits) exists which could be successfully asserted against the Company on
account of or relating to Employee Benefit Plans.
3.18 CERTAIN ADDITIONAL REGULATORY MATTERS.
None of (x) the Company, any Subsidiary of the Company, or the officers,
directors or employees of the Company or any Subsidiary of the Company, (y) to
the Company's Knowledge (for this purpose, without independent investigation or
inquiry), any Person who provides billing services under agreements with the
Company or any Subsidiary of the Company as an agent of such entity, or (z) to
the Company's Knowledge (for this purpose, without independent investigation or
inquiry), any Person with whom the Company has a Contract to provide equipment
or services (but solely with respect to matters relating specifically to such
Contracts), has engaged in any activities which constitute violations of, or are
cause for imposition of civil penalties upon the Company or mandatory or
permissive exclusion of the Company from Medicare or Medicaid, under 42 U.S.C.
Sections 1320a-7, 1320a-7a, 1320a-7b, or 1395nn, the federal Civilian Health and
Medical Plan of the Uniformed Services statute ("CHAMPUS"), or the regulations
promulgated pursuant to such statutes or regulations or related state or local
statutes or any other Fraud and Abuse Laws including the following activities:
(a) knowingly and willfully making or causing to be made a false statement
or misrepresentation of a material fact in any application for any benefit or
payment;
(b) knowingly and willfully making or causing to be made any false
statement or misrepresentation of a material fact for use in determining rights
to any benefit or payment;
(c) presenting or causing to be presented a claim for reimbursement under
CHAMPUS, Medicare, Medicaid or any other State Health Care Program (as defined
below) or Federal Health Care Program (as defined below) that is (i) for an item
or service that the Person presenting or causing to be presented knows or should
know was not provided as claimed, or (ii) for an item or service and the Person
presenting knows or should know that the claim is false or fraudulent;
(d) knowingly and willfully offering, paying, soliciting or receiving any
remuneration (including any kickback, bribe or rebate), directly or indirectly,
overtly or covertly, in cash or in kind (i) in return for referring, or to
induce the referral of, an individual to a Person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part by CHAMPUS, Medicare or Medicaid, or any other State
Health
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Care Program or any Federal Health Care Program, or (iii) in return for, or
to induce, the purchase, lease, or order, or the arranging for or
recommending of the purchase, lease, or order, of any good, facility,
service, or item for which payment may be made in whole or in part by
CHAMPUS, Medicare or Medicaid or any other State Health Care Program or any
Federal Health Care Program; or
(e) knowingly and willfully making or causing to be made or inducing or
seeking to induce the making of any false statement or representation (or
omitting to state a material fact required to be stated therein or necessary to
make the statements contained therein not misleading) of a material fact with
respect to (i) the conditions or operations of a facility in order that the
facility may qualify for CHAMPUS, Medicare, Medicaid or any other State Health
Care Program certification or any Federal Health Care Program certification, or
(ii) information required to be provided under Section 1124(A) of the Social
Security Act ("SSA") (Section 1320 a-3 of Title 42 of the United States Code).
3.19 MEDICARE/MEDICAID PARTICIPATION; ACCREDITATION.
(a) Neither the Company nor any existing officer, director, shareholder
with an interest in the Company of 5% or more or managing employee of the
Company: (1) has had a civil monetary penalty assessed against it under Section
1128A of the SSA or any regulations promulgated thereunder; (2) has been
excluded from participation under the Medicare program or a state health care
program as defined in SSA Section 1128(h) or any regulations promulgated
thereunder ("State Health Care Program") or a federal health care program as
defined in SSA Section 1128B(f) ("Federal Health Care Program"); or (3) has been
convicted (as that term is defined in 42 C.F.R. Section 1001.2) of any of the
following categories of offenses as described in SSA Section 1128(a) and (b)(1),
(2), (3) or any regulations promulgated thereunder:
(i) criminal offenses relating to the delivery of an item or service
under Medicare or any State Health Care Program or any Federal Health Care
Program;
(ii) criminal offenses under federal or state law relating to patient
neglect or abuse in connection with the delivery of a health care item or
service; criminal offenses under federal or state law relating to fraud, theft,
embezzlement, breach of fiduciary responsibility, or other financial misconduct
in connection with the delivery of a health care item or service or with respect
to any act or omission in a program operated by or financed in whole or in part
by any federal, state or local governmental agency;
(iii) federal or state laws relating to the interference with or
obstruction of any investigation into any criminal offense described above in
this clause (a); or
(iv) criminal offenses under federal or state law relating to the
unlawful manufacture, distribution, prescription or dispensing of a controlled
substance.
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(b) Neither the Company nor any of its Subsidiaries bills directly to
Medicare for services furnished by the Company or any of its Subsidiaries.
(c) Neither the Company nor any of its Subsidiaries bills directly to any
state's Medicaid Agency for services provided by the Company or its
Subsidiaries.
3.20 ENVIRONMENTAL MATTERS.
(a) The Company has not received any notice or report (written or, to the
Company's Knowledge, oral) (i) regarding any actual or alleged violation of any
Environmental, Health and Safety Laws, or any Liabilities, relating to any of
its past or presently owned or leased properties or operations or (ii) that the
Company is potentially responsible under any Environmental, Health and Safety
Laws for response costs, corrective action or natural resource damages, as those
terms are defined under the Environmental, Health and Safety Laws, at any
location.
(b) The Company and its predecessors (if any) have not owned any real
property at any time since December 31, 1995. There are no hazardous waste
treatment, storage or disposal facilities located at any of the Leased
Properties.
(c) Except as set forth on Schedule 3.20(c), the Company has not treated,
stored, disposed of, arranged for or permitted the disposal of, transported,
handled or released any substance, or owned or operated any property (and no
such property is contaminated by any such substance) in a manner that has given
or could reasonably be expected to give rise to Liabilities pursuant to any
Environmental, Health and Safety Laws, including any Liability for response
costs pursuant to any Environmental, Health and Safety Laws.
(d) The Company has provided InSight with correct and complete copies of
all reports and studies within the possession or control of the Company with
respect to past or present environmental conditions or events at any of the
Leased Properties.
3.21 BROKERS. There are no claims for brokerage commissions, finder's fees or
similar compensation arising out of or due to any act of the Company in
connection with the transactions contemplated by this Agreement or any Related
Document, other than fees to BancBoston Securities, Inc., for investment banking
services in connection with the transactions contemplated by this Agreement or
the Related Documents, which fees will be paid by the Stockholders.
3.22 RELATED PARTY TRANSACTIONS. Schedule 3.22 sets forth the essential terms
of all transactions between the Company or its Subsidiaries, on the one hand,
and any of their respective Affiliates, directors, officers, employees, or
consultants, on the other hand, in each case consummated at any time since the
Latest Balance Sheet Date. Except as set forth on Schedule 3.22, there are no
agreements or arrangements between the Company or its Subsidiaries, on the one
hand, and any of their respective Affiliates, directors, officers,
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employees or consultants, on the other hand, with respect to any such
transactions. No Affiliate, director, officer, employee or consultant of the
Company owns any interest in any asset or property (real or personal,
tangible or intangible), business or contract used or intended for use or
otherwise relating to the Business currently conducted or proposed to be
conducted by the Company or any Subsidiary and the Company is not a guarantor
or otherwise liable for any actual or potential Liability of any such Person.
3.23 ACCOUNTS AND NOTES RECEIVABLE. Except as set forth on Schedule 3.23, all
accounts receivable and notes receivable owing to the Company as of the date
hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of business, and, except to the extent
reflected in reserves on the consolidated books of the Company, there are no
known or asserted claims, refusals to pay or other rights of set-off against any
thereof.
3.24 BANK ACCOUNTS. Schedule 3.24 sets forth a true and complete list of all
bank accounts, safe deposit boxes, lockboxes and vaults of the Company, the name
and address of each bank or brokerage firm at which each is located and all
persons who are signatories thereunder or who have access thereto.
3.25 CUSTOMERS. Set forth on Schedule 3.25 is a list of the ten largest
customers (measured by dollar volume) of the Company for the year ended December
31, 1997, and with respect to each, the name and address, dollar volume involved
and nature of the relationship. Except as set forth on Schedule 3.25, no
customers to which more than $250,000 in the aggregate of the Company's annual
revenues for the year ended December 31, 1997 are attributable have notified the
Company that they intend to or, to the Company's Knowledge, have threatened to
terminate or materially curtail their relationship and dealings with the
Company, whether as a result of the transactions contemplated by this Agreement
or otherwise.
3.26 GUARANTEES; POWERS OF ATTORNEY. The Company is not a party to any
Guaranty, and has not executed any power of attorney or similar agreements,
except as set forth on Schedule 3.12(a) or Schedule 3.26.
3.27 DISCLOSURE. No representation or warranty of the Company or the Minority
Stockholders contained in this Agreement or the Schedules hereto, and no
certificate of notice furnished by or on behalf of the Company or the Minority
Stockholders or its agents pursuant to this Agreement, contains or will contain
any untrue statement of material fact or omits to state a material fact
necessary to make the statements contained herein or therein not misleading,
taken as a whole.
3.28 CUMULATIVE EXCEPTIONS. The exceptions and qualifications to the
representations and warranties of the Company in this Article III which are
based upon such exceptions and qualifications not being "material" or being "in
all material respects," or not having a Material Adverse Effect will not,
individually or in the aggregate, have a Material Adverse Effect.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SMSI
SMSI represents and warrants to Newco and InSight as follows:
4.1 ORGANIZATION; CORPORATE AUTHORITY. SMSI is a corporation duly organized,
validly existing and in good standing under the Laws of the State of Connecticut
and has all requisite power and authority (corporate or otherwise) to own, lease
and operate its assets and properties and to carry on its business as presently
conducted and as presently proposed to be conducted. InSight has been furnished
with true, correct and complete copies of SMSI's certificate of incorporation
and SMSI's bylaws, in each case as amended and in effect on the date hereof. The
sole stockholder of SMSI is Anthem.
4.2 CORPORATE ACTION; AUTHORITY; NO CONFLICT. SMSI has all requisite power and
authority (corporate and otherwise) to execute, deliver and perform its
obligations under this Agreement and each Related Document to which it is or
will be a party and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by SMSI of this Agreement and
each Related Document to which it is or will be a party, and the performance of
its obligations hereunder and thereunder have been duly and validly authorized
by all necessary corporate action on the part of SMSI and its stockholders.
This Agreement and each Related Document to which SMSI is or will be a party has
been, or upon the execution thereof will be, duly and validly executed and
delivered by SMSI and constitutes, or upon its execution and delivery will
constitute, a valid and binding obligation of SMSI, enforceable against it in
accordance with its terms, except that such enforcement is subject to applicable
bankruptcy, reorganization, insolvency, moratorium and other similar laws
affecting generally the enforcement of creditors' rights. Neither SMSI's
execution and delivery of, and/or performance of its obligations under, this
Agreement and each Related Document to which it is or will be a party, nor the
consummation of the transactions contemplated hereby and thereby will result in
any material violation or breach of any of the terms, conditions or provisions
of, or constitute (with due notice or lapse of time, or both) a material default
under, or give rise to any right of termination, cancellation or acceleration
under any provision of SMSI's certificate of incorporation or SMSI's bylaws or
any Contract to which SMSI is a party or by which it or any of its assets or
properties is or may be bound.
4.3 BROKERS. There are no claims for brokerage commissions, finder's fees or
similar compensation arising out of or due to any act of SMSI in connection with
the transactions contemplated by this Agreement or any Related Document.
4.4 CONSENTS. No consent, approval, Order or authorization of, or
registration, declaration or filing with or notification to (except for any
filings required under the HSR Act), any Governmental Entity is required in
connection with the execution, delivery and performance by
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SMSI of this Agreement or the Related Documents to which SMSI is or will be a
party or the consummation by SMSI of the transactions contemplated hereby or
thereby.
4.5 COMPANY REPRESENTATIONS. (i) The representations and warranties of the
Company and the Minority Stockholders set forth in Sections 3.1, 3.2 and 3.4 are
true and correct and (ii) to the Knowledge of SMSI (without independent
investigation or inquiry), the representations and warranties of the Company and
the Minority Stockholders set forth in Sections 3.3 and 3.5 through and
including 3.28 are true and correct.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE MINORITY STOCKHOLDERS
Each Minority Stockholder severally, and not jointly, represents and
warrants to Newco and InSight, with respect to himself and no other party, as
follows:
5.1 AUTHORITY; NO CONFLICT. Each Minority Stockholder has all requisite power
and authority to execute, deliver and perform his obligations under this
Agreement and each Related Document to which he is or will be a party and to
consummate the transactions contemplated hereby and thereby. This Agreement and
each Related Document to which such Minority Stockholder is or will be a party
has been, or upon the execution thereof will be, duly and validly executed and
delivered by such Minority Stockholder and constitutes, or upon its execution
and delivery will constitute, a valid and binding obligation of such Minority
Stockholder, enforceable against him in accordance with its terms, except that
such enforcement is subject to applicable bankruptcy, reorganization,
insolvency, moratorium and other similar laws affecting generally the
enforcement of creditors' rights.
5.2 BROKERS. There are no claims for brokerage commissions, finder's fees or
similar compensation arising out of or due to any act of each Minority
Stockholder in connection with the transactions contemplated by this Agreement
or any Related Document.
5.3 CONSENTS. No consent, approval, Order or authorization of, or
registration, declaration or filing with or notification to (except for any
filings required under the HSR Act), any Governmental Entity is required in
connection with the execution, delivery and performance by each Minority
Stockholder of this Agreement or the Related Documents to which such Minority
Stockholder is or will be a party or the consummation by the Minority
Stockholders of the transactions contemplated hereby or thereby.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INSIGHT AND NEWCO
Each of InSight and Newco, jointly and severally, represents and warrants
to the Company and the Stockholders as follows:
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6.1 ORGANIZATION; CORPORATE AUTHORITY. Each of InSight and Newco is a
corporation duly organized, validly existing and in good standing under the Laws
of the State of Delaware and has all requisite power and authority (corporate or
otherwise) to own, lease and operate its assets and properties and to carry on
its business as presently conducted and as presently proposed to be conducted.
The Company has been furnished with true, correct and complete copies of Newco's
Charter and Newco's By-Laws, and InSight's restated certificate of incorporation
("InSight's Charter") and InSight's restated bylaws ("InSight's By-Laws"), in
each case as amended and in effect on the date hereof.
6.2 CORPORATE ACTION; AUTHORITY; NO CONFLICT. Each of InSight and Newco has
all requisite power and authority (corporate and otherwise) to execute, deliver
and perform its obligations under this Agreement and each Related Document to
which it is or will be a party and to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance by each of InSight
and Newco of this Agreement and each Related Document to which it is or will be
a party, and the performance of its obligations hereunder and thereunder have
been duly and validly authorized by all necessary corporate action on the part
of each of InSight and Newco and its stockholders. This Agreement and each
Related Document to which each of InSight and Newco is or will be a party has
been, or upon the execution thereof will be, duly and validly executed and
delivered by each of InSight and Newco, and constitutes, or upon its execution
and delivery will constitute, a valid and binding obligation of each of InSight
and Newco, enforceable against it in accordance with its terms, except that such
enforcement is subject to applicable bankruptcy, reorganization, insolvency,
moratorium and other similar laws affecting generally the enforcement of
creditors' rights. Neither InSight's or Newco's execution and delivery of,
and/or performance of its obligations under, this Agreement and each Related
Document to which it is or will be a party, nor the consummation of the
transactions contemplated hereby and thereby will (i) result in any material
violation or breach of any of the terms, conditions or provisions of, or
constitute (with due notice or lapse of time, or both) a material default under,
or give rise to any right of termination, cancellation or acceleration or result
in the creation of any Encumbrance upon, any of the assets or properties of
InSight or Newco under any provision of Newco's Charter or Newco's By-Laws or
InSight's Charter or InSight's By-Laws or any Contract to which InSight or Newco
is a party or by which it or any of its assets or properties is or may be bound
or (ii) violate in any material respect, or result in the creation of an
Encumbrance upon any of InSight's or Newco's assets as a result of, any Law's
applicable to InSight or Newco or any of its properties or assets.
6.3 BROKERS. There are no claims for brokerage commissions, finder's fees or
similar compensation arising out of or due to any act of Newco or InSight in
connection with the transactions contemplated by this Agreement or any Related
Document.
6.4 CONSENTS. No consent, approval, Order or authorization of, or
registration, declaration or filing with or notification to (except for any
filings required under the HSR Act), any Governmental Entity is required in
connection with the execution, delivery and performance by
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InSight or Newco of this Agreement or the Related Documents to which InSight
or Newco is or will be a party or the consummation of the transactions
contemplated hereby or thereby.
6.5 INVESTMENT INTENT. Newco is acquiring the Merger Shares pursuant to the
Merger for its account and not with a view to their distribution within the
meaning of Section 2(11) of the Securities Act.
ARTICLE VII
COVENANTS AND AGREEMENTS
7.1 ACCESS TO RECORDS AND PROPERTIES OF THE COMPANY. From and after the date
hereof until the Closing, the Company shall afford (i) to InSight, its potential
lenders and other financing sources and their respective authorized
representatives, including accountants, free and full access at all reasonable
times during normal business hours and after reasonable prior notice to the
assets, Business, facilities, properties, books, records (including tax returns
filed and in preparation), customers, consultants and key employees of or
relating to the Company in order that InSight has full opportunity to make such
investigation as it shall reasonably desire to make of the affairs of the
Company, and the Company shall cooperate fully as reasonably requested by
InSight in connection therewith and (ii) to the respective independent certified
public accountants of InSight, free and full access at all reasonable times
during normal business hours and after reasonable prior notice to the records of
the independent certified public accountants of the Company relating to the
Company. The investigation contemplated by this Section 7.1 shall not affect or
otherwise diminish or obviate in any respect any of the representations and
warranties or the indemnification obligations of the Company contained in this
Agreement.
7.2 CONDUCT OF THE COMPANY. From the date hereof to the Effective Time, the
Company shall carry on its Business in the ordinary course consistent with past
practice and use reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers, licensors, licensees
and others having significant business dealings with it. Without limiting the
generality of the foregoing, from the date hereof to the Effective Time, the
Company shall not without the prior written consent of InSight:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock (other than the
declaration of an aggregate dividend of $820,000 accrued with respect to the
Preferred Shares), (ii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock, or (iii) purchase, redeem
or otherwise acquire any Shares or any capital stock of the Company or any
Subsidiary or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities (other than in connection with the
Option Settlement Agreements);
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(b) issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any Options;
(c) amend the Company's Charter or the Company's By-Laws;
(d) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the assets or stock of, or by any other
manner, any business or any Person, or (ii) any assets except for the purchase
of (x) equipment as identified on the Commitments List or (y) equipment or other
assets in the ordinary course of business, provided that the amount thereof
does not exceed $100,000 individually or $250,000 in the aggregate, other than
as set forth on the Commitments List;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any
Encumbrance or otherwise dispose of any of its properties or assets, except (i)
immaterial assets, (ii) in the ordinary course of business (including for
trade-ins) or (iii) as required by the terms of any Contract existing as of the
date of this Agreement and binding upon the Company;
(f) (i) incur any indebtedness or guarantee any indebtedness of another
Person, issue or sell any debt securities or warrants or other rights to acquire
any debt securities of the Company or any Subsidiary, guarantee any debt
securities of another Person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing except for
obtaining a demand loan from Anthem in the proposed amount of $6,160,064,
short-term borrowings incurred in the ordinary course of business consistent
with past practice and except as required by any Contract existing as of the
date of this Agreement and binding upon the Company, or (ii) make any loans,
advances (other than advances to Subsidiaries or among Subsidiaries) or capital
contributions to, or investments in, any other Person, except as required by any
Contract existing as of the date of this Agreement and binding upon the Company;
(g) make any material tax election (other than as required pursuant to
this Agreement) or settle or compromise any material income tax liability;
(h) pay, discharge, settle or satisfy any claims or Liabilities, other
than the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of Liabilities
reflected or reserved against in the Latest Balance Sheet (or the notes thereto)
or incurred thereafter in the ordinary course of business consistent with past
practice, or waive any material benefits of, or agree to modify in any material
respect, any confidentiality, standstill, non-solicitation or similar agreement
to which the Company or any Subsidiary is a party;
(i) modify, amend or terminate any Material Contract, or waive, release or
assign any rights or claims, other than in the ordinary course of business
consistent with past practice;
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(j) enter into any Contract relating to the provision of services by the
Company or any Subsidiary, the maintenance of any MRI Unit, CT Unit, LI Unit or
MMI Unit or the distribution, sale or marketing by third parties of the
Company's or any Subsidiary's services, including any Contract with any
hospital, clinic, medical or healthcare provider, health maintenance
organization or other customer or third party payor, other than in the ordinary
course of business consistent with past practice;
(k) except as required to comply with applicable law and except as
described on Schedule 7.2, (i) adopt, enter into, terminate or amend any Benefit
Plan or other arrangement for the benefit or welfare of any director, officer or
current or former employee (including any employment or severance agreements),
other than, in the case of non-officer employees, in the ordinary course of
business consistent with past practice, (ii) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any director or officer
(other than pursuant to the Option Settlement Agreements or as set forth on
Schedule 3.16 or on Schedule 7.2), (iii) pay any material benefit not provided
for under any Benefit Plan (other than pursuant to the Option Settlement
Agreements), (iv) except as permitted in clause (ii), grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Benefit Plan (including the grant of stock options, stock appreciation rights,
stock based or stock related awards, performance units or restricted stock, or
the removal of existing restrictions in any Benefit Plans or agreement or awards
made thereunder) or (v) take any action to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement, contract
or arrangement or Benefit Plan other than pursuant to the Option Settlement
Agreements; or (vi) authorize any of, or commit or agree to take any of, the
foregoing actions other than pursuant to the Option Settlement Agreements; or
(l) enter into any agreement, whether in writing or otherwise, to take any
of the actions specified in the foregoing clauses (a) through (l).
7.3 ANTHEM GUARANTY. Provided the conditions set forth in Sections 8.1 and 8.2
are satisfied, SMSI shall ensure that Anthem executes and delivers the Anthem
Guaranty to InSight and Newco on the Closing Date.
7.4 EFFORTS TO CONSUMMATE. Subject to the terms and conditions of this
Agreement, each party shall use commercially reasonable efforts to take or cause
to be taken all actions and do or cause to be done all things required under all
applicable Laws, in order to consummate the transactions contemplated hereby.
7.5 EXCLUSIVITY. From and after the date hereof until the Closing, or the
termination of this Agreement pursuant to Article IX, the Company shall not, and
shall cause its officers, directors, Affiliates, representatives and agents
(including, without limitation, financial advisors, attorneys and accountants)
not to, directly or indirectly, (i) take any action to solicit or initiate any
Acquisition Proposal, (ii) continue, initiate or engage in negotiations or
discussions relating to an Acquisition Proposal with, or disclose or provide any
non-public information or Confidential
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Information (other than in the ordinary course of business or otherwise
required by Law, Order or similar compulsion) relating to the Company or any
Person other than the parties hereto and their respective representatives or
(iii) enter into any written or oral agreement or understanding with any
Person (other than InSight or Newco) regarding an Acquisition Proposal. If
the Company receives any bona fide unsolicited offer or proposal to enter
into negotiations relating to any Acquisition Proposal, the Company shall
promptly notify Newco of such offer or proposal and the general economic
terms of such offer or proposal and shall furnish a copy of any written offer
or proposal thereto.
7.6 PUBLIC ANNOUNCEMENTS. Each party agrees that, except (i) as otherwise
required by Law and (ii) for disclosure to its respective directors, officers,
employees, financial advisors, potential financing sources, legal counsel,
independent certified public accountants or other agents, advisors or
representatives on a need-to-know basis, it will not issue any reports,
statements or releases, in each case pertaining to this Agreement or any Related
Document to which it is a party or the transactions contemplated hereby or
thereby, without the prior written consent of the other party, which consent
shall not unreasonably be withheld or delayed.
7.7 FILINGS. Newco and the Company will make or cause to be made all such
filings and submissions under applicable law and regulations as may be required
for the consummation of the transactions contemplated hereunder, including
without limitation any filings required under the HSR Act. Newco shall pay the
filing fee required under the HSR Act; provided, however, that if this Agreement
is terminated (i) pursuant to Section 9.1(b), the Company shall reimburse Newco
in full for all filing fees paid by Newco pursuant to the HSR Act, or (ii)
pursuant to Section 9.1(d) or (e) (unless such termination results from the
failure to satisfy the conditions set forth in Sections 8.1(a), 8.3(d) or
8.3(e)), the Company shall reimburse Newco in the amount of one-half of all
filing fees paid by Newco pursuant to the HSR Act. Newco and the Company will
cooperate and coordinate with one another in connection with any such filings or
submissions.
7.8 STOCK OPTION PLANS.
(a) As soon as practicable following the date hereof but in any event
prior to the Effective Time, the Company (or, if appropriate, the Board of
Directors of the Company or any committee administering the Stock Option Plans
(as defined below)) shall take action, including by adopting resolutions or
taking any other actions, so as to allow all outstanding options to purchase
Shares (the "Company Options") heretofore granted under any stock option, stock
appreciation rights or stock purchase plan, program or arrangement of the
Company (collectively, the "Stock Option Plans") outstanding immediately prior
to the date hereof, whether or not then exercisable, to be canceled at the
Effective Time in exchange for an amount in cash, payable at the time of such
cancellation, equal to $4,945,941 in the aggregate, to be allocated as among the
Company Options based on the number of Shares purchasable under each Company
Option (the "Net Amount"). The Company shall not make, or agree to make, any
payment of any kind to any holder of a Company Option (except for the payment
described above and except as described on Schedule 7.2) without the consent of
InSight and Newco.
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(b) All Stock Option Plans shall be terminated as of the Effective Time
and the provisions in any other Benefit Plan providing for the issuance,
transfer or grant of any capital stock of the Company or any interest in respect
of any capital stock of the Company shall be terminated as of the Effective
Time. The Company shall ensure that following the Effective Time, no holder of
a Company Option or any participant in any Stock Option Plan shall have any
right thereunder to acquire any capital stock of the Company, InSight, Newco or
the Surviving Corporation.
(c) The Company shall pay its portion and withhold and deposit the proper
amount of all Federal and state payroll and employment taxes required to be paid
and withheld from the Net Amount.
7.9 TAX TREATMENT. The parties agree that for federal income tax purposes, (a)
the Merger is intended to be treated as (i) a sale of the Company's assets to
Newco followed by (ii) a liquidation of the Company in which an amount equal to
(A) the Closing Merger Payment plus the Escrow Amount, plus or minus, as
applicable, the Final Adjustment, multiplied by (B) the aggregate number of
Merger Shares, will be distributed to the Stockholders in cancellation of the
Merger Shares pursuant to Article II, and (b) SMSI's share of such deemed
liquidating distribution is intended to be tax-free as a distribution received
in a liquidation described in Section 332 of the Code. The Stockholders will be
responsible for Taxes incurred by the Company and for obligations of the Company
under the tax sharing agreement described in Schedule 3.8, in each case as a
result of the Merger based on the foregoing tax characterization of the Merger.
7.10 CONFIDENTIALITY. Except as and to the extent required by law, InSight
and Newco will not disclose or use, and will direct their representatives not to
disclose or use, to the detriment of the Company or the Stockholders, any
Confidential Information with respect to the Company or the Stockholders,
furnished, or to be furnished, by the Company or any Stockholder, or their
respective representatives, to InSight or Newco or their representatives, at any
time or in any manner other than in connection with its evaluation of the
Merger. "Confidential Information" means any information about the Company or
the Stockholders stamped "confidential" or identified in writing as such to
InSight or Newco by the Company or the Stockholders promptly following its
disclosure, unless (a) such information is already known to InSight or Newco or
their representatives or to others not bound by a duty of confidentiality or
such information becomes publicly available through no fault of InSight or Newco
or their representatives, (b) the use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the Merger or (c) the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings. In the event the Merger is not consummated, upon the written
request of the Company or the Stockholders, after the termination of this
Agreement pursuant to Article X, InSight and Newco will return promptly to the
Company or the Stockholders, as applicable, or
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destroy any Confidential Information in its possession and certify in writing
to the Company and the Stockholders that it has done so.
7.11 GENERAL RELEASE. As a material inducement for InSight and Newco to enter
into this Agreement, effective as of the Effective Time, each of the
Stockholders hereby unconditionally and irrevocably releases and forever
discharges the Company from any and all rights, claims, demands, judgments,
obligations, Liabilities and damages relating to the Company which ever existed,
now exist, or may hereafter exist, by reason of any tort, breach of contract,
violation of law or other act or failure to act which shall have occurred at or
prior to the Effective Time. Each Stockholder expressly intends that the
foregoing release shall be effective regardless of whether the basis for any
claim or right hereby released shall have been known to or anticipated by such
Stockholder.
7.12 COOPERATION AND ACCESS TO INFORMATION. InSight and Newco will provide
SMSI with such cooperation and information as SMSI reasonably may request for
the purpose of preparing and filing any Tax return, amended return or claim for
refund, determining a liability for Taxes or a right to a refund of Taxes or
participating in or conducting any audit or other proceeding in respect of
Taxes, in each case to the extent involving the Company and taxable periods
ending on or before the Closing Date. Such cooperation and information shall
include providing access to books and records of the Company, financial
statements, state allocation information with respect to Taxes and copies of
relevant Tax returns or portions thereof, together with accompanying schedules
and related work papers and documents relating to rulings or other
determinations by taxing authorities. InSight and Newco shall make their
employees available to SMSI on a mutually convenient basis to provide
explanations of any documents or information provided hereunder. Newco and
InSight will retain all returns, schedules and work papers and all material
records or other documents relating to Tax matters of the Company for the
taxable period first ending after the Closing Date and for all prior taxable
periods until the later of (i) the expiration of the statute of limitations of
the taxable periods to which such returns and other documents relate, without
regard to extensions except to the extent notified by the other party in writing
of such extensions for the respective Tax periods, or (ii) eight (8) years
following the due date (without extension) for such returns. Anything to the
contrary in this Agreement notwithstanding, SMSI may retain all returns,
schedules and work papers and all material records or other documents relating
to Tax matters for all taxable periods of the Company ending on or prior to the
Closing Date and will make such documents available and provide copies of such
documents upon reasonable request of InSight or Newco. Any information obtained
under this Section 7.12 shall be kept confidential, except as may be otherwise
necessary in connection with the filing of returns or claims for refund or in
conducting an audit or other proceeding.
7.13 AMENDMENT OF THE COMPANY'S 401(k) PLAN. The Company shall amend its 401(k)
Plan prior to the Closing Date to provide that no contributions shall be made to
such plan subsequent to the Closing Date.
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ARTICLE VIII
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective
obligations of each party to effect the Merger are subject to the satisfaction
or waiver, where permissible, prior to the Effective Time, of the following
conditions:
(a) No statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
Governmental Entity that prohibits or restricts the consummation of the Merger
or makes such consummation illegal (each party agreeing to use commercially
reasonable efforts to have any such prohibition lifted).
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
8.2 CONDITIONS TO THE COMPANY'S AND THE STOCKHOLDERS' OBLIGATION TO EFFECT THE
MERGER. The obligation of the Company and the Stockholders to effect the Merger
shall be subject to the satisfaction or waiver, prior to the proposed Effective
Time, of the following conditions:
(a) All of the representations and warranties of InSight and Newco set
forth in this Agreement shall be true and correct in all material respects as of
the date hereof and (except for those that are expressly made only as of another
date) as of the Effective Time as though made on and as of such time, and each
of InSight and Newco shall have performed in all material respects all covenants
and agreements required to be performed by it under this Agreement at or prior
to the Effective Time;
(b) Each of InSight and Newco shall have entered into and delivered to the
Company and the Stockholders each of the Related Documents to which it is a
party.
(c) InSight and Newco shall have delivered to the Company and the
Stockholders the opinions of Arent Fox Kintner Plotkin & Kahn, PLLC, counsel to
InSight and Newco, in form and substance reasonably acceptable to the Company
and the Stockholders.
(d) InSight shall pay or cause to be paid to Anthem $6,160,064,
representing the amount the Company is indebted to Anthem as of the Closing Date
as shown on Schedule 2.2(b).
(e) InSight shall pay or cause to be paid to SMSI the dividend declared by
the Company on the Preferred Shares in the amount of $820,000.
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8.3 CONDITIONS TO INSIGHT'S AND NEWCO'S OBLIGATIONS TO EFFECT THE MERGER. The
obligations of InSight and Newco to effect the Merger shall be subject to the
satisfaction or waiver by InSight and Newco, prior to the proposed Effective
Time, of the following conditions:
(a) All of the representations and warranties of the Company set forth in
this Agreement shall be true and correct in all material respects (except those
representations or warranties that are qualified as to materiality, which shall
be true and correct in all respects) as of the date hereof and (except for those
that are expressly made only as of another date) as of the Effective Time as
though made on and as of such time, and the Company shall have performed in all
material respects all covenants and agreements required to be performed by it
under this Agreement at or prior to the Effective Time.
(b) The unanimous approval of the Stockholders shall have been obtained in
accordance with applicable law and the Company's Charter.
(c) There shall not have occurred any Material Adverse Change since
December 31, 1997.
(d) All filings required to be made prior to the Effective Time with, and
all consents, approvals, authorizations and Permits required to be obtained
prior to the Effective Time from, any Governmental Entity in connection with the
consummation of the Merger, shall have been made and/or obtained, other than
those the failure of which to be made and/or obtained would not reasonably be
expected to have a Material Adverse Effect or prevent or materially delay the
consummation of the Merger (it being understood that such failure with respect
to any certificates of need, determinations of need, licenses in respect of
radioactive materials shall be deemed to have such Material Adverse Effect).
(e) All notices required to be given prior to the Effective Time with, and
all consents, approvals, authorizations, waivers and amendments required to be
obtained prior to the Effective Time from, any third party in connection with
the consummation of the Merger shall have been made and/or obtained (or, if the
notice, consent, approval, authorization, waiver or amendment that is not so
made and/or obtained is required pursuant to the terms of any of the Company's
indebtedness or obligations for money borrowed, the Company repays such
indebtedness or obligation prior to the Effective Time), other than those the
failure of which to be made and/or obtained would not reasonably be expected to
have a Material Adverse Effect or prevent or materially delay the consummation
of the Merger (it being understood that such failure with respect to the matters
listed on Schedule 8.3(e) shall be deemed to have such Material Adverse Effect).
(f) InSight and Newco shall have received evidence satisfactory to them
that the payment of all Transaction Expenses incurred by the Company in
connection with the preparation for, and consummation of, the transactions
contemplated hereby and by the Related
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Documents, has occurred or has been reflected on the Estimated Closing
Balance Sheet either as an increase in Assumed Debt or a reduction in cash or
Net Noncash Working Capital.
(g) The Company and each of the Stockholders shall have entered into and
delivered to InSight and Newco each of the Related Documents to which each is a
party.
(h) The Company shall have delivered to InSight and Newco the opinions of
Shipman & Goodwin LLP, counsel for the Company, SMSI and the other Stockholders,
in form and substance reasonably acceptable to InSight and Newco.
(i) The Company's 401(k) Plan shall have been amended in accordance with
the provisions of Section 7.13.
ARTICLE IX
TERMINATION; EFFECT OF TERMINATION
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing by:
(a) the mutual written consent of InSight, Newco, the Company and the
Stockholders; or
(b) InSight and Newco, if there has been a material breach by the Company
or any Stockholder of any representation, warranty, covenant or agreement set
forth in this Agreement which is not cured by the Company or such Stockholder
within 10 days after notice thereof; or
(c) the Company, if there has been material breach by InSight or Newco of
any representation, warranty, covenant or agreement set forth in this Agreement
which is not cured by InSight or Newco within 10 days after notice thereof; or
(d) InSight and Newco, if the conditions set forth in Sections 8.1 or 8.3
shall not have been satisfied or waived by May 15, 1998; or
(e) the Company and the Stockholders, if the conditions set forth in
Sections 8.1 or 8.2 shall not have been satisfied or waived by May 15, 1998; or
(f) either InSight and Newco, on the one hand, or the Company and the
Stockholders, on the other hand, if any permanent injunction or other Order of a
court or other competent authority preventing the Closing shall have become
final and nonappealable; provided, however, that neither InSight and Newco, on
the one hand, nor the Company and the Stockholders, on the other hand, shall be
entitled to terminate this Agreement if such party's breach of this Agreement
has prevented the satisfaction of a condition. Any termination pursuant
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to this Section 9.1 (other than a termination pursuant to Section 9.1(a))
shall be effected by written notice from the party or parties so terminating
to the other parties hereto, which notice shall specify the Section of this
Agreement pursuant to which this Agreement is being terminated.
9.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement
as provided in Section 9.1, this Agreement shall be of no further force or
effect, except for this Section 9.2 and Article X, each of which shall survive
the termination of this Agreement.
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1. SURVIVAL OF REPRESENTATIONS. The representations, warranties and
covenants of the parties contained in this Agreement or in any certificate or
other writing delivered pursuant hereto or in connection herewith shall survive
the Closing until the second anniversary of the Closing Date; provided, however,
that (i) the representations and warranties in Sections 3.8 and 3.20 shall
survive until the expiration of the statute of limitations applicable to the
matters covered thereby, and (ii) the representations and warranties set forth
in Sections 3.1, 3.2 and 3.4 and Articles IV (other than Section 4.5(ii)), V and
VI shall survive indefinitely. Notwithstanding the preceding sentence, any
representation or warranty in respect of which indemnity may be sought under
this Agreement shall survive the time at which it would otherwise terminate
pursuant to the preceding sentence, if notice of the inaccuracy or breach
thereof giving rise to such right of indemnity shall have been given to the
party against whom such indemnity may be sought prior to such time. All
covenants and agreements of the parties contemplating performance after the
Closing Date shall survive the Closing Date for a period ending at the earlier
of the date such covenant or agreement is performed or the expiration of the
statute of limitations for any claim relating thereto.
10.2. INDEMNIFICATION BY THE COMPANY AND THE MINORITY STOCKHOLDERS. Subject
to the limitations set forth in Section 10.7, each of the Minority Stockholders
and, if the Closing has not occurred, the Company, agrees to indemnify and hold
InSight and Newco harmless against and in respect of any Losses which arise out
of or result from, or any Liability of any nature incurred in connection with
(i) any breach by the Company or any Minority Stockholder of any covenant,
representation or warranty made or given by the Company or any Minority
Stockholder herein or in any certificate, schedule or exhibit delivered pursuant
hereto, PROVIDED, that with respect to the representations and warranties set
forth in Article V, each Minority Stockholder shall indemnify and hold Insight
and Newco harmless only in respect of Losses arising out of or resulting from
and Liabilities incurred in connection with a breach by such Minority
Stockholder, severally and not jointly with any other Minority Stockholder, or
(ii) any action, suit, proceeding, claim or demand by any Person where any of
the alleged or actual breach, default, act, omission or other grounds therefor
is attributable to events occurring on or prior to the Closing Date, including
any and all Losses attributable to the use of the services
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provided by the Company on or prior to the Closing Date, whether or not such
litigation, proceeding or claim is pending, threatened, or asserted before,
on or after the Closing Date.
10.3. INDEMNIFICATION BY SMSI. Subject to the limitations set forth in
Section 10.7, SMSI agrees, severally and not jointly, to indemnify and hold
InSight and Newco harmless against and in respect of any Losses which arise out
of or result from (i) any breach by SMSI of any covenant, representation or
warranty of SMSI made herein, or in any certificate, schedule or exhibit
delivered pursuant hereto and (ii) any breach by the Company of any covenant,
representation or warranty of the Company made herein or in any certificate,
schedule or exhibit delivered pursuant hereto, PROVIDED that SMSI's liability
under this clause (ii) shall be non-recourse to SMSI, and InSight and Newco may
recover Losses under this clause (ii) only from and to the extent of SMSI's Pro
Rata Share (as defined in the Escrow Agreement) of the Escrow Amount.
10.4. INDEMNIFICATION BY INSIGHT AND NEWCO. InSight and Newco, jointly and
severally, agree to indemnify and hold harmless the Stockholders against and in
respect of any Losses which arise out of or result from or are incurred by the
Stockholders in connection with (i) any breach by InSight or Newco of any
covenant, representation or warranty of InSight or Newco made herein, or in any
certificate, schedule or exhibit delivered pursuant hereto, and (ii) any action,
suit, proceeding, claim or demand by any Person where any of the alleged or
actual breach, default, act, omission or other grounds therefor is attributable
to events occurring after the Closing Date, whether or not such litigation,
proceeding or claim is pending, threatened, or asserted before, on or after the
Closing Date.
10.5. PROCEDURES FOR THIRD PARTY INDEMNIFICATION. If any action, suit or
proceeding shall be commenced against, or any claim or demand be asserted
against any party hereto, in respect of which such party proposes to demand
indemnification under Section 10.2, 10.3 or 10.4, as applicable, as a condition
precedent thereto, the party seeking indemnification ("Indemnitee") shall
promptly notify the other party ("Indemnitor") in writing to that effect, and
with reasonable particularity and containing a reference to the provisions of
this Agreement; provided, however, that the failure to so notify the Indemnitor
shall only relieve the Indemnitor of its obligations hereunder to the extent
such failure actually prejudices such Indemnitor. Indemnitor shall have the
right to assume the entire control of, including the selection of counsel,
subject to the right of Indemnitee to participate (at its expense and with
counsel of its choice) in the defense, compromise or settlement thereof, and in
connection therewith, Indemnitee shall cooperate fully in all respects with
Indemnitor in any such defense, compromise or settlement thereof, including,
without limitation, the selection of counsel, and Indemnitee shall make
available to the Indemnitor all pertinent information and documents under the
control of Indemnitee. Indemnitor will not compromise or settle any such
action, suit, proceeding, claim or demand without the prior written consent of
Indemnitee, which consent will not be unreasonably withheld or delayed. So long
as Indemnitor is defending in good faith any such claim or demand asserted by a
third party against Indemnitee, Indemnitee shall not settle or compromise such
claim or demand without the prior written consent of Indemnitor, which consent
will not be unreasonably withheld
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or delayed. Indemnitee shall make available to the Indemnitor or its agents
all records and other materials in Indemnitee's possession reasonably
required by it for its use in contesting any third party claim or demand. If
the Indemnitor shall fail to defend any such action, suit, proceeding, claim
or demand and shall fail to cure such failure to defend within three (3) days
after receipt of written notice from Indemnitee, then Indemnitee may defend,
through counsel of its own choosing, such action, suit, proceeding, claim or
demand and (so long as Indemnitee gives Indemnitor at least fifteen (15)
days' written notice of the terms of the proposed settlement thereof and
permits Indemnitor to then undertake the defense thereof if Indemnitor
objects to the proposed settlement) to settle such action, suit, proceeding,
claim or demand and to recover from Indemnitor the amount of such Losses.
10.6. NOTICE OF CLAIMS. Upon discovery of any breach of the covenants,
representatives and warranties of any party herein contained (other than as a
result of the bringing of any action, suit or proceeding or the assertion of any
claim or demand referred to Section 10.5), the discovering party shall give
notice to the breaching party promptly after the discovery of such breach,
provided, however, that the failure to so notify the Indemnitor shall only
relieve the Indemnitor of its obligations hereunder to the extent such failure
actually prejudices such Indemnitor.
10.7. LIMITATIONS ON INDEMNIFICATION BY THE STOCKHOLDERS.
(a) Notwithstanding any other provision of this Article X, SMSI's
liability to InSight and Newco hereunder shall not exceed the proportion of the
Closing Merger Payment plus the Escrow Amount (without deduction for any
payments made therefrom to InSight or Newco in respect of indemnification
claims) plus or minus, as applicable, the Final Adjustment that, in each case,
SMSI is entitled to receive as payment for its Merger Shares pursuant to Section
2.2; and
(b) Notwithstanding any other provision of this Article X, the Minority
Stockholders' joint and several liability to InSight and Newco hereunder shall
not exceed the proportion of the Closing Merger Payment plus the Escrow Amount
(without deduction for any payments made therefrom to InSight or Newco in
respect of indemnification claims) plus or minus, as applicable, the Final
Adjustment that, in each case, the Minority Stockholders are entitled to receive
as payment for their Merger Shares pursuant to Section 2.2.
(c) Notwithstanding any other provision of this Article X, any
indemnification payments payable to InSight or Newco under this Article X shall
be paid (i) first from any amounts held in the Escrow Account as set forth in
the Escrow Agreement and (ii) then by SMSI and/or the Minority Stockholders, as
applicable, subject to Sections 10.7(a) and (b).
(d) In the event that both SMSI and the Minority Stockholders are liable
for the same indemnification claim, liability shall be allocated 80% to SMSI and
20% to the Minority Stockholders.
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10.8 TAX INDEMNITY.
(a) If the intended tax characterization of the Merger as set forth in
Section 7.9 is inaccurate, InSight and Newco agree, jointly and severally, to
indemnify and hold harmless the Company and the Stockholders and their
respective affiliates and successors (collectively, the "Company Indemnitees")
from any and all Losses incurred by, imposed upon or assessed against the
Company Indemnitees as a result thereof (i) in excess of those that would have
been incurred by the Company Indemnitees if such tax characterization had been
accurate and the Company Indemnitees timely paid all Taxes due and owing based
on such tax characterization; and (ii) in enforcement of the indemnity provided
pursuant to this Section 10.8. InSight's and Newco's indemnification obligations
set forth in this Section 10.8 are subject to the condition that prior to March
6, 1998, SMSI was the record and beneficial owner for state corporate law
purposes of at least 80% of the Merger Shares and has remained (and will remain)
the record and beneficial owner for state corporate law purposes of at least 80%
of the Merger Shares until the Effective Time.
(b) The Stockholders shall indemnify InSight and Newco for any Tax
Liability arising from the Company being included in any consolidated Tax Return
of SMSI filed from and after the Closing Date with respect to Tax periods ending
on or before the Closing Date or including the Closing Date, provided that this
Section 10.8(b) shall not in any way limit the indemnity set forth in Section
10.8(a) or require that the Stockholders indemnify InSight or Newco with respect
to the matters described in Section 10.8(a).
10.9. INDEMNIFIED LOSSES. For the purpose of this Article X, the term
"Losses" shall mean and include any and all Liabilities, losses, damages,
claims, expenses, Taxes (including any Taxes attributable to indemnity payments
made pursuant to Section 10.8), costs, fines, fees, penalties, obligations or
injuries, including those resulting from any and all actions, suits,
proceedings, demands, assessments or judgments, together with reasonable costs
and expenses, including (except as provided in Section 10.5) the reasonable
attorney's fees and other legal costs and expenses relating thereto; provided,
however, that Losses shall not include, and InSight and Newco, in the case of
clause (i), and no party, in the case of clause (ii), shall be entitled to
recover, (i) damages covered by reserves on the Adjusted Closing Balance Sheet
or provided for on the Adjusted Assumed Debt Schedule, or (ii) consequential
damages unrelated to the Business, punitive damages or any Tax benefits or
savings to the party seeking indemnification attributable to, or derived from,
such Losses, and Losses shall also be reduced by the proceeds of any insurance
paid to such party with respect to the events giving rise to such Loss, but no
right of subrogation shall accrue to any insurer.
10.10 INDEMNIFICATION THRESHOLD. Notwithstanding any other provision of
this Article X, (i) no Stockholder shall be liable to InSight and Newco
hereunder unless and until the cumulative aggregate claims of InSight and Newco
against the Stockholders exceed $150,000 (excluding any payments made pursuant
to the Final Adjustment) (the "Threshold Amount"), at which time and at all
times thereafter InSight and Newco shall be entitled to the full amount of all
claims
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without deduction of the Threshold Amount, and (ii) neither InSight nor Newco
shall be liable to any Stockholder hereunder unless and until the cumulative
aggregate claims of the Stockholders against InSight and Newco exceed the
Threshold Amount, at which time and at all times thereafter the Stockholders
shall be entitled to the full amount of all claims without deduction of the
Threshold Amount.
10.11 EXCLUSIVE REMEDY. The provisions of this Article X, in conjunction
with but not limited to the provisions of the Escrow Agreement, set forth the
exclusive remedy of the parties with respect to any matter or event described in
Sections 10.1, 10.2, 10.3 or 10.4, respectively, or any other dispute arising
out of this Agreement or transactions contemplated by this Agreement, except
that the Stockholders and the Company shall be entitled to seek and obtain
equitable remedies against InSight and Newco in the event of a breach by InSight
and Newco of Section 7.10, and InSight and Newco shall be entitled to seek and
obtain equitable remedies, including specific performance, in the event of a
breach of Section 7.5 or if the Company or any Stockholder breaches its
obligation to consummate the Closing.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 AMENDMENT. This Agreement shall not be altered or otherwise amended except
pursuant to an instrument in writing signed by each party, except that any party
may waive any obligation owed to it by another party under this Agreement. No
waiver by any party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
11.2 ENTIRE AGREEMENT. This Agreement and the other agreements and documents
referenced herein (including the schedules and the exhibits (in their executed
form) attached hereto) and any other document or agreement entered into
contemporaneously with this Agreement contain all of the agreements among the
parties hereto with respect to the transactions contemplated hereby and
supersede all prior agreements or understandings among the parties with respect
thereto.
11.3 SEVERABILITY. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the Law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such
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<PAGE>
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn,
without invalidating the remaining provisions of this Agreement or affecting
the validity or enforceability of such provision in any other jurisdiction.
11.4 BENEFITS OF AGREEMENT. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns. Except as expressly provided
herein, this Agreement shall not confer any rights or remedies upon any Person
other than the foregoing.
11.5 EXPENSES. Except as otherwise provided in this Agreement, InSight, Newco,
the Company and the Stockholders shall each bear their own expenses incurred in
connection with this Agreement and the Related Documents.
11.6 HEADINGS. Descriptive headings are for convenience only and shall not
control or affect in any way the meaning or construction of any provision of
this Agreement.
11.7 NOTICES. All notices or other communications pursuant to this Agreement
shall be in writing and shall be deemed to be sufficient if delivered
personally, by facsimile, sent by nationally recognized, overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address for
a part as shall be specified by like notice):
(a) if to the Company or the Stockholders, to:
Signal Medical Services Inc.
74 Batterson Park Road
Farmington, CT 06032
Attention: President
Telephone No.: 860-674-9991
Facsimile No.: 860-674-9711
with copies to:
Anthem Health Plans, Inc.
370 Bassett Road
North Haven, CT 06473
Attention: General Counsel
Telephone No.: 203-239-8526
Facsimile No.: 203-239-7742
Shipman & Goodwin, LLP
One American Row
Hartford, CT 06103-2819
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<PAGE>
Attention: John E. Kreitler, Esq.
Telephone No.: 860-251-5119
Facsimile No.: 860-251-5900
(b) if to Newco or InSight, to:
SMSI Acquisition Company
c/o InSight Health Services Corp.
4400 MacArthur Blvd.
Suite 800
Newport Beach, CA 92660
Attention: General Counsel
Telephone No.: (714) 476-0733
Facsimile No.: (714) 851-5981
with a copy to:
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, NW
Washington, DC 20036
Attention: Gerald P. McCartin, Esq.
Telephone No.: (202) 857-6090
Facsimile No.: (202) 857-6395.
All such notices and other communications shall be deemed to have been given and
received (i) in the case of personal delivery, on the date of such delivery,
(ii) in the case of delivery by facsimile, on the date of such delivery, (iii)
in the case of delivery by nationally-recognized, overnight courier, on the
Business Day following dispatch, and (iv) in the case of mailing, on the third
Business Day following such mailing.
11.8 ASSIGNMENT. Nothing contained in this Agreement shall be construed to
permit the assignment by any party hereto of any rights or obligations hereunder
and such assignment is expressly prohibited without the prior written consent of
(i) InSight and Newco, if assignment is sought by the Company or any
Stockholder, or (ii) the Company and the Stockholders, if assignment is sought
by InSight or Newco; provided, however, that after the Closing Newco may assign
its rights and obligations hereunder to any of its Affiliates and provided
further that after the Closing InSight and Newco may grant a security interest
in or otherwise transfer or assign this Agreement if such security interest,
transfer or assignment is solely for the purpose of providing collateral to a
third party lender, in which event such transferee or assignee shall have all of
InSight's and Newco's rights and remedies hereunder, provided that any such
transfer, assignment or other grant of an interest shall not relieve InSight or
Newco from their obligations hereunder.
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<PAGE>
11.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute one agreement.
11.10 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Connecticut, without giving effect to
any choice of law or conflicting provision or rule (whether of the State of
Connecticut, or any other jurisdiction) that would cause the laws of any
jurisdiction other than the State of Connecticut to be applied, except with
respect to matters of corporate law as they apply to Newco and the Company,
which shall be governed by the Delaware Statute.
11.11 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
11.12 INDEPENDENCE OF COVENANTS AND REPRESENTATIONS AND WARRANTIES. All
covenants hereunder shall be given independent effect so that if a certain
action or condition constitutes a default under a certain covenant, the fact
that such action or condition is permitted by another covenant shall not affect
the occurrence of such default, unless expressly permitted under an exception to
such initial covenant. In addition, all representations and warranties
hereunder shall be given independent effect so that if a particular
representation or warranty proves to be incorrect or is breached, the fact that
another representation or warranty concerning the same or similar subject matter
is correct or is not breached shall not affect the incorrectness of or a breach
of a representation and warranty hereunder.
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<PAGE>
11.13 INTERPRETATION; CONSTRUCTION. The term "Agreement" means this
Agreement together with all schedules and exhibits hereto, as the same may from
time to time be amended, modified, supplemented or restated in accordance with
the terms hereof. In this Agreement, the term "Knowledge" of any Person (other
than SMSI) means (i) the actual knowledge of such Person and (ii) that knowledge
which should have been acquired by such Person after making such due inquiry and
exercising such due diligence as a prudent businessperson would have made or
exercised in the management of his or her business affairs. When used in the
case of SMSI, the term "Knowledge" shall mean the actual knowledge of (i) the
officers, directors, employees and agents of SMSI and Anthem and (ii) any
representatives of SMSI or Anthem who are directors of the Company. When used
in the case of the Company, the term "Knowledge" shall mean the Knowledge of the
executive officers and directors of the Company. The use in this Agreement of
the term "including" means "including, without limitation." The words "herein",
"hereof", "hereunder", "hereby", "hereto", "hereinafter", and other words of
similar import refer to this Agreement as a whole, including the schedules and
exhibits, as the same may from time to time be amended, modified, supplemented
or restated, and not to any particular article, section, subsection, paragraph,
subparagraph or clause contained in this Agreement. All references to articles,
sections, subsections, clauses, paragraphs, schedules and exhibits mean such
provisions of this Agreement and the schedules and exhibits attached to this
Agreement, except where otherwise stated. The title of and the article, section
and paragraph headings in this Agreement are for convenience of reference only
and shall not govern or affect the interpretation of any of the terms or
provisions of this Agreement. The use herein of the masculine, feminine or
neuter forms shall also denote the other forms, as in each case the context may
require. Where specific language is used to clarify by example a general
statement contained herein, such specific language shall not be deemed to
modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement has been
chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party. Accounting terms used but not
otherwise defined herein shall have the meanings given to them under GAAP.
11.14 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED DOCUMENT.
[SIGNATURES ON THE FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Merger as of the date first written above.
INSIGHT HEALTH SERVICES CORP.
By:
--------------------------------------------
Name:
Title:
SMSI ACQUISITION COMPANY
By:
--------------------------------------------
Name:
Title:
SIGNAL MEDICAL SERVICES, INC.
By:
--------------------------------------------
Name:
Title:
SMSI HOLDINGS, INC.
By:
--------------------------------------------
Name:
Title:
MINORITY STOCKHOLDERS
------------------------------------------------
Brian P. Stone
------------------------------------------------
Thomas W. Crucitti
------------------------------------------------
Todd Stowell
<PAGE>
ANNEX I
DEFINITIONS
"Acquisition Proposal" means any offer, proposal or indication of interest
in (i) the direct or indirect acquisition of all or any material part of the
assets or properties of the Company, (ii) a merger, consolidation or other
business combination directly or indirectly involving the Company or (iii) the
direct or indirect acquisition of any capital stock, or option, warrant, right,
or other security convertible into or exercisable for capital stock, of the
Company.
"Affiliate" means, with respect to any Person, (i) a director, officer or
stockholder of such Person, (ii) a spouse of such Person, and (iii) any other
Person that, directly or indirectly through one or more intermediaries,
Controls, or is Controlled by, or is under common Control with, such Person.
"Agreement" has the meaning set forth in Section 11.13.
"Anthem" means Anthem Health Plans, Inc., a Connecticut corporation.
"Anthem Guaranty" means the Guaranty of Anthem in the form attached hereto
as Exhibit B.
"Applicable Rate" means the prime rate as of the Closing Date as reported
in the Wall Street Journal.
"Assumed Debt" means the total outstanding principal balance of the
Company's long-term debt and capital lease obligations as recorded in the
Company's balance sheet from time to time in accordance with GAAP plus the total
adjustments to outstanding debt (which adjustments treat certain operating
leases as capital leases and treat certain guarantees as indebtedness) initially
set forth on Schedule 2.2(b) delivered by the Company on the date hereof (the
"Assumed Debt Adjustment Schedule") and as subsequently revised pursuant to
Section 2.2; provided, that in the event the Company takes delivery of that
certain General Electric 1.5 Mobile MRI Unit (Unit M018) prior to Closing, the
principal balance of long-term debt or capital lease obligations incurred in
connection with the acquisition of such unit shall not be included in Assumed
Debt.
"Business" means the Company's business of providing fixed and mobile site
diagnostic imaging and therapeutic services in the United States and
administrative, consulting and business services to providers of diagnostic
imaging in the United States and to Subsidiaries of the Company.
"Business Day" means any day that is not a Saturday, Sunday or a day on
which banking institutions in New York, New York are not required to be open.
<PAGE>
"Certificate of Merger" means the Certificate of Merger in the form
attached as Exhibit A hereto.
"Closing" has the meaning set forth in Section 1.7.
"Closing Date" has the meaning set forth in Section 1.7.
"Closing Merger Payment" has the meaning set forth in Section 2.2(b).
"Code" has the meaning set forth in Section 3.8(a).
"Commitments List" has the meaning set forth in Section 3.6(d).
"Company" has the meaning set forth in the introductory paragraph to this
Agreement.
"Company's By-Laws" means the bylaws of the Company as in effect on the
date hereof.
"Company's Charter" means the certificate of incorporation of the Company
as in effect on the date hereof.
"Confidential Information" has the meaning set forth in Section 7.10.
"Contract", with respect to any entity, means any contract, agreement,
lease, arrangement or understanding, or any loan or credit agreement, note,
bond, mortgage, indenture, lease, sublease, purchase order or other agreement,
commitment or instrument.
"Control" means, with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Covered Taxes" means all Taxes of the Company and each Tax Affiliate for
periods ending on or prior to the close of business on the Closing.
"CT Unit" has the meaning set forth in Section 3.6(c).
"Effective Time" has the meaning set forth in Section 1.2.
"Employment Agreements" means those Employment Agreements and the Amendment
to Employment Agreement in the forms attached hereto as Exhibit E.
<PAGE>
"Employee Benefit Plan" (i) any qualified or non-qualified Employee
Pension Benefit Plan (as defined in Section 3(2) of ERISA), including any
Multiemployer Plan or Multiple Employer Plan, (ii) any Employee Welfare Benefit
Plan (as defined in Section 3(1) of ERISA), or (iii) any employee benefit,
fringe benefit, compensation, severance, incentive, bonus, profit-sharing, stock
option, stock purchase or other plan, program or arrangement, whether or not
subject to ERISA and whether or not funded.
"Encumbrances" shall mean and include security interests, mortgages, liens,
pledges, charges, easements, reservations, restrictions, rights of way,
servitudes, options, rights of first refusal, community property interests,
equitable interests, restrictions of any kind and all other encumbrances,
whether or not relating to the extension of credit or the borrowing of money.
"Environmental, Health and Safety Laws" means all Laws, Permits and Orders
and all common law relating to or addressing pollution or protection of the
environment, including, but not limited to, all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control or cleanup of any hazardous materials, substances or
wastes, chemical substances or mixtures, pesticides, pollutants, contaminants,
toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls, noise or radiation.
"ERISA Affiliate" means, with respect to any Person, any other Person that
is a member of a "controlled group of corporations" with, or is under "common
control" with, or is a member of the same "affiliated service group" with such
Person as defined in Section 414(b), 414(c), or 414(m) or 414(o) of the Code.
"Escrow Agent" has the meaning provided in the Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement by and among InSight, Newco,
the Stockholders and State Street Bank and Trust Company, as Escrow Agent, the
form of which is attached hereto as Exhibit F.
"Escrow Amount" has the meaning set forth in Section 2.2(a).
"Estimated Closing Balance Sheet" has the meaning set forth in Section
2.2(b).
"Federal Health Care Program" has the meaning set forth in Section 3.19.
"Financial Statements" has the meaning set forth in Section 3.6.(a).
"Fraud and Abuse Laws" means: False Claims Act, 31 U.S.C. (S) 3729; 18
U.S.C. (S) 287 (criminal provisions); Social Security Act, 42 U.S.C. (S)(S)
1320a-7, 1320a-7a, 1320a-7b, 1395nn; 18 U.S.C. (S)(S) 1347, 669, 1035, 1518,
1001, 1341, 1343, 1956, 1957, 371, 286, 1961, 641, 1345, 981, and all applicable
similar state laws and regulations.
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<PAGE>
"GAAP" means generally accepted accounting principles.
"Governmental Entity" means federal, state, local or foreign government and
any court, tribunal, administrative agency, commission or other governmental or
regulatory authority or agency, domestic, foreign or supranational.
"Group Health Plan" has the meaning set forth in Section 3.17.
"Guaranty" means, as to any Person, any Contract of such Person pursuant to
which such Person guarantees the indebtedness, liabilities or obligations of
others, directly or indirectly, in any manner, including agreements to purchase
such indebtedness, liabilities or obligations, or to supply funds to or in any
manner invest in others for the benefit of another Person, or to otherwise
assure the holder of such indebtedness, liabilities or obligations against loss.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Income Taxes" shall mean all Taxes based upon income, including without
limitation income Taxes, franchise Taxes based upon income and any Taxes paid in
lieu of (or because they are greater than) any of the foregoing.
"Intellectual Property" has the meaning set forth in Section 3.11.
"Knowledge" has the meaning set forth in Section 11.13.
"Latest Balance Sheet" means the audited consolidated balance sheet of the
Company as of December 31, 1997, as audited by KPMG Peat Marwick.
"Latest Balance Sheet Date" means December 31, 1997.
"Law" means any applicable foreign, federal, state or local law, statute,
treaty, rule, directive, regulation, ordinances and similar provisions having
the force or effect of law or an Order of any Governmental Entity (including all
Environmental, Health and Safety Laws).
"Leased Property" has the meaning set forth in Section 3.10.
"Letter of Intent" means the letter dated March 6, 1998 from InSight Health
Services Corp. to the Company.
"LI Unit" has the meaning set forth in Section 3.6(c).
-iv-
<PAGE>
"Liability" means any liability or obligation, whether known or unknown,
asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated
or unliquidated and whether due or to become due, regardless of when asserted.
"Material Adverse Change" has the meaning set forth in Section 3.7(a).
"Material Adverse Effect" means any effect or condition that, individually
or in the aggregate with any other effect or condition, is materially adverse to
the assets, properties, business, financial condition, results of operations or
prospects of the Company and its Subsidiaries (taken as a whole).
"Merger Consideration" means (i) the sum of Closing Merger Payment and the
Escrow Amount, to the extent payable to the Stockholders, plus or minus the
Final Adjustment, as applicable, divided by (ii) the aggregate number of Merger
Shares.
"Merger Shares" means the Shares that are issued and outstanding
immediately prior to the Effective Time that are owned by any Person other than
the Company.
"MMI Unit" has the meaning set forth in Section 3.6(c).
"MRI Unit" has the meaning set forth in Section 3.6(c).
"Net Noncash Working Capital" means the Company's total current assets,
excluding cash and cash equivalents, minus the Company's total current
liabilities, excluding the dividend in the amount of $820,000 declared on the
Preferred Shares, the current portion of long-term debt and the current portion
of capital lease obligations, as recorded in the Company's balance sheet from
time to time in accordance with GAAP.
"Newco" has the meaning set forth in the introductory paragraph to this
Agreement.
"Newco's By-Laws" has the meaning set forth in Section 4.1.
"Newco's Charter" has the meaning set forth in Section 4.1.
"Option Agreements" means those Option Agreements in the forms attached
hereto as Exhibit C.
"Option Settlement Agreements" means those Option Settlement Agreements in
the forms attached hereto as Exhibit D.
"Options" means securities that are convertible into, exchangeable for, or
carrying the right to acquire, equity securities of the Company or
subscriptions, warrants, options, calls, puts, convertible securities,
registration or other rights, arrangements or commitments obligating the
-v-
<PAGE>
Company to issue, sell, register, purchase or redeem any of its equity
securities or any ownership interest or rights therein.
"Orders" means judgments, writs, decrees, compliance agreements,
injunctions or judicial or administrative orders and determinations of any
Governmental Entity or arbitrator.
"Permits" means all permits, licenses, authorizations, registrations,
franchises, approvals, certificates, variances and similar rights obtained, or
required to be obtained, from Governmental Entities (including all certificates
of need).
"Permitted Encumbrances" means (i) Encumbrances to secure the performance
of statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (ii)
Encumbrances for Taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded in an aggregate amount
of less than $75,000; (iii) Encumbrances incurred in the ordinary course of
business of the Company with respect to obligations that do not exceed $25,000
in the aggregate and that (a) are not incurred in connection with the borrowing
of money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company; (iv) workers or unemployment compensation
liens arising in the ordinary course of business; and (v) mechanic's,
materialmen's supplier's, vendor's, or similar liens arising in the ordinary
course of business securing amounts that are not delinquent.
"Person" shall be construed broadly and shall include an individual, a
partnership, a corporation, a limited liability company, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization or a
governmental entity (or any department, agency or political subdivision
thereof).
"Preferred Shares" means the shares of Series A Preferred Stock, par value
$.01 per share, of the Company.
"Proceeding" means any action, suit, investigation or proceedings before
any Governmental Entity or arbitrator.
"Related Documents" means the Escrow Agreement, the Anthem Guaranty, each
of the Option Agreements, each of the Option Settlement Agreements, each of the
Employment Agreements and each other instrument or document executed in
connection with the transactions contemplated by this Agreement.
"Securities" means "securities" as defined in Section 2(1) of the
Securities Act.
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<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of common stock, par value $.01 per share, of the
Company.
"SMSI" means SMSI Holdings, Inc.
"SSA" has the meaning set forth in Section 3.18.
"State Health Care Program" has the meaning set forth in Section 3.19.
"Stockholder" has the meaning set forth in the recitals to this Agreement.
"Subsidiary" means any Person of which 50% or more of the total voting
power is owned directly or indirectly by the Company.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Taxes" means, with respect to any Person, (i) all income taxes (including
any tax on or based upon net income, gross income, income as specially defined,
earnings, profits or selected items of income, earnings or profits) and all
gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, alternative or add-on minimum taxes, customs
duties and other taxes, fees, assessments or charges of any kind whatsoever,
together with all interest and penalties, additions to tax and other additional
amounts imposed by any taxing authority (domestic or foreign) on such Person (if
any) and (ii) any liability for the payment of any amount of the type described
in clause (i) above as a result of (A) being a "transferee" (within the meaning
of Section 6901 of the Code or any other applicable Law) of another Person, (B)
being a member of an affiliated, combined or consolidated group or (C) a
contractual arrangement or otherwise.
"Transaction Expenses" means all fees and expenses that are incurred by or
on behalf of the Company in connection with the preparation for the and
consummation of the transactions contemplated hereby and by the other agreements
referred to herein.
-vii-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,650
<SECURITIES> 0
<RECEIVABLES> 21,674
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,803
<PP&E> 73,734
<DEPRECIATION> 26,989
<TOTAL-ASSETS> 126,787
<CURRENT-LIABILITIES> 20,611
<BONDS> 0
0
37,096
<COMMON> 3
<OTHER-SE> (1,255)
<TOTAL-LIABILITY-AND-EQUITY> 126,787
<SALES> 83,041
<TOTAL-REVENUES> 85,673
<CGS> 0
<TOTAL-COSTS> 68,166
<OTHER-EXPENSES> 12,819
<LOSS-PROVISION> 1,525
<INTEREST-EXPENSE> 4,665
<INCOME-PRETAX> (1,022)
<INCOME-TAX> 431
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,453)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
