<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1998
REGISTRATION NO. 333-60573
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
INSIGHT HEALTH SERVICES CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8071 33-0702770
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
SEE TABLE OF ADDITIONAL REGISTRANTS
------------------------------
4400 MACARTHUR BOULEVARD
SUITE 800
NEWPORT BEACH, CALIFORNIA 92660
(949) 476-0733
(Address, including zip code, and telephone number of Registrant's principal
executive offices)
------------------------------
MR. THOMAS V. CROAL
SENIOR EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
4400 MACARTHUR BOULEVARD
SUITE 800
NEWPORT BEACH, CALIFORNIA 92660
(949) 476-0733
(Name, address, including zip code, and telephone number of agent for service)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
GERALD P. MCCARTIN, ESQ.
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
1050 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
(202) 857-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF PRIMARY STANDARD
INCORPORATION INDUSTRIAL IRS EMPLOYER
OR CLASSIFICATION CODE IDENTIFICATION
NAME ORGANIZATION NUMBER NUMBER
- -------------------------------------------------------------- --------------- ------------------- -------------
<S> <C> <C> <C>
InSight Health Corp........................................... Delaware 8071 52-1278857
Radiosurgery Centers, Inc..................................... Delaware 8071 33-0522445
Maxum Health Services Corp.................................... Delaware 8071 75-2135957
Quest Financial Services, Inc................................. Delaware 8071 75-2327889
MTS Enterprises, Inc.......................................... Texas 8071 75-227322
DiagnosTemps, Inc............................................. Delaware 8071 75-2482470
Maxum Health Corp............................................. Delaware 8071 75-2287276
Maxum Health Services of North Texas, Inc..................... Texas 8071 75-2435797
NDDC, Inc..................................................... Texas 8071 75-2407830
Diagnostic Solutions Corp..................................... Delaware 8071 75-2565249
Maxum Health Services of Arlington, Inc....................... Texas 8071 75-2576423
Maxum Health Services of Dallas, Inc.......................... Texas 8071 75-2615132
Open MRI, Inc................................................. Delaware 8071 94-3251529
Radiology Services Corp....................................... Delaware 8071 33-0771659
Mississippi Mobile Technology, Inc............................ Mississippi 8071 64-0769460
Signal Medical Services, Inc.................................. Delaware 8071 33-0802413
</TABLE>
The address, including zip code and telephone number, including area code,
of each of the above Registrant's principal executive offices is: 4400 MacArthur
Boulevard, Suite 800, Newport Beach, California 92660, (949) 476-0733.
<PAGE>
PROSPECTUS
$100,000,000
OFFER FOR
ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008
IN EXCHANGE FOR
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED
OF
[LOGO]
HEALTH SERVICES CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON OCTOBER , 1998, UNLESS EXTENDED.
InSight Health Services Corp., a Delaware corporation (the "Company") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange an aggregate principal amount of up to
$100,000,000 of 9 5/8% Series B Senior Subordinated Notes Due 2008 (the
"Exchange Notes") of the Company, which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus constitutes
a part, for a like principal amount of 9 5/8% Senior Subordinated Notes Due 2008
(the "Outstanding Notes" and, with the Exchange Notes, the "Notes") of the
Company with the holders (the "Holders") thereof.
The terms of the Exchange Notes are identical in all material respects to
the Outstanding Notes except for certain transfer restrictions and registration
rights relating to the Outstanding Notes and except that, if the Exchange Offer
is not consummated on or prior to December 9, 1998 or a shelf registration
statement is not declared effective when required, the Company will pay
liquidated damages to each Holder of Outstanding Notes for the first 90 days
following such date in an amount equal to $.05 per week per $1,000 principal
amount of Outstanding Notes held by such Holder. The amount of liquidated
damages will increase by an additional $.05 per week per $1,000 principal amount
of Outstanding Notes at the beginning of each subsequent 90-day period until the
Exchange Offer is consummated or the shelf registration is declared effective,
up to a maximum amount of liquidated damages of $.30 per week per $1,000
principal amount of Outstanding Notes. The Exchange Notes are offered hereunder
in order to satisfy certain obligations of the Company under the Purchase
Agreement dated as of June 9, 1998 (the "Purchase Agreement") among the Company,
the existing Subsidiary Guarantors (as defined below) and the initial purchasers
of the Outstanding Notes (the "Initial Purchasers") and the Registration Rights
Agreement dated June 12, 1998 (the "Registration Rights Agreement") among the
Company, the existing Subsidiary Guarantors and the Initial Purchasers. The
Exchange Notes evidence the same debt as the Outstanding Notes and are issued
under and are entitled to the same benefits under the Indenture (as defined
herein) as the Outstanding Notes. In addition, the Exchange Notes and the
Outstanding Notes are treated as one series of securities under the Indenture.
The net proceeds from the issuance of the Outstanding Notes, together with
the net proceeds of the term loan portion of the Senior Credit Facilities (as
defined herein), were used by the Company to repay existing indebtedness of the
Company under the Senior Credit Facilities and for general corporate purposes.
The Notes mature on June 15, 2008, unless previously redeemed. Interest on
the Notes is payable semiannually on June 15 and December 15, commencing
December 15, 1998. The Notes are redeemable at the option of the Company, in
whole or in part, on or after June 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, if any, to the Redemption Date
(as defined herein). Notwithstanding the foregoing, at any time on or prior to
June 15, 2001, the Company may redeem up to 35% of the sum of (i) the initial
aggregate original principal amount of Notes and (ii) the initial aggregate
principal amount of any Additional Notes (as defined herein) with the net
proceeds of one or more Equity Offerings (as defined herein) at a redemption
price equal to 109.625% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the Redemption Date; provided that at least 65% of the sum
of (i) the initial aggregate principal amount of Notes and (ii) the initial
aggregate principal amount of any Additional Notes remains outstanding
immediately after the occurrence of such redemption. Upon a Change of Control
(as defined herein), the Company will be required to offer to repurchase all
outstanding Notes at 101% of the unpaid principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of repurchase.
The Notes are unsecured senior subordinated obligations of the Company and
are subordinated in right of payment to all existing and future Senior
Indebtedness (as defined herein) of the Company, including borrowings under the
Senior Credit Facilities. The Notes rank PARI PASSU with all existing and future
senior subordinated indebtedness of the Company and rank senior to all other
existing and future subordinated indebtedness of the Company. The Notes are
fully and unconditionally guaranteed on an unsecured, senior subordinated basis
(the "Subsidiary Guarantees") by all existing and future subsidiaries of the
Company (other than Permitted Joint Ventures (as defined herein)) (collectively,
the "Subsidiary Guarantors"). The Notes are also effectively subordinated to all
existing and future Senior Indebtedness of the Subsidiary Guarantors. As of
March 31, 1998, after giving pro forma effect to the acquisition of Signal
Medical Services, Inc. ("Signal"), the borrowing under the term loan portion of
the Senior Credit Facilities, the issuance of the Notes and the application of
the net proceeds therefrom, the Company would have had $53.4 million of Senior
Indebtedness outstanding and $100 million available to be borrowed under the
Senior Credit Facilities, all of which would be Senior Indebtedness, and the
Subsidiary Guarantors would have had $53.4 million of Senior Indebtedness
outstanding, all of which would have represented guarantees of indebtedness
under the Senior Credit Facilities.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 1998.
<PAGE>
The Exchange Notes will be issued in the form of a global note (the "Global
Note"), which will be deposited with, or on behalf of, the Depositary (as
defined herein) and registered in the name of the Depositary or its nominee.
Except as set forth herein, owners of beneficial interests in the Global Note
will not be entitled to have the Exchange Notes represented by the Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Exchange Notes in definitive form and will not be
considered to be the owners or holders of any Exchange Notes under the Global
Note. Payment of principal of and interest on Exchange Notes represented by the
Global Note registered in the name of and held by the Depositary or its nominee
will be made to the Depositary or its nominee, as the case may be, as the
registered owner and holder of the Global Note. See "Description of Notes --
Book Entry, Delivery and Form."
The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in certain no-action letters addressed to other parties in other transactions.
However, the Company has not sought its own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Based upon
these interpretations by the staff of the Commission, the Company believes that
Exchange Notes issued pursuant to this Exchange Offer in exchange for
Outstanding Notes may be offered for resale, resold and otherwise transferred by
a holder thereof, other than (i) a broker-dealer who purchased such Outstanding
Notes directly from the Company for resale pursuant to Rule 144A or other
available exemptions under the Securities Act of 1933, as amended (the
"Securities Act") or (ii) a person that is an "affiliate" (as defined in Rule
405 of the Securities Act) of the Company, without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holder's
business and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of such
Exchange Notes. Holders of Outstanding Notes accepting the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes may not
rely on the position of the staff of the Commission as set forth in these
no-action letters and would have to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. A secondary resale transaction in the United States by a
holder who is using the Exchange Offer to participate in the distribution of
Exchange Notes must be covered by an effective registration statement containing
the selling security holder information required by Item 507 of Regulation S-K
under the Securities Act.
Each broker-dealer (other than an "affiliate" of the Company) that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Outstanding Notes as a result of market-making
activities or other trading activities and will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period (the "Exchange Offer
Registration Period") the longer of (A) the period until consummation of the
Exchange Offer and (B) two years after the effectiveness of the Registration
Statement (as defined herein) (unless, in the case of (B), all resales of
Exchange Notes covered by the Registration Statement have been made), the
Company will make this Prospectus, as amended or supplemented, available to any
such broker-dealer for use in connection with any such resale; provided,
however, that the Company shall not be required to maintain the effectiveness of
the Registration Statement for more than 60 days following the consummation of
the Exchange Offer unless the Company has been notified in writing on or prior
to the 60th day following the consummation of the Exchange Offer by one or more
broker-dealers that such holder has received Exchange Notes as to which it will
be required to deliver this Prospectus upon resale. See "Plan of Distribution."
Any broker-dealer
i
<PAGE>
who is an affiliate of the Company may not rely on such no-action letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transactions. See
"Exchange Offer."
There is currently no market for the Exchange Notes. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the Exchange Notes, they are not obligated to do so, and any such
market-making may be discontinued at any time without notice. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Exchange Notes. The Company does not intend to apply for listing of the Exchange
Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System ("Nasdaq").
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the rights and preferences and
will be subject to the limitations applicable thereto under the Indenture.
Following consummation of the Exchange Offer, the holders of Outstanding Notes
will continue to be subject to the existing restrictions upon transfer thereof
and the Company will have no further obligation to such holders to provide for
the registration under the Securities Act of the Outstanding Notes held by them.
To the extent that Outstanding Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Outstanding Notes could be
adversely affected. It is not expected that an active market for the Outstanding
Notes will develop while they are subject to restrictions on transfer.
The Company will accept for exchange any and all Outstanding Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time,
on the date the Exchange Offer expires, which will be October , 1998 (the
"Expiration Date"), unless the Exchange Offer is extended by the Company, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. Tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date, unless previously accepted for payment by the Company. The Exchange Offer
is not conditioned upon any minimum principal amount of Outstanding Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. The Exchange Notes will bear interest from
the last interest payment date of the Outstanding Notes to occur prior to the
issue date of the Exchange Notes or, if no such interest has been paid, from
June 12, 1998. Holders of the Outstanding Notes whose Outstanding Notes are
accepted for exchange will not receive interest on such Outstanding Notes for
any period subsequent to the last interest payment date to occur prior to the
issue date of the Exchange Notes or, if no such interest has been paid, from
June 12, 1998, and will be deemed to have waived the right to receive any
interest payment on the Outstanding Notes accrued from and after such date.
ii
<PAGE>
NOTE REGARDING FORWARD-LOOKING INFORMATION
The information contained in this Prospectus contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which are identified by the use of forward-looking terminology such as
"may," "will," "could," "should," "expect," "anticipate," "intend," "plan,"
"estimate" or "continue" or the negative thereof or other variations thereof.
Such forward-looking statements are necessarily based on various assumptions and
estimates and are inherently subject to various risks and uncertainties,
including risks and uncertainties relating to the possible invalidity of the
underlying assumptions and estimates and possible changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners and competitors and
legislative, regulatory, judicial and other governmental authorities and
officials. In addition to any risks and uncertainties specifically identified in
the text surrounding such forward-looking statements, the statements under the
caption "Risk Factors" beginning on page 13 of this Prospectus or in the
reports, proxy statements, and other information referred to in "Available
Information" constitute cautionary statements identifying important factors that
could cause actual amounts, results, events and circumstances to differ
materially from those reflected in such forward-looking statements.
MARKET SHARE DATA
Except as otherwise indicated, the market share data presented herein are
based upon estimates by management of the Company, utilizing various third party
sources, where available. While management believes that such estimates are
reasonable and reliable, in certain cases, such estimates cannot be verified by
information available from independent sources. Accordingly, no assurance can be
given that such market share data are accurate in all material respects.
------------------------
AVAILABLE INFORMATION
The Company is subject to certain of the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Commission.
Reports, proxy statements and other information filed by the Company with the
Commission can be inspected without charge and copied, upon payment of
prescribed rates, at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and the Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports, proxy
statements and other information concerning the Company are also available for
inspection at the offices of The Nasdaq SmallCap Market, Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006. Copies of such material and any part
thereof are also available by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and via the Commission's address on the World Wide Web at
http://www.sec.gov. In addition, the Indenture provides that whether or not the
Company is subject to the reporting requirements of the Exchange Act, the
Company will furnish without cost to each holder of Notes and file with the
Commission and the Trustee copies of the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) and 15(d) of the Exchange Act or any
successor provision thereto if the Company were so required.
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company and the Subsidiary Guarantors with the Commission under the
Securities Act. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. Separate
iii
<PAGE>
financial statements of the Subsidiary Guarantors are not presented because the
Company's management has determined that they would not be material to
investors. Reference is hereby made to the Registration Statement and related
exhibits and schedules filed therewith for further information with respect to
the Company and the Subsidiary Guarantors and the Exchange Notes offered hereby.
Statements contained herein concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
iv
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "INSIGHT"
REFER TO INSIGHT HEALTH SERVICES CORP., ITS CONSOLIDATED SUBSIDIARIES,
PARTNERSHIPS AND LIMITED LIABILITY COMPANIES, INCLUDING SIGNAL, AND REFERENCES
TO THE COMPANY'S "SUBSIDIARIES" REFER TO THE COMPANY'S CONSOLIDATED
SUBSIDIARIES, PARTNERSHIPS AND LIMITED LIABILITY COMPANIES, INCLUDING SIGNAL.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "PRO
FORMA TRANSACTIONS" REFER TO PRO FORMA RESULTS FOR THE COMPANY AFTER GIVING
EFFECT TO THE ISSUANCE OF THE OUTSTANDING NOTES, THE BORROWING UNDER THE TERM
LOAN PORTION OF THE SENIOR CREDIT FACILITIES AND THE APPLICATION OF THE NET
PROCEEDS THEREFROM, THE RECAPITALIZATION (AS DEFINED HEREIN) AND THE
ACQUISITIONS OF SIGNAL AND MOBILE IMAGING CONSORTIUM, LIMITED PARTNERSHIP AND
MOBILE IMAGING CONSORTIUM--NEW HAMPSHIRE (TOGETHER, "MIC") AND THE OTHER
ACQUISITIONS REFERRED TO HEREIN (EXCLUDING THE ACQUISITIONS OF MOUNTAIN
DIAGNOSTICS AND REDWOOD CITY MRI) DURING THE RELEVANT PERIOD AS IF THEY HAD
OCCURRED AT THE BEGINNING OF THE RELEVANT PERIOD. SEE "SUMMARY UNAUDITED PRO
FORMA CONSOLIDATED FINANCIAL DATA." SEE ALSO "RISK FACTORS" FOR INFORMATION THAT
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS.
THE COMPANY
The Company is a leading nationwide provider of diagnostic imaging and
related information services, including magnetic resonance imaging ("MRI"),
computed tomography ("CT"), mammography, ultrasound, x-ray and lithotripsy
services. The Company believes it is unique in its ability to offer a broad
continuum of diagnostic imaging services, ranging from single modality mobile
services to comprehensive multi-modality diagnostic imaging centers to the joint
ownership and management of the multi-modality radiology department of a
hospital or multi-specialty physician group. The breadth of the Company's
services allows it to meet the diverse and developing needs of its customers,
which include leading health care providers such as managed care organizations,
hospitals, radiologists and insurance companies. InSight delivers these services
through strong regional networks of diagnostic imaging facilities, which will
continue to be the principal method of development for the Company. The Company
believes its regional networks increase its economies of scale and enhance its
appeal to managed care organizations, thereby increasing its overall scan
volume. The Company has a substantial presence in California, Texas, New
England, the Carolinas and the Midwest (Illinois, Indiana and Ohio), and
provides its services through 50 fixed site imaging facilities ("Fixed
Facilities"), including 16 multi-modality imaging centers ("Multi-Modality
Centers"), and 51 mobile imaging facilities ("Mobile Facilities"). For the
twelve months ended March 31, 1998, MRI services accounted for approximately 77%
of the Company's total revenues.
The Company was formed in June 1996 as a result of the merger (the "Merger")
of American Health Services Corp. ("AHS") and Maxum Health Corp. ("MHC"), two
publicly held providers of diagnostic imaging services. The Merger was
consummated in order to achieve cost savings, enhanced marketing capabilities,
increased market presence and greater financial resources, and to take advantage
of the positive consolidating trends in the diagnostic imaging industry. Under
the leadership of its experienced management team, the Company has successfully
implemented its business strategy and capitalized on the business strengths
afforded by the Merger through a geographically disciplined growth strategy
focused on providing the highest quality, most cost-effective diagnostic
information within its regional diagnostic imaging networks. The Company's
operating profits have increased during each of the seven quarters since the
Merger (excluding a one-time non-cash charge of $6.3 million incurred in
connection with the Recapitalization) due in part to its successful integration
of seven acquisitions and increases in scan volumes at its existing facilities.
For the twelve months ended March 31, 1998, after giving effect to the Pro Forma
Transactions, the Company had revenues of $135.3 million and adjusted EBITDA of
$38.1 million.
1
<PAGE>
DIAGNOSTIC IMAGING INDUSTRY OVERVIEW
Diagnostic imaging uses non-surgical techniques to generate representations
of internal structures and organs on film or video. The Company believes that
diagnostic imaging services accounted for 1997 revenues in the United States in
excess of $50 billion, constituting approximately 5% of total health care
spending. The Company believes that outpatient diagnostic imaging services,
including MRI services, accounted for approximately $6 billion of revenues in
the United States in 1996, which is the most recent year for which such
information is available. The approximately 4,000 MRI systems in the United
States include approximately 2,400 hospital-owned systems, 1,000 independent
fixed site systems and 600 mobile systems.
MRI uses high strength magnetic fields and radio waves to produce
cross-sectional images of the anatomy, enabling physicians to differentiate
between internal organs, structures and tissues, thereby facilitating the early
diagnosis of diseases and disorders. MRI frequently lessens the cost and amount
of care needed and often eliminates the need for invasive diagnostic procedures.
MRI is the preferred imaging modality for the brain, the spine and soft tissue
because it produces a superior image and does not expose patients to ionizing
radiation. As a result of MRI's increasing cost efficiency and clinical
effectiveness, MRI services have experienced substantial growth as measured by
total scan volume, which increased at a compounded annual growth rate of 8.6%
from 7.7 million in 1993 to 10.7 million in 1997. The Company believes that
growth in MRI scan volumes has been attributable to increased physician
acceptance, substitution of MRI for other imaging modalities (including x-ray
based techniques), expanding applications for MRI technology and health care
reform, which has led to a significant increase in outpatient services.
The MRI services industry is highly fragmented. Recently, however, the
industry has begun to undergo consolidation. The Company believes such
consolidation is primarily driven by (i) economies of scale in the provision of
services to a larger customer base; (ii) growth of managed care in the delivery
of health care services; and (iii) the decision by many smaller, capital
constrained operators to sell their MRI businesses rather than make substantial
investments in new imaging systems. Despite ongoing industry consolidation, the
top ten MRI service providers accounted for less than 15% of the nation's total
outpatient diagnostic imaging revenues in 1996, which is the most recent year
for which such information is available.
COMPETITIVE STRENGTHS
The Company believes it is well-positioned to take advantage of current
trends in the diagnostic imaging industry and attributes its favorable market
position to the following strengths:
STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. InSight has
developed a substantial presence in its targeted markets by forming regional
networks of diagnostic imaging services that provide superior service and
convenience to the Company's customers, including managed care organizations,
hospitals, radiologists and insurance companies. The Company believes these
networks enable InSight to increase its overall scan volume by effectively
addressing its customers' demands for high-quality service, customized
diagnostic information, flexible scheduling, single invoices and convenient
locations. In addition, such regional networks enable the Company to benefit
from enhanced economies of scale, including greater purchasing power, reduced
overhead, centralized billing and more efficient use of marketing expenditures.
CONTINUUM OF SERVICES. The Company believes it is unique in its ability to
offer a broad continuum of diagnostic services, from single modality Mobile
Facilities to comprehensive Multi-Modality Centers to the joint ownership and
management of the multi-modality radiology department of a hospital or multi-
specialty physician group. Through this continuum of increasing value-added
services, the Company is able to meet the diverse and developing needs of its
customers as their individual requirements change.
2
<PAGE>
STRONG RELATIONSHIPS WITH HOSPITALS AND MANAGED CARE. The Company's
contractual relationships with its hospital and managed care customers accounted
for approximately 83% of the Company's revenues during the twelve months ended
March 31, 1998.
HOSPITALS. The Company has over 200 exclusive contracts with hospitals for
Mobile Facility services and 13 exclusive contracts with hospitals for Fixed
Facility services. The Company provides MRI services to hospitals that require
such services but that do not want to incur the substantial capital investment
associated with MRI systems. InSight's Mobile Facilities employ systems housed
in specially designed trailers and typically operate under contracts with
average terms of three years to provide a specified schedule of service on a
fee-per-scan basis. The Company designs schedules for each system to rotate
among multiple hospitals in a manner that optimizes equipment utilization. Since
the Merger, the Company has experienced a renewal rate of approximately 85% for
its Mobile Facility hospital contracts. InSight's contracts with hospitals to
provide Fixed Facility and other diagnostic imaging services generally last from
five to ten years.
MANAGED CARE ORGANIZATIONS. The Company recognizes managed care as the
driving force behind its changing customer mix and has focused its marketing
efforts on appealing to what it believes are the primary concerns of managed
care: quality, cost, convenience and service. As a result, the Company currently
has in excess of 400 contracts with managed care organizations for diagnostic
imaging services at the Company's Fixed Facilities, primarily on a discounted
fee-for-service basis. The Company provides managed care organizations with
"one-stop shopping" consisting of centralized scheduling, single invoices, wide
geographic coverage, quality assurance and utilization management. The Company
experienced a 25% increase in the number of its managed care contracts from
March 31, 1997 to March 31, 1998.
TECHNOLOGICALLY ADVANCED EQUIPMENT. The Company's Fixed Facilities and
Mobile Facilities are operated with state-of-the-art equipment. Of the Company's
100 conventional MRI systems, 79% have a magnet strength of at least 1.0 Tesla.
In addition, the Company operates 13 Open MRI systems, nine of which are less
than one year old. The Company believes its technologically advanced equipment
allows the Company to perform the variety and volume of scans and to produce the
high quality images that its customers demand. In order to increase throughput
and productivity, the Company's MRI systems are periodically upgraded with the
latest software, which reduces the time per scan and improves image quality. As
a result of these upgrades, the Company's maintenance capital expenditures have
been stable and the Company expects such expenditures to remain stable for the
foreseeable future. In addition, the Company believes it is well-positioned to
benefit from new applications (e.g. mammography and stroke detection) for MRI
technology.
EXPERIENCED MANAGEMENT TEAM. The Company has a highly experienced senior
management team with an average of 15 years industry experience. Since the
Merger, management has successfully implemented the Company's business strategy,
resulting in increasing quarterly operating profitability (excluding a one-time
non-cash charge of $6.3 million incurred in connection with the
Recapitalization). In addition, the Company's successful integration of seven
acquisitions has produced increased revenues and cash flows. Management will
continue to develop the Company's business strategy by growing through regional
network expansion, pursuing opportunities within existing networks, focusing on
managed care and introducing new products.
STRONG EQUITY SPONSORSHIP. InSight enjoys strong strategic support from its
equity sponsors, The Carlyle Group and General Electric Company ("GE"). In
October 1997, certain affiliates of The Carlyle Group ("Carlyle") purchased $25
million of a new series of the Company's preferred stock, currently convertible
into approximately 30% of the Company's common stock on a fully diluted basis,
and GE exchanged its existing preferred stock for a new series of the Company's
preferred stock, currently convertible into approximately 33% of the Company's
common stock on a fully diluted basis. The Carlyle Group is a global investment
firm which originates, structures and acts as lead equity investor in targeted
industries. Designees of Carlyle and GE serve on the Company's Board of
Directors (the "Board").
3
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is to further develop and expand regional
diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The Company's strategy primarily consists of the
following components:
GROWTH THROUGH REGIONAL NETWORK EXPANSION. The Company intends to further
participate in the consolidation occurring in the diagnostic imaging industry by
continuing to build its market presence in its existing regional diagnostic
imaging networks through geographically disciplined acquisitions. In addition,
the Company may develop or acquire additional regional networks in strategic
locations where the Company can offer a broad range of services to its customers
and realize increased economies of scale.
PURSUE OPPORTUNITIES WITHIN EXISTING NETWORKS. The Company will continue to
market current diagnostic imaging applications through its existing facilities
to optimize and increase overall procedure volume. The Company also expects to
increase scan volumes as new applications develop for the Company's existing
diagnostic imaging equipment. In addition, the Company's management remains
focused on maximizing cost savings through increased purchasing power and the
reduction of overhead.
FOCUS ON MANAGED CARE. As the Company continues to strengthen its regional
diagnostic imaging networks, management recognizes the importance of managed
care customers and has developed specialized "one-stop shopping" for managed
care organizations. InSight intends to capitalize on its existing relationships
in the managed care industry and believes its regional networks and
strategically located Fixed Facilities give it a significant competitive
advantage in marketing to managed care organizations.
NEW PRODUCT INTRODUCTIONS. The Company is currently implementing a variety
of new products and services designed to further leverage its core business
strengths, including:
OPEN MRI SYSTEMS. The Company intends to expand beyond its existing 13 Open
MRI systems by establishing Open MRI imaging services throughout its regional
diagnostic imaging networks. Open MRI services allow for the diagnosis of a
patient without requiring the patient to enter into a conventional large-bore
MRI. The "open" application of the MRI technology offers treatment previously
unavailable to certain patients, including infants, pediatric patients,
claustrophobic patients, large or obese patients and patients suffering from
post-traumatic stress syndrome. Certain MRI applications, such as kinematic
studies, are more easily conducted in an Open MRI than in a conventional MRI.
RADIOLOGY CO-SOURCE PRODUCT. The Company seeks to develop its co-sourcing
product, which will involve the joint ownership and management (outsourcing) of
the physical and technical operations of the multi-modality radiology department
of a hospital or multi-specialty physician group. The Company believes it has
the expertise to manage these operations more efficiently and cost-effectively
than many hospitals and multi-specialty groups and views the co-source product
as a significant opportunity to expand its products and services from the $6
billion outpatient diagnostic imaging services industry to the $50 billion
diagnostic imaging services industry as a whole.
4
<PAGE>
RECENT DEVELOPMENTS
The Company expects to report net income of approximately $512,000 for the
year ended June 30, 1998, as compared to net income of approximately $1,281,000
for the comparable period in 1997. The results for the Company's year ended June
30, 1998 were primarily impacted by (i) the one-time provision for termination
of supplemental service fee of approximately $6,309,000 incurred in connection
with the Recapitalization (as defined below) and (ii) increased interest
expense, offset by (i) an increase in income from operation from center
operations and (ii) an increase in income from operation from Company
acquisitions. Excluding the one-time provision for supplemental service fee
termination, net income for the year ended June 30, 1998 would have been
approximately $6,821,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On July 21, 1998, Glenn P. Cato, the Company's Senior Executive Vice
President and Chief Operating Officer, resigned and Thomas V. Croal, the
Company's Executive Vice President and Chief Financial Officer, was elected
Senior Executive Vice President and Chief Operating Officer to replace Mr. Cato.
Mr. Croal will continue to act as the Company's Chief Financial Officer until
his replacement is appointed.
On June 12, 1998, concurrently with the issuance of the Outstanding Notes,
the Company entered into an amendment to and restatement of the Senior Credit
Facilities, pursuant to which, among other things, the Company refinanced and
consolidated its prior $20 million tranche term loan and $40 million tranche
term loan into a single $50 million term loan. See "Description of Senior Credit
Facilities." The Company utilized a portion of the net proceeds from the sale of
the Outstanding Notes, together with the net proceeds of the borrowing under the
term loan portion of the Senior Credit Facilities, to repay outstanding
indebtedness under the Senior Credit Facilities (including indebtedness incurred
in connection with the acquisition of Signal) in the approximate aggregate
amount of $114.5 million. The remainder of such proceeds were or will be used
for general corporate purposes.
On May 18, 1998, the Company acquired Signal, a Farmington, Connecticut
based provider of mobile and fixed site MRI services, mobile lithotripsy
services, fixed site CT services and other outsourced health care services. The
purchase price, including the assumption of indebtedness, was $45.7 million
(subject to certain post-closing adjustments). Signal operates 16 mobile MRI
systems and several other diagnostic imaging systems, primarily in New England
and the Southeast.
------------------------
The Company's principal executive offices are located at 4400 MacArthur
Boulevard, Suite 800, Newport Beach, California 92660 and its telephone number
is (949) 476-0733. The Company's common stock is quoted on The Nasdaq SmallCap
Market under the symbol "IHSC."
5
<PAGE>
EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered................ Up to $100,000,000 principal amount of 9 5/8% Series B
Senior Subordinated Notes Due 2008, which have been
registered under the Securities Act. The terms of the
Exchange Notes are identical in all material respects to
the Outstanding Notes except for certain transfer
restrictions and registration rights relating to the
Outstanding Notes and except that if the Exchange Offer
has not been consummated on or prior to December 9, 1998
or a shelf registration statement is not declared
effective when required, then the Company will pay
liquidated damages to each Holder of Outstanding Notes
for the first 90 days following such date in an amount
equal to $.05 per week per $1,000 principal amount of
Outstanding Notes held by such Holder. The amount of
liquidated damages will increase by an additional $.05
per week per $1,000 principal amount of Outstanding
Notes at the beginning of each subsequent 90-day period
until the Exchange Offer is consummated or the shelf
registration is declared effective, up to a maximum
amount of liquidated damages of $.30 per week per $1,000
principal amount of Outstanding Notes.
The Exchange Offer................ The Exchange Notes are being offered in exchange for a
like principal amount of Outstanding Notes. The issuance
of the Exchange Notes is intended to satisfy obligations
of the Company contained in the Registration Rights
Agreement. The Exchange Notes evidence the same debt as
the Outstanding Notes and will be issued, and holders
thereof are entitled to the same benefits as holders of
the Outstanding Notes, under the Indenture.
Tenders, Expiration Date;
Withdrawal........................ The Exchange Offer will expire at 5:00 p.m., New York
City time on October , 1998, or such later date and
time to which it is extended. Tenders of Outstanding
Notes may be withdrawn at any time prior to the
Expiration Date. Any Outstanding Notes not accepted for
exchange for any reason will be returned without expense
to the tendering holder thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer. See "The Exchange Offer" for a
description of the procedures for tendering the
Outstanding Notes.
Federal Income Tax Consequences... The exchange pursuant to the Exchange Offer should not
result in income, gain or loss to the holders of Notes
who participate in the Exchange Offer or to the Company
for U.S. federal income tax purposes. See "Certain
Federal Income Tax Considerations".
Use of Proceeds................... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Exchange Agent.................... State Street Bank and Trust Company, N.A. is serving as
Exchange Agent (the "Exchange Agent") pursuant to the
Exchange Offer.
</TABLE>
6
<PAGE>
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain no-action letters addressed to
other parties in other transactions. However, the Company has not sought its own
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in such
other circumstances. Based upon these interpretations by the staff of the
Commission, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold and otherwise transferred by a holder thereof, other than (i) a
broker-dealer who purchased such Outstanding Notes directly from the Company for
resale pursuant to Rule 144A or other available exemptions under the Securities
Act or (ii) a person that is an "affiliate" (as defined in Rule 405 of the
Securities Act) of the Company without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of such Exchange Notes.
Holders of Outstanding Notes accepting the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may not rely on the
position of the staff of the Commission as set forth in these no-action letters
and would have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. A secondary resale transaction in the United States by a holder who
is using the Exchange Offer to participate in the distribution of Exchange Notes
must be covered by an effective registration statement containing the selling
securityholder information required by Item 507 of Regulation S-K under the
Securities Act.
Each broker-dealer (other than an "affiliate" of the Company) that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Outstanding Notes as a result of market-making
activities or other trading activities and will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Outstanding Notes where such Outstanding
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for the
Exchange Offer Registration Period, the Company will make this Prospectus, as
amended or supplemented, available to any such broker-dealer for use in
connection with any such resale; provided, however, that the Company shall not
be required to maintain the effectiveness of the Registration Statement for more
than 60 days following the consummation of the Exchange Offer unless the Company
has been notified in writing on or prior to the 60th day following the
consummation of the Exchange Offer by one or more broker-dealers that such
holder has received Exchange Notes as to which it will be required to deliver
this Prospectus upon resale. See "Plan of Distribution". Any broker-dealer who
is an affiliate of the Company may not rely on such no-action letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transactions. See
"Exchange Offer."
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
The terms of the Exchange Notes are identical in all material respects to
the Outstanding Notes except for certain transfer restrictions and registration
rights relating to the Outstanding Notes and except that, if the Exchange Offer
has not been consummated on or prior to December 9, 1998 or a shelf registration
statement is not declared effective when required, then the Company will pay
liquidated damages to each Holder of Outstanding Notes for the first 90 days
following such date in an amount equal to $.05 per week per $1,000 principal
amount of Outstanding Notes held by such Holder. The amount of liquidated
damages will increase by an additional $.05 per week per $1,000 principal amount
of Outstanding Notes at the beginning of each subsequent 90-day period until the
Exchange Offer is consummated or
7
<PAGE>
the shelf registration is declared effective, up to a maximum amount of
liquidated damages of $.30 per week per $1,000 principal amount of Outstanding
Notes. The Exchange Notes will bear interest from the last interest payment date
of the Outstanding Notes to occur prior to the issue date of the Exchange Notes
or, if no such interest has been paid, from June 12, 1998. Holders of the
Outstanding Notes whose Outstanding Notes are accepted for exchange will not
receive interest on such Outstanding Notes for any period subsequent to the last
interest payment date to occur prior to the issue date of the Exchange Notes or,
if no such interest has been paid, from June 12, 1998, and will be deemed to
have waived the right to receive any interest payment on the Outstanding Notes
accrued from and after such date.
<TABLE>
<S> <C>
ISSUER............................. InSight Health Services Corp.
SECURITIES OFFERED................. $100,000,000 in aggregate principal amount of 9 5/8%
Series B Senior Subordinated Notes due 2008 of the
Company.
MATURITY DATE...................... June 15, 2008
INTEREST PAYMENT DATES............. June 15 and December 15, commencing December 15, 1998
SUBSIDIARY GUARANTEES.............. The Notes are fully and unconditionally guaranteed by
each of the Subsidiary Guarantors. Each of the
Subsidiary Guarantees is a guarantee of payment and
not of collection.
SUBORDINATION...................... The Notes are unsecured senior subordinated
obligations of the Company and are subordinated in
right of payment to all existing and future Senior
Indebtedness of the Company, including borrowings
under the Senior Credit Facilities. The Notes will
rank PARI PASSU with all existing and future senior
subordinated indebtedness of the Company and rank
senior to all other existing and future subordinated
indebtedness of the Company. The Subsidiary Guarantees
are unsecured senior subordinated obligations of the
Subsidiary Guarantors and are subordinated in right of
payment to all existing and future Senior Indebtedness
of the Subsidiary Guarantors, including the guarantees
of indebtedness under the Senior Credit Facilities. As
of March 31, 1998, after giving pro forma effect to
the acquisition of Signal, the borrowing under the
term loan portion of the Senior Credit Facilities, the
issuance of the Outstanding Notes and the application
of net proceeds therefrom, the Company would have had
$53.4 million of Senior Indebtedness outstanding and
$100 million available to be borrowed under the Senior
Credit Facilities, all of which would be Senior
Indebtedness, and the Subsidiary Guarantors would have
had $53.4 million of Senior Indebtedness outstanding,
all of which would have represented guarantees of
indebtedness under the Senior Credit Facilities. See
"Risk Factors--Subordination of Notes and Subsidiary
Guarantees; Asset Encumbrances."
OPTIONAL REDEMPTION................ On or after June 15, 2003, the Company may redeem the
Notes, in whole or in part, at the redemption prices
set forth herein, plus accrued and unpaid interest
thereon, if any, to the Redemption Date.
Notwithstanding the foregoing, at any time on or
before June 15, 2001, the Company may redeem up to 35%
of the sum of (i) the initial aggregate original
principal amount of the Notes and (ii) the initial
aggregate principal
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
amount of any Additional Notes with the net proceeds
of one or more Equity Offerings at a redemption price
equal to 109.625% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to
the Redemption Date; provided, that at least 65% of
the sum of (x) the initial aggregate principal amount
of the Notes and (y) the initial aggregate principal
amount of any Additional Notes remains outstanding
immediately after the occurrence of such redemption.
See "Description of Notes--Optional Redemption."
MANDATORY REDEMPTION............... None, except at maturity on June 15, 2008.
CHANGE OF CONTROL.................. Upon a Change of Control, the Company will be required
to make an offer to repurchase all outstanding Notes
at 101% of the unpaid principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the
date of repurchase. See "Description of
Notes--Repurchase at the Option of Holders--Change of
Control."
COVENANTS.......................... The Indenture pursuant to which the Notes are issued
(the "Indenture") restricts among other things, the
ability of the Company and the Subsidiary Guarantors
to incur additional indebtedness and issue preferred
stock, enter into sale and leaseback transactions,
incur liens, pay dividends or make certain other
restricted payments, apply net proceeds from certain
asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other
person, sell stock of subsidiaries, and assign,
transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company. See
"Description of Notes--Certain Covenants."
USE OF PROCEEDS.................... The Company will not receive any proceeds from the
Exchange Offer. See "Use of Proceeds."
</TABLE>
RISK FACTORS
Prospective investors should carefully consider the factors discussed in
detail elsewhere in this Prospectus under the caption "Risk Factors."
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The Company's summary unaudited pro forma consolidated statement of
operations data for the twelve month period ended March 31, 1998, the nine
months ended March 31, 1998 and the year ended June 30, 1997 are for
informational purposes only and give effect to the issuance of the Outstanding
Notes, the borrowing under the term loan portion of the Senior Credit Facilities
and the application of the net proceeds therefrom, the October 1997 purchase by
Carlyle of $25 million of a new series of the Company's preferred stock and
exchange by GE of its existing preferred stock and certain other rights for a
new series of the Company's preferred stock, currently convertible into
approximately 30% and 33%, respectively, of the Company's common stock on a
fully diluted basis (the "Recapitalization") and the acquisitions of Signal, MIC
and other smaller acquisitions as if they had occurred on July 1, 1996, the
beginning of the Company's most recently completed fiscal year. The following
summary unaudited pro forma consolidated balance sheet data of the Company as of
March 31, 1998 is based upon the Company's historical and unaudited balance
sheet, Signal's historical unaudited balance sheet and after giving pro forma
effect to the issuance of the Outstanding Notes, the borrowing under the term
loan portion of the Senior Credit Facilities and the application of the net
proceeds therefrom. The summary unaudited pro forma consolidated financial data
does not purport to represent what the Company's results of operations or
financial position would have been had such transactions in fact occurred at the
beginning of the periods or on the date indicated. This financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial statements and notes thereto
of the Company and the unaudited pro forma combined condensed statements of
operations and balance sheet of the Company located elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
1998(1) 1998(1) 1997
------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................. $ 135,316 $ 102,397 $ 127,666
Gross profit......................................................... 27,507 20,827 19,078
Operating income..................................................... 16,433 12,412 11,483
Interest expense, net................................................ 12,176 8,782 11,546
Net income (loss).................................................... 3,182 2,639 (63)
OTHER DATA:
EBITDA (2)........................................................... $ 36,304 $ 27,795 $ 30,091
Adjusted EBITDA (3).................................................. 38,078 29,124 31,126
Cash interest expense, net........................................... 11,576 8,332 10,946
Depreciation and amortization........................................ 19,871 15,383 18,608
Capital expenditures (4)............................................. 19,928 15,233 7,102
Ratios:
Adjusted EBITDA to cash interest expense, net...................... 3.3x 3.5x 2.8x
Pro forma ratio of earnings to fixed charges (5)................... 1.2x 1.3x 1.0x
Total net debt to adjusted EBITDA.................................. 3.0x
Margins:
Gross margin....................................................... 20.3% 20.3% 14.9%
Operating margin................................................... 12.1% 12.1% 9.0%
Adjusted EBITDA margin............................................. 28.1% 28.4% 24.4%
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............................................ $ 40,792
Working capital...................................................... 42,668
Total assets......................................................... 211,130
Total debt, including current maturities............................. 153,351
Stockholders' equity................................................. 35,844
</TABLE>
- ------------------------------
(1) These amounts do not include the one-time non-cash charge of approximately
$6.3 million for the elimination of the GE supplemental service fee. Such
charge was recorded on October 14, 1997 and was a direct result of the
Recapitalization.
(2) EBITDA is defined as the operating income plus depreciation and
amortization. This measurement has been included herein because management
believes that certain investors will find it to be a useful tool for
measuring the Company's ability to meet debt service, capital expenditure
and working capital requirements. EBITDA should not be considered an
alternative to, or more meaningful than, earnings from operations or other
traditional indicators of operating performance and cash flow from operating
activities.
(3) Adjusted EBITDA represents EBITDA of the Company for the relevant period
plus the calculated EBITDA of the Company for the relevant period with
respect to the Mountain Diagnostics and Redwood City MRI acquisitions.
Calculated EBITDA with respect to Mountain Diagnostics and Redwood City MRI
was computed using annualized unaudited financial information.
(4) Capital expenditures represent historical capital expenditures of the
Company, excluding Signal, for the periods presented.
(5) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of lease rental expense
representing interest.
10
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The Merger was accounted for using the purchase method of accounting and
treating MHC as the acquiror. Accordingly, the following table presents summary
consolidated historical financial data of the Company for the nine months ended
March 31, 1998 and 1997, the fiscal year ended June 30, 1997 and the summary pro
forma combined financial data of MHC and AHS for the twelve months ended June
30, 1996, adjusted to give effect to the Merger as if it had occurred as of July
1, 1995. The summary historical information presented for each of the nine
months ended March 31, 1998 and 1997 has been derived from unaudited interim
consolidated financial statements of the Company, and, in the opinion of
management of the Company, reflects a fair presentation of the Company's
financial information. The summary historical data presented below under the
caption "Statement of Operations" for the fiscal year ended June 30, 1997 are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by Arthur Andersen LLP, independent
certified public accountants, and are included elsewhere in this Prospectus. The
summary pro forma combined financial data of MHC and AHS for the twelve months
ended June 30, 1996 has been provided for comparison purposes only and has been
derived from (i) available information and certain assumptions that management
believes are reasonable and (ii) the separate unaudited financial information of
each of AHS and MHC for the year ended June 30, 1996. Such financial data is
provided for informational purposes only and does not purport to represent what
the Company's results of operations would actually have been had the Merger in
fact occurred as of July 1, 1995. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto of the
Company included elsewhere in this Prospectus.
The following table also presents summary historical financial data of
Signal for the three months ended March 31, 1998 and 1997 and fiscal years ended
December 31, 1997 and 1996. The summary historical information presented for
each of the three months ended March 31, 1998 and 1997 has been derived from
unaudited interim financial statements of Signal, and, in the opinion of
management of the Company, reflects a fair presentation of Signal's financial
information. The summary historical data presented below under the caption
"Statement of Operations" for the years ended December 31, 1997 and 1996 are
derived from the financial statements of Signal, which financial statements have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
and are included elsewhere in this Prospectus. The following information should
be read in conjunction with the financial statements and notes thereto of Signal
included elsewhere in this Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
---------------------------- -------------------------
INSIGHT HEALTH SERVICES CORP. 1998 1997 1997 1996
- -------------------------------------------------------- --------------- ----------- ----------- ------------
(UNAUDITED) (PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 85,673 $ 68,129 $ 93,063 $ 87,720
Gross profit.......................................... 15,982 8,602 12,726 7,130
Operating income (loss)............................... 3,643(1) 3,623 5,763 (973)
OTHER DATA:
EBITDA (2)............................................ $ 14,313 $ 10,826 $ 15,634 $ 9,197
Adjusted EBITDA....................................... 20,622(3) 10,826 15,634 9,197
Depreciation and amortization......................... 10,670 7,203 9,871 10,170
Capital expenditures.................................. 15,233 2,407 7,102 --
Margins:
Gross margin........................................ 18.7% 12.6% 13.7% 8.1%
Operating margin.................................... 4.3% 5.3% 6.2%
EBITDA margin....................................... 16.7% 15.9% 16.8% 10.5%
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................................... $ 13,192
Total assets.......................................... 126,787
Total debt, including current maturities.............. 73,487
Stockholders' equity.................................. 35,844
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------------- --------------------------
SIGNAL MEDICAL SERVICES, INC. 1998 1997 1997 1996
- ------------------------------------------------------- --------------- ----------- ----------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 5,622 $ 5,085 $ 20,704 $ 17,852
Gross profit......................................... 1,811 1,473 5,876 4,920
Operating income..................................... 966 767 3,175 2,663
OTHER DATA:
EBITDA (2)........................................... $ 2,024 $ 1,655 $ 6,851 $ 5,863
Depreciation and amortization........................ 1,058 888 3,676 3,200
Capital expenditures................................. 107 68 3,421 2,918
Margins:
Gross margin....................................... 32.2% 29.0% 28.4% 27.6%
Operating margin................................... 17.2% 15.1% 15.3% 14.9%
EBITDA margin...................................... 36.0% 32.5% 33.1% 32.8%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)............................ $ (24)
Total assets......................................... 18,345
Total debt, including current maturities............. 7,900
Stockholders' equity................................. 3,966
</TABLE>
- ------------------------------
(1) This amounts includes the one-time non-cash charge of approximately $6.3
million for the elimination of the GE supplemental service fee. Such charge
was recorded on October 14, 1997 and was a direct result of the
Recapitalization.
(2) EBITDA is defined as the operating income plus depreciation and
amortization. This measurement has been included herein because management
believes that certain investors will find it to be a useful tool for
measuring the Company's ability to meet debt service, capital expenditure
and working capital requirements. EBITDA should not be considered an
alternative to, or more meaningful than, earnings from operations or other
traditional indicators of operating performance and cash flow from operating
activities.
(3) Adjusted EBITDA is defined as EBITDA and the add-back of the one-time
non-cash charge of approximately $6.3 million discussed above.
12
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE THE FOLLOWING
FACTORS RELATING TO THE COMPANY AND THE ISSUANCE OF THE OUTSTANDING NOTES,
TOGETHER WITH THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN
THIS PROSPECTUS, IN EVALUATING, AND BEFORE MAKING AN INVESTMENT IN, THE EXCHANGE
NOTES OFFERED HEREBY.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Outstanding Notes as set forth in the legend
thereon as a consequence of the issuance of the Outstanding Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Outstanding Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register
Outstanding Notes under the Securities Act. In addition, the tender of
Outstanding Notes pursuant to the Exchange Offer may have an adverse effect upon
holders of, and may increase the volatility of the market price of, the
Outstanding Notes due to a reduction in liquidity. Based on interpretations by
the staff of the Commission, Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such Holders' business and such Holders have
no arrangement or understanding with any person to participate in the
distribution of Exchange Notes. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If any Holder is an affiliate of the Company, is
engaged in or intends to engage in or has any arrangement or understanding with
respect to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, such Holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer (other than an "affiliate" of the
Company) that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Outstanding Notes as a
result of market-making activities or other trading activities and will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for the Exchange Offer Registration Period, the Company will make this
Prospectus, as amended or supplemented, available to any such broker-dealer for
use in connection with any such resale; provided, however, that the Company
shall not be required to maintain the effectiveness of the Registration
Statement for more than 60 days following the consummation of the Exchange Offer
unless the Company has been notified in writing on or prior to the 60th day
following the consummation of the Exchange Offer by one or more broker-dealers
that such holder has received Exchange Notes as to which it will be required to
deliver this Prospectus upon resale. See "Plan of Distribution." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the
Exchange Notes may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or an exemption from registration or
qualification is available and is complied with. The Company does not currently
intend to register or qualify the sale of the Exchange Notes in any such
jurisdictions. See "Exchange Offer -- Terms of the Exchange Offer" and
"Consequences of Failure to Exchange."
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<PAGE>
Issuance of the Exchange Notes in exchange for the Outstanding Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of such Outstanding Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents. Therefore, holders of
the Outstanding Notes desiring to tender such Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to tenders of Outstanding Notes for exchange. Outstanding Notes that are
not tendered or that are tendered but not accepted by the Company for exchange,
will, following consummation of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof under the Securities Act and,
upon consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate.
SUBSTANTIAL LEVERAGE
The Company has incurred substantial indebtedness to finance its acquisition
strategy and to refinance outstanding indebtedness, and is highly leveraged and
has significant debt service obligations. At March 31, 1998, on a pro forma
basis after giving effect to the acquisition of Signal, the borrowing under the
term loan portion of the Senior Credit Facilities, the issuance of the
Outstanding Notes and the application of the net proceeds therefrom, the Company
would have had $153.4 million of consolidated indebtedness outstanding. See
"Capitalization." Subject to certain limitations, the Indenture and the Senior
Credit Facilities permit the Company and its subsidiaries to incur additional
indebtedness.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company's
ability to obtain additional financing in the future for capital expenditures,
acquisitions or general corporate purposes, including working capital, may be
limited; (ii) a substantial portion of the Company's cash flow from operations
will be required for debt service, thereby reducing the funds available to the
Company for its operations, capital expenditures, acquisitions or other
purposes; (iii) the Company's borrowings under the Senior Credit Facilities will
bear interest at variable rates, which could result in higher interest expense
if interest rates rise; (iv) the Company's level of indebtedness could limit its
flexibility in planning for and reacting to, and make it more vulnerable to,
competitive pressures and changes in industry and economic conditions generally;
and (v) indebtedness incurred under the Senior Credit Facilities is scheduled to
become due prior to the time any principal payments are required on the Notes
and, therefore, the Company may need to refinance such indebtedness. The
Company's ability to refinance the Senior Credit Facilities, if necessary, will
depend on, among other things, its financial condition at the time, the
restrictions in the instruments governing its then outstanding indebtedness and
other factors, including general economic and market conditions, that are beyond
the control of the Company. In addition, the Company's operating flexibility
with respect to certain business matters will be limited by financial and
restrictive covenants contained in the Indenture and the Senior Credit
Facilities and the failure to comply with those covenants could have a material
adverse effect on the Company. There can be no assurance that those covenants
will not adversely affect the Company's ability to finance its future operations
or capital needs or to engage in business activities that may be in its
interest. See "Description of Senior Credit Facilities" and "Description of
Notes."
The ability of the Company to service its indebtedness, and to comply with
the financial and restrictive covenants contained in the Indenture and the
Senior Credit Facilities, will depend upon the Company's future performance and
ability to generate cash, which are subject to financial, economic, competitive
and other factors, many of which are beyond the Company's control. Based on the
Company's current expectations with respect to its existing business, the
Company does not expect to generate cash sufficient to repay the Notes at
maturity and, accordingly, will have to refinance the Notes at their maturity.
In addition, there can be no assurance that the Company will be able to generate
sufficient cash to meet its other debt service obligations. If the Company is
unable to generate sufficient funds to meet its debt service obligations, it may
be required to refinance some of its indebtedness, to sell assets or to raise
additional equity. No assurance can be given that such refinancings, asset sales
or equity sales could be
14
<PAGE>
accomplished or, if accomplished, would raise sufficient funds to meet the
Company's debt service obligations. The Company's high degree of leverage and
related financial covenants could have a material adverse effect on its ability
to withstand competitive pressures or adverse economic conditions, to make
acquisitions, to obtain future financing or to take advantage of business
opportunities that may arise.
SUBORDINATION OF NOTES AND SUBSIDIARY GUARANTEES; ASSET ENCUMBRANCES
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all of the Company's existing and future Senior
Indebtedness, including borrowings under the Senior Credit Facilities. In
addition, each Subsidiary Guarantee is a general unsecured obligation of the
relevant Subsidiary Guarantor, and similarly subordinated in right of payment to
all existing and future Senior Indebtedness of that Subsidiary Guarantor,
including guarantees of indebtedness under the Senior Credit Facilities. At
March 31, 1998, on a pro forma basis after giving effect to the acquisition of
Signal, the borrowing under the term loan portion of the Senior Credit
Facilities, the issuance of the Outstanding Notes and the application of the net
proceeds therefrom, the aggregate amount of Senior Indebtedness of the Company
would have been approximately $53.4 million, and the aggregate amount of Senior
Indebtedness of the Subsidiary Guarantors would have been $53.4 million, all of
which would have represented guarantees of indebtedness under the Senior Credit
Facilities. In addition, the Company would have had additional availability of
$100 million for borrowings under the Senior Credit Facilities, all of which
would be Senior Indebtedness, if borrowed. Additional Senior Indebtedness may be
incurred by the Company and the Subsidiary Guarantors from time to time, subject
to certain restrictions. See "Description of Senior Credit Facilities."
In the event of the bankruptcy, liquidation or reorganization of the Company
or any Subsidiary Guarantor, the assets of the Company and the Subsidiary
Guarantors will be available to pay obligations on the Notes only after all
Senior Indebtedness of those entities has been paid in full, following which
there may not be sufficient assets remaining to pay amounts due in respect of
the Notes then outstanding. In addition, under certain circumstances the Company
will not be permitted to pay its obligations under the Notes in the event of a
default under certain Senior Indebtedness. See "Description of Notes--
Subordination" and "--Subsidiary Guarantees."
In addition, the Notes and each Subsidiary Guarantee are effectively
subordinated to all secured obligations of the Company and such Subsidiary
Guarantor, respectively, to the extent of the assets securing those obligations.
The Senior Credit Facilities are secured by all of the capital stock of the
Company's subsidiaries and substantially all of the assets of the Company and
its subsidiaries. The Notes would be effectively subordinated to all existing
and future indebtedness of the Subsidiary Guarantors if the Subsidiary
Guarantees were avoided or subordinated in favor of the Subsidiary Guarantors'
other creditors. See "--Fraudulent Conveyance Statutes."
BUSINESS STRATEGY; ACQUISITIONS
The ongoing acquisition of diagnostic imaging services providers is a
principal component of the Company's business strategy. Accordingly, the Company
is continually investigating and evaluating potential acquisition candidates.
Although at present the Company has no agreements or understandings relating to
any such acquisitions, it may enter into such agreements or understandings in
the future, including with respect to acquisitions that may be substantial in
size. In addition, the Company's expansion and acquisition strategy may require
substantial capital, and no assurance can be given that the Company will be able
to raise any necessary additional funds through bank financing or through the
issuance of equity or debt securities on terms acceptable to the Company, if at
all. Acquisitions also involve the integration of acquired operations with those
of the Company. Although the Company believes it has successfully integrated
such acquisitions in the past, there can be no assurance that the Company will
be able to successfully integrate the operations of any future acquisitions. See
"Management's Discussion and
15
<PAGE>
Analysis of Financial Condition and Results of Operations" and
"Business--Business Strategy--Growth Through Regional Network Expansion."
GOVERNMENT REGULATION
The health care industry is highly regulated and changes in laws and
regulations can be significant. Changes in the law or new interpretations of
existing laws can have a material effect on permissible activities of the
Company, the relative costs associated with doing business and the amount of
reimbursement by government and other third party payors. The federal government
and all states in which the Company currently operates regulate various aspects
of the Company's business. Failure to comply with these laws could adversely
affect the Company's ability to receive reimbursement for its services and
subject the Company and its officers to penalties. See "Business--Government
Regulation" for a more complete description of the following regulations and
other regulations to which the Company may be subject.
HEALTH CARE FRAUD AND ABUSE REGULATIONS
The fraud and abuse provisions of the Social Security Act prohibit the
solicitation, payment, receipt or offering of any direct or indirect
remunerations in return for, or the inducement of, the referral of patients,
items or services that are paid for, in whole or in part, by Medicare, Medicaid
or any other federally funded health care program. These laws also impose
significant penalties for false or improper billings for health care services.
Violations of the fraud and abuse laws may result in substantial civil or
criminal penalties, including large civil monetary penalties and exclusion from
participation in Medicare, Medicaid or other federally funded health care
programs. See "Business--Government Regulation--Anti-Kickback Statutes."
Under another provision of the Social Security Act, known as "Stark II,"
physicians who refer Medicare and Medicaid patients to the Company for certain
designated health care services are not permitted to have an investment interest
in or a compensation arrangement with the Company, subject to specified
exceptions, and the Company may not accept referrals from such physicians.
Violations of Stark II may be the basis for substantial civil fines and
exclusion from Medicare, Medicaid or other federally funded health care
programs. See "Business--Government Regulation--Stark II; State Physician
Self-Referral Laws."
Many states also have enacted "anti-kickback" and "anti-referral" laws
similar to those contained in the Social Security Act, as well as certain
licensing requirements for the radiologists with whom the Company contracts for
interpretive services. Some of these state laws are broader than their federal
counterparts. For example, they may apply to the provision of health care items
and services generally, not just to those covered by government-funded programs.
Violations of state fraud and abuse and anti-referral laws or licensing
requirements may result in civil or criminal penalties for individuals or
entities, including the Company. See "Business--Government
Regulation--Anti-Kickback Statutes," "--Stark II: State Physician Self-Referral
Laws" and "--Radiologist Licensing."
Although the Company believes that its operations materially comply with
these federal and state laws, there can be no assurance that such federal and
state laws will not be interpreted or changed in a manner that would have a
material adverse effect on the Company's business, financial condition or
results of operations.
OTHER STATE HEALTH CARE REGULATIONS
The laws of many states prohibit business corporations, such as the Company,
from exercising control over the medical judgments or decisions of physicians
and from engaging in certain financial arrangements, such as fee-splitting, with
physicians. These laws and their interpretations vary from state to state and
are typically enforced by the courts and regulatory authorities, each with broad
discretion. The Company
16
<PAGE>
provides the management, administrative and technical services associated with
diagnostic imaging and the Company's position is that it does not engage in the
practice of medicine. The laws of many states also require licensure or
certification of diagnostic imaging equipment, and the laws of some states
require the licensure or certification of diagnostic imaging centers, or define
narrow exemptions from licensure requirements for diagnostic imaging centers.
Although the Company believes its operations are conducted in material
compliance with existing laws, there can be no assurance that such laws will not
be interpreted or changed in a manner that would have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Business--Government Regulation--Anti-Kickback Statutes."
In addition, some states require hospitals and certain other health care
facilities to obtain a Certificate of Need ("CON") or similar regulatory
approval prior to the commencement of certain health care operations or services
and/or the acquisition of major medical equipment, including MRI and Gamma Knife
systems. CON regulations may limit or preclude the Company from providing
diagnostic imaging services or systems in certain states. The Company believes
that it will not be required to obtain CONs in most of the states in which it
intends to operate and, in those states where a CON is required, the Company
believes it has complied or will comply with such requirements. Nevertheless, a
significant increase in the number of states regulating the Company's business
within the CON or state licensure framework could adversely affect the Company's
business, financial condition and results of operation. Conversely, repeal of
existing CON regulations in jurisdictions where the Company has obtained or
operates under a CON could also adversely affect the Company's business,
financial condition and results of operation as barriers to entry are reduced or
removed. This is an area of continuing legislative activity, and there can be no
assurance that the Company will not be subject to CON and licensing statutes in
other states in which it operates or may operate in the future. See
"Business--Government Regulation-- Certificates of Need."
REIMBURSEMENT OF HEALTH CARE COSTS
The Medicare program provides reimbursement for hospitalization, physician,
diagnostic and certain other services to eligible persons 65 years of age and
over and certain others. Providers of service are paid by the federal government
in accordance with regulations promulgated by the United States Department of
Health and Human Services ("HHS") and generally accept said payment, with
nominal co-insurance amounts required to be paid by the service recipient, as
payment in full. The Medicaid program is a combined federal and state program
providing coverage for low income persons. The specific services offered and
reimbursement methods vary from state to state. In many states, Medicaid
reimbursement is patterned after the Medicare program. In recent years, there
have been numerous initiatives at the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services,
including services provided by the Company. The Company believes that such
initiatives may continue in the future. Among other things, in late 1997, the
Clinton Administration and Congress approved the Balanced Budget Act of 1997
(the "Balanced Budget Act"), which seeks to achieve a balanced federal budget
by, among other things, reducing federal spending on the Medicare and Medicaid
programs and limiting reimbursement payments made to providers of diagnostic
services in future years. The Company believes that such limitations on
reimbursement amounts and other cost containment pressures have resulted in
decreasing revenues per scan. Although scan prices appear to have stabilized,
the Company expects continuing downward pressure on pricing levels. In addition,
it is not clear at this time what proposals, if any, will be adopted in addition
to the Balanced Budget Act or pursuant to any recommendations made to Congress
by the recently formed National Bipartisan Commission on the Future of Medicare
or, if any such proposals are adopted, what effect such proposals will have on
the Company's business, financial condition and results of operations. There can
be no assurance that changes in Medicare or Medicaid program reimbursement would
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Reimbursement of Health Care
Costs--Medicare" and "--Medicaid."
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<PAGE>
Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs") attempt to control the cost of health care services.
Managed care contracting has become very competitive and reimbursement schedules
are at or below Medicare reimbursement levels. The development and expansion of
HMOs, PPOs and other managed care organizations within the Company's regional
networks could have a negative impact on utilization of the Company's services
in certain markets and/or affect the revenue per procedure which the Company can
collect. See "Business--Reimbursement of Health Care Costs--Managed Care" and
"Business--Operations--Customers and Fees." In addition, the Company believes
that private health insurance programs will also reduce reimbursement levels in
response to reductions in government reimbursement, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Reimbursement of Health Care Costs--Private Insurance
Reimbursement."
DEPENDENCE ON REFERRALS FOR FIXED FACILITIES
The Company's Fixed Facility operations are principally dependent on the
Company's ability (either directly or indirectly through its hospital customers)
to attract referrals from physicians and other health care providers
representing a variety of specialties. The Company's eligibility to provide
service in response to a referral is often dependent on the existence of a
contractual arrangement with the referred patient's insurance carrier (primarily
if the insurance is provided by a managed care organization). The Company
currently has in excess of 400 contracts with managed care organizations for
diagnostic imaging services provided at the Company's Fixed Facilities,
primarily on a discounted fee-for-service basis. A significant decline in
referrals would have a material adverse effect on the Company's business,
financial condition and results of operations. See
"Business--Operations--Customers and Fees."
CONTRACT RENEWALS
Contract services revenues, which are primarily earned by Mobile Facilities
and certain Fixed Facilities, represented approximately 46% of the Company's
total revenues for the nine months ended March 31, 1998. Each year approximately
one-quarter to one-third of the Company's contract services agreements for
Mobile Facilities are subject to renewal. It is expected that some high volume
customer accounts will elect not to renew their agreements and instead will
purchase or lease their own diagnostic imaging equipment and some customers may
choose an alternative services provider. In the past, when such agreements have
not been renewed, the Company has generally been able to obtain replacement
contracts. While some replacement accounts have initially been smaller than the
lost accounts, such replacement accounts' revenues have generally increased over
the term of the agreement. There can be no assurance, however, that new and
renewal contracts will offset revenues lost from customers electing not to renew
their contracts with the Company. Although the non-renewal of a single customer
agreement would not have a material adverse effect on the Company's contract
services revenues, non-renewal of several agreements could have a material
adverse effect on contract services revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Operations-- Customers and Fees."
In addition, the Company's contract services revenues with regard to its
Mobile Facilities in certain markets depend in part on some hospital accounts
with high volume. If the future reimbursement levels of such 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, the Company's contract services revenues would be
adversely affected. No single source accounts for more than 10% of the Company's
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Operations--Customers and Fees."
18
<PAGE>
ADVERSE UTILIZATION TRENDS FOR CERTAIN DIAGNOSTIC IMAGING PROCEDURES
During the early 1990's, decreased utilization of outpatient services
contributed to a downturn in the diagnostic imaging industry. See "The
Diagnostic Imaging Industry--MRI Industry Trends." Currently, the supply of
diagnostic imaging equipment exceeds the demand for such equipment in the
market. Such demand may be further decreased by payor perceptions that
diagnostic imaging services such as those provided by the Company are sometimes
requested when not medically justified. In addition, the relatively low cost of
Open MRI systems compared to conventional MRI systems has led to an influx of
Open MRI systems in the industry and has aggravated excess capacity levels. The
current excess capacity for diagnostic imaging equipment could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, hospitals comprise a large portion of the Company's
customers. Continued consolidation in the hospital industry will cause certain
hospitals to close and, as a result, could decrease utilization of the Company's
services. Such continued trends could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS INHERENT IN THE PROVISION OF DIAGNOSTIC IMAGING SERVICES
The hospitals and physicians who use the Company's diagnostic imaging
services and imaging systems are involved in the delivery of health care
services to the public and, therefore, are exposed to the risk of liability
claims. The Company's position is that it does not engage in the practice of
medicine. The Company provides only the equipment and technical components of
diagnostic imaging, including certain limited nursing services, and has not
experienced any material losses due to claims for malpractice. Nevertheless,
claims for malpractice have been asserted against the Company in the past and
any future claims, if successful, could result in substantial damage awards to
the claimants, which may exceed the limits of any applicable insurance coverage.
While the Company maintains professional liability insurance, there can be no
assurance that any such claims against the Company will not exceed the amount of
insurance maintained. Successful malpractice claims asserted against the
Company, to the extent not covered by the Company's liability insurance, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Liability Insurance."
TECHNOLOGICAL CHANGES
The Company's services require the use of state-of-the-art diagnostic
imaging equipment that has been characterized by constant technological
advances. Although the Company believes that substantially all of the MRI and
other diagnostic imaging systems it provides can be upgraded to maintain their
state-of-the-art character, the development of new technologies or refinements
of existing ones might make the Company's existing systems technologically or
economically obsolete, or cause a reduction in the value of, or reduce the need
for, the Company's systems. MRI and other diagnostic imaging systems are
currently manufactured by numerous companies. Competition among manufacturers
for a greater share of the MRI and other diagnostic imaging systems market may
result in technological advances in the capacity of these new systems.
Consequently, the obsolescence of the Company's systems may be accelerated.
Although the Company is aware of no imminent substantial technological changes,
should such changes occur, there can be no assurance that the Company would be
able to acquire the new or improved systems that may be required to service its
customers.
COMPETITION
The health care industry in general, and the market for diagnostic imaging
services in particular, is highly competitive. The Company competes principally
on the basis of its reputation for productive and cost-effective quality
services. The Company's operations must compete with groups of radiologists,
established hospitals and certain other independent organizations, including
equipment manufacturers and leasing companies, that own and operate imaging
equipment. The Company will continue to encounter substantial competition from
hospitals and independent organizations, including, with respect to the
Company's Mobile Facilities, Alliance Imaging, Inc. and its affiliates. Some of
the Company's direct
19
<PAGE>
competitors that provide contract diagnostic imaging services may have access to
greater financial resources than the Company.
Certain hospitals, particularly the larger hospitals, may be expected to
directly acquire and operate imaging and treatment equipment on-site as part of
their overall inpatient servicing capability, subject only to their decision to
acquire a high-cost diagnostic imaging system, assume the associated financial
risk, employ the necessary technologists and satisfy applicable licensure and
CON requirements, if any. Historically, smaller hospitals have been reluctant to
purchase imaging and treatment equipment. This reluctance, however, has
encouraged the entry of start-up ventures and more established business
operations into the diagnostic and treatment services business. As a result,
there is significant excess capacity in the diagnostic imaging business in the
United States, which negatively affects utilization and reimbursement.
POTENTIAL CONTROL BY GE AND CARLYLE
GE and Carlyle own all of the Company's Series C Preferred Stock and Series
B Preferred Stock, respectively. Currently, GE has the right to elect one member
to the Board and Carlyle has the right to elect two members to the Board. In
addition, GE and Carlyle are each entitled to vote their Preferred Stock (as
defined herein) on an as-converted basis with the holders of the Company's
common stock on all matters submitted to a stockholder vote other than the
election of directors, provided that the aggregate number of votes cast by GE
and Carlyle does not exceed 37% of the number of votes entitled to be cast. Each
of GE and Carlyle also has certain approval rights with respect to certain
significant transactions by the Company. In addition, if GE and Carlyle both
convert their Preferred Stock pursuant to the terms thereof into shares of the
Company's common stock or Series D Preferred Stock (as defined herein), which
votes on an as-converted basis with the Company's common stock, GE and Carlyle
acting together would hold approximately 70% of the common stock's voting power.
If either GE or Carlyle, but not both, were to convert its shares of Preferred
Stock to the Company's common stock and exercise all warrants held by it
pursuant to the terms thereof, GE or Carlyle, as appropriate, would beneficially
own, pursuant to the provisions of Rule 13d-3 under the Exchange Act, over 50%
of the Company's issued and outstanding common stock. Accordingly, either GE or
Carlyle, or GE and Carlyle acting together, could under certain circumstances
control the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition, Liquidity and Capital
Resources," "Security Ownership of Certain Beneficial Owners and
Management--Possible Future Board Changes" and "Description of Preferred Stock."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the services and management experience of its
executive officers. The loss of the service of one or more of its executive
officers or other key management personnel could adversely affect the Company.
Furthermore, the success of the Company's Fixed Facilities depends on the
Company's ability to retain and attract competent managers for each location.
There can be no assurance that the Company will be successful in attracting or
retaining key personnel. The inability to attract and retain key personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will be
entitled to require the Company to purchase any or all of the Notes held by such
holder at 101% of the unpaid principal amount thereof, plus accrued and unpaid
interest to the date of purchase. However, the Company's ability to purchase
Notes upon a Change of Control may be limited by the terms of then existing
contractual obligations of the Company. In addition, the Company may not have
adequate financial resources to effect such a purchase, and there can be no
assurance that the Company would be able to obtain such resources through a
refinancing of the Notes to be purchased or otherwise. The Company's failure to
purchase all of
20
<PAGE>
the Notes tendered for purchase upon the occurrence of a Change of Control would
constitute an Event of Default under the Indenture.
The Change of Control provision may not necessarily afford the holders of
Notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the holders, because such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not otherwise fall within the definition of a Change of Control under the
Indenture.
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Subsidiary Guarantor, at the time it incurred the indebtedness evidenced
by the Notes or executed its Subsidiary Guarantee, (i) (a) was or is insolvent
or rendered insolvent by reason of such occurrence, (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or such
Subsidiary Guarantor constituted unreasonably small capital or (c) intended or
intends to incur, or believed or believes that it would incur, debts beyond its
ability to pay those debts as they mature, and (ii) the Company or such
Subsidiary Guarantor received or receives less than reasonably equivalent value
or fair consideration for the incurrence of that indebtedness, the Notes and the
Subsidiary Guarantees could be voided, or claims in respect of the Notes or the
Subsidiary Guarantees could be subordinated to other debts of the Company or
such Subsidiary Guarantor in addition to Senior Indebtedness. For similar
reasons, other indebtedness of the Company or any Subsidiary Guarantor,
including indebtedness under the Senior Credit Facilities and any pledge or
other security interest securing that indebtedness, could be voided or
subordinated. The voiding or subordination of any such pledges or other security
interests or of any such other indebtedness, could result in an event of default
with respect to that indebtedness, which could result in acceleration thereof.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the fair saleable value of all of its assets at a
fair valuation or if the present fair saleable value of its assets were less
than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature or (ii) it could not pay its debts as they become due.
On the basis of their historical financial information and recent operating
history as discussed elsewhere herein under the headings "Selected Historical
Consolidated Financial and Operating Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as other
factors, the Company and each Subsidiary Guarantor believe that, after giving
effect to the acquisition of Signal, the borrowing under the term loan portion
of the Senior Credit Facilities, the issuance of the Outstanding Notes and the
application of the net proceeds therefrom, they (i) will not be insolvent, will
not have unreasonably small capital for the business in which they are engaged
and will not incur debts beyond their ability to pay such debts as they mature
and (ii) will have sufficient assets to satisfy any probable money judgment
against them in any pending action. There can be no assurance, however, as to
what standard a court would apply in making such determinations.
ABSENCE OF PUBLIC MARKET
The Exchange Notes are new securities for which there currently is no market
and there can be no assurance as to the liquidity of any markets that may
develop for the Exchange Notes, the ability of holders of the Exchange Notes to
sell their Exchange Notes, or the prices at which holders would be able to sell
their Exchange Notes. Future trading prices of the Exchange Notes will depend on
many factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities. The Initial
Purchasers have advised the Company that they currently intend to make a market
in the Exchange Notes; however, the Initial Purchasers are not obligated to do
so and any market making
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<PAGE>
may be discontinued at any time without notice. The Company does not intend to
apply for listing of the Exchange Notes offered hereby on any securities
exchange or for quotation through the facilities of The Nasdaq Stock Market.
YEAR 2000
The approach of the year 2000 presents potential issues to all organizations
which use computers in the conduct of their businesses or depend on business
partners which use computers. The inability of computer systems and applications
to recognize or properly treat the year 2000 (the "Year 2000 Issue") may result
in computer system failure or miscalculation of critical financial and
operational information as well as failure of equipment controlling
date-sensitive microprocessors.
The Company is developing a plan to address the Year 2000 Issue. The plan
generally will involve the following phases: awareness, assessment, renovation,
testing and implementation. The Company has completed a significant portion of
its assessment of the impact of this issue on its internal information
technology systems and expects to complete its assessment of its internal
information and non-information technology systems by December 31, 1998. The
Company has completed the renovation of approximately 50% of its information
technology systems and continues to renovate the portions of such systems for
which assessment is complete. The Company estimates on a preliminary basis that
the cost of assessment, renovation, testing and implementation of its internal
systems will range from approximately $500,000 to $1,500,000, of which
approximately $30,000 has been incurred. This estimated cost, which is being
funded through operating cash flows, may increase as more information is learned
as the Company continues its assessment and proceeds with the renovation,
testing and implementation of its plan. The Company anticipates that solutions
to all internal Year 2000 issues will be implemented and tested by approximately
June 30, 1999. There can be no assurance, however, that the Company's year 2000
plan will be implemented with respect to its internal systems in a timely
fashion. If such systems were not Year 2000 compliant on a timely basis,
significant problems, including delays, may be incurred in billing the Company's
major customers (e.g., Medicare, HMOs or private insurance carriers) for
services performed.
The Company has also begun, but not completed, its assessment of the impact
of the Year 2000 Issue on its diagnostic imaging equipment used to provide
imaging services. The Company expects to complete such assessment by March 31,
1999 and that renovation will be completed by June 30, 1999. The Company expects
that its equipment vendors will bear the cost of modifying or otherwise
renovating such diagnostic imaging equipment. There can be no assurance,
however, that such equipment will be year 2000 compliant in a timely fashion. If
such equipment were not year 2000 compliant on a timely basis, the Company may
not be able to provide imaging services to patients.
The Company has also received preliminary information concerning the year
2000 readiness of some of its customers, vendors (other than equipment vendors)
and other third parties with which it has a material relationship. There can be
no assurance that such parties' systems will be year 2000 compliant in a timely
fashion. If the systems of the Company's customers were not year 2000 compliant
on a timely basis, the Company could experience problems and delays in receiving
and processing correct reimbursements. If the systems of other vendors or
suppliers of the Company's necessary power, telecommunications, transportation
and financial services are unable to provide such equipment or services due to
year 2000-related problems, the Company may be unable to service its customers.
If any of the foregoing uncertainties were to occur, and if the Company's
contingency plan, as developed, fails, the Company's business, financial
condition and results of operations would be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of the
effect of such events on the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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<PAGE>
USE OF PROCEEDS
The net proceeds from the issuance of the Outstanding Notes, together with
the net proceeds borrowed under the term loan portion of the Senior Credit
Facilities, were approximately $144 million. The Company used a portion of the
net proceeds to repay existing indebtedness under the Senior Credit Facilities,
including indebtedness recently incurred in connection with the acquisition of
Signal. See "Summary--Recent Developments." The remaining proceeds were or will
be used for general corporate purposes, including future acquisitions of
diagnostic imaging facilities and providers. Immediately following application
of the net proceeds from the issuance of the Outstanding Notes and the term loan
portion of the Senior Credit Facilities, the Company had no outstanding
indebtedness under the revolving credit facility or the acquisition facility
portions of the Senior Credit Facilities and each such facility was available to
the Company in full for future borrowings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Senior Credit Facilities."
The following table sets forth the sources and uses of funds in connection
with the issuance of the Outstanding Notes, the borrowing under the term loan
portion of the Senior Credit Facilities and the application of the net proceeds
therefrom:
SOURCES AND USES OF FUNDS
(dollars in thousands)
<TABLE>
<CAPTION>
SOURCES OF FUNDS
<S> <C>
Senior Credit Facilities (1)....................................... $ 50,000
9% Senior Subordinated Notes due 2008.............................. 100,000
---------
Total Sources of Funds........................................... $ 150,000
---------
---------
USES OF FUNDS
Refinancing of Existing Debt....................................... $ 114,500
Transaction Costs (2).............................................. 6,000
Cash at Closing.................................................... 29,500
---------
Total Uses of Funds.............................................. $ 150,000
---------
---------
</TABLE>
- ------------------------------
(1) Upon application of the net proceeds of the issuance of the Outstanding
Notes and borrowing under the $50 million term loan portion of the $150
million Senior Credit Facilities, the Company had thereunder a $75 million
acquisition facility and a $25 million revolving credit facility, all of
which were available to the Company in full for future borrowings.
(2) Includes discounts and commissions and estimated expenses to be incurred in
connection with the issuance of the Outstanding Notes and amendment of the
Senior Credit Facilities. See "Description of Senior Credit Facilities."
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby, the terms of which are identical in all material
respects to those of the Outstanding Notes. The Outstanding Notes surrendered in
exchange for the Exchange Notes will be canceled and cannot be reissued. The
issuance of the Exchange Notes will not result in any change in the aggregate
indebtedness of the Company.
EXCHANGE OFFER
The Outstanding Notes were not registered under the Securities Act or any
state securities laws. The Outstanding Notes were offered and sold (i) to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) in compliance with Rule 144A, (ii) to a limited number of institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) and (iii) pursuant to offers and sales that occurred outside the
United States in accordance with Regulation S under the Securities Act. The
Outstanding Notes sold to "qualified institutional buyers" are eligible for
trading in the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL") market.
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<PAGE>
TERMS OF THE EXCHANGE OFFER
Promptly after the Registration Statement of which this Prospectus
constitutes a part has been declared effective, the Company will offer the
Exchange Notes in exchange for surrender of the Outstanding Notes. The Company
will keep the Exchange Offer open for not less than 30 days and not more than 45
days (or longer if required by applicable law) after the date on which notice of
the Exchange Offer is mailed to the holders of the Outstanding Notes. For each
Outstanding Note validly tendered to the Company pursuant to the Exchange Offer
and not withdrawn by the holder thereof, the holder of such Outstanding Note
will receive an Exchange Note having a principal amount equal to the principal
amount of such surrendered Outstanding Note. Interest on each Exchange Note will
accrue from the last interest payment date on which interest was paid on the
Outstanding Note surrendered in exchange therefor or, if no interest has been
paid on such Outstanding Note, from the date of the original issue of the
Outstanding Notes. The Exchange Notes evidence the same debt as the Outstanding
Notes and are issued under and are entitled to the same benefits under the
Indenture as the Outstanding Notes. In addition, the Exchange Notes and the
Outstanding Notes are treated as one series of securities under the Indenture.
If the Exchange Offer has not been consummated on or prior to December 9,
1998 or a shelf registration statement is not declared effective when required,
then the Company will pay liquidated damages to each Holder of Outstanding Notes
for the first 90 days following such date in an amount equal to $.05 per week
per $1,000 principal amount of Outstanding Notes held by such Holder. The amount
of liquidated damages will increase by an additional $.05 per week per $1,000
principal amount of Outstanding Notes at the beginning of each subsequent 90-day
period until the Exchange Offer is consummated or the shelf registration is
declared effective, up to a maximum amount of liquidated damages of $.30 per
week per $1,000 principal amount of Outstanding Notes. Upon the consummation of
the Exchange Offer or the effectiveness of a shelf registration statement, as
the case may be, the interest rate borne by the Notes from the date of such
consummation or effectiveness, as the case may be, will be reduced to the
original interest rate of 9 5/8% per annum; provided, however, that, if after
such reduction in interest rate, a different event specified above occurs, the
interest rate may again be increased pursuant to the foregoing provisions.
PERIOD FOR TENDERING OUTSTANDING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Outstanding Notes which
are properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on October , 1998; provided, however, that if the period of
time for which the Exchange Offer is open is extended, the term "Expiration
Date" means the latest time and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about September , 1998, to all Holders
of Outstanding Notes known to the Company. The Company's obligation to accept
Outstanding Notes for exchange pursuant to the Exchange Offer is subject to
certain conditions set forth under "--Certain Conditions to the Exchange Offer"
below.
Outstanding Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "--Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Outstanding Notes
as promptly as practicable, such notice in the case of any extension to be
issued by means of a press release or other public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
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<PAGE>
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender to the Company of Outstanding Notes by a Holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to tender
Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to, or an Agent's Message (as
defined herein) in connection with a book-entry transfer must be completed and
received by, State Street Bank and Trust Company, N.A. (the "Exchange Agent") at
one of the addresses set forth below under "Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Outstanding Notes
must be received by the Exchange Agent along with the Letter of Transmittal, or
(ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Outstanding Notes, if such procedure is available, into
the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the Holder
must comply with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OUTSTANDING
NOTES SHOULD BE SENT TO THE COMPANY.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent, forming a part of a
confirmation of a book-entry transfer, which states that the Book-Entry Transfer
Facility has received an express acknowledgment from the participant in the
Book-Entry Transfer Facility tendering the Outstanding Notes that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal and that the Issuers may enforce such agreement against such
participant.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Outstanding Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Outstanding
Notes who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). If signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantees must be made by a firm which is a member of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc. or by a commercial bank or trust company having an
office or correspondent in the United States (collectively, "Eligible
Institutions").
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Outstanding Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Outstanding Notes not properly tendered or not to
accept any particular Outstanding Notes which acceptance might, in the judgment
of the Company or its counsel, be unlawful. The Company also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Outstanding Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any Holder
who seeks to tender Outstanding Notes in the Exchange Offer). The interpretation
of the terms and conditions of the Exchange Offer as to any particular
Outstanding Notes either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Outstanding Notes for exchange must be cured
within such reasonable period of time as the Company shall determine. Neither
the Company, the Exchange Agent nor any other person shall be under any duty to
give notification of any defect or irregularity with respect to
25
<PAGE>
any tender of Outstanding Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If Outstanding Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Outstanding Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered Holder with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Outstanding Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Outstanding Notes
or a timely Book-Entry Confirmation of such Outstanding Notes in the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Outstanding Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer or if Outstanding Notes are submitted
for a greater principal amount than the Holder desires to exchange, such
unaccepted or non-exchanged Outstanding Notes will be returned without expense
to the tendering Holder thereof (or, in the case of Outstanding Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry procedures described below, such
non-exchanged Outstanding Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility system may make book-entry delivery of Outstanding Notes by causing DTC
to transfer such Outstanding Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with DTC's procedures for transfer.
However, although delivery of Outstanding Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and any
other required documents, must, in any case, be transmitted to and received by
the Exchange Agent at one of the addresses set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of Outstanding Notes desires to tender such
Outstanding Notes and such Outstanding Notes are not immediately available, or
time will not permit such Holder's Outstanding Notes or other required documents
to reach the Exchange Agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent received from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, or mail or
hand delivery), setting forth the name and address of the Holder of Outstanding
Notes and the amount of Outstanding Notes tendered, stating that the tender is
being made thereby and guaranteeing that within five New York Stock Exchange
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Outstanding Notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the
26
<PAGE>
Exchange Agent, and (iii) the certificates for all physically tendered
Outstanding Notes, in proper form for transfer, or a Book-Entry Confirmation, as
the case may be, and all other documents required by the Letter of Transmittal,
are received by the Exchange Agent within five New York Stock Exchange trading
days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Outstanding Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Outstanding Notes to be withdrawn, identify the
Outstanding Notes to be withdrawn (including the principal amount of such
Outstanding Notes), and (where certificates for Outstanding Notes have been
transmitted) specify the name in which such Outstanding Notes are registered, if
different from that of the withdrawing Holder. If certificates for Outstanding
Notes have been delivered or otherwise identified to the Exchange Agent, then,
prior to the release of such certificates, the withdrawing Holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such Holder is an Eligible Institution. If Outstanding Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn
Outstanding Notes and otherwise comply with the procedures of such facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Outstanding Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Outstanding Notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to the Holder thereof
without cost to such Holder (or, in the case of Outstanding Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Outstanding Notes will be credited to an account maintained with such Book-Entry
Transfer Facility for the Outstanding Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Outstanding Notes may be retendered by following one of the procedures
described under "--Procedures for Tendering Outstanding Notes" above at any time
on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue Exchange Notes in exchange
for, any Outstanding Notes and may terminate or amend the Exchange Offer, if at
any time before the acceptance of such Outstanding Notes for exchange or the
exchange of the Exchange Notes for such Outstanding Notes, any of the following
events shall occur:
(a) the Exchange Offer violates applicable law or any applicable
interpretation of the staff of the Commission;
(b) an action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer, or a material
adverse development shall have occurred in any existing action or proceeding
with respect to the Company; or
(c) all governmental approvals shall not have been obtained, which
approvals the Company deems necessary for the consummation of the Exchange
Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right
27
<PAGE>
and each such right shall be deemed an ongoing right which may be asserted at
any time and from time to time.
In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
EXCHANGE AGENT
State Street Bank and Trust Company, N.A. has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of the
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
Main Delivery to:
State Street Bank and Trust Company, N.A., Exchange Agent
By Mail, Hand or Overnight Delivery:
State Street Bank and Trust Company, N.A., Exchange Agent
61 Broadway, 15th Floor
New York, New York 10006
Facsimile: (212) 612-3201
Confirm by Telephone: (212) 612-3458
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The Company will pay certain other expenses to be incurred in connection
with the Exchange Offer, including the fees and expenses of the Exchange Agent,
accounting and certain legal fees.
TRANSFER TAXES
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register Exchange Notes in the name of, or request
that Outstanding Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Outstanding Notes as set forth in the legend
thereon as a consequence of the issuance of the Outstanding Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Outstanding Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register
Outstanding Notes under the Securities Act. To the extent that Outstanding Notes
are tendered and accepted in connection with the Exchange Offer, any trading
market for Outstanding Notes not tendered in connection with the Exchange Offer
could be adversely affected. The tender of Outstanding Notes pursuant to the
Exchange Offer may have an adverse effect upon, and increase the volatility of,
the market price of the Outstanding Notes due to a reduction in liquidity.
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<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 (i) the pro forma
combined cash and cash equivalents and capitalization of the Company giving
effect to the acquisition of Signal and (ii) the cash and cash equivalents and
capitalization of the Company as adjusted to give effect to the acquisition of
Signal, the borrowing under the term loan portion of the Senior Credit
Facilities, the issuance of the Outstanding Notes and the application of the net
proceeds therefrom as if they occurred on March 31, 1998. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
PRO FORMA AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................ $ 11,292 $ 40,792
---------- -----------
---------- -----------
Current maturities of long-term debt..................................................... $ 9,008 $ 9,008
---------- -----------
---------- -----------
Long-term debt, net of current maturities:
Senior Credit Facilities............................................................... $ 106,981 $ 42,481
Equipment and other notes.............................................................. 1,862 1,862
9 5/8% Senior Subordinated Notes due 2008.............................................. -- 100,000
---------- -----------
Total long-term debt................................................................. 108,843 144,343
---------- -----------
Minority interest........................................................................ 1,871 1,871
---------- -----------
Stockholders' equity:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
March 31, 1998..................................................................... 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
March 31, 1998..................................................................... 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized: 2,805,660 shares
outstanding at March 31, 1998........................................................ 3 3
Additional paid-in capital............................................................. 23,366 23,366
Accumulated deficit.................................................................... (24,621) (24,621)
---------- -----------
Total stockholders' equity........................................................... 35,844 35,844
---------- -----------
Total capitalization............................................................... $ 146,558 $ 182,058
---------- -----------
---------- -----------
</TABLE>
29
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
REFERENCES TO THE "OFFERING" IN THESE UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS INCLUDE THE SALE OF THE OUTSTANDING NOTES, THE BORROWING
UNDER THE TERM LOAN PORTION OF THE SENIOR CREDIT FACILITIES AND THE APPLICATION
OF THE NET PROCEEDS THEREFROM.
The accompanying unaudited pro forma combined condensed financial statements
reflect (i) the acquisition by the Company of all the issued and outstanding
common stock of Signal, all the assets of MIC and other smaller acquisitions
made by the Company since July 1, 1996 (excluding Mountain Diagnostics, see
below) (the "Acquisitions"), (ii) the Recapitalization consummated on October
14, 1997 and (iii) the Offering. The Acquisitions have been or will be accounted
for by the Company using the purchase method of accounting.
The accompanying unaudited pro forma combined condensed balance sheet is
based upon the Company's historical unaudited condensed consolidated balance
sheet as of March 31, 1998, Signal's historical unaudited balance sheet as of
March 31, 1998 and the pro forma effect of the Offering and is presented as if
the acquisition of Signal and the Offering had been consummated on March 31,
1998.
The accompanying unaudited pro forma combined condensed statements of
operations for the year ended June 30, 1997 and the nine months ended March 31,
1998 give the effect to the Acquisitions, the Recapitalization and the Offering
as if they had occurred on July 1, 1996, the beginning of the Company's most
recently completed fiscal year. The unaudited pro forma combined condensed
statement of operations for the year ending June 30, 1997 combines the audited
historical consolidated results of the Company for such year with the (i)
unaudited results of Signal for the twelve month period ended June 30, 1997,
(ii) unaudited results of MIC for an eleven month period ended May 31, 1997 (the
date of acquisition by the Company), (iii) the unaudited results of the other
smaller acquisitions for the twelve month periods ended June 30, 1997, (iv) the
unaudited pro forma effects of the Recapitalization, and (v) the unaudited pro
forma effects of the Offering. The unaudited pro forma combined condensed
statement of operations for the nine months ended March 31, 1998 combines the
unaudited historical consolidated results for the Company for such period with
(i) the unaudited results of Signal for the nine month period ended March 31,
1998, (ii) the unaudited results of the other smaller acquisitions for the nine
month period ended March 31, 1998 to the extent not already included in the
Company's historical financial results, (iii) the unaudited pro forma effects of
the Recapitalization and (iv) the unaudited pro forma effects of the Offering.
The pro forma financial statements referred to above exclude any adjustments
for the Company's acquisition of Mountain Diagnostics in Las Vegas, Nevada
because the Company purchased Mountain Diagnostics from the trustee in
bankruptcy and limited financial data was available for the periods preceding
such acquisition.
The pro forma adjustments are based upon available information and upon
certain assumptions that the management of the Company believes are reasonable.
However, the unaudited pro forma combined condensed financial statements do not
purport to be indicative of the results that would have been achieved if the
transactions had been completed on the respective dates above or the results
that may be achieved in the future.
30
<PAGE>
INSIGHT HEALTH SERVICES CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
SIGNAL PRO FORMA
HISTORICAL HISTORICAL ACQUISITION FORMA OFFERING AFTER
INSIGHT SIGNAL ADJUSTMENTS COMBINED ADJUSTMENTS OFFERING
---------- ---------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents....................... $ 9,650 $ 1,642 $-- $ 11,292 $29,500(3) $ 40,792
Trade accounts receivable, net.................. 21,674 3,397 -- 25,071 -- 25,071
Other receivable, net........................... 330 239 -- 569 -- 569
Other current assets............................ 2,149 121 -- 2,270 -- 2,270
---------- ---------- ----------- -------- ----------- --------
Total current assets............................ 33,803 5,399 -- 39,202 29,500 68,702
Property and equipment, net..................... 46,745 12,286 4,309(2) 63,340 -- 63,340
Investment in partnerships...................... 495 -- -- 495 -- 495
Other assets, net............................... 2,471 660 -- 3,131 6,000(3) 9,131
Intangible assets, net.......................... 43,273 -- 26,189(1) 69,462 -- 69,462
---------- ---------- ----------- -------- ----------- --------
Total assets.................................... $ 126,787 $18,345 $30,498 $175,630 $35,500 $211,130
---------- ---------- ----------- -------- ----------- --------
---------- ---------- ----------- -------- ----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of equipment and other notes.... $ 5,706 $ 3,302 $-- $ 9,008 $-- $ 9,008
Accounts payable and accrued expenses........... 14,905 2,121 -- 17,026 -- 17,026
---------- ---------- ----------- -------- ----------- --------
Total current liabilities....................... 20,611 5,423 -- 26,034 -- 26,034
Long-term portion of equipment and other notes.. 67,781 4,598 32,155(1)
4,309(2) 108,843 (64,500)(3) 44,343
9 5/8% Senior Subordinated Notes................ -- -- -- -- 100,000(3) 100,000
Other........................................... 680 2,358 -- 3,038 -- 3,038
---------- ---------- ----------- -------- ----------- --------
Total liabilities............................... 89,072 12,379 36,464 137,915 35,500 173,415
---------- ---------- ----------- -------- ----------- --------
Minority interest............................... 1,871 -- -- 1,871 -- 1,871
---------- ---------- ----------- -------- ----------- --------
Redeemable convertible cumulative preferred
stock......................................... -- 2,000 (2,000)(1) -- -- --
---------- ---------- ----------- -------- ----------- --------
Stockholders' equity
Convertible Series B preferred stock.......... 23,923 -- -- 23,923 -- 23,923
Convertible Series C preferred stock.......... 13,173 -- -- 13,173 -- 13,173
Common stock.................................. 3 -- -- 3 -- 3
Additional paid-in capital.................... 23,366 156 (156)(1) 23,366 -- 23,366
(Accumulated deficit) retained earnings....... (24,621) 4,310 (4,310)(1) (24,621) -- (24,621)
Treasury stock................................ -- (500) 500(1) -- -- --
---------- ---------- ----------- -------- ----------- --------
Total stockholders' equity.................... 35,844 3,966 (3,966) 35,844 -- 35,844
---------- ---------- ----------- -------- ----------- --------
Total liabilities and stockholders' equity.... $ 126,787 $18,345 $30,498 $175,630 $35,500 $211,130
---------- ---------- ----------- -------- ----------- --------
---------- ---------- ----------- -------- ----------- --------
</TABLE>
31
<PAGE>
The pro forma combined condensed balance sheet as of March 31, 1998 reflects the
following pro forma adjustments:
(1) To record the acquisition of the common stock of Signal for $32,155 in
borrowed funds and the resulting goodwill of $26,189.
(2) To record the acquisition of equipment for debt on equipment that is
currently under operating leases.
The above reflects the acquisition of Signal by the Company using the purchase
method of accounting. Under purchase accounting, the assets and liabilities of
Signal are stated at fair market value (FMV). For purposes of these pro forma
financial statements, the book value of Signal's assets and liabilities are
assumed to approximate FMV. The excess purchase price is allocated to goodwill.
<TABLE>
<CAPTION>
Goodwill calculation for Signal acquisition
- ---------------------------------------------------------------
<S> <C>
Cash purchase price............................................ $ 32,155
Estimated FMV of net assets acquired........................... 5,966
----------
Purchase price in excess of FMV................................ $ 26,189
----------
----------
</TABLE>
(3) To record the proceeds of the issuance of the Outstanding Notes of $100,000,
the proceeds from the term loan portion of the Senior Credit Facilities of
$50,000, transaction costs of $6,000, repayment of existing indebtedness of
$114,500 and net cash proceeds of $29,500.
32
<PAGE>
INSIGHT HEALTH SERVICES CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
11 MONTHS ADJUSTMENTS FOR
HISTORICAL OF MIC ADJUSTMENTS HISTORICAL OTHER OTHER ADJUSTMENTS FOR
INSIGHT (B) FOR MIC (B) ACQUISITIONS (A) ACQUISITIONS (A) RECAPITALIZATION
---------- --------- ----------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $93,063 $6,675 $-- $8,597 $-- -$-
---------- --------- ----------- ------ ------- ------
Costs of operations:
Costs of services...... 52,070 3,581 -- 4,572 -- (278)(4)
Equipment leases....... 18,396 -- -- 116 -- --
Depreciation and
amortization......... 9,871 1,112 247(1) 989 864(1) --
---------- --------- ----------- ------ ------- ------
Total costs of
operations............. 80,337 4,693 247 5,677 864 (278)
---------- --------- ----------- ------ ------- ------
Gross profit (loss)...... 12,726 1,982 (247) 2,920 (864) 278
Corporate operating
expenses............... 7,431 -- -- 632 -- --
---------- --------- ----------- ------ ------- ------
Income (loss) from
company operations..... 5,295 1,982 (247) 2,288 (864) 278
Equity in earnings....... 468 -- -- -- -- --
---------- --------- ----------- ------ ------- ------
Operating income
(loss)................. 5,763 1,982 (247) 2,288 (864) 278
Interest (income)
expense................ 4,055 129 615(3) 118 1,730(3) (1,481)(5)
---------- --------- ----------- ------ ------- ------
Income (loss) before
provision for taxes.... 1,708 1,853 (862) 2,170 (2,594) 1,759
Provision (benefit) for
income taxes........... 427 35 213(8) 15 (121)(8) 440(8)
---------- --------- ----------- ------ ------- ------
Net income (loss)........ $ 1,281 $1,818 $(1,075) $2,155 $(2,473) $1,319
---------- --------- ----------- ------ ------- ------
---------- --------- ----------- ------ ------- ------
Net income (loss) per
common and preferred
share
Basic................ $ 0.25
Diluted.............. $ 0.24
Weighted average common
and preferred shares
outstanding:
Basic................ 5,215
Diluted.............. 5,440
<CAPTION>
SIGNAL PRO FORMA
HISTORICAL ACQUISITION PRO FORMA OFFERING AFTER
SIGNAL ADJUSTMENTS COMBINED ADJUSTMENTS OFFERING
---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................. $19,331 $ -- $127,666 $-- $127,666
---------- ----------- ---------- ----------- ---------
Costs of operations:
Costs of services...... 9,390 -- 69,335 -- 69,335
Equipment leases....... 3,651 (1,518)(6) 20,645 20,645
Depreciation and
amortization......... 3,354 1,309(1) 18,608 18,608
862(2)
---------- ----------- ---------- ----------- ---------
Total costs of
operations............. 16,395 653 108,588 -- 108,588
---------- ----------- ---------- ----------- ---------
Gross profit (loss)...... 2,936 (653) 19,078 -- 19,078
Corporate operating
expenses............... -- -- 8,063 8,063
---------- ----------- ---------- ----------- ---------
Income (loss) from
company operations..... 2,936 (653) 11,015 -- 11,015
Equity in earnings....... -- -- 468 -- 468
---------- ----------- ---------- ----------- ---------
Operating income
(loss)................. 2,936 (653) 11,483 -- 11,483
Interest (income)
expense................ 720 2,894(3) 8,780 2,766(7) 11,546
---------- ----------- ---------- ----------- ---------
Income (loss) before
provision for taxes.... 2,216 (3,547) 2,703 (2,766) (63)
Provision (benefit) for
income taxes........... 887 (1,220)(8) 676 (676)(8) --
---------- ----------- ---------- ----------- ---------
Net income (loss)........ $ 1,329 $ (2,327) $ 2,027 $(2,090) $ (63)
---------- ----------- ---------- ----------- ---------
---------- ----------- ---------- ----------- ---------
Net income (loss) per
common and preferred
share
Basic................ $ 0.22 $ (0.01)
Diluted.............. $ 0.22 $ (0.01)
Weighted average common
and preferred shares
outstanding:
Basic................ 9,035 9,035
Diluted.............. 9,261 9,035
</TABLE>
33
<PAGE>
The pro forma combined condensed statement of operations for the year ended June
30, 1997 reflects the following Recapitalization and acquisition adjustments:
(1) To record the amortization of goodwill over 20 years.
(2) To record depreciation expense on operating leases purchased.
(3) To record interest expense for acquisition financing.
(4) To record the reversal of maintenance expense related to the GE supplemental
service fee through June 30, 1997.
(5) To record net interest savings from the October 14, 1997 Recapitalization.
(6) To record the reversal of lease expense on operating leases purchased.
(7) To record additional interest expense of $4,389 as a result of the Offering
offset by interest income of $1,623 on the net cash to be received.
(8) To record the tax effect on the above entries at estimated effective rates.
(A) These amounts include the Company's other smaller acquisitions that have
been completed since the fiscal year ended June 30, 1997. The acquisitions
included in these amounts are Chattanooga, Columbus and Murfreesboro.
Excluded from these amounts is Mountain Diagnostics, which was acquired by
the Company out of bankruptcy and for which there is limited financial data
available.
The other smaller acquisitions were made for an aggregate cash purchase
price of $16,800 and resulted in goodwill of $17,289. Acquisition financing
was $16,700 at a weighted average interest rate of 10.4 percent.
(B) The acquisition of MIC was made in May 1997 for a cash purchase price of
$6,800, all borrowed at a rate of 9 percent, and resulted in goodwill of
$4,940.
34
<PAGE>
INSIGHT HEALTH SERVICES CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR SIGNAL
HISTORICAL ADJUSTMENTS FOR HISTORICAL OTHER OTHER HISTORICAL ACQUISITION
INSIGHT (A) RECAPITALIZATION ACQUISITIONS (A) ACQUISITIONS (A) SIGNAL ADJUSTMENTS
----------- ----------------- ----------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 85,673 $ -- $ 629 $ -- $ 16,095 $ --
----------- ------ ------ ----- ----------- -------------
Costs of operations:
Costs of services....... 46,038 (413)(1) 272 -- 5,993 --
Equipment leases........ 12,983 -- 40 -- 2,412 (1,138)(5)
Depreciation and
amortization.......... 10,670 -- 4 92(3) 2,989 982(3)
646(6)
----------- ------ ------ ----- ----------- -------------
Total costs of
operations.............. 69,691 (413) 316 92 11,394 490
----------- ------ ------ ----- ----------- -------------
Gross profit.............. 15,982 413 313 (92) 4,701 (490)
Provision for supplemental
service fee
termination............. 6,309 (6,309)(8) -- -- -- --
Corporate operating
expenses................ 6,510 -- 220 -- 2,165 --
----------- ------ ------ ----- ----------- -------------
Income (loss) from company
operations.............. 3,163 6,722 93 (92) 2,536 (490)
Equity in earnings........ 480 -- -- -- -- --
----------- ------ ------ ----- ----------- -------------
Operating income (loss)... 3,643 6,722 93 (92) 2,536 (490)
Interest (income)
expense................. 4,665 (679)(2) (1) 60(4) 492 2,170(4)
----------- ------ ------ ----- ----------- -------------
Income (loss) before
provision for taxes..... (1,022) 7,401 94 (152) 2,044 (2,660)
Provision (benefit) for
income taxes............ 431 1,311(9) (2) (15)(9) 829 (997)(9)
----------- ------ ------ ----- ----------- -------------
Net income (loss)......... $ (1,453) $ 6,090 $ 96 $ (137) $ 1,215 $ (1,663)
----------- ------ ------ ----- ----------- -------------
----------- ------ ------ ----- ----------- -------------
Net income (loss) per
common and preferred
share
Basic................. $ (0.19)
Diluted............... $ (0.19)
Weighted average common
and preferred shares
outstanding:
Basic................. 7,590
Diluted............... 7,590
<CAPTION>
PRO FORMA
PRO FORMA OFFERING AFTER
COMBINED ADJUSTMENTS OFFERING
----------- ------------- -----------
<S> <C> <C> <C>
Revenues.................. $ 102,397 $ -- $ 102,397
----------- ------------- -----------
Costs of operations:
Costs of services....... 51,890 -- 51,890
Equipment leases........ 14,297 14,297
Depreciation and
amortization.......... 15,383 15,383
----------- ------------- -----------
Total costs of
operations.............. 81,570 -- 81,570
----------- ------------- -----------
Gross profit.............. 20,827 -- 20,827
Provision for supplemental
service fee
termination............. -- -- --
Corporate operating
expenses................ 8,895 -- 8,895
----------- ------------- -----------
Income (loss) from company
operations.............. 11,932 -- 11,932
Equity in earnings........ 480 480
----------- ------------- -----------
Operating income (loss)... 12,412 -- 12,412
Interest (income)
expense................. 6,707 2,075(7) 8,782
----------- ------------- -----------
Income (loss) before
provision for taxes..... 5,705 (2,075) 3,630
Provision (benefit) for
income taxes............ 1,557 (566)(9) 991
----------- ------------- -----------
Net income (loss)......... $ 4,148 $ (1,509) $ 2,639
----------- ------------- -----------
----------- ------------- -----------
Net income (loss) per
common and preferred
share
Basic................. $ 0.46 $ 0.29
Diluted............... $ 0.44 $ 0.28
Weighted average common
and preferred shares
outstanding:
Basic................. 9,054 9,054
Diluted............... 9,331 9,331
</TABLE>
35
<PAGE>
The pro forma combined condensed statement of operations for the nine months
ended March 31, 1998 reflect the following Recapitalization and acquisition
adjustments:
(1) To record the reversal of maintenance expense related to the GE supplemental
service fee agreement through December 31, 1997.
(2) To record net interest savings from the October 14, 1997 Recapitalization.
(3) To record the amortization of goodwill over 20 years.
(4) To record interest expense for acquisition financing.
(5) To record the reversal of lease expense on operating leases purchased.
(6) To record depreciation expense on operating leases purchased.
(7) To record additional interest expense of $3,292 as a result of the Offering
offset by interest income on of $1,217 the net cash to be received.
(8) To record the reversal of the one-time charge of approximately $6.3 million
for the elimination of the GE supplemental service fee. Such charge was
recorded on October 14, 1997 and was a direct result of the
Recapitalization.
(9) To record the tax effect on the above entries at estimated effective rates.
(A) These amounts include the Company's insignificant acquisition of
Murfreesboro. Excluded from these amounts is Mountain Diagnostics, which was
acquired by the Company out of bankruptcy and for which limited financial
data is available. Murfreesboro was acquired in November 1997 for a cash
purchase price of $2,300, which was borrowed at a rate of 7.9 percent.
36
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The Merger was accounted for using the purchase method of accounting and
treating MHC as the acquiror. Accordingly, the following table presents summary
consolidated historical financial data of the Company for the fiscal year ended
June 30, 1997 and each of the nine months ended March 31, 1998 and March 31,
1997, the summary pro forma combined financial data of MHC and AHS for the
twelve months ended June 30, 1996, adjusted to give effect to the Merger as if
it had occurred on July 1, 1995, and the summary consolidated historical
financial data of MHC for the six months ended June 30, 1996 and 1995 and each
of the fiscal years in the four year period ended December 31, 1995. The
selected historical data presented below under the caption "Statement of
Operations" for each of the fiscal periods ended June 30, 1997 and 1996 and
December 31, 1995, 1994, 1993 and 1992 are derived from the consolidated
financial statements of the Company or MHC, as appropriate, which financial
statements have been audited by Arthur Andersen LLP, independent certified
public accountants (for the Company) or Deloitte & Touche LLP, independent
auditors (for MHC) as of December 31, 1995 and prior, and are included elsewhere
in this Prospectus. The historical information presented for each of the nine
month periods ended March 31, 1998 and 1997 and the six month period ended June
30, 1995 has been derived from unaudited interim consolidated financial
statements of the Company or MHC, as appropriate, and, in the opinion of
management of the Company, reflects a fair presentation of the Company's and
MHC's financial information. The summary pro forma combined financial data of
MHC and AHS for the twelve months ended June 30, 1996 has been provided for
comparison purposes only and has been derived from (i) available information and
certain assumptions that management believes are reasonable and (ii) the
separate unaudited financial information of each AHS and MHC for the year ended
June 30, 1996. Such financial data is provided for informational purposes only
and does not purport to represent what the Company's results of operations would
actually have been had the Merger in fact occurred as of July 1, 1995. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto of the Company included elsewhere in
this Prospectus.
37
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED PRO FORMA SIX MONTHS ENDED
----------------------- YEAR ENDED YEAR ENDED ---------------------
MARCH 31, MARCH 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1998(4) 1997(4) 1997 1996(4) 1996(1) 1995(1)(4)
- ---------------------------------------- --------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $85,673 $68,129 $ 93,063 87,720 $ 26,460 $ 24,434
Costs of operations (2)................. 69,691 59,527 80,337 80,590 27,420 22,986
--------- --------- ---------- ---------- --------- ----------
Gross profit (loss)..................... 15,982 8,602 12,726 7,130 (960) 1,448
Corporate operating expenses............ 12,819(5) 5,343 7,431 8,453 2,127 1,915
--------- --------- ---------- ---------- --------- ----------
Income (loss) from company operations... 3,163 3,259 5,295 (1,323) (3,087) (467)
Equity in earnings of unconsolidated
partnerships.......................... 480 364 468 350 138 136
--------- --------- ---------- ---------- --------- ----------
Operating income (loss)................. 3,643 3,623 5,763 (973) (2,949) (331)
Interest expense, net................... (4,665) (2,741) (4,055) (3,813) (1,144) (648)
Provision for securities litigation
settlement............................ -- -- -- (1,500) -- --
Gain on sale of partnership interests... -- -- -- -- -- --
Provision for income taxes.............. (431) (134) (427) (281) (65) --
--------- --------- ---------- ---------- --------- ----------
Income (loss) before extraordinary
item.................................. (1,453) 748 1,281 (6,567) (4,158) (979)
Extraordinary item...................... -- -- -- 3,179 3,179 --
--------- --------- ---------- ---------- --------- ----------
Net income (loss)....................... $(1,453) $ 748 $ 1,281 (3,388) $ (979) $ (979)
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item
per common and preferred share (3)
Basic................................. $ (0.19) $ 0.14 $ 0.25 $ (2.43) $ (2.99) $ (0.73)
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Diluted............................... $ (0.19) $ 0.14 $ 0.24 $ (2.43) $ (2.99) $ (0.73)
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Income (loss) per common and preferred
share:
Basic................................. $ (0.19) $ 0.14 $ 0.25 $ (1.25) $ (0.70) $ (0.73)
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Diluted............................... $ (0.19) $ 0.14 $ 0.24 $ (1.25) $ (0.70) $ (0.73)
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Weighted average number of common and
preferred shares outstanding
Basic................................. 7,590 5,214 5,215 2,706 1,389 1,333
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Diluted............................... 7,590 5,444 5,440 2,706 1,389 1,333
--------- --------- ---------- ---------- --------- ----------
--------- --------- ---------- ---------- --------- ----------
Ratio of earnings to fixed charges...... -- 1.2x 1.0x --
Fixed charge coverage deficiency........ (1,022) -- -- $ 4,093
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 1995(1) 1994(1) 1993(1) 1992(1)
- ---------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 50,609 $ 45,868 $ 45,075 $ 45,135
Costs of operations (2)................. 48,778 45,439 47,456 45,329
--------- --------- --------- ---------
Gross profit (loss)..................... 1,831 429 (2,381) (194)
Corporate operating expenses............ 3,372 4,040 4,344 6,747
--------- --------- --------- ---------
Income (loss) from company operations... (1,541) (3,611) (6,725) (6,941)
Equity in earnings of unconsolidated
partnerships.......................... 348 834 685 1,020
--------- --------- --------- ---------
Operating income (loss)................. (1,193) (2,777) (6,040) (5,921)
Interest expense, net................... (1,626) (1,206) (1,773) (2,391)
Provision for securities litigation
settlement............................ (1,500) -- -- --
Gain on sale of partnership interests... -- 4,957 -- --
Provision for income taxes.............. -- (160) -- --
--------- --------- --------- ---------
Income (loss) before extraordinary
item.................................. (4,319) 814 (7,813) (8,312)
Extraordinary item...................... -- 3,342 1,036 --
--------- --------- --------- ---------
Net income (loss)....................... $ (4,319) $ 4,156 $ (6,777) $ (8,312)
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item
per common and preferred share (3)
Basic................................. $ (3.21) $ 0.60 $ (4.49) $ (4.89)
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................... $ (3.21) $ 0.58 $ (4.49) $ (4.89)
--------- --------- --------- ---------
--------- --------- --------- ---------
Income (loss) per common and preferred
share:
Basic................................. $ (3.21) $ 3.04 $ (3.89) $ (4.89)
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................... $ (3.21) $ 2.96 $ (3.89) $ (4.89)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and
preferred shares outstanding
Basic................................. 1,345 1,367 1,742 1,699
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................... 1,345 1,402 1,742 1,699
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of earnings to fixed charges...... -- 1.2x -- --
Fixed charge coverage deficiency........ $ 4,319 -- $ 7,813 $ 8,312
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, AT JUNE 30, AT DECEMBER 31,
------------ -------------------- ------------------------------------------
1998(4) 1997 1996 1995(1) 1994(1) 1993(1) 1992(1)
------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... 13,192 $ (5,740) $ (1,167) $ (2,228) $ 1,587 $ (8,594) $ (14,607)
Property and equipment, net............. 46,745 34,488 29,852 12,386 5,272 9,791 18,772
Intangible assets....................... 43,273 33,272 16,965 4,047 1,194 1,263 2,513
Total assets............................ 126,787 98,322 70,386 28,306 22,592 23,566 38,043
Total long-term liabilities............. 68,461 59,205 39,839 19,723 9,575 7,967 8,368
Stockholders' equity (deficit).......... 35,844 6,685 5,404 (4,005) 300 (3,857) 2,502
</TABLE>
- ----------------------------------
(1) The selected consolidated financial data represents historical data of MHC
only.
(2) Includes a (net credit) provision for prior restructuring costs of $(0.5)
million and $7.5 million in 1993 and 1992, respectively.
(3) Amounts are computed on a pro forma basis as if the reset of par value of
MHC common stock and related conversion into InSight common stock had
occurred on January 1, 1992.
(4) Unaudited.
(5) Amount includes a charge of $6,309 for provision for GE supplemental service
fee termination.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
UNLESS THE CONTEXT OTHERWISE REQUIRES, HISTORICAL REFERENCES IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS TO THE "COMPANY" OR "INSIGHT" REFER TO INSIGHT HEALTH SERVICES CORP.,
ITS CONSOLIDATED SUBSIDIARIES, PARTNERSHIPS AND LIMITED LIABILITY COMPANIES,
EXCLUDING SIGNAL.
OVERVIEW
The Company is a leading nationwide provider of diagnostic imaging and
related information services. While the Company generated approximately 77% of
its revenues from MRI services during the twelve months ended March 31, 1998, it
provides a comprehensive offering of diagnostic imaging and treatment services,
including CT, mammography, diagnostic ultrasound, lithotripsy and x-ray, to
leading health care organizations, including hospitals, managed care
organizations and insurance companies. The Company has developed, and continues
to develop, strong regional networks of diagnostic imaging services, enabling
the Company to increase its overall utilization and to benefit from enhanced
economies of scale. The Company has a substantial presence in California, Texas,
New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio), and
provides its services through 50 Fixed Facilities, including 16 Multi-Modality
Centers, and 51 Mobile Facilities.
The Company's revenues are primarily generated from contract services and
patient services. Contract services revenues are generally earned from services
billed to a hospital or other health care provider which include: (i)
fee-for-service arrangements in which revenues are based upon a contractual rate
per procedure, (ii) equipment rental in which revenues are generally based upon
a fixed monthly rental and (iii) management fees. Contract services revenues are
primarily earned through Mobile Facilities and certain Fixed Facilities. Patient
services revenues are earned from services billed directly to patients or third
party payors (generally managed care organizations, Medicare, Medicaid, private
insurers and workers compensation funds), and are primarily earned through Fixed
Facilities. Contract and patient services revenues represented approximately 46%
and 51%, respectively, of the Company's total revenues for the nine months ended
March 31, 1998.
During the nine months ended March 31, 1998 compared to the same period
during the prior year, the Company increased scan volumes at its existing
facilities by 35%. During the same period, the average fee-per-scan performed at
Mobile Facilities increased by 1% and at Fixed Facilities decreased by 4%.
Management believes the decrease in the average fee-per-scan at Fixed Facilities
is the result of continuing competitive pressure in the MRI service industry,
cost containment efforts by third party payors and an increase in the Company's
managed care contracts with lower discounted fee-per-scan rates. Overall, the
Company's average fee-per-scan is lower at its Fixed Facilities than at its
Mobile Facilities due to the range of procedures, many of which have a lower
fee-per-scan than MRI, provided at the Company's Multi-Modality Centers.
The Company maintains a high fixed cost structure, with fixed costs and
variable costs representing 85% and 15% of total operating expenses,
respectively, for the nine months ended March 31, 1998. Four categories of fixed
expenses account for approximately 72% of the Company's total operating
expenses: (i) salaries and benefits expenses; (ii) equipment lease expenses;
(iii) contractual maintenance expenses; and (iv) depreciation and amortization,
comprising 30%, 19%, 8% and 15%, respectively, of the Company's total operating
expenses for the nine months ended March 31, 1998. Due to this high degree of
operating leverage with respect to the Company's equipment, any increase in
existing facility scan volumes disproportionately increases the Company's
operating cash flow. Service supplies, consisting mainly of film and contrast
media used in the Company's diagnostic imaging services, comprised 5% of the
Company's total operating expenses for the nine months ended March 31, 1998 and
were the Company's largest variable operating expense during such period.
39
<PAGE>
The Company 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. The following chart sets forth the Company's eight completed
acquisitions since the Merger:
<TABLE>
<CAPTION>
PURCHASE PRICE
(INCLUDING
NAME OF TYPE OF ASSUMED DEBT)
DATE LOCATION FACILITY FACILITY (IN MILLIONS)
- ------------------ ------------------ ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
September 1996 Hayward, Open MRI of Fixed Facility $ 2.8
California Hayward
May 1997 Maine and New MIC Mobile Facilities 8.7
Hampshire
June 1997 Chattanooga, Chattanooga Fixed Facility(1) 10.9
Tennessee Outpatient
Center
July 1997 Columbus, Ohio Broad Street Fixed Facility(1) 5.5
Imaging Center
November 1997 Murfreesboro, Imaging Center Fixed Facility(1) 2.3
Tennessee at Murfreesboro
November 1997 Redwood City, Redwood City Fixed Facility 0.3
California MRI
November 1997 Las Vegas, Mountain Fixed Facility(1) 10.3
Nevada Diagnostics
May 1998 Farmington, Signal Mobile and 45.7
Connecticut Fixed Facilities
(HQ) and other
services(2)
</TABLE>
- ------------------------
(1) Multi-Modality Center.
(2) Acquisition consisted of the purchase by merger of all of the outstanding
common stock of Signal, a provider of mobile and fixed MRI, mobile
lithotripsy and other diagnostic services in eleven states, primarily in New
England and the Southeast. See "Offering Memorandum Summary--Recent
Developments."
RESULTS OF OPERATIONS
InSight, which has a fiscal year ending on June 30, commenced operations on
June 26, 1996, following the merger of two public companies, AHS and MHC, each
of which had fiscal years ending on December 31. Because MHC was treated as the
acquiror for accounting purposes, the Company's operating results relating to
the periods prior to July 1, 1996 represent the historical results of MHC only,
while the Company's operating results relating to the periods on and after July
1, 1996 represent the operating results of InSight on a consolidated basis,
including the results of AHS and MHC as operating subsidiaries. Due to such
accounting treatment and different fiscal years, the operating results of the
Company required to be presented herein include (i) the nine months ended March
31, 1998 compared to the nine months ended March 31, 1997 (in each case
representing InSight's results); (ii) the year ended June 30, 1997 (representing
InSight's results) compared to the six months ended June 30, 1996 (representing
MHC's results only); (iii) the six months ended June 30, 1996 compared to the
six months ended
40
<PAGE>
June 30, 1995 (in each case representing MHC's results only); and (iv) the year
ended December 31, 1995 compared to the year ended December 31, 1994 (in each
case representing MHC's results only).
In order to provide an additional basis for comparison with respect to the
Company's operating results for the twelve months ended June 30, 1997, the
Company has included elsewhere in this Offering Memorandum, and discussed below,
unaudited pro forma financial information for the twelve months ended June 30,
1996, adjusted to give effect to the Merger as if it had occurred as of July 1,
1995. Such pro forma adjustments are based upon (i) available information and
certain assumptions that management believes are reasonable and (ii) the
separate financial information of each of AHS and MHC for the year ended June
30, 1996. Such presentation is provided for informational purposes only and does
not purport to represent what the Company's results of operations would actually
have been had the Merger in fact occurred as of July 1, 1995.
The following table sets forth items of income and expense as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
INSIGHT HEALTH SERVICES CORP.
---------------------------------------------
PRO
NINE NINE FORMA
MONTHS MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, JUNE 30, JUNE 30,
1998 1997 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- -------- --------
Costs of operations
Costs of services............................... 52.0 54.9 54.3 55.6
Provision for doubtful accounts................. 1.8 1.6 1.6 3.7
Equipment leases................................ 15.2 20.3 19.8 21.1
Depreciation and amortization................... 12.5 10.6 10.6 11.6
--------- --------- -------- --------
Total operating expenses...................... 81.5 87.4 86.3 92.0
--------- --------- -------- --------
Gross profit.................................... 18.5 12.6 13.7 8.0
Corporate operating expenses.................... 15.0 7.8 8.0 9.6
--------- --------- -------- --------
Income (loss) from operations..................... 3.5 4.8 5.7 (1.6)
Equity in earnings of unconsolidated
partnerships..................................... 0.6 0.5 0.5 0.4
--------- --------- -------- --------
Operating income (loss)........................... 4.1 5.3 6.2 (1.2)
Other income (expense)
Interest expense, net........................... (5.4) (4.0) (4.4) (4.3)
Provision for securities litigation
settlement.................................... 0.0 0.0 0.0 (1.7)
Gain on sale of partnership interests........... 0.0 0.0 0.0 0.0
--------- --------- -------- --------
Total other income (expense).................. (5.4) (4.0) (4.4) (6.0)
--------- --------- -------- --------
Income (loss) before income taxes................. (1.3) 1.3 1.8 (7.2)
Provision for income taxes........................ 0.5 0.2 0.5 0.3
--------- --------- -------- --------
Income (loss) before extraordinary item........... (1.8) 1.1 1.3 (7.5)
Extraordinary item, net gain on debt
extinguishment................................... 0.0 0.0 0.0 3.6
--------- --------- -------- --------
Net income (loss)................................. (1.8%) 1.1% 1.3% (3.9%)
--------- --------- -------- --------
--------- --------- -------- --------
<CAPTION>
MAXUM HEALTH CORP.
-------------------------------------------------------
SIX SIX
MONTHS MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
-------- -------- ------------ ------------
Costs of operations
Costs of services............................... 60.1 57.8 56.9 56.8
Provision for doubtful accounts................. 2.3 2.0 3.3 2.5
Equipment leases................................ 26.3 28.6 28.6 31.8
Depreciation and amortization................... 14.9 6.5 7.7 8.0
-------- -------- ------------ ------------
Total operating expenses...................... 103.6 94.9 96.5 99.1
-------- -------- ------------ ------------
Gross profit.................................... (3.6) 5.1 3.5 0.9
Corporate operating expenses.................... 8.0 7.0 6.7 8.8
-------- -------- ------------ ------------
Income (loss) from operations..................... (11.6) (1.9) (3.2) (7.9)
Equity in earnings of unconsolidated
partnerships..................................... 0.5 0.6 0.7 1.8
-------- -------- ------------ ------------
Operating income (loss)........................... (11.1) (1.3) (2.5) (6.1)
Other income (expense)
Interest expense, net........................... (4.3) (2.7) (3.2) (2.6)
Provision for securities litigation
settlement.................................... 0.0 0.0 (3.0) 0.0
Gain on sale of partnership interests........... 0.0 0.0 0.0 10.8
-------- -------- ------------ ------------
Total other income (expense).................. (4.3) (2.7) (6.2) 8.2
-------- -------- ------------ ------------
Income (loss) before income taxes................. (15.4) (4.0) (8.7) 2.1
Provision for income taxes........................ 0.2 0.0 0.0 0.3
-------- -------- ------------ ------------
Income (loss) before extraordinary item........... (15.6) (4.0) (8.7) 1.8
Extraordinary item, net gain on debt
extinguishment................................... 12.0 0.0 0.0 7.3
-------- -------- ------------ ------------
Net income (loss)................................. (3.6%) (4.0%) (8.7%) 9.1%
-------- -------- ------------ ------------
-------- -------- ------------ ------------
</TABLE>
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) COMPARED TO NINE MONTHS ENDED MARCH
31, 1997 (UNAUDITED)
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 million) and an
41
<PAGE>
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%) and by
nominal increases in reimbursement from customers, primarily hospitals.
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 Facility and a Gamma
Knife center in fiscal 1998 (approximately $0.6 million).
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 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 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 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 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
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.
42
<PAGE>
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION. As part of the
Recapitalization and the Senior Credit Facilities, the Company issued to GE
7,000 shares of Series C Preferred Stock to terminate GE's right to receive
supplemental service fee payments equal to 14% of the Company's pretax income.
The Series C Preferred Stock was valued at $7 million and the Company recorded a
one-time non-cash 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 million in long-term debt relating to the
Recapitalization and the Senior Credit Facilities (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.
YEAR ENDED JUNE 30, 1997 COMPARED TO PRO FORMA YEAR ENDED JUNE 30, 1996
(UNAUDITED)
REVENUES. Revenues increased approximately 6.1%, from approximately $87.7
million for the year ended June 30, 1996, to approximately $93.1 million for the
year ended June 30, 1997. The increase in revenues was due primarily to MHC's
acquisitions in October 1995, the acquisitions in fiscal 1997 and an increase in
contract services, patient services and other revenues.
Contract services revenues increased approximately 4.7% from approximately
$45.7 million for the year ended June 30, 1996, to approximately $47.8 million
for the year ended June 30, 1997. This increase was due to higher utilization
from customers, primarily hospitals.
Patient services revenues increased approximately 4% from approximately $41
million for the year ended June 30, 1996, to approximately $42.7 million for the
year ended June 30, 1997. This increase was due primarily to the acquisitions
discussed above and to higher utilization at existing facilities, offset by
declines in reimbursement from third party payors.
COSTS OF OPERATIONS. Costs of operations decreased approximately 0.3% from
approximately $80.6 million for the year ended June 30, 1996, to approximately
$80.3 million for the year ended June 30, 1997. This decrease was due primarily
to the write down of approximately $1.5 million of goodwill and other
intangibles related to two of MHC's Multi-Modality Centers during the year ended
June 30, 1996, offset by increased costs associated with the acquisitions
discussed above.
GROSS PROFIT. Gross profit increased approximately 78.5% from approximately
$7.1 million for the year ended June 30, 1996, to approximately $12.7 million
for the year ended June 30, 1997. The increase was due to the acquisitions
discussed above increased utilization at existing facilities and the decrease in
costs of operations.
43
<PAGE>
CORPORATE OPERATING EXPENSES. Corporate operating expenses decreased
approximately 12.1%, from approximately $8.5 million for the year ended June 30,
1996, to approximately $7.4 million for the year ended June 30, 1997. This
decrease was due primarily to the duplicative administrative infrastructure of
MHC and AHS in 1996. In fiscal 1997, the Company achieved annualized cost
savings compared to the historical combined costs of MHC and AHS.
INTEREST EXPENSE, NET. Interest expense, net increased approximately 6.4%
from approximately $3.8 million for the year ended June 30, 1996, to
approximately $4.1 million for the year ended June 30, 1997. The increase was
due to additional debt related to the acquisitions discussed above, offset by
amortization of the deferred gain on the debt restructure with GE and
amortization of long-term debt.
PROVISION FOR SECURITIES LITIGATION SETTLEMENT. In anticipation of the MHC
settlement of two class-action lawsuits originally filed in 1993, the Company
recorded a charge of $1.5 million in the year ended June 30, 1996. In February
1996, MHC and the other parties to such lawsuits reached a settlement. On July
29, 1996, following final court approval, MHC and the other parties collectively
paid to the plaintiffs in the class action the balance of the agreed upon
settlement amount.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT. In connection with the Merger,
MHC recorded an extinguishment of $9 million of long-term obligations owed to GE
in June 1996. The extraordinary gain represents the excess of the carrying value
of the debt obligations settled over the sum of fair value of MHC's preferred
stock issued in exchange for such debt extinguishment and the sum of future
interest payable on all remaining obligations owed to GE.
In accordance with the provisions of troubled debt accounting, a portion of
the extraordinary gain, equal to the sum of the current and long-term portions
of future interest payable on all remaining GE debt was deferred and will be
reduced by future interest payments over the terms of the respective debt
instruments.
YEAR ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased approximately $66.6 million for the year ended
June 30, 1997, compared to the six months ended June 30, 1996. The increase in
revenues was due primarily to additional revenues as a result of the Merger
(approximately $38.7 million), increases in revenues due to acquisitions
(approximately $2 million) and an increase in contract services, patient
services and other revenues at MHC (approximately $25.9 million). The increase
of approximately $25.9 million in MHC revenues was due primarily to a year of
results for 1997 compared to the six month period in 1996. MHC revenues
decreased by approximately 0.1% from approximately $52.9 million (on an
annualized basis) for the six months ended June 30, 1996 to approximately $52.4
million for the year ended June 30, 1997.
Contract services revenues increased approximately $27.8 million for the
year ended June 30, 1997, compared to the six months ended June 30, 1996. This
increase was due primarily to additional revenues as a result of the Merger
(approximately $7.8 million), an increase in revenues due to acquisitions
(approximately $0.2 million) and an increase in MHC revenues of approximately
$19.8 million. The increase of approximately $19.8 million was due primarily to
a year of results for 1997 compared to a six month period in 1996. MHC revenues
decreased by approximately 0.5% from approximately $40.1 million (on an
annualized basis) for the six months ended June 30, 1996 to approximately $39.9
million for the year ended June 30, 1997. This decrease was due to reductions in
reimbursement (approximately 6%) from customers, primarily hospitals, offset by
increased utilization (approximately 30%).
Patient services revenues increased approximately $36.9 million for the year
ended June 30, 1997, compared to the six months ended June 30, 1996. The
increase in revenues was due primarily to additional revenues as a result of the
Merger (approximately $30.5 million), increased revenues due to acquisitions
(approximately $1.8 million), and an increase in MHC revenues of approximately
$4.6 million. The increase in MHC revenues of approximately $4.6 million was due
primarily to a year of results for 1997
44
<PAGE>
compared to a six month period in 1996. MHC revenues decreased by approximately
11% from approximately $11.7 million (on an annualized basis) for the six months
ended June 30, 1996 to approximately $10.4 million for the year ended June 30,
1997. This decrease was due to continued declines in reimbursement
(approximately 5%) from third party payors and the closure of a Fixed Facility
in June 1996, offset by increased utilization (approximately 20%).
COSTS OF OPERATIONS. Costs of operations increased approximately $52.9
million for the year ended June 30, 1997, compared to the six months ended June
30, 1996. This increase was due primarily to additional costs as a result of the
Merger (approximately $29.8 million), an increase in costs due to acquisitions
(approximately $1.5 million), and an increase in costs at MHC of approximately
$21.6 million. The increase of approximately $21.6 million at MHC was due
primarily to a year of results for 1997 compared to a six month period in 1996.
MHC costs decreased by approximately 10.6% from approximately $54.8 million (on
an annualized basis) for the six months ended June 30, 1996 to approximately $49
million for the year ended June 30, 1997. This decrease was due to a reduction
in costs of services, provision for doubtful accounts, and equipment leases and
depreciation and amortization.
Costs of services, including the provision for doubtful accounts, increased
approximately $35.6 million for the year ended June 30, 1997, compared to the
six months ended June 30, 1996. The increase in costs was due primarily to
additional costs as a result of the Merger (approximately $20.8 million), an
increase in costs due to acquisitions (approximately $1.2 million) and an
increase in costs at MHC (approximately $13.6 million). The increase in costs at
MHC was due primarily to a year of results for 1997 compared to a six month
period in 1996. MHC costs decreased by approximately 8.7% from approximately $33
million (on an annualized basis) for the six months ended June 30, 1996 to
approximately $30.2 million for the year ended June 30, 1997. This decrease was
due to (i) reduced costs in service supplies and equipment maintenance and (ii)
one time charges in fiscal 1996 related to the closure of two Multi-Modality
Centers and the early return of four Mobile Facilities.
Equipment leases and depreciation and amortization increased approximately
$17.4 million for the year ended June 30, 1997, compared to the six months ended
June 30, 1996. The increase was due primarily to additional costs as a result of
the Merger (approximately $9.2 million), increased costs due to acquisitions
(approximately $0.3 million) and an increase in costs at MHC (approximately $7.9
million). The increase at MHC of $7.9 million was primarily due to a year of
results for 1997 compared to a six month period in 1996. MHC costs decreased by
approximately 13.3% from approximately $21.8 million (on an annualized basis)
for the six months ended June 30, 1996 to approximately $18.9 million for the
year ended June 30, 1997. This decrease was due to a write down of approximately
$1.5 million of intangibles in fiscal 1996 which did not occur in fiscal 1997.
Under the terms of the amended equipment maintenance service agreement with
GE, GE was entitled to receive a supplemental service fee equal to 14% of pretax
income, subject to certain adjustments. During the year ended June 30, 1997, the
Company recorded a provision of approximately $0.3 million in connection with
this agreement. The Company's future obligations under this agreement were
terminated as part of the Recapitalization. The Company recorded a non-recurring
expense of $6.3 million in the second quarter of fiscal 1998 in connection with
the termination of this agreement.
GROSS PROFIT. Gross profit increased approximately $13.7 million during the
year ended June 30, 1997, compared to the six months ended June 30, 1996. The
increase was due primarily to additional gross profit as a result of the Merger
(approximately $8.9 million), an increase due to acquisitions (approximately
$0.5 million), and an increase at MHC (approximately $4.3 million).
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CORPORATE OPERATING EXPENSES. Corporate operating expenses increased
approximately $5.3 million for the year ended June 30, 1997, compared to the six
months ended June 30, 1996. The increase was partially related to maintaining
duplicate staffing during the transition phase of the Merger and to additional
consulting and legal costs associated with the Company's acquisition activities.
The Company has achieved annualized cost savings (approximately $1 million)
compared to the historical combined costs of MHC and AHS, primarily as a result
of elimination of duplicate facilities including corporate headquarters, and
synergies in staff and functional areas.
INTEREST EXPENSE, NET. Interest expense, net increased approximately $2.9
million for the year ended June 30, 1997, compared to the six months ended June
30, 1996. The increase was due primarily to (i) additional debt assumed as a
result of the Merger (approximately $3.3 million) and (ii) additional debt
related to acquisitions (approximately $0.3 million), offset by reduced interest
as a result of (i) amortization of the deferred gain on the debt restructure
with GE (approximately $1 million) and (ii) amortization of long-term debt.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT. In connection with the Merger,
MHC recorded an extraordinary gain on debt extinguishment of approximately $3.2
million in 1996. There was no similar gain in 1997.
INCOME (LOSS) PER COMMON SHARE. Net income per common share was $0.24 for
the year ended June 30, 1997, compared to a net loss per common share before
extraordinary item of $(2.99) for the six months ended June 30, 1996. The
improvement in income per common share is the result of (i) increased gross
profit and (ii) an increase in earnings from unconsolidated partnerships, offset
by (x) increased corporate operating expenses and (y) increased interest
expense.
MAXUM HEALTH CORP.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
REVENUES. Revenues increased by approximately 8.3% from approximately $24.4
million for the six months ended June 30, 1995 to approximately $26.5 million
for the six months ended June 30, 1996. The increase in revenues was due
primarily to the (i) acquisition of certain customer contracts in April 1995,
(ii) acquisition of certain Fixed Facility locations in October 1995 and (iii)
increases in volumes on certain contracts serviced by Mobile Facilities and
Fixed Facilities. These increases were offset by decreases in reimbursement
rates from third party payors.
COSTS OF OPERATIONS. Costs of operations increased by approximately 19.3%
from approximately $23 million for the six months ended June 30, 1995 to
approximately $27.4 million for the six months ended June 30, 1996. This
increase was primarily due to (i) the write down of approximately $1.5 million
of goodwill and other intangibles related to two of MHC's Multi-Modality
Centers, (ii) an increase in cost of services of $2.3 million and (iii) an
increase in depreciation of $0.7 million, offset by a decrease in the provision
for doubtful accounts of $0.4 million. Costs of services increased $2.3 million
during the six months ended June 30, 1996, compared with the same period in
1995. The increase was due primarily to (i) certain one-time charges relating to
operating strategies associated with the Merger which include provisions for the
closure of two Multi-Modality Centers, the write down of a Mobile Facility and
the estimated costs and termination fees for the early return of four Mobile
Facilities, (ii) increased costs associated with acquisitions and (iii) higher
costs associated with the increase in patient services revenues which include
personnel costs, facility costs, service supplies and professional fees.
The provision for doubtful accounts decreased by approximately $0.4 million
for the six months ended June 30, 1995 compared to the six months ended June 30,
1996. This decrease is primarily attributable to a $0.3 million charge recorded
in June 1995. A similar charge was not recorded in 1996.
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Depreciation and amortization increased by approximately $0.7 million for
the six months ended June 30, 1995 compared to the six months ended June 30,
1996. This increase was due primarily to capital leases entered into,
acquisitions completed, and leasehold improvements incurred at several of MHC's
Fixed Facilities subsequent to June 30, 1995.
GROSS PROFIT. Gross profit decreased by approximately 166.3% from
approximately $1.4 million for the six months ended June 30, 1995 to a loss of
approximately $1 million for the six months ended June 30, 1996. This decrease
was primarily attributable to the increase in costs of services discussed above.
CORPORATE OPERATING EXPENSES. Corporate operating expenses increased by
approximately 11.1% from approximately $1.9 million for the six months ended
June 30, 1995 to approximately $2.1 million for the six months ended June 30,
1996. This increase was due primarily to a provision in June 1996 of $0.6
million for termination benefits and facility costs in connection with the
reduction in the duplicative administrative infrastructure as a result of the
Merger.
INTEREST EXPENSE, NET. Interest expense, net increased by approximately
76.5% from approximately $0.6 million for the six months ended June 30, 1995 to
approximately $1.1 million for the six months ended June 30, 1996. This increase
was due primarily to debt financed in 1995 in connection with acquisitions and
the financing of certain operating expenses.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT. In connection with the Merger,
MHC recorded an extinguishment of $9 million of long-term obligations owed to GE
in June 1996. The extraordinary gain represents the excess of the carrying value
of the debt obligations settled over the sum of the fair value of the MHC
preferred stock issued in exchange for such debt extinguishment and the sum of
future interest payable on all remaining obligations owed to GE.
In accordance with the provisions of troubled debt accounting, a portion of
the extraordinary gain, equal to the sum of the current and long-term portions
of future interest payable on all remaining GE debt was deferred and will be
reduced by future interest payments over the terms of the respective debt
instruments.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased by approximately 10.3% from approximately
$45.9 million for the year ended December 31, 1994 to approximately $50.6
million for the year ended December 31, 1995. The increase in revenues was
related primarily to acquisitions. This increase was partially offset by the
continued decline in reimbursement rates and a decrease in other revenues in
1995 compared to 1994.
An increase in fee-for-service revenues of $5 million in 1995 compared to
1994 was attributable to (i) the award of an exclusive capitated managed care
contract in December 1994, under which MHC's fees were paid directly by the
managed care organization and were earned on a per-member-per-month basis and
(ii) the acquisition of certain customer contracts in the first half of 1995.
Other fee-for-service revenues, including equipment rental revenues (derived
primarily from Mobile Facilities), decreased $1.8 million, compared to 1994, due
to expiration of hospital service contracts and third party equipment leases.
Management fees decreased $0.6 million in 1995, compared to 1994, due primarily
to the sale or termination of certain partnerships in late 1994.
Approximately 58% of the $2.4 million increase in patient services revenues
was due to increased patient services revenues associated with acquisitions
during 1995. Approximately 25% of the increase is attributable to a contract
awarded in the third quarter of 1994 to provide radiology and management
services at an outpatient Fixed Facility for a hospital customer. The remainder
of the increase was due primarily to increases in procedure volumes at MHC's
other Multi-Modality Centers, offset by continued declines in reimbursement
rates. Other revenues decreased during 1995 compared to 1994, due primarily to
the sale of MHC's technical services division in June 1994.
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COSTS OF OPERATIONS. Costs of operations increased by approximately 7.4%
from approximately $45.4 million for the year ended December 31, 1994 to
approximately $48.8 million for the year ended December 31, 1995. Costs of
services in 1995 was reduced by $0.8 million related to sales/use tax refunds.
These refunds represent taxes paid in prior years attributable to certain mobile
diagnostic imaging equipment, and were received due to a determination by the
taxing authority that the mobile equipment was subject to motor vehicle tax
rather than sales/use tax.
Occupancy expense (which includes operating costs of facilities leased or
subcontracted by MHC) increased by approximately $0.8 million, or approximately
88%, for the year ended December 31, 1995 compared to the year ended December
31, 1994. This increase was due primarily to subcontracting costs incurred
related to the capitated managed care contract that was awarded in December
1994.
Professional fees increased by approximately $0.7 million, or approximately
41% for the year ended December 31, 1995 compared to the year ended December 31,
1994. The increase was due primarily to the increase in patient services
revenues and to costs incurred related to the capitated managed care contract.
In addition to the net impact of the sales/use tax refund, occupancy expense
and professional fees discussed above, all other components of costs of
operations experienced a net increase of $2.2 million in 1995 compared to 1994,
due primarily to the variable costs associated with the increase in revenues
resulting primarily from acquisitions in 1995.
The provision for doubtful accounts increased by approximately $0.5 million,
or approximately 48% for the year ended December 31, 1995 compared to the year
ended December 31, 1994, due primarily to the increase in patient services
revenues and a shift in the payor mix at MHC's Multi-Modality Centers related to
the penetration of managed care. This change in payor mix had an unfavorable
impact on reimbursement rates realized by the Multi-Modality Centers and
resulted in an increase in bad debt expense in 1995 associated with unreimbursed
amounts which were not subsequently collectible from patients.
Depreciation decreased by approximately $0.2 million, or 6% for the year
ended December 31, 1995 compared to the year ended December 31, 1994. This
decrease was due primarily to a purchase and sale-leaseback transaction (in
connection with MHC's settlement with a significant creditor in June 1994) which
resulted in reductions in net book values of certain Mobile Facilities.
GROSS PROFIT. Gross profit increased by approximately $1.4 million, or
approximately 326% for the year ended December 31, 1995 compared to the year
ended December 31, 1994. The increase was primarily attributable to higher
profit margins from the absorption of excess capacity associated with
acquisitions completed in 1995 and the capitated managed care contract awarded
in December 1994.
CORPORATE OPERATING EXPENSES. Corporate operating expenses decreased by
approximately 16.5% from approximately $4 million for the year ended December
31, 1994 to approximately $3.4 million for the year ended December 31, 1995.
This decrease was due primarily to reductions in legal costs and insurance
premiums.
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS. Equity in earnings of
unconsolidated partnerships decreased by approximately 58.3% from approximately
$0.8 million for the year ended December 31, 1994 to approximately $0.3 million
for the year ended December 31, 1995. This decrease was due to the sale of
certain partnerships in late 1994 discussed below.
INTEREST EXPENSE, NET. Interest expense, net increased by approximately
34.8% from approximately $1.2 million for the year ended December 31, 1994 to
approximately $1.6 million for the year ended December 31, 1995. This increase
was due primarily to (i) the addition of several capital leases of diagnostic
imaging equipment, (ii) debt obligations incurred as a result of the
acquisitions during 1995 and (iii) interest on operating expenses financed
during late 1994 and in 1995.
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PROVISION FOR SECURITIES LITIGATION SETTLEMENT. In anticipation of the MHC
settlement of two class-action lawsuits originally filed in 1993, MHC recorded a
charge of $1.5 million in the fourth quarter of 1995.
GAIN ON SALE OF PARTNERSHIP INTERESTS. In December 1994, MHC sold its
interests in three lithotripsy partnerships for approximately $5 million in
cash, which resulted in a pretax gain of approximately $5.0 million.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENTS. During 1994, MHC settled its
outstanding debt and lease obligations owed to a significant creditor and two
smaller creditors, which resulted in a net extraordinary gain of approximately
$3.3 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $10 million for
the nine months ended March 31, 1998 and $7.3 million for the year ended June
30, 1997. Cash provided by operating activities resulted primarily from net
income before depreciation and amortization (approximately $9.3 million) and the
provision for supplemental service fee termination ($6.3 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.
Net cash used in investing activities was approximately $29.1 million for
the nine months ended March 31, 1998 and $30.3 million for the year ended June
30, 1997. Cash used in investing activities resulted primarily from the Company
purchasing new diagnostic imaging equipment or upgrading its existing diagnostic
imaging equipment (approximately $15.2 million) and from the Company's
acquisition activities (approximately $12.9 million).
The Company generated approximately $21.6 million from financing activities,
primarily from the Carlyle investment pursuant to the Recapitalization, which
was used to refinance a portion of the Company's outstanding indebtedness. 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 Senior Credit Facilities are 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 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 such Open MRI systems: one at an existing Multi-Modality
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.
On October 14, 1997, the Company consummated the Recapitalization, pursuant
to which the Company issued 25,000 shares of Series B Preferred Stock and
warrants to purchase 250,000 shares of the Company's common stock to Carlyle for
cash proceeds of $25 million and 27,953 shares of Series C Preferred Stock to GE
as part of the Recapitalization. Concurrently, the Company entered into the
Senior Credit Facilities with NationsBank, N.A., as agent, which included a $50
million term loan facility, a $25 million revolving working capital facility
and, as amended, a $75 million acquisition facility. The net proceeds from the
Carlyle investment were used to refinance a portion of the outstanding GE
indebtedness (approximately $20 million). At the initial funding of the Senior
Credit Facilities, all of the term loan facility was drawn down to refinance all
of the remaining GE indebtedness (approximately $50 million) and approximately
$8 million of the revolving facility was drawn down for working capital
purposes. See
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"Description of Preferred Stock" and "Description of Senior Credit Facilities."
The Company used the net proceeds from the issuance of the Outstanding Notes,
together with the borrowing under the term loan portion of the Senior Credit
Facilities, to repay all amounts outstanding under the revolving credit facility
and the acquisition facility portions of the Senior Credit Facilities, leaving
the $75 million acquisition facility and the $25 million working capital
facility available in full for future borrowings. See "Use of Proceeds." The
terms of the Series B Preferred Stock, the Series C Preferred Stock and the
Senior Credit Facilities contain certain restrictions on the Company's ability
to act without first obtaining a waiver or consent from Carlyle, GE and the
required lenders under the Senior Credit Facilities. In addition, the covenants
contained in the Senior Credit Facilities and the Notes will restrict, among
other things, the ability of the Company and the Subsidiary Guarantors to incur
additional indebtedness and issue preferred stock, enter into sale and leaseback
transactions, pay dividends or make certain other restricted payments, incur
liens, sell stock of subsidiares, apply net proceeds from certain asset sales,
merge or consolidate with any other person, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company and enter
into certain transactions with affiliates. See "Description of Notes" and
"Description of Senior Credit Facilities."
The Company believes that, based on proceeds from the issuance of the
Outstanding Notes, current levels of operations and anticipated growth, its cash
from operations, together with other available sources of liquidity, including
borrowings available under the Senior Credit Facilities, 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 payments due
on the Notes and obligations under the Senior Credit Facilities. In addition,
the Company continually evaluates potential acquisitions and expects to fund
such acquisitions from its available sources of liquidity, including borrowings
under the Senior Credit Facilities. The Company's acquisition strategy, however,
may require sources of capital in addition to that currently available to the
Company, and no assurance can be given that the Company will be able to raise
any such necessary additional funds on terms acceptable to the Company or at
all. See "Risk Factors--Business Strategy; Acquisitions."
YEAR 2000 ISSUE
IMPACT OF YEAR 2000. The Year 2000 Issue exists because many computer
systems and applications currently use two-digit date fields to designate a
year. As the century date occurs, computer programs, computers and embedded
microprocessors controlling equipment with date-sensitive systems may recognize
Year 2000 as 1900 or not at all. This inability to recognize or properly treat
Year 2000 may result in computer system failures or miscalculations of critical
financial and operational information as well as failures of equipment
controlling date-sensitive microprocessors. In addition, there are two other
related issues, which could also lead to miscalculations or failures: (i) some
older systems' programming assigns special meaning to certain dates, such as
9/9/99 and (ii) the Year 2000 is a leap year.
STATE OF READINESS. The Company's predecessors started to formulate a plan
to address the Year 2000 Issue in late 1994. To date, the Company's primary
focus has been on its own internal information technology systems, including all
types of systems in use by the Company in its operations, marketing, finance and
human resources departments, and to deal with the most critical systems first.
The Company is in the process of developing a Year 2000 Plan to address all of
its Year 2000 Issues. The Company has given its Vice President-Management
Information Systems specific responsibility for managing its Year 2000 Plan and
a Year 2000 Committee has been established to assist in developing and
implementing the Year 2000 Plan. The Year 2000 Plan being developed will involve
generally the following phases: awareness, assessment, renovation, testing and
implementation.
Although the Company's assessment of the Year 2000 Issue is incomplete, the
Company has completed an assessment of approximately 75% of its internal
information technology systems. The Company estimates that it will complete the
assessment of its remaining internal information technology systems by December
31, 1998 and will establish a timetable for the renovation phase of the
remaining technology systems. The Company has already completed the renovation
of approximately 50% of its
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information technology systems, including modifying and upgrading software and
developing and purchasing new software, and continues to renovate the portions
of such systems for which assessment is complete. The Company has not begun or
established a timetable for the testing and implementation phases. The Company's
goal is to complete such phases by June 30, 1999, although complications arising
from unanticipated acquisitions might cause some delay.
The Company has recently begun to assess the potential for Year 2000
problems with the information systems of its customers and vendors. The Company
is preparing questionnaires that it expects to send to its customers, vendors
and other third parties with which the Company has a material relationship by
December 31, 1998. The Company expects to complete the assessment with respect
to such parties by March 31, 1998, subject to their ability to provide requested
information by February 28, 1999. The Company does not have sufficient
information to provide an estimated timetable for completion of renovation and
testing that such parties with which the Company has a material relationship may
undertake. The Company is unable to estimate the costs that it may incur to
remedy the Year 2000 issues relating to such parties.
The Company has received some preliminary information concerning the Year
2000 readiness of some of its customers, vendors and other third parties with
which the Company has a material relationship and expects to engage in
discussions with most of such parties during the balance of 1998 and through
March 31, 1999 in an attempt to determine the extent to which the Company is
vulnerable to those parties' possible failure to become Year 2000 compliant.
All of the Company's diagnostic imaging equipment used to provide imaging
services have computer systems and applications, and in some cases embedded
microprocessors, that could be affected by Year 2000 issues. The Company has
begun to assess the impact on its diagnostic imaging equipment by contacting the
vendors of such equipment. The vendor with respect to the majority of the MRI
and CT equipment used by the Company has informed the Company that (i) certain
identified MRI and CT equipment is Year 2000 compliant, (ii) it has developed
software for functional workarounds to ensure Year 2000 compliance with respect
to the balance of its noncompliant MRI and CT equipment and (iii) remediation
will be made during future regular maintenance visits. The Company is in the
process of contacting the other vendors of its diagnostic imaging equipment. The
Company expects to receive information from such other vendors by December 31,
1998 with respect to their assessment of the impact on the equipment that they
provided to the Company and the nature and timetable of the remediation that
such vendors may propose. The Company expects to complete its assessment by
March 31, 1999 and that renovation will be completed by June 30, 1999. The
Company expects that its equipment vendors will propose timely remediation and
will bear the cost of modifying or otherwise renovating the Company's diagnostic
imaging equipment.
The Company has recently begun an assessment of the potential for Year 2000
problems with the embedded microprocessors in its other equipment, facilities
and corporate and regional offices, including telecommunications systems,
utilities, dictation systems, security systems and HVACS and expects to complete
the assessment by December 31, 1998.
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company estimates on a preliminary
basis that the cost of assessment, renovation, testing and implementation of its
internal systems will range from approximately $500,000 to $1,500,000, of which
approximately $30,000 has been incurred. The major components of these costs
are: consultants, additional personnel costs, programming, new software and
hardware, software upgrades and travel expenses. The Company expects that such
costs will be funded through operating cash flows. This estimate, based on
currently available information, will be updated as the Company continues its
assessment and proceeds with renovation, testing and implementation and may be
adjusted upon receipt of more information from the Company's vendors, customers
and other third parties and upon the design and implementation of the Company's
contingency plan. In addition, the availability and cost of consultants and
other personnel trained in this area and unanticipated acquisitions might
materially affect the estimated costs.
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RISKS TO THE COMPANY. The Company's Year 2000 Issue involves significant
risks. There can be no assurance that the Company will succeed in implementing
the Year 2000 Plan it is developing. The following describes the Company's most
reasonably likely worst-case scenario, given current uncertainties. If the
Company's renovated or replaced internal information technology systems fail the
testing phase, or any software application or embedded microprocessors central
to the Company's operations are overlooked in the assessment or implementation
phases, significant problems including delays may be incurred in billing the
Company's major customers (Medicare, HMOs or private insurance carriers) for
services performed. If its major customers' systems do not become Year 2000
compliant on a timely basis, the Company will have problems and incur delays in
receiving and processing correct reimbursement. If the computer systems of third
parties with which the Company's systems exchange data do not become Year 2000
compliant both on a timely basis and in a manner compatible with continued data
exchange with the Company's information technology systems, significant problems
may be incurred in billing and reimbursement. If the systems on the diagnostic
imaging equipment utilized by the Company are not Year 2000 compliant, the
Company may not be able to provide imaging services to patients. If the
Company's vendors or suppliers of the Company's necessary power,
telecommunications, transportation and financial services, fail to provide the
Company with equipment and services the Company will be unable to provide
services to its customers. If any of these uncertainties were to occur, the
Company's business, financial condition and results of operations would be
adversely affected. The Company is unable to assess the likelihood of such
events occurring or the extent of the effect on the Company.
CONTINGENCY PLAN. The Company has not yet established a contingency plan to
address unavoided or unavoidable Year 2000 risks with internal information
technology systems and with customers, vendors and other third parties, but it
expects to create such a plan by March 31, 1999.
INFLATION
Inflation in recent years has not had a significant impact on the Company's
business and is not expected to adversely affect the Company in the near future.
NEW PRONOUNCEMENTS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation." As
permitted under the standard, the Company continued to account for employee
stock options in accordance with APB Opinion No. 25 and made necessary pro forma
disclosures mandated by SFAS No. 123. The adoption of this standard had no
impact on the Company's results of operations.
In fiscal 1998, the Company will be required to adopt SFAS No. 129,
"Disclosure of Information about Capital Structure," which continues the
existing requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of companies
subject to portions of its requirements. The adoption of this standard will have
no effect on the Company's results of operations.
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share
("EPS")". SFAS No. 128 replaces primary EPS and fully diluted EPS with basic
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.
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information." SFAS Nos. 130 and 131 are effective for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The Company
believes that adoption of these standards will not have a material effect on the
Company.
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THE DIAGNOSTIC IMAGING INDUSTRY
OVERVIEW
Diagnostic imaging uses non-surgical techniques to generate representations
of internal structures and organs on film or video. The Company believes that
diagnostic imaging services accounted for 1997 revenues in the United States in
excess of $50 billion, constituting approximately 5% of total health care
spending. The Company believes that outpatient diagnostic imaging services,
including MRI services, accounted for approximately $6 billion of revenues in
the United States in 1996, which is the most recent year for which such
information is available. The approximately 4,000 MRI systems in the United
States include approximately 2,400 hospital-owned systems, 1,000 independent
fixed site systems and 600 mobile systems.
MRI uses high strength magnetic fields and radio waves to produce
cross-sectional images of the anatomy, enabling physicians to differentiate
between internal organs, structures and tissues, thereby facilitating the early
diagnosis of diseases and disorders. MRI frequently lessens the cost and amount
of care needed and often eliminates the need for invasive diagnostic procedures.
MRI is the preferred imaging modality for the brain, the spine and soft tissue
because it produces a superior image and does not expose patients to ionizing
radiation. As a result of MRI's increasing cost efficiency and clinical
effectiveness, MRI services have experienced substantial growth as measured by
total utilization, which increased at a compounded annual growth rate of 8.6%
from 7.7 million in 1993 to 10.7 million in 1997. The Company believes that
growth in MRI scan volumes has been attributable to increased physician
acceptance, substitution of MRI for other imaging modalities (including x-ray
based techniques), expanding applications for MRI technology and health care
reform, which has led to a significant increase in outpatient services.
DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY
Diagnostic imaging systems have evolved from conventional x-rays to the
advanced technologies of MRI, CT, ultrasound and nuclear medicine. Additional
services provided by some diagnostic imaging companies, such as InSight, include
radiation oncology, lithotripsy and Gamma Knife procedures. Following is a brief
description of such diagnostic imaging and related services:
- MRI uses magnetic fields and radio waves to produce cross-sectional images
of the anatomy, enabling physicians to differentiate between internal
organs, structures and tissues, thereby facilitating the early diagnosis
of diseases and disorders.
- CT uses digital x-ray technology to provide cross-sectional images of
particular organs or areas of the body.
- Ultrasound uses sound wave technology to generate images of soft tissues
and internal body organs.
- Nuclear medicine detects gamma radiation generated by inhaled or injected
pharmaceuticals to develop information about organ functions.
- X-ray is the conventional method of producing bone images and
contrast-enhanced vasculature and organ images. Digital x-ray systems add
computer image processing capability to traditional x-ray images.
- Radiation oncology uses external beam radiation or electrons from linear
accelerators to treat cancer.
- Lithotripsy uses extracorporeal shockwaves to shatter kidney stones, which
then pass out of the body naturally.
- Gamma Knife procedures use a radiosurgical device to treat intracranial
neoplasma and vascular anomalies without surgical intervention.
Each of these diagnostic imaging and treatment modalities (other than
conventional x-ray) represents the marriage of computer technology and various
medical imaging modalities. See "Business--Diagnostic Imaging and Treatment
Services Offered."
During approximately the last 20 years, there has been a major effort
undertaken by the medical and scientific communities to develop cost-effective
diagnostic imaging technologies and to minimize the risks
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associated with the application of such technologies. Much of the thrust of
product development during the last 20 years has been to reduce the hazards
associated with conventional x-ray and nuclear medicine techniques, which
include potentially harmful ionizing radiation, and to develop new, virtually
harmless imaging technologies such as ultrasound and MRI.
The Company expects technological improvements to expand the services and
capabilities of diagnostic imaging systems and to favorably affect the
diagnostic imaging industry in the upcoming years. Originally, MRI was used to
explore the structure of the brain and for spinal and orthopedic imaging.
Currently, however, newer MRI methods are creating a much broader array of uses
for MRI. Magnetic resonance angiography, for example, is used to create images
of blood flow through vessels, which may reduce the cost of bypass surgery and
the length of inpatient hospital stay and replace conventional angiography for
some patients. Furthermore, experimental MRI imaging techniques, such as
magnetic resonance spectroscopic imaging, are used to show the functions of the
brain and to investigate how epilepsy, AIDS, brain tumors, Alzheimer's and other
abnormalities affect the brain. Additional improvements in MRI technologies,
contrast agents and scan capabilities are leading to new non-invasive methods of
diagnosing blockages in the heart's vital coronary arteries, liver metastasises,
pelvic diseases and certain vascular abnormalities without exploratory surgery.
MRI INDUSTRY TRENDS
In 1984, the Food and Drug Administration (the "FDA") approved the sale of
MRI systems to community hospitals and private clinics. MRI services today are
provided by hospitals with in-house systems, independent fixed site operators
and independent mobile operators.
The history of the MRI industry can be divided into three periods: (i)
initial growth from 1984 to 1992; (ii) downturn in 1993 and 1994; and (iii)
renewed growth and consolidation from 1995 to the present. The increased use of
MRI as a diagnostic tool between 1984 and 1992 resulted from a variety of
factors, including declining equipment costs, increased physician acceptance of
MRI technology, increased number of clinical applications and Congressional
Medicare reform in 1983, which has led to a significant increase in outpatient
services. Changes in the health care industry and legislative reform between
1992 and 1994 slowed the growth of the MRI industry. The threat of health care
reform and the desire to control medical costs and pricing placed physicians
under scrutiny to control costs and further contributed to the decrease in use
of MRI by the medical profession. Simultaneously, the shift towards HMOs and the
trend towards decreased utilization of outpatient services and declining
reimbursement rates led to a period in which the use of MRI as a diagnostic tool
was limited.
Despite the new cost-conscious environment in which hospitals and physicians
operated, the advantages of MRI as compared to other forms of diagnostic imaging
equipment, development of new practical uses of MRI and increased Medicare
reimbursement levels (1% to 2% increase per year between 1994 and 1996) resulted
in increased MRI use beginning in 1995 to 1996. As a result, hospitals and other
health care providers seeking to provide MRI technology and related services
despite budgetary limitations are using third parties, such as the Company, to
provide the necessary imaging systems and related services. Mobile MRI is a
cost-effective alternative for hospitals unwilling or unable to make the
significant capital investment associated with MRI systems or lacking the
patient volume necessary to use an MRI system in a cost-effective manner. Mobile
MRI operators employ systems housed in specially designed trailers and typically
enter into contracts to provide a specified schedule of service on a
fee-per-scan basis. Operators then design schedules for each system to rotate
among multiple hospitals in a manner that optimizes system utilization.
The MRI services industry is highly fragmented. Recently, however, the
industry has begun to undergo consolidation. The Company believes such
consolidation is primarily driven by (i) economies of scale in the provision of
services to a larger customer base; (ii) growth of managed care in the delivery
of health care services; and (iii) the decision by many smaller, capital
constrained operators to sell their MRI businesses rather than make substantial
investments in new imaging systems. Despite ongoing industry consolidation, the
top ten MRI service providers accounted for less than 15% of the nation's total
outpatient diagnostic imaging revenues in 1996, which is the most recent year
for which such information is available.
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BUSINESS
The Company is a leading nationwide provider of diagnostic imaging and
related information services, including MRI, CT, mammography, ultrasound, x-ray
and lithotripsy services. The Company believes it is unique in its ability to
offer a broad continuum of diagnostic imaging services, ranging from single
modality Mobile Facilities to comprehensive Multi-Modality Centers to the joint
ownership and management of the multi-modality radiology department of a
hospital or multi-specialty physician group. The breadth of the Company's
services allows it to meet the diverse and developing needs of its customers,
which include leading health care providers such as managed care organizations,
hospitals, radiologists and insurance companies. InSight delivers these services
through strong regional networks of diagnostic imaging facilities, which will
continue to be the principal method of development for the Company. The Company
believes its regional networks increase its economies of scale and enhance its
appeal to managed care organizations, thereby increasing its overall scan
volume. The Company has a substantial presence in California, Texas, New
England, the Carolinas and the Midwest (Illinois, Indiana and Ohio), and
provides its services through 50 Fixed Facilities, including 16 Multi-Modality
Centers, and 51 Mobile Facilities. For the twelve months ended March 31, 1998,
MRI services accounted for approximately 77% of the Company's total revenues.
The Company was formed in June 1996 as a result of the merger of AHS and
MHC, two publicly held providers of diagnostic imaging services. The Merger was
consummated in order to achieve cost savings, enhanced marketing capabilities,
increased market presence and greater financial resources, and to take advantage
of positive consolidating trends in the diagnostic imaging industry. Under the
leadership of its experienced management team, the Company has successfully
implemented its business strategy and capitalized on the business strengths
afforded by the Merger through a geographically disciplined growth strategy
focused on providing the highest quality, most cost-effective diagnostic
information within its regional diagnostic imaging networks. The Company's
operating profits have increased during each of the seven quarters since the
Merger (excluding a one-time non-cash charge of $6.3 million incurred in
connection with the Recapitalization) due in part to its successful integration
of seven acquisitions and increases in scan volumes, at its existing facilities.
For the twelve months ended March 31, 1998, after giving effect to the Pro Forma
Transactions, the Company had revenues of $135.3 million and adjusted EBITDA of
$38.1 million.
COMPETITIVE STRENGTHS
The Company believes it is well-positioned to take advantage of current
trends in the diagnostic imaging industry and attributes its favorable market
position to the following strengths:
STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. InSight has
developed a substantial presence in its targeted markets by forming regional
networks of diagnostic imaging services that provide superior service and
convenience to the Company's customers, including managed care organizations,
hospitals, radiologists and insurance companies. The Company believes these
networks enable InSight to increase its overall scan volume by effectively
addressing its customers' demands for high-quality service, customized
diagnostic information, flexible scheduling, single invoices and convenient
locations. In addition, such regional networks enable the Company to benefit
from enhanced economies of scale, including greater purchasing power, reduced
overhead, centralized billing and more efficient use of marketing expenditures.
CONTINUUM OF SERVICES. The Company believes it is unique in its ability to
offer a broad continuum of diagnostic services, from single modality Mobile
Facilities to comprehensive Multi-Modality Centers to the joint ownership and
management of the multi-modality radiology department of a hospital or multi-
specialty physician group. Through this continuum of increasing value-added
services, the Company is able to meet the diverse and developing needs of its
customers as their individual requirements change.
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STRONG RELATIONSHIPS WITH HOSPITALS AND MANAGED CARE. The Company's
contractual relationships with its hospital and managed care customers accounted
for approximately 83% of the Company's revenues during the twelve months ended
March 31, 1998.
HOSPITALS. The Company has over 200 exclusive contracts with hospitals for
Mobile Facility services and 13 exclusive contracts with hospitals for Fixed
Facility services. The Company provides MRI services to hospitals that require
such services but that do not want to incur the substantial capital investment
associated with MRI systems. InSight's Mobile Facilities employ systems housed
in specially designed trailers and typically operate under contracts with
average terms of three years to provide a specified schedule of service on a
fee-per-scan basis. The Company designs schedules for each system to rotate
among multiple hospitals in a manner that optimizes equipment utilization. Since
the Merger, the Company has experienced a renewal rate of approximately 85% for
its Mobile Facility hospital contracts. InSight's contracts with hospitals to
provide Fixed Facility and other diagnostic imaging services generally last from
five to ten years.
MANAGED CARE ORGANIZATIONS. The Company recognizes managed care as the
driving force behind its changing customer mix and has focused its marketing
efforts on appealing to what it believes are the primary concerns of managed
care: quality, cost, convenience and service. As a result, the Company currently
has in excess of 400 contracts with managed care organizations for diagnostic
imaging services at the Company's Fixed Facilities, primarily on a discounted
fee-for-service basis. The Company provides managed care organizations with
"one-stop shopping" consisting of centralized scheduling, single invoices, wide
geographic coverage, quality assurance and utilization management. The Company
experienced a 25% increase in the number of its managed care contracts from
March 31, 1997 to March 31, 1998.
TECHNOLOGICALLY ADVANCED EQUIPMENT. The Company's Fixed Facilities and
Mobile Facilities are operated with state-of-the-art equipment. Of the Company's
100 conventional MRI systems, 79% have a magnet strength of at least 1.0 Tesla.
In addition, the Company operates 13 Open MRI systems, nine of which are less
than one year old. The Company believes its technologically advanced equipment
allows the Company to perform the variety and volume of scans and to produce the
high quality images that its customers demand. In order to increase throughput
and productivity, the Company's MRI systems are periodically upgraded with the
latest software, which reduces the time per scan and improves image quality. As
a result of these upgrades, the Company's maintenance capital expenditures have
been stable and the Company expects such expenditures to remain stable for the
foreseeable future. In addition, the Company believes it is well-positioned to
benefit from new applications (e.g. mammography and stroke detection) for MRI
technology.
EXPERIENCED MANAGEMENT TEAM. The Company has a highly experienced senior
management team with an average of 15 years industry experience. Since the
Merger, management has successfully implemented the Company's business strategy,
resulting in increasing quarterly operating profitability (excluding a one-time
non-cash charge of $6.3 million incurred in connection with the
Recapitalization). In addition, the Company's successful integration of seven
acquisitions has produced increased revenues and cash flows. Management will
continue to develop the Company's business strategy by growing through regional
network expansion, pursuing opportunities within existing networks, focusing on
managed care and introducing new products.
STRONG EQUITY SPONSORSHIP. InSight enjoys strong strategic support from its
equity sponsors, The Carlyle Group and GE. In October 1997, Carlyle purchased
$25 million of a new series of the Company's preferred stock, currently
convertible into approximately 30% of the Company's common stock on a fully
diluted basis, and GE exchanged its existing preferred stock for a new series of
the Company's preferred stock, currently convertible into approximately 33% of
the Company's common stock on a fully diluted basis. The Carlyle Group is a
global investment firm which originates, structures and acts as lead equity
investor in targeted industries. Designees of Carlyle and GE serve on the Board.
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BUSINESS STRATEGY
The Company's business strategy is to further develop and expand regional
diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The Company's strategy primarily consists of the
following components:
GROWTH THROUGH REGIONAL NETWORK EXPANSION. The Company intends to further
participate in the consolidation occurring in the diagnostic imaging industry by
continuing to build its market presence in its existing regional diagnostic
imaging networks through geographically disciplined acquisitions. In addition,
the Company may develop or acquire additional regional networks in strategic
locations where the Company can offer a broad range of services to its customers
and realize increased economies of scale.
PURSUE OPPORTUNITIES WITHIN EXISTING NETWORKS. The Company will continue to
market current diagnostic imaging applications through its existing facilities
to optimize and increase overall procedure volume. The Company also expects to
increase scan volume as new applications develop for the Company's existing
diagnostic imaging equipment. In addition, the Company's management remains
focused on maximizing cost savings through increased purchasing power and the
reduction of overhead.
FOCUS ON MANAGED CARE. As the Company continues to strengthen its regional
diagnostic imaging networks, management recognizes the importance of managed
care customers and has developed specialized "one-stop shopping" for managed
care organizations. InSight intends to capitalize on its existing relationships
in the managed care industry and believes its regional networks and
strategically located Fixed Facilities give it a significant competitive
advantage in marketing to managed care organizations.
NEW PRODUCT INTRODUCTIONS. The Company is currently implementing a variety
of new products and services designed to further leverage its core business
strengths, including:
OPEN MRI SYSTEMS. The Company intends to expand beyond its existing 13 Open
MRI systems by establishing Open MRI imaging services throughout its regional
diagnostic imaging networks. Open MRI services allow for the diagnosis of a
patient without requiring the patient to enter into a conventional large-bore
MRI. The "open" application of the MRI technology offers treatment previously
unavailable to certain patients, including infants, pediatric patients,
claustrophobic patients, large or obese patients and patients suffering from
post-traumatic stress syndrome. Certain MRI applications, such as kinematic
studies, are more easily conducted in an Open MRI than in a conventional MRI.
RADIOLOGY CO-SOURCE PRODUCT. The Company seeks to develop its co-sourcing
product, which will involve the joint ownership and management (outsourcing) of
the physical and technical operations of the multi-modality radiology department
of a hospital or multi-specialty physician group. The Company believes it has
the expertise to manage these operations more efficiently and cost-effectively
than many hospitals and multi-specialty groups and views the co-source product
as a significant opportunity to expand its products and services from the $6
billion outpatient diagnostic imaging services industry to the $50 billion
diagnostic imaging services industry as a whole.
DIAGNOSTIC IMAGING AND TREATMENT SERVICES OFFERED
The Company provides a broad range of diagnostic imaging services, including
MRI, Open MRI, CT, ultrasound, nuclear medicine and x-ray services, as well as a
range of treatment services, including radiation oncology, lithotripsy and Gamma
Knife services.
MRI SERVICES. The Company provides MRI services through 51 Mobile
Facilities and 49 Fixed Facilities serving its regional networks. For the twelve
months ended March 31, 1998, MRI services accounted for approximately 77% of the
Company's total revenues. During the nine months ended March 31, 1998 compared
to the same period during the prior year, the Company had an increase in scan
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volumes at its existing facilities of approximately 12%. MRI uses high strength
magnetic fields and radio waves to produce cross-sectional images of the
anatomy, enabling physicians to differentiate between internal organs,
structures and tissues, thereby facilitating the early diagnosis of diseases and
disorders. MRI frequently lessens the cost and amount of care needed and often
eliminates the need for invasive diagnostic procedures. MRI is the preferred
imaging modality for the brain, the spine and soft tissue because it uses low
energy radiowaves to manipulate protons (usually hydrogen) in the body. As a
result, MRI produces a superior image without exposing patients to ionizing
radiation.
The major components of an MRI system are a large magnet, radio wave
equipment and a computer for data storage and image processing. During an MRI
study, a patient lies on a table, which is then placed into the magnet. Once in
the magnetic field, the protons in a patient's body will tend to align with the
magnetic field. Radio frequency ("RF") waves, produced by a radio antenna coil
which surrounds the body part to be imaged, are "pulsed" against the magnetic
field. The RF energy is then turned off, and the protons are observed for
different types of behavior, movement or "relaxation". Different tissues have
different relaxation times, depending on the amount of hydrogen or water in the
tissue. The data on each proton's behavior are collected digitally by the
system's computer and then reconstructed into cross-sectional images in three
dimensional planes of orientation. The resulting image reproduces soft tissue
anatomy (as found in the brain, spinal cord and interior ligaments of body
joints such as the knee) with superior clarity, not available by any other
currently existing imaging modality. A typical MRI examination takes from 20 to
45 minutes.
Because the signals used to produce magnetic resonance images contain both
chemical and structural information, the Company believes this technique has
greater potential for many important diagnostic applications than any other
imaging technology currently in use. While existing MRI systems demonstrate
excellent portrayals of anatomical structures within the human body, of even
greater significance is the fact that MRI is also sensitive to subtle
differences between tissues. Thus, MRI offers not only the opportunity for
highly effective classical diagnosis, but also the potential for future
monitoring of chemical processes within the body.
Depending upon type, features and options selected, an MRI system and
related housing and installation generally cost between $1.6 million and $2.2
million. The largest manufacturers of MRI systems are General Electric Medical
Systems ("GEMS"), Hitachi Medical Systems America, Inc., Phillips Medical
Systems North America Company, Picker International, Inc. and Siemens Medical
Systems, Inc. These manufacturers also supply maintenance and service under
warranties and contracts. Industry participants typically enter into contracts
with the manufacturers after expiration of the warranty for comprehensive
maintenance programs on equipment to minimize downtime (the period of time
equipment is unavailable during scheduled use hours because of malfunctions).
OPEN MRI SERVICES. The Company has 13 Open MRI systems, nine of which are
less than one year old. Recent technological advances in software and gradient
coil technology for MRI systems have allowed equipment with lower magnetic field
strength and open architecture design to offer significantly improved image
quality. Open MRI systems use permanent electromagnetic technology rather than
superconductivity magnets, substantially lowering both siting and service costs,
but do not provide images as efficiently as conventional large-bore MRI systems.
The open design allows for studies not normally possible in conventional MRI
systems, including exams of infants, pediatric patients, claustrophobic
patients, large or obese patients and patients suffering from post-traumatic
stress syndrome. Open MRI is also capable of conducting musculoskeletal exams
that require the patient to move or flex, such as kinematic knee studies. A
typical Open MRI non-kinematic exam takes from 45 to 90 minutes. Open MRI
systems are priced in the range of $0.6 million to $1 million. The Company
believes that Open MRI provides additional flexibility to its customers within a
regional network who either need or desire Open MRI capabilities.
CT SERVICES. Thirteen of the Company's Multi-Modality Centers offer CT
services in addition to MRI. CT scanning is performed by the rotation of a high
output x-ray tube around the patient. The x-ray
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tube emits a thin fan-shaped beam of x-rays that passes through the patient and
is absorbed by an array of x-ray detectors located on the side of the patient
opposite from the x-ray tube. The detected x-rays are then converted into
digital measurements of x-ray intensity directly proportional to the density of
the portion of the patient through which the beam passes. These digital
measurements of x-ray intensity are then processed by a specialized image
reconstruction computer system into a cross-sectional image. CT systems perform
multiple scans to create a "stack" of cross-sectional images. Typical scanning
times for a single image are in the one second to six second range. A complete
CT examination takes from 15 minutes to 45 minutes, depending on the complexity
of the examination and number of individual cross-sectional images required. The
current selling prices of CT systems fall in the range of $0.3 million to $1.5
million, depending upon the specific performance characteristics of the systems.
ULTRASOUND SERVICES. Nine of the Company's Multi-Modality Centers offer
ultrasound services in addition to MRI. Ultrasound systems emit, detect and
process high frequency sound waves to generate images of soft tissues and
internal body organs. The sound waves used in ultrasound do not involve ionizing
radiation and are not known to cause any harmful effects to the patient.
NUCLEAR MEDICINE SERVICES. Five of the Company's Multi-Modality Centers
offer nuclear medicine services in addition to MRI. Nuclear medicine gamma
cameras, which are based upon the detection of gamma radiation generated by
radioactive pharmaceuticals injected or inhaled into the body, are used to
provide information about organ function as opposed to anatomical structure.
X-RAY SERVICES. Thirteen of the Company's Multi-Modality Centers offer
x-ray services in addition to MRI. X-ray is the most common energy source used
in imaging the body. In addition to its use for CT scans, x-ray is employed in
two other imaging modalities: (i) conventional x-ray systems, the oldest method
of imaging, produce bone images and images of contrast-enhanced vasculature and
organs and constitute the largest number of installed systems; and (ii) digital
x-ray systems add computer image processing capability to conventional x-ray
systems.
RADIATION ONCOLOGY SERVICES. The Company offers radiation oncology services
at one Multi-Modality Center and at one dedicated radiation oncology center.
Radiation oncology generally uses external beam radiation from a linear
accelerator to treat cancer with ionizing radiation of the same type, but at
higher doses, as for diagnostic x-rays. In addition to x-rays, certain linear
accelerators have the capacity to produce electrons. While x-ray radiation can
penetrate the body a certain distance before delivering its maximum dose, and
therefore can treat internal structures, electrons have less penetrating ability
and permit the clinician to treat superficial lesions. Radiation oncology also
includes brachytherapy, which implants radioactive sources directly into or near
a tumor.
LITHOTRIPSY SERVICES. The Company acquired four mobile lithotripters in
connection with its acquisition of Signal, all of which operate in New England
or the Southeast. Lithotripsy is a non-invasive procedure for the treatment of
kidney stones, typically performed on an outpatient basis, that eliminates the
need for lengthy hospital stays and extensive recovery periods associated with
surgery. Lithotripters shatter kidney stones through the use of extracorporeal
shockwaves, following which the resulting kidney stone fragments pass out of the
body naturally.
GAMMA KNIFE SERVICES. The Company currently owns one Gamma Knife system.
The Gamma Knife delivers a single high dose of ionizing radiation by way of
individual beams focused on a common target, producing an intense concentration
of radiation at the target site, destroying the lesion while spreading the entry
radiation dose uniformly and harmlessly over the patient's skull. The Gamma
Knife treatment requires no open surgical intervention, no lengthy hospital stay
and no risk of post-surgical bleeding or infection. Typical treatment time is
approximately 10 to 15 minutes per area of interest ("isocenter"). Gamma Knife
systems generally cost approximately $3 million. During the nine months ended
March 31, 1998, the Company transferred the operations of one Gamma Knife unit
to the hospital where it was located.
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OPERATIONS
CUSTOMERS AND FEES. The Company's revenues are primarily generated from
contract services and patient services. For the nine months ended March 31,
1998, contract services and patient services accounted for 46% and 51%,
respectively, of the Company's revenues. Contract services revenues are
generally earned from services billed to a hospital or other health care
provider. During the nine months ended March 31, 1998, (i) 97% of contract
services revenues were derived from fee-for-service arrangements, in which
revenues are based upon a contractual rate per procedure; (ii) 1% of contract
services revenues were derived from equipment rental, in which revenues are
generally based upon a fixed monthly rental; and (iii) 2% of contract services
revenues were derived from management fees. Contract services revenues are
primarily earned through Mobile Facilities and certain Fixed Facilities and are
generally paid pursuant to hospital contracts with a life span of one to five
years for Mobile Facilities and five to ten years for Fixed Facilities. The
Company has over 200 exclusive contracts with hospitals for Mobile Facility
services and 13 exclusive contracts with hospitals for Fixed Facility services.
Patient services are billed directly to patients or third party payors
(generally managed care organizations, Medicare, Medicaid, private insurers and
workers compensation funds) on a fee-for-service basis, and are primarily earned
through Fixed Facilities, including Multi-Modality Centers.
The following chart illustrates the Company's payor mix based on revenues
for its patient services and contract services for the twelve months ended March
31, 1998:
<TABLE>
<CAPTION>
PATIENT CONTRACT
PAYOR SERVICES SERVICES CONSOLIDATED(1)
- -------------------------------------------------------------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Hospital........................................................................ 2% 100 % 56%
Managed Care.................................................................... 60% -- 27%
Medicare/Medicaid............................................................... 23% -- 10%
Workers' Compensation, Liens and Personal Injury................................ 10% -- 4%
Indemnity Insurance............................................................. 5% -- 3%
</TABLE>
- ------------------------
(1) Consolidated payor mix refers to the weighted average calculation of each
type of payor contribution to the Company's respective patient services and
contract services.
The Company's Fixed Facility operations are principally dependent on the
Company's ability (either directly or indirectly through its hospital customers)
to attract referrals from physicians and other health care providers
representing a variety of specialties. The Company's eligibility to provide
service in response to a referral is often dependent on the existence of a
contractual arrangement with the referred patient's insurance carrier (primarily
if the insurance is provided by a managed care organization). The Company
currently has in excess of 400 contracts with managed care organizations for
diagnostic imaging services provided at the Company's Fixed Facilities,
primarily on a discounted fee-for-service basis. A significant decline in
referrals and/or reimbursement rates would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Dependence on Referrals for Fixed Facilities."
Each year approximately one-quarter to one-third of the Company's contract
services agreements for Mobile Facilities are subject to renewal. It is expected
that some high volume customer accounts will elect not to renew their agreements
and instead will purchase or lease their own diagnostic imaging equipment and
some customers may choose an alternative services provider. In the past, when
such agreements have not been replaced, the Company has generally been able to
obtain replacement contracts. While some replacement accounts have initially
been smaller than the lost accounts, such replacement accounts' revenues have
generally increased over the term of the agreement. There can be no assurance,
however, that new and renewal contracts will offset revenues lost from customers
electing not to renew their contracts with the Company. Although the non-renewal
of a single customer agreement would not have a
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material adverse effect on the Company's contract services revenues, non-renewal
of several agreements could have a material adverse effect on contract services
revenues.
In addition, the Company's contract services revenues with regard to its
Mobile Facilities in certain markets depend in part on some hospital accounts
with high volume. If the future reimbursement levels of such 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, the Company's contract services revenues would be
adversely affected. No single source accounts for more than 10% of the Company's
revenues. See "Risk Factors--Contract Renewals."
SALES AND MARKETING. The Company selectively invests in marketing and sales
resources and activities for the purpose of obtaining new sources of revenues
for the Company, expanding business relationships, growing revenues at its
existing facilities and maintaining present business alliances and contractual
agreements. Marketing activities include efforts to contact physicians,
education programs on new applications and uses of technology, customer service
programs and contracting with insurance payors for volume discounts. Sales
activities principally focus on hospital customers who purchase Mobile Facility
services from the Company or enter into other more extensive relationships for
Fixed Facility partnerships or radiology department management services.
EQUIPMENT. The Company has estimated that it has invested approximately $50
million since the Merger to replace and upgrade its existing diagnostic imaging
systems and to purchase new systems. As a result, the Company has
technologically advanced, state-of-the-art diagnostic imaging equipment. The
Company owns or leases 137 diagnostic imaging and treatment systems, of which
100 are conventional MRI systems, 13 are Open MRI systems, 16 are CT systems,
five are lithotripters, two are radiation oncology systems and one is a Gamma
Knife. The Company owns 75 of its imaging and treatment systems and has
operating leases for the remaining 59 systems. Of the Company's 100 conventional
MRI systems, 36% have a magnet strength of 1.5 Tesla and 40% have a magnet
strength of 1.0 Tesla. Currently, the industry standard magnet strength for
fixed systems is 1.5 Tesla and the industry standard magnet strength for mobile
systems is 1.0 Tesla. The Company is in the process of upgrading or replacing
its remaining conventional MRI systems from magnet strengths of less than 1.0
Tesla to magnet strengths of at least 1.0 Tesla. Nine of the Company's 13 Open
MRI systems are less than one year old.
The Company's master lease agreement with GEMS includes a variable lease
arrangement for 17 of the Company's 59 leased imaging and treatment systems,
which significantly reduces the Company's downside cash flow risk. Under the
Company's standard operating lease agreement with GEMS, the Company pays
approximately $30,000 per month to lease each system. Under the variable rate
election, the Company may choose to pay a monthly rental fee averaging $18,000
per system, plus 40% of the operating profits generated by such system, or to
store idle systems at a fixed location for a monthly payment from GEMS of $1,500
per system, representing approximately half of the monthly maintenance costs for
an idle system. The Company's variable lease arrangement with GEMS covers most
of the Company's older systems, which the Company either has upgraded or expects
to replace within the next 18 to 24 months. As of May 15, 1998, the Company had
elected the variable lease option with respect to four of the 17 systems in the
variable rate pool, each of which requires total monthly payments of $13,000 or
less. The option to elect the variable lease structure in the future with
respect to additional systems provides the Company with downside cash flow
protection in the event that any particular MRI system experiences low
utilization.
Several substantial companies are presently engaged in the manufacture of
MRI (including Open MRI), CT and other diagnostic imaging equipment, including
GEMS, Hitachi Medical Systems, Inc., Philips Medical Systems North America
Company, Picker International, Inc. and Siemens Medical Systems, Inc. The
Company maintains good working relationships with many of the major
manufacturers to better ensure an adequacy of supply as well as access to those
types of diagnostic imaging systems which appear most appropriate for the
specific diagnostic or treatment center to be established.
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COMPETITION
The health care industry in general, and the market for diagnostic imaging
services in particular, is highly competitive. The Company competes principally
on the basis of its reputation for productive and cost-effective quality
services. The Company's operations must compete with groups of radiologists,
established hospitals and certain other independent organizations, including
equipment manufacturers and leasing companies, that own and operate imaging
equipment. The Company will continue to encounter substantial competition from
hospitals and independent organizations, including, with respect to its Mobile
Facilities, Alliance Imaging, Inc. and its affiliates. Some of the Company's
direct competitors that provide contract diagnostic imaging services may have
access to greater financial resources than the Company.
Certain hospitals, particularly the larger hospitals, may be expected to
directly acquire and operate imaging and treatment equipment on-site as part of
their overall inpatient servicing capability, subject only to their decision to
acquire a diagnostic imaging system, assume the associated financial risk,
employ the necessary technologists and satisfy applicable licensure
requirements, if any. Historically, smaller hospitals have been reluctant to
purchase imaging and treatement equipment. This reluctance, however, has
encouraged the entry of start-up ventures and more established business
operations into the diagnostic services business. As a result, there is
significant excess capacity in the diagnostic imaging business in the United
States, which negatively affects utilization and reimbursement. See "Risk
Factors--Competition."
LIABILITY INSURANCE
The hospitals and physicians who use the Company's diagnostic imaging
services and imaging systems are involved in the delivery of health care
services to the public and, therefore, are exposed to the risk of liability
claims. The Company's position is that it does not engage in the practice of
medicine. The Company provides only the equipment and technical components of
diagnositic imaging, including certain limited nursing services, and has not
experienced any material losses due to claims for malpractice. Nevertheless,
claims for malpractice have been asserted against the Company in the past and
any future claims, if successful, could result in substantial damage awards to
the claimants, which may exceed the limits of any applicable insurance coverage.
While the Company maintains professional liability insurance, there can be no
assurance that any such claims against the Company will not exceed the amount of
insurance maintained. Successful malpractice claims asserted against the
Company, to the extent not covered by the Company's liability insurance, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Risks Inherent in the Provision of
Diagnostic Imaging Services."
GOVERNMENT REGULATION
The health care industry is highly regulated and changes in laws and
regulations can be significant. Changes in the law or new interpretations of
existing laws can have a material effect on permissible activities of the
Company, the relative costs associated with doing business and the amount of
reimbursement by government and other third party payors. The federal government
and all states in which the Company currently operates regulate various aspects
of the Company's business. Failure to comply with these laws could adversely
affect the Company's ability to receive reimbursement for its services and
subject the Company and its officers to penalties. See "Risk Factors--Government
Regulation."
ANTI-KICKBACK STATUTES
The Company is subject to federal and state laws which govern financial and
other arrangements between health care providers. These include the federal
anti-kickback statute which prohibits bribes, kickbacks, rebates and any other
direct or indirect remuneration in return for or to induce the referral of an
individual to a person for the furnishing, directing or arranging of services,
items or equipment for which payment may be made in whole or in part under
Medicare, Medicaid or other federal health care
62
<PAGE>
programs. Violation of the anti-kickback statute may result in criminal
penalties and exclusion from the Medicare and other federal health care
programs. Many states have enacted similar statutes which are not limited to
items and services paid for under Medicare or a federally funded health care
program. In recent years, there has been increasing scrutiny by law enforcement
authorities, HHS, the courts and Congress of financial arrangements between
health care providers and potential sources of patient and similar referrals of
business to ensure that such arrangements are not designed as mechanisms to pay
for patient referrals. HHS interprets the anti-kickback statute broadly to
apply, under certain circumstances, to distributions of partnership and
corporate profits to investors who refer federal health care program patients to
a corporation or partnership in which they have an ownership interest and to
payments for service contracts and equipment leases that are designed to provide
direct or indirect remuneration for patient referrals or similar opportunities
to furnish reimbursable items or services. In July 1991, HHS issued "safe
harbor" regulations that set forth certain provisions which, if met, will assure
that health care providers and other parties who refer patients or other
business opportunities, or who provide reimbursable items or services, will be
deemed not to violate the anti-kickback statute. The Company is also subject to
separate laws governing the submission of false claims. The Company believes
that its operations materially comply with the anti-kickback statutes. See "Risk
Factors--Government Regulation--Health Care Fraud and Abuse Regulations."
STARK II; STATE PHYSICIAN SELF-REFERRAL LAWS
A federal law, commonly known as the "Stark Law" or "Stark II," also imposes
civil penalties and exclusions for referrals for "designated health services" by
physicians to certain entities with which they have a financial relationship
(subject to certain exceptions). "Designated health services" include, among
other things, radiology services, including MRIs, CTs and ultrasound, and
inpatient and outpatient hospital services. The law applies only to services
reimbursable by Medicare or Medicaid. The Stark Law is self-effectuating and
does not require implementing regulation; however, while implementing
regulations have been issued relating to referrals for clinical laboratory
services, final regulations have not been issued regarding the other designated
health services. In addition, several states in which the Company operates have
enacted or are considering legislation that prohibits "physician self-referral"
arrangements or requires physicians to disclose to their patients any financial
interest they may have with a health care provider whom they recommend. Possible
sanctions for violating these provisions include loss of licensure and civil and
criminal sanctions. Such state laws vary from state to state and seldom have
been interpreted by the courts or regulatory agencies. Nonetheless, strict
enforcement of these requirements is likely. Although the Company believes its
operations materially comply with these federal and state physician
self-referral laws, there can be no assurance that Stark II or other regulations
will not be interpreted or changed in a manner that would have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Risk Factors--Government Regulation--Health Care Fraud and
Abuse Regulations."
INDEPENDENT PHYSIOLOGICAL LABORATORIES; INDEPENDENT DIAGNOSTIC TREATMENT
FACILITIES
Under past Medicare policy, imaging centers generally participated in the
Medicare program as either medical groups or, subject to the discretion of
individual Medicare carriers, Independent Physiological Laboratories ("IPLs").
The IPL is a loosely defined Medicare provider category that is not specifically
authorized to provide imaging services. Accordingly, certain carriers permit
IPLs to provide imaging services and others do not. In the past, the Company has
preferred, to the extent possible, to operate its imaging centers for Medicare
purposes as IPLs. The Company believes that the designation of its imaging
centers as IPLs gave it greater operational control than it would have had if
its imaging centers were operated under the medical group model, where the
Company would function as a "manager".
The Health Care Financing Administration ("HCFA") has established a new
category of Medicare provider intended to replace IPLs, referred to as
Independent Diagnostic Treatment Facilities ("IDTFs"). HCFA has not yet
implemented a mechanism for processing IDTF applications, but the Company
expects such mechanism to be put in place during calendar 1998. Under the
regulations, it appears that imaging
63
<PAGE>
centers will have the option to participate in the Medicare program either as
IDTFs or as medical groups. The Company believes that the impact of the IDTF
regulations is likely to be positive overall. Accordingly, the Company will
convert some or all of its existing centers into IDTFs, except in those states
where the medical group model is required. Since the mechanism to be used to
convert to IDTFs is still undetermined, it is possible that such conversions
will raise unanticipated issues. In addition, since the IDTF designation is new,
it is unclear to what extent and in what manner IDTFs will be monitored by HCFA,
but it is probable that HCFA will exercise increased oversight of IDTFs compared
to IPLs, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Reimbursement
of Health Care Costs."
FDA PREMARKET APPROVALS
The FDA has issued the requisite premarket approval for all of the MRI, CT,
lithotripsy and Gamma Knife systems utilized by the Company. Although the
Company does not believe that any further FDA approval is required in connection
with equipment currently in operation or proposed to be operated, there can be
no assurance that the Company's equipment vendors will be able to obtain any
requisite FDA premarket approvals in the future.
CERTIFICATES OF NEED
Some states require hospitals and certain other health care facilities to
obtain a CON or similar regulatory approval prior to the commencement of certain
health care operations or services and/or the acquisition of major medical
equipment, including MRI and Gamma Knife systems. CON regulations may limit or
preclude the Company from providing diagnostic imaging services or systems in
certain states. The Company believes that it will not be required to obtain CONs
in most of the states in which it intends to operate and in those states where a
CON is required, the Company believes it has complied or will comply with such
requirements. Nevertheless, a significant increase in the number of states
regulating the Company's business within the CON or state licensure framework
could adversely affect the Company's business, financial condition and results
of operations. Conversely, repeal of existing CON regulations in jurisdictions
where the Company has obtained or operates under a CON could also adversely
affect the Company's business, financial condition and results of operations as
barriers to entry are reduced or removed. This is an area of continuing
legislative activity, and there can be no assurance that the Company will not be
subject to CON and licensing statutes in other states in which it operates or
may operate in the future. See "Risk Factors--Government Regulation--Other State
Health Care Regulations."
RADIOLOGIST LICENSING
The radiologists with whom the Company may enter into agreements to provide
professional services are subject to licensing and related regulations by the
states. As a result, the Company requires its radiologists to have and maintain
appropriate licensure. Although the Company does not believe that such laws and
regulations will either prohibit or require licensure approval of its business
operations, there can be no assurance that such laws and regulations will not be
interpreted to extend such prohibitions or requirements to the Company's
operations. See "Risk Factors--Government Regulation--Health Care Fraud and
Abuse Regulations."
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<PAGE>
REIMBURSEMENT OF HEALTH CARE COSTS
MEDICARE
The Medicare program provides reimbursement for hospitalization, physician,
diagnostic and certain other services to eligible persons 65 years of age and
over and certain others. Providers of service are paid by the federal government
in accordance with regulations promulgated by HHS and generally accept said
payment, with nominal co-insurance amounts required to be paid by the service
recipient, as payment in full. In general, these regulations provide for a
specific prospective payment to reimburse hospitals for inpatient treatment
services based upon the diagnosis of the patient. Although outpatient services
such as those primarily provided by the Company are presently exempt from
prospective payment reimbursement, Congress has instructed the Prospective
Payment Assessment Commission to study alternative methods for reimbursing
hospitals for outpatient services, including prospective payment methods, and
the Medicare program has adopted fee schedules for some diagnostic services.
Recent congressional and regulatory action has also imposed additional
requirements on the eligibility of certain diagnostic services for reimbursement
by the Medicare program, including new requirements regarding necessary
documentation from ordering physicians and supervision by radiologists. Such
congressional and regulatory action reflects industry-wide cost containment
pressures which the Company believes will affect all health care providers for
the foreseeable future. Such reductions in reimbursement levels may affect
health care providers' ability to pay for the services offered by the Company
and could indirectly adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors--Reimbursement of Health
Care Costs."
MEDICAID
The Medicaid program is a combined federal and state program providing
coverage for low income persons. The specific services offered and reimbursement
methods vary from state to state. In many states, Medicaid reimbursement is
patterned after the Medicare program. There can be no assurance that changes in
Medicaid program reimbursement would not have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Reimbursement of Health Care Costs."
MANAGED CARE
HMOs and PPOs attempt to control the cost of health care services. Managed
care contracting has become very competitive and reimbursement schedules are at
or below Medicare reimbursement levels. The development and expansion of HMOs,
PPOs and other managed care organizations within the Company's regional networks
could have a negative impact on utilization of the Company's services in certain
markets and/or affect the revenue per procedure which the Company can collect
because such organizations will exert greater control over patients' access to
diagnostic imaging services, the selection of the provider of such services and
the reimbursement thereof. The Company expects that the excess capacity of
equipment in the United States may negatively impact operations because of the
competition among health care providers for contracts with all types of managed
care organizations. As a result of such competition, the length of term of any
contracts which the Company may obtain and the payment to the Company for such
services may also be negatively affected. See "Risk Factors--Reimbursement of
Health Care Costs" and "Business--Operations--Customers and Fees."
PRIVATE INSURANCE REIMBURSEMENT
Private health insurance programs generally have authorized the payment for
diagnostic imaging and Gamma Knife procedures on satisfactory terms and HCFA has
authorized reimbursement under the federal Medicare program for all diagnostic
imaging and Gamma Knife services currently being provided by the Company.
However, if Medicare reimbursement is reduced, the Company believes that private
65
<PAGE>
health insurance programs will also reduce reimbursement, which could have an
adverse impact on the Company's business, financial condition and results of
operations. See "Risk Factors--Reimbursement of Health Care Costs."
LEGAL PROCEEDINGS
The Company is engaged from time to time in the defense of lawsuits arising
out of the ordinary course and conduct of its business and has insurance
policies covering such potential insurable losses where the Company believes
such coverage is cost-effective. The Company believes that the outcome of any
such lawsuits will not have a material adverse impact on the Company's business.
On May 8, 1998, Medical Synergies, Inc. ("MSI") and its subsidiary, The
Center for Diagnostic Medical Services, Inc. ("CDMSI"), filed a complaint
against InSight Health Corp., a wholly owned subsidiary of the Company ("IHC"),
and certain of its officers, E. Larry Atkins, Thomas V. Croal, Glenn P. Cato,
Robert N. LaDouceur and Michael A. Boylan, in the District Court of Dallas
County, Texas. Plaintiffs allege that they had a final and binding agreement
with IHC with respect to the acquisition by IHC of certain assets, and
assumption by IHC of certain liabilities, of MSI and CDMSI. Plaintiffs'
complaint includes claims of anticipatory repudiation of an alleged agreement,
fraud, negligent misrepresentation, tortious interference with contract,
tortious interference with prospective business relations and attorneys' fees
based on breach or repudiation of the alleged agreement. The complaint requests
a judgment for actual, compensatory and consequential damages in an unspecified
amount, punitive and exemplary damages in an unspecified amount, pre-judgment
and post-judgment interest, attorneys' fees, expenses, costs and disbursements.
The Company, IHC and the other defendants have answered the complaint and the
case has been removed to the U.S. Bankruptcy Court for the Northern District of
Texas, Dallas Division, since MSI and CDMSI filed, after the filing of the
complaint against the defendants, for protection under Chapter 11 of the federal
bankruptcy law. The Company, IHC and the other defendants believe that
plaintiffs' claims are without merit and intend to vigorously defend the
lawsuit.
PROPERTIES
The Company leases approximately 12,300 square feet of office space for its
executive offices in Newport Beach, California, under a lease expiring in 2001,
and approximately 5,300 square feet of office space in Farmington, Connecticut,
under a lease expiring in 2002. The Company believes its facilities are adequate
for its reasonably foreseeable needs. In addition, the following table sets
forth the other principal properties used by the Company as of June 30, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ------------------------------------------- ------------- -----------------------------------
<S> <C> <C>
OWNED PROPERTIES:
Northern Indiana Oncology Center........... 3,500 Valparaiso, Indiana
Berwyn Magnetic Resonance Center (1)....... 3,800 Berwyn, Illinois
Garfield Imaging Center (1)................ 4,500 Monterey Park, California
LAC/USC Imaging Sciences
Center (1)............................... 8,500 Los Angeles, California
Maxum Diagnostic Center--Eighth Avenue..... 10,000 Ft. Worth, Texas
Diagnostic Outpatient Center (1)........... 13,800 Hobart, Indiana
Harbor/UCLA Diagnostic Imaging Center
(1)...................................... 15,000 Torrance, California
Mountain Diagnostics....................... 19,100 Las Vegas, Nevada
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ------------------------------------------- ------------- -----------------------------------
<S> <C> <C>
LEASED PROPERTIES:
Buckhead Imaging........................... 1,500 Atlanta, Georgia
Redwood City MRI........................... 2,900 Redwood City, California
Dublin Imaging............................. 3,900 Dublin, Ohio
Open MRI of Orange County.................. 4,000 Santa Ana, California
Washington Magnetic Resonance Center....... 4,100 Whittier, California
Imaging Center at Murfreesboro............. 5,000 Murfreesboro, Tennessee
Marshwood Imaging.......................... 5,000 Scarborough, Maine
Maxum Diagnostic Center--Preston Road...... 5,800 Dallas/Plano, Texas
Open MRI of Hayward........................ 6,400 Hayward, California
Central Maine Imaging Center............... 7,250 Lewiston, Maine
Ocean Medical Imaging Center............... 8,700 Tom's River, New Jersey
Broad Street Imaging Center................ 12,700 Columbus, Ohio
Maxum Diagnostic Center--Forest Lane....... 14,100 Dallas, Texas
Chattanooga Outpatient Center.............. 14,700 Chattanooga, Tennessee
Fleet Services/Training/Applications....... 20,000 Winston-Salem, North Carolina
</TABLE>
- ------------------------
(1) The Company owns the building and holds the related land under a long-term
lease.
On April 24, 1998, the Company completed the purchase of 77,690 square feet
of land in Ft. Worth, Texas, upon which the Company intends to build a
Multi-Modality Center to which certain existing operations in Ft. Worth will be
relocated.
EMPLOYEES
At June 30, 1998, the Company had approximately 800 full-time and 50
part-time employees. None of the Company's employees are covered by a collective
bargaining agreement. Management believes its employee relations to be
satisfactory.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of each of the
persons who are directors and executive officers of the Company. Each director
will hold office until the date indicated in the appropriate footnote or until
his successor has been elected and qualified. Officers are elected by the Board
and serve at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
E. Larry Atkins................. 51 President, Chief Executive Officer and Director (1) (2)
Thomas V. Croal................. 38 Senior Executive Vice President, Chief Operating Officer and Chief
Financial Officer
Michael A. Boylan............... 42 Executive Vice President and Chief Development Officer
Marilyn U. MacNiven-Young....... 47 Executive Vice President, General Counsel and Secretary
Michael D. Cragin............... 50 Senior Vice President--Operations
Brian G. Drazba................. 36 Senior Vice President--Finance and Corporate Controller
Robert N. LaDouceur............. 53 Senior Vice President--Operations
Deborah M. MacFarlane........... 42 Senior Vice President--Marketing
Brian P. Stone.................. 38 Senior Vice President--Operations
Frank E. Egger.................. 53 Chairman of the Board and Director (1) (3)
Michael E. Aspinwall............ 45 Director (4)
Grant R. Chamberlain............ 33 Director (1) (5)
David W. Dupree................. 45 Director (6)
Leonard H. Habas................ 54 Director (1) (3)
Ronald G. Pantello.............. 54 Director (1) (5)
Glenn A. Youngkin............... 31 Director (6)
</TABLE>
- ------------------------
(1) Elected by the holders of the Company's common stock.
(2) Class I Director (term expires at the Company's annual meeting of
stockholders in 2000).
(3) Class III Director (term expires at the Company's annual meeting of
stockholders in 1999).
(4) Elected by the holders of the Series C Preferred Stock.
(5) Class II Director (term expires at the Company's annual meeting of
stockholders in 1998).
(6) Elected by the holders of the Series B Preferred Stock.
E. LARRY ATKINS has been a director and president and chief executive
officer of the Company since February 23, 1996. Mr. Atkins joined AHS in 1986
and has served as AHS's president and chief executive officer since August 1990
and chairman of the board from December 1990 to June 1992. Mr. Atkins served as
executive vice president and chief operating officer of AHS from 1986 to August
1990. Mr. Atkins became a director of AHS in 1988. From 1979 to 1986, Mr. Atkins
served as president and chief executive officer of AMI Diagnostic Services, a
wholly owned subsidiary of American Medical International, Inc.
THOMAS V. CROAL has been senior executive vice president, chief operating
officer and chief financial officer of the Company since July 21, 1998. He was
executive vice president, chief financial officer and secretary of the Company
from February 23, 1996 to July 21, 1998. Mr. Croal served as a director of AHS
from March 1991 until June 26, 1996. He has served as vice president and chief
financial officer of AHS
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<PAGE>
since April 1991. He was controller of AHS from 1989 until April 1991. In
December 1990, Mr. Croal was appointed corporate secretary. From 1981 to 1989,
Mr. Croal was employed by Arthur Andersen & Co., an independent public
accounting firm.
MICHAEL A. BOYLAN has been executive vice president and chief development
officer of the Company since April 1, 1998. From February 23, 1996 to April 1,
1998, he was senior vice president-operations of the Company. Mr. Boylan has
served as executive vice president of MHC since March 1994. From 1992 to 1994,
he served as a regional vice president of MHC's principal operating subsidiary,
Maxum Health Services Corp. ("MHSC"). From 1991 to 1992, he served as an
executive director of certain of MHC's operations. From 1986 to 1991, Mr. Boylan
served in various capacities as an officer and employee, including president and
chief operating officer, with American Medical Imaging Corporation.
MARILYN U. MACNIVEN-YOUNG has been executive vice president, general counsel
and secretary of the Company since August 1, 1998. From July 1, 1996 through
July 31, 1998, she served as outside general counsel of the Company. From
September 1994 through June 1995, Ms. MacNiven-Young served as vice president,
general counsel and secretary of Abbey Healthcare Group Inc. From 1991 to 1994,
she served as general counsel of AHS.
MICHAEL D. CRAGIN has been senior vice president-operations of the Company
since February 23, 1996. Mr. Cragin has served as regional vice president,
western operations of AHS since he joined AHS in May 1994. From 1989 to 1994, he
was Director of Professional Business Affairs at Saint John's Hospital, Santa
Monica, California.
BRIAN G. DRAZBA was elected senior vice president-finance of the Company on
July 18, 1997. From March 28, 1996, he served as vice president-finance of the
Company. Since June 1995, he has served as vice president-finance of AHS. Mr.
Drazba served as corporate controller for AHS from 1992 to 1995. From 1985 to
1992, Mr. Drazba was employed by Arthur Andersen & Co.
ROBERT N. LADOUCEUR has been senior vice president-operations of the Company
since February 23, 1996. Mr. LaDouceur has served as executive vice president of
MHC since March 1994. From 1992 to 1994, he served as a regional vice president
of MHSC. From 1991 to 1992, he served as an executive director of certain of
MHC's operations. From 1984 to 1991, Mr. LaDouceur served in various capacities
as an officer or employee, including vice president, with Glassrock Home Health
Care.
DEBORAH M. MACFARLANE has been senior vice president-marketing of the
Company since March 28, 1996. Since July 1991, she has served as vice president,
marketing of AHS. From 1987 until June 1991, Ms. MacFarlane served as director
of marketing for the Center Operating Group of Medical Imaging Centers of
America, Inc.
BRIAN P. STONE has been senior vice president-operations of the Company
since May 18, 1998. From 1994 until May 18, 1998, Mr. Stone served as president
and chief executive officer of Signal. From 1991 until 1994, Mr. Stone served as
treasurer and chief financial officer of Signal.
FRANK E. EGGER has been chairman of the board and a director of the Company
since February 23, 1996. Mr. Egger was a director of AHS from August 1991 until
June 26, 1996. He was appointed chairman of the board of AHS in May 1995, and
served as such until June 26, 1996. From 1995 through December 1996, Mr. Egger
served as vice president of Kovens & Associates, Inc. ("Kovens & Associates"), a
successor entity to Kovens Enterprises, where Mr. Egger served as chief
financial officer from 1980 to 1995. Kovens & Associates is a group of real
estate development and investment companies based in Miami, Florida. Since
December 1996, Mr. Egger has been a consultant.
MICHAEL E. ASPINWALL has been a director of the Company since November 20,
1997. Mr. Aspinwall is senior vice president and health care industry leader in
Equity Capital Group, Inc., a subsidiary of General Electric Capital
Corporation, and specializes in private equity investments in the health care
industry. From 1994 to 1996, Mr. Aspinwall was senior vice president and
manager, health care receivables in
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<PAGE>
Commercial Finance Group, Inc., a subsidiary of General Electric Capital
Corporation. From 1987 to 1994, Mr. Aspinwall held several vice presidential
positions with Chase Manhattan Bank, N.A. in New York.
GRANT R. CHAMBERLAIN has been a director of the Company since July 19, 1996.
Since January 1, 1998, Mr. Chamberlain has been a managing director of Shattuck
Hammond Partners, Inc. ("Shattuck Hammond"), an investment banking firm based in
New York City. From April 1995 to January 1, 1998, Mr. Chamberlain was a vice
president of Shattuck Hammond. From April 1991 to April 1995, he served as
manager of strategic investments and restructurings for GE.
DAVID W. DUPREE has been a director of the Company since October 14, 1997.
Mr. Dupree is a managing director of The Carlyle Group, a Washington, D.C. based
merchant banking firm where he has been employed since 1992. From 1990 to 1992,
Mr. Dupree was a principal in Corporate Finance, Private Placements, with
Montgomery Securities. From 1988 to 1990, he was vice president-corporate
finance and co-head of Equity Private Placements at Alex, Brown & Sons,
Incorporated. Mr. Dupree is also a director of Care Systems Corporation,
Pharmaceutical Research Associates, Inc., and Whole Foods Market, Inc.
LEONARD H. HABAS has been a director of the Company since February 23, 1996.
From 1986 to June 26, 1996, Mr. Habas was a director of MHC. Since 1995 he has
been a director , chairman of the board and chief executive officer of Advance
Publishers, L.C., a book distribution company based in Winter Park, Florida. He
established his own financing and consulting firm in 1987, which he continues to
own. Mr. Habas is also a director of Dick Davis Digest and CeraMed Corporation.
RONALD G. PANTELLO has been a director of the Company since February 23,
1996. From 1993 to June 26, 1996, Mr. Pantello was a director of MHC. He is a
founding partner of Lally, McFarland & Pantello, an advertising agency
specializing in the health care industry, based in New York City, and has been
its chief executive officer since 1980.
GLENN A. YOUNGKIN has been a director of the Company since October 14, 1997.
Mr. Youngkin is a vice president at The Carlyle Group, where he has been
employed since 1995. Mr. Youngkin was a consultant with McKinsey & Company, a
global management consulting firm from 1994 to 1995. From 1990 to 1992, Mr.
Youngkin worked in the Natural Resource Group of CS First Boston where he
structured and executed merger and acquisition transactions and capital market
financings. Mr. Youngkin also serves as a director of Elgar Holdings, Inc.
COMMITTEES
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During fiscal
1998 prior to the Recapitalization, the Company's Compensation Committee
consisted of two non-employee directors, Messrs. Habas (co-chairman) and
Pantello (co-chairman). Since the Recapitalization, the Compensation Committee
has consisted of three non-employee directors, Messrs. Habas, Pantello and
Youngkin. The Compensation Committee is responsible for determining the specific
forms and levels of compensation of the Company's executive officers, and
administering the Company's 1998 Employee Stock Option Plan, 1997 Management
Stock Option Plan, 1996 Employee Stock Option Plan and 1996 Directors' Stock
Option Plan, AHS's 1987 Stock Option Plan, AHS's 1992 Option and Incentive Plan,
and MHC's 1989 Stock Option Plan.
ACQUISITION COMMITTEE. The Acquisition Committee was created pursuant to
the Recapitalization. It currently consists of Messrs. Aspinwall, Atkins, Egger
and Youngkin. Its principal functions are to consider certain transactions with
respect to which the aggregate compensation payable in connection therewith is
less than $15 million.
AUDIT COMMITTEE. During fiscal 1998 prior to the Recapitalization, the
Audit Committee consisted of Messrs. Egger (chairman) and Chamberlain. Its
principal functions are to review the results of the Company's annual audit with
the Company's independent auditors and review the performance of the
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Company's independent auditors. Since the Recapitalization, the Audit Committee
has consisted of Messrs. Chamberlain and Pantello. It is intended that the Joint
Director, when appointed and approved, will be a member of the Audit Committee.
EXECUTIVE COMMITTEE. Following the Recapitalization, the Executive
Committee was created. The Executive Committee currently consists of Messrs.
Aspinwall, Atkins, Dupree and Egger. It is authorized to exercise all the power
and authority of the Board in the management of the business of the Company but
its authority does not extend to certain fundamental corporate transactions.
NOMINATING COMMITTEE. The Nominating Committee currently consists of
Messrs. Habas and Egger. Its principal function is to make recommendations
relating to the composition of the Board, including identifying potential
candidates as Board members.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Because the Company was not a reporting company pursuant to Section 13(a) or
15(d) of the Exchange Act until June 26, 1996, its fiscal year ended shortly
thereafter on June 30, 1996 and each of its predecessors, MHC and IHC, were
reporting companies and have reported executive compensation information through
the year ended December 31, 1995, the following table sets forth information
concerning the annual, long-term and all other compensation for services
rendered in all capacities to the Company, its subsidiaries and predecessors for
the year ended December 31, 1995, the six months ended June 30, 1996 and the
years ended June 30, 1998 and 1997 of (i) the Company's chief executive officer
and (ii) the four most highly compensated executive officers (other than the
chief executive officer) of the Company (the "Other Executive Officers"), whose
aggregate cash compensation exceeded $100,000 for the year ended June 30, 1998.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- AWARDS
NAME AND PRINCIPAL FISCAL YEAR STOCK OPTIONS ALL OTHER
POSITION ENDED SALARY(1) BONUS(2) OTHER(3) (SHARES) COMP(3)
- -------------------------------------------------- ------------- ---------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
E. Larry Atkins................................... 1998 $ 287,000 $ -- $ 9,000 200,000 $ 16,242
President and Chief 1997 246,400 86,000 9,000 100,000 11,040
Executive Officer 1996(4) 123,200 -- 4,500 -- 4,691
1995 246,400 61,600 4,680 175,000 7,882
Glenn P. Cato..................................... 1998 207,000 -- 9,000 110,000 14,335
Senior Executive Vice 1997 180,000 54,000 9,000 25,000 13,296
President and Chief 1996(4) 97,500 10,000 3,000 -- --
Operating Officer(5) 1995 172,500 20,000 6,000 30,000 3,158
Thomas V. Croal................................... 1998 200,000 33,333 9,000 165,000 12,748
Executive Vice President, 1997 175,230 53,000 9,000 25,000 9,804
Chief Financial Officer and 1996(4) 87,615 -- 4,500 -- 2,669
Secretary (6) 1995 175,230 43,808 4,742 125,000 2,669
Robert N. LaDouceur............................... 1998 181,500 -- 7,800 60,000 14,638
Senior Vice President- 1997 165,000 36,000 7,800 10,000 8,169
Operations 1996(4) 82,500 10,000 3,900 -- --
1995 165,000 20,000 6,400 30,000 3,072
Michael A. Boylan................................. 1998 188,250 -- 7,800 60,000 7,715
Executive Vice President and Chief 1997 165,000 36,000 7,800 10,000 5,509
Development Officer 1996(4) 81,865 25,000 3,900 -- --
1995 165,000 20,000 6,400 30,000 --
</TABLE>
- ------------------------
(1) Includes amounts for periods during which the chief executive officer and
the Other Executive Officers of the Company whose aggregate cash
compensation exceeded $100,000 served as executive officers of IHC or MHC,
which are now wholly owned subsidiaries of the Company.
(2) Annual bonuses are earned and accrued during the fiscal years indicated, and
paid subsequent to the end of each fiscal year.
(3) Amounts of Other Annual Compensation include perquisites (auto allowances
and commissions for contract awards and renewals) and amounts of All Other
Compensation include (i) amounts contributed to the Company's, MHC's or
IHC's 401(k) profit sharing plans, as the case may be, (ii) specified
premiums on executive split-dollar insurance arrangements and (iii)
specified premiums on executive health insurance arrangements, for the chief
executive officer and the Other Executive Officers of the Company.
(4) Six months ending June 30, 1996.
(5) Mr. Cato's employment by the Company was terminated as of July 21, 1998.
(6) On July 21, 1998 Mr. Croal became Senior Executive Vice President and Chief
Operating Officer of the Company. He remained Chief Financial Officer of the
Company and was replaced as Secretary of the Company.
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<PAGE>
COMPENSATION OF DIRECTORS
The members of the Board who are not employees of the Company receive an
annual director fee of $15,000 and options to purchase the Company's common
stock for their services as directors, as provided in the Company's 1996
Directors' Stock Option Plan ("Directors' Plan"). On March 28, 1996, the Company
entered into a consulting agreement with Mr. Egger pursuant to which Mr. Egger
receives $85,000 per year for services rendered to the Company in connection
with its acquisition and financing activities. See "Employment Agreements and
Severance Agreements" and "Certain Relationships and Related Transactions."
The Directors' Plan provided for the automatic grant at the effective time
of the merger of each of AHS and MHC into wholly owned subsidiaries of the
Company ("Merger") to each non-employee director then serving on the Board of an
option to purchase 15,000 shares of the Company's common stock at an exercise
price equal to the fair market value of such stock on the date of the grant. In
addition, each new director of the Company who commences service after the
effective time of the Merger will be granted an option to purchase 15,000 shares
of the Company's common stock. The initial grants vest monthly on a pro rata
basis over a three-year period, so long as the individual remains a director of
the Company or is an employee or independent contractor of the Company or any of
its subsidiaries. At the end of such three-year period and annually thereafter
during the term of the Directors' Plan, so long as the individual remains a
director, he or she will be granted an option to purchase 5,000 shares of the
Company's common stock. These additional grants vest monthly over one year on
the same terms as the initial grants. These options expire ten years from the
date of grant. In accordance with this formula, on June 26, 1996, each of
Messrs. Egger, Habas and Pantello were granted options to purchase 15,000 shares
of the Company's common stock at an exercise price of $5.37 per share. In
addition, on July 19, 1996, Mr. Chamberlain was granted an option to purchase
15,000 shares of the Company's common stock at an exercise price of $7.00 per
share.
On July 17, 1997, the Company issued to each of Messrs. Chamberlain, Egger,
Habas and Pantello a warrant to purchase 15,000 shares of the Company's common
stock at an exercise price of $4.56 per share, which was the fair market value
of the Company's common stock on such date. The warrants vest cumulatively at
the rate of 416.66 shares per month and are exercisable at any time up to July
17, 2000.
In lieu of an automatic grant, under the Directors' Plan, to each of the
Series B Directors and the Series C Director of an option to purchase 15,000
shares of the Company's common stock, at the request of the Preferred Stock
Directors (as defined below), upon the date each of them became a Preferred
Stock Director, the Company issued to an affiliate of Carlyle a warrant to
purchase 30,000 shares of the Company's common stock at an exercise price of
$7.25 per share and GE a warrant to purchase 15,000 shares of the Company's
common stock at an exercise price of $10.00 per share. The Carlyle warrant vests
cumulatively at the rate of 833.33 shares per month and the GE warrant vests
cumulatively at the rate of 416.67 shares per month. The Carlyle warrant is
exercisable at any time up to October 14, 2000 and the GE warrant is exercisable
at any time up to November 20, 2000. See "Transactions With Holders of Preferred
Stock".
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<PAGE>
OPTION GRANTS
The following table sets forth information concerning options granted to
each of the chief executive officer and the Other Executive Officers of the
Company during the year ended June 30, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (2)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ------------------------
NAME GRANTED IN FISCAL YEAR SHARE (1) DATE 5% 10%
- ---------------------------------- ----------- ----------------- ----------- ----------- ---------- ------------
E. Larry Atkins................... 50,000 5% $ 4.56 07/17/07(3) $ 143,388 $ 363,373
150,000 16% 8.37 11/07/07(4) 789,577 2,000,944
Glenn P. Cato..................... 30,000 3% 4.56 07/17/07(3) 86,033 218,024
80,000 8% 8.37 11/07/07(4) 421,108 1,067,170
Thomas V. Croal................... 25,000 3% 4.56 07/17/07(3) 71,694 181,687
140,000 14% 8.37 11/07/07(4) 736,939 1,867,547
Robert N. LaDouceur............... 10,000 1% 4.56 07/17/07(3) 28,678 72,675
50,000 5% 8.37 11/07/07(4) 263,192 666,981
Michael A. Boylan................. 10,000 1% 4.56 07/17/07(3) 28,678 72,675
50,000 5% 8.37 11/07/07(4) 263,192 666,981
</TABLE>
- ------------------------
(1) All options were granted at fair market value (the closing price reported on
The Nasdaq SmallCap Market for the Company's common stock) on the date of
grant.
(2) Potential realizable value is determined by taking the exercise price per
share and applying the stated annual appreciation rate compounded annually
for the remaining term of the options (ten years), subtracting the exercise
price per share at the end of the period and multiplying the remaining
number by the number of options granted. Actual gains, if any, on stock
option exercises and the Company's common stock holdings are dependent on
the future performance of the Company's common stock and overall stock
market conditions.
(3) Options are exercisable starting twelve (12) months after the grant date,
with 25% of the shares becoming exercisable at that time and with an
additional 25% of the shares becoming exercisable on each successive
anniversary date, with full vesting occurring on the fourth anniversary
date. The options were granted for a term of ten years, subject to earlier
termination in certain events related to termination of employment.
(4) 50% of the options are exercisable starting twelve (12) months after the
grant date, with 33% of the shares becoming exercisable at that time and
with in additional 33% of the shares becoming exercisable on each successive
anniversary date. The remaining 50% of the options are exercisable 7 years
after the grant date, with 33% of the shares becoming exercisable at that
time and with an additional 33% of the shares becoming exercisable on each
successive anniversary date, with acceleration in certain circumstances. The
options were granted for a term of ten years, subject to earlier termination
in certain events related to termination of employment.
OPTION EXERCISES DURING FISCAL 1998 AND FISCAL YEAR-END VALUES
During the year ended June 30, 1998, neither of the chief executive officer
nor the Other Executive Officers of the Company (except Mr. Cato) exercised any
stock options. The following table sets forth information with respect to the
stock options exercised by Mr. Cato during fiscal 1998 and the unexercised stock
options to purchase the Company's common stock granted, under (i) MHC's and
AHS's stock option
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<PAGE>
plans and assumed by the Company pursuant to the Merger, and (ii) the Company's
1996 Employee Stock Option Plan and (iii) the Company's 1997 Management Stock
Option Plan to the chief executive officer and the Other Executive Officers of
the Company as of June 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE- MONEY
ACQUIRED HELD AT JUNE 30, 1998 OPTIONS AT JUNE 30, 1998(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Larry Atkins......................... -- -- 39,000 278,500 $18,375 $1,032,875
Glenn P. Cato........................... 34,385 $487,011(2) 24,190 128,750 195,819 460,475
Thomas V. Croal......................... -- -- 16,250 186,250 13,125 592,950
Robert N. LaDouceur..................... -- -- 41,370 67,500 408,165 214,650
Michael A. Boylan....................... -- -- 41,370 67,500 408,165 214,650
</TABLE>
- ------------------------
(1) Based on the closing price reported on The Nasdaq SmallCap Market for the
Company's common stock on that date of $10.75 per share.
(2) The value realized is the fair market value of the shares on the date of
exercise less the exercise price.
INDEMNIFICATION AGREEMENTS
The Company has entered into separate indemnification agreements with each
of its directors and executive officers that could require the Company, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors and executive officers and to
advance expenses incurred by them as a result of any proceedings against them as
to which they could be indemnified.
The Recapitalization agreements also contain provisions for the
indemnification of the Company's directors under certain circumstances. The
agreements pursuant to which Carlyle and GE acquired Series B Preferred Stock
and Series C Preferred Stock, respectively, provide that the Company will
indemnify, defend and hold harmless Carlyle and GE, as the case may be, and
their respective affiliates, directors, officers, advisors, employees and agents
to the fullest extent lawful from and against all demands, losses, damages,
penalties, claims, liabilities, obligations, actions, causes of action and
reasonable expenses ("Losses") arising out of the agreements or the related
transactions or arising by reason of or resulting from the breach of any
representation, warranty, covenant or agreement of the Company contained in such
agreements for the period for which such representation or warranty survives;
provided, however, that the Company does not have any liability to indemnify
Carlyle or GE with respect to Losses arising from the bad faith or gross
negligence of the Carlyle or GE indemnified party. The Recapitalization
agreements provide that no claim may be made by Carlyle or GE against the
Company for indemnification until the aggregate dollar amount of all Losses
incurred by Carlyle or GE, as applicable, exceeds $250,000 and the
indemnification obligations of the Company shall be effective only until the
dollar amount paid in respect of the Losses incurred by Carlyle or GE, as
applicable, and indemnified against aggregates to an amount equal to $25
million, except with respect to Losses resulting from the breaches of certain
representations or covenants, which are unlimited in amount.
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<PAGE>
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
The Company has entered into executive employment agreements with its chief
executive officer, the Other Executive Officers and Messrs. Cragin, Drazba and
Stone and Ms. MacFarlane and Ms. MacNiven-Young, which provide for rolling
twelve (12) month periods of employment, and severance compensation equal to 12
months of compensation at his or her annual salary rate then in effect, in the
event the executive's employment is terminated (i) because of physical or mental
disability, (ii) because of discretionary action of the Board or (iii)
voluntarily by the executive due to a "Change of Control" and in the case of Mr.
Stone and Ms. MacNiven-Young voluntarily by them for "good reason" as defined in
their employment agreements. A "Change of Control" will have occurred if the
Company or its stockholders enter into an agreement to dispose of, whether by
sale, exchange, merger, consolidation, reorganization, dissolution or
liquidation, (a) not less than 80% of the assets of the Company or (b) a portion
of the Company's outstanding common stock such that one person or "group" (as
defined by the SEC) owns, of record or beneficially, not less than 50% of the
Company's outstanding common stock. In the event that the executive's employment
is terminated for cause, he or she has no right to receive any severance
compensation under his or her employment agreement. In consideration for such
severance compensation, each executive has agreed not to solicit, entice, divert
or otherwise contact any customer or employee of InSight for any provision of
services which constitute "Company Business" during the period that the
executive is receiving severance compensation or for a period of 12 months after
the executive's termination of employment, whichever is later. "Company
Business" means the development and operation, at times together with other
healthcare providers, of outpatient facilities which provide diagnostic services
in the areas of general radiology, MRI, cardiology and neurosciences utilizing
the related equipment and computer programs and software and various
distribution methods and investment structures.
Mr. Egger, a director and chairman of the board, has entered into a
consulting agreement with InSight providing for compensation at the rate of
$85,000 per year. Mr. Egger's agreement provides for severance compensation
equal to 12 months of compensation in the event the agreement is terminated as a
result of (i) Mr. Egger becoming physically or mentally disabled, (ii)
discretionary action of the Board, or (iii) a corporate reorganization that has
the effect of diminishing or impairing Mr. Egger's consulting responsibilities.
Pursuant to his executive employment agreement, Mr. Cato will receive
severance equal to twelve months salary at his level of compensation as of July
21, 1998 in connection with his termination of employment.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership, reported to the Company
as of June 30, 1998, of the Company's common stock, including shares as to which
a right to acquire ownership exists (for example, through the exercise of stock
options and warrants and conversions of Preferred Stock within the meaning of
Rule 13d-3(d)(1) under the Exchange Act), of (i) each person known to the
Company to own
76
<PAGE>
beneficially 5% or more of the Company's common stock, (ii) each director of the
Company, (iii) the Company's executive officers, and (iv) all directors and
executive officers, as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESSES OF BENEFICIAL OWNERSHIP PERCENTAGE OF COMMON STOCK
BENEFICIAL OWNERS OF COMMON STOCK (1) BENEFICIALLY OWNED (1)
- --------------------------------------------------------------- -------------------- ---------------------------
<S> <C> <C>
Carlyle (2) ................................................... 3,243,408 53.5%
1001 Pennsylvania Avenue, N.W.
Suite 220
Washington, D.C. 20004
General Electric Company (3) .................................. 3,591,331 56.0%
20825 Swenson Drive
Suite 100
Waukesha, WI 53186
E. Larry Atkins (4) ........................................... 63,600 2.2%
4400 MacArthur Boulevard
Suite 800
Newport Beach, CA 92660
Grant R. Chamberlain (5) ...................................... 16,250 *
620 Fifth Avenue
Suite 2950
New York, NY 10111
Frank E. Egger (6) ............................................ 62,552 2.2%
10301 S.W. 13th Street
Pembroke Pines, FL 33025
Leonard H. Habas (7) .......................................... 59,091 2.0%
501 S. New York Avenue
Suite 210
Winter Park, FL 32789
David W. Dupree (8) ........................................... 0 0
1001 Pennsylvania Avenue, N.W.
Suite 220 South
Washington, D.C. 20004
Glenn A. Youngkin (9) ......................................... 1,000 *
1001 Pennsylvania Avenue, N.W.
Suite 220 South
Washington, D.C. 20004
Roz Kovens (10) ............................................... 149,079 5.0%
9999 Collins Avenue #1K
Bal Harbour, FL 33154
Ronald G. Pantello (11) ....................................... 34,606 1.2%
60 Madison Avenue
New York, NY 10010
Glenn P. Cato (12) ............................................ 66,371 2.0%
400 MacArthur Boulevard
Suite 800
Newport Beach, CA 92660
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C>
Thomas V. Croal (13) .......................................... 24,000 *
4400 MacArthur Boulevard
Suite 800
Newport Beach, CA 92660
Michael A. Boylan (14) ........................................ 43,870 1.5%
110 Gibraltar Road
Horsham, PA 18901
Robert N. LaDouceur (15) ...................................... 43,870 1.5%
11011 King Street
Suite 240
Overland Park, KS 66210
Michael D. Cragin (16) ........................................ 6,250 *
4400 MacArthur Boulevard
Suite 800
Newport Beach, CA 92660
Brian G. Drazba (17) .......................................... 4,500 *
4400 MacArthur Boulevard
Suite 800
Newport Beach, CA 92660
Deborah M. MacFarlane (18) .................................... 6,750 *
4400 MacArthur Boulevard
Suite 800
Newport Beach, CA 92660
Brian P. Stone (19) ........................................... 8,930 *
74 Batterson Park Road
Farmington, CT 06032
All directors and executive officers as a group (15 persons) 434,140 13.4%
(20).........................................................
</TABLE>
- ------------------------
* Less than 1% of the Company's outstanding common stock.
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any security that such person has the right to acquire within
60 days after June 30, 1998.
(2) The information in the table is based upon the Schedule 13D filed with the
Commission by Carlyle on October 24, 1997. Represents shares of the
Company's common stock issuable upon conversion of all 25,000 shares of
Series B Preferred Stock (convertible into 2,985,075 shares of the Company's
common stock) and exercise of certain warrants ("Carlyle Warrants")
(exercisable for 250,000 shares of the Company's common stock) held by
Carlyle, which is comprised of the entities listed in the following
sentence. The cumulative Carlyle ownership figure represents (i) 3,235,075
shares beneficially owned by Carlyle Partners II, L.P., including 8,208
shares of Series B Preferred Stock (convertible into 980,028 shares of the
Company's common stock) and Carlyle Warrants to purchase 82,077 shares of
the Company's common stock with respect to which it has disposal power, and
3,235,075 shares with respect to which it shares voting power; (ii)
3,235,075 shares beneficially owned by Carlyle Partners III, L.P., including
375 shares of Series B Preferred Stock (convertible into 44,732 shares of
the Company's common stock) and Carlyle Warrants to purchase 3,764 shares of
the Company's common stock with respect to which it has disposal power, and
3,235,075 shares with respect to which it shares voting power; (iii) 896,526
shares beneficially owned by Carlyle International Partners II,
78
<PAGE>
L.P., including 6,928 shares of Series B Preferred Stock (convertible into
827,244 shares of the Company's common stock) and Carlyle Warrants to
purchase 69,282 shares of the Company's common stock with respect to which
it has disposal power and shares voting power; (iv) 48,304 shares
beneficially owned by Carlyle International Partners III, L.P., including
373 shares of Series B Preferred Stock (convertible into 44,571 shares of
the Company's common stock) and Carlyle Warrants to purchases 3,733 shares
of the Company's common stock with respect to which it has disposal power
and shares voting power; (v) 201,857 shares beneficially owned by C/S
International Partners, including 1,559 shares of Series B Preferred Stock
(convertible into 186,258 shares of the Company's common stock) and Carlyle
Warrants to purchase 15,599 shares of the Company's common stock with
respect to which it has disposal power and shares voting power; (vi) 1,115
shares beneficially owned by Carlyle Investment Group, L.P., including 9
shares of Series B Preferred Stock (convertible into 1,029 shares of the
Company's common stock) and Carlyle Warrants to purchase 86 shares of the
Company's common stock with respect to which it has disposal power and
shares voting power; (vii) 118,902 shares beneficially owned by
Carlyle-InSight International Partners, L.P., including 919 shares of Series
B Preferred Stock (convertible into 109,714 shares of the Company's common
stock) and Carlyle Warrants to purchase 9,178 shares of the Company's common
stock with respect to which it has disposal power and shares voting power;
(viii) 3,235,075 shares beneficially owned by Carlyle-InSight Partners, L.P.
including 3,181 shares of Series B Preferred Stock (convertible into 379,863
shares of the Company's common stock) and Carlyle Warrants to purchase
31,813 shares of the Company's common stock with respect to which it has
disposal power and 3,235,075 shares with respect to which it shares voting
power; (ix) 446,404 shares beneficially owned by Carlyle Investment
Management, L.L.C. acting as investment advisor and manager with
responsibility to invest certain assets of the State Board of Administration
of the State of Florida ("State Board"), including 3,448 shares of Series B
Preferred Stock (convertible into 411,658 shares of the Company's common
stock) and Carlyle Warrants to purchase 34,746 shares of the Company's
common stock with respect to which it has disposal power and shares voting
power; and (x) warrants to purchase 8,333 shares of the Company's common
stock at an exercise price of $7.25 per share owned by TC Group Management,
LLC. Does not include warrants to purchase 21,667 shares of the Company's
common stock at an exercise price of $7.25 per share, owned by TC Group
Management, LLC, which are not currently exercisable. TC Group, L.L.C. may
be deemed to share voting and disposal power with respect to, and therefore
be the beneficial owner of 3,235,075 shares of the Company's common stock as
the general partner of Carlyle Partners II, L.P., Carlyle Partners III,
L.P., Carlyle Investment Group, L.P., and Carlyle-InSight Partners, L.P.,
and as the managing partner of Carlyle International Partners II, L.P.,
Carlyle International Partners III, L.P., C/S International Partners, and
Carlyle-InSight International Partners II, L.P. TCG Holdings, L.L.C., as a
member holding a controlling interest in TC Group, L.L.C., may be deemed to
share all rights herein described belonging to TC Group, L.L.C. Furthermore,
because certain managing members of TCG Holdings, L.L.C., are also managing
members of Carlyle Investment Management, L.L.C., Carlyle Investment
Management, L.L.C. may be deemed to be part of Carlyle and consequently, TCG
Holdings, L.L.C. may be deemed the beneficial owner of the shares of the
Company's common stock controlled by Carlyle Investment Management, L.L.C.
The principal business address of TC Group, L.L.C. and TCG Holdings, L.L.C.
is c/o The Carlyle Group, 1001 Pennsylvania Avenue, N.W., Suite 220 South,
Washington, D.C. 20004. The principal business address of Carlyle Partners
II, L.P., Carlyle Partners III, L.P., Carlyle Investment Group, L.P.,
Carlyle-InSight Partners, L.P., and Carlyle Investment Management, L.L.C. is
Delaware Trust Building, 900 Market Street, Suite 200, Wilmington, Delaware
19801. The principal business address of Carlyle International Partners II,
L.P., Carlyle International Partners III, L.P., C/S International Partners,
and Carlyle-InSight International Partners, L.P. is Coutts & Co., P.O. Box
707, Cayman Islands, British West Indies. Carlyle owns all of the
outstanding shares of the Series B Preferred Stock.
(3) The information in the table is based upon Amendment No. 1 to Schedule 13D
filed by GE with the Commission on October 23, 1997. Represents shares of
the Company's common stock issuable upon
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<PAGE>
(i) conversion of all 27,953 shares of Series C Preferred Stock (convertible
into 3,337,581 shares of the Company's common stock) held by GE, (ii)
exercise of certain warrants ("GE Warrants") (exercisable for 250,000 shares
of the Company's common stock), and (iii) warrants to purchase 3,750 shares
of the Company's common stock at an exercise price of $10.00 per share. Does
not include warrants to purchase 11,250 shares of the Company's common stock
at an exercise price of $10.00 per share, which are not currently
exercisable. GE owns all of the outstanding shares of Series C Preferred
Stock.
(4) Includes (i) options to purchase 14,000 shares of the Company's common stock
at an exercise price of $2.50 per share, (ii) options to purchase 25,000
shares of the Company's common stock at an exercise price of $6.25 per share
and (iii) options to purchase 2,500 shares of the Company's common stock at
an exercise price of $4.56 per share. Does not include (i) options to
purchase 3,500 shares of the Company's common stock at an exercise price of
$2.50 per share, (ii) options to purchase 75,000 shares of the Company's
common stock at an exercise price of $6.25 per share, (iii) options to
purchase 37,500 shares of the Company's common stock at an exercise price of
$4.56 per share, and (iv) options to purchase 150,000 shares of the
Company's common stock at an exercise price of $8.37 per share, which are
not currently exercisable.
(5) Includes (i) options to purchase 10,417 shares of the Company's common stock
at an exercise price of $7.00 per share and (ii) warrants to purchase 5,833
shares of the Company's common stock at an exercise price of $4.56 per
share. Does not include options to purchase 4,583 shares of the Company's
common stock at an exercise price of $7.00 per share and (ii) warrants to
purchase 9,167 shares of the Company's common stock at an exercise price of
$4.56 per share, which are not currently exercisable.
(6) Includes (i) options to purchase 10,833 shares of the Company's common stock
at an exercise price of $5.37 per share, (ii) options to purchase 2,400
shares of the Company's common stock at an exercise price of $2.50 per
share, (iii) options to purchase 2,000 shares of the Company's common stock
at an exercise price of $16.20 per share, (iv) warrants to purchase 2,268
shares of the Company's common stock at an exercise price of $5.64 per
share, and (v) warrants to purchase 5,833 shares of the Company's common
stock at an exercise price of $4.56 per share. Does not include (i) options
to purchase 4,167 shares of the Company's common stock at an exercise price
of $5.37 per share, (ii) options to purchase 600 shares of the Company's
common stock at an exercise price of $2.50 per share and (iii) warrants to
purchase 9,167 shares of the Company's common stock at an exercise price of
$4.56 per share, which are not currently exercisable.
(7) Includes (i) options to purchase 10,833 shares of the Company's common stock
at an exercise price of $5.37 per share, (ii) options to purchase 4,485
shares of the Company's common stock at an exercise price of $15.64 per
share, (iii) options to purchase 8,970 shares of the Company's common stock
at an exercise price of $1.25 per share, (iv) options to purchase 8,970
shares of the Company's common stock at an exercise price of $0.10 per share
and (v) warrants to purchase 5,833 shares of the Company's common stock at
an exercise price of $4.56 per share. Does not include (i) options to
purchase 4,167 shares of the Company's common stock at an exercise price of
$5.37 per share and (ii) warrants to purchase 9,167 shares of the Company's
common stock at an exercise price of $4.56 per share, which are not
currently exercisable.
(8) Mr. Dupree is a managing member of TCG Holdings, L.L.C. Mr. Dupree's
interest in TCG Holdings, L.L.C. is not controlling and thus Mr. Dupree
expressly disclaims any beneficial ownership in the Company's common stock
beneficially owned by TCG Holdings, L.L.C.
(9) Mr. Youngkin is an employee of The Carlyle Group and holds no economic
interest in either TC Group L.L.C. or TCG Holdings, L.L.C., and as such
expressly disclaims any beneficial ownership in the Company's common stock
beneficially owned by Carlyle.
(10) The information in the table is based upon Schedule 13G filed with the
Commission on March 12, 1998. Includes (i) options to purchase 600 shares of
the Company's common stock at an exercise price
80
<PAGE>
of $2.50 per share and (ii) by virtue of her status as personal
representative of the Estate of Cal Kovens, the 1,004 shares of the
Company's common stock beneficially owned thereby. Does not include options
to purchase 600 shares at an exercise price of $2.50 per share, which are
not currently exercisable.
(11) Includes (i) options to purchase 10,417 shares of the Company's common
stock at an exercise price of $5.37 per share, (ii) options to purchase
8,970 shares of the Company's common stock at an exercise price of $1.25 per
share, (iii) options to purchase 8,970 shares of the Company's common stock
at an exercise price of $0.10 per share and (iv) warrants to purchase 5,417
shares of the Company's common stock at an exercise price of $4.56 per
share. Does not include (i) options to purchase 4,583 shares of the
Company's common stock at an exercise price of $5.37 per share and (ii)
warrants to purchase 9,583 shares of the Company's common stock at an
exercise price of $4.56 per share, which are not currently exercisable.
(12) Includes (i) options to purchase 17,940 shares of the Company's common
stock at an exercise price of $2.50 per share, (ii) options to purchase
6,250 shares of the Company's common stock at an exercise price of $6.25 per
share and (iii) options to purchase 7,500 shares of the Company's common
stock at an exercise price of $4.56 per share.
(13) Includes (i) options to purchase 10,000 shares of the Company's common
stock at an exercise price of $2.50 per share and (ii) options to purchase
6,250 shares of the Company's common stock at an exercise price of $6.25 per
share. Does not include (i) options to purchase 18,750 shares of the
Company's common stock at an exercise price of $6.25 per share, (ii) options
to purchase 25,000 shares of the Company's common stock at an exercise price
of $4.56 per share, (iii) options to purchase 2,500 shares of the Company's
common stock at $2.50 per share, and (iv) options to purchase 140,000 shares
of the Company's common stock at an exercise price of $8.37 per share, which
are not currently exercisable.
(14) Includes (i) options to purchase 11,960 shares of the Company's common
stock at an exercise price of $0.42 per share, (ii) options to purchase
8,970 shares of the Company's common stock at an exercise price of $0.10 per
share, (iii) options to purchase 17,940 shares of the Company's common stock
at an exercise price of $0.84 per share and (iv) options to purchase 2,500
shares of the Company's common stock at an exercise price of $6.25 per
share. Does not include (i) options to purchase 7,500 shares of the
Company's common stock at an exercise price of $6.25 per share, (ii) options
to purchase 10,000 shares of the Company's common stock at an exercise price
of $4.56 per share, and (iii) options to purchase 50,000 shares of the
Company's common stock at an exercise price of $8.37 per share, which are
not currently exercisable.
(15) Includes (i) options to purchase 11, 960 shares of the Company's common
stock at an exercise price of $0.42 per share, (ii) options to purchase
8,970 shares of the Company's common stock at an exercise price of $0.10 per
share, (iii) options to purchase 17,940 shares of the Company's common stock
at an exercise price of $0. 84 per share, (iv) options to purchase 2,500
shares of the Company's common stock at an exercise price of $6.25 per share
and (v) options to purchase 2,500 shares of the Company's common stock at an
exercise price of $4.56 per share. Does not include (i) options to purchase
7,500 shares of the Company's common stock at an exercise price of $6.25 per
share, (ii) options to purchase 7,500 shares of the Company's common stock
at an exercise price of $4.56 per share, and (iii) options to purchase
50,000 shares of the Company's common stock at an exercise price of $8.37
per share, which are not currently exercisable.
(16) Includes (i) options to purchase 3,750 shares of the Company's common stock
at an exercise price of $6.25 per share and (ii) options to purchase 2,500
shares of the Company's common stock at an exercise price of $4.56 per
share. Does not include (i) options to purchase 11,250 shares of the
Company's common stock at an exercise price of $6.25 per share, (ii) options
to purchase 7,500 shares of the Company's common stock at an exercise price
of $4.56 per share, and (iii) options to purchase
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30,000 shares of the Company's common stock at an exercise price of $8.37
per share, which are not currently exercisable.
(17) Includes (i) options to purchase 2,000 shares of the Company's common stock
at an exercise price of $6.25 per share and (ii) options to purchase 2,500
shares of the Company's common stock at an exercise price of $4.56 per
share. Does not include (i) options to purchase 6,000 shares of the
Company's common stock at an exercise price of $6.25 per share and (ii)
options to purchase 7,500 shares of the Company's common stock at an
exercise price of $4.56 per share, which are not currently exercisable.
(18) Includes (i) options to purchase 3,750 shares of the Company's common stock
at an exercise price of $6.25 per share and (ii) options to purchase 2,500
shares of the Company's common stock at an exercise price of $4.56 per
share. Does not include (i) options to purchase 11,250 shares of the
Company's common stock at an exercise price of $6.25 per share and (ii)
options to purchase 7,500 shares of the Company's common stock at an
exercise price of $4.56 per share, which are not currently exercisable.
(19) Includes options to purchase 8,930 shares of the Company's common stock at
an exercise price of $12.57 per share. Does not include options to purchase
98,230 shares of the Company's common stock at an exercise price of $12.57
per share, which are not currently exercisable.
(20) Assumes the exercise in full of options or warrants described in footnotes
(4) through (7) and (11) through (19) that are currently exercisable or that
will become exercisable within 60 days of June 30, 1998.
Except as otherwise noted, the Company believes that each of the
stockholders listed in the table above has sole voting and dispositive power
over all shares owned.
POSSIBLE FUTURE BOARD CHANGES
The Company's common stock holders currently are entitled to elect a
majority of the Board. Under certain circumstances, the holders of the Series D
Preferred Stock (which is issuable only on conversion of the Series B Preferred
Stock and the Series C Preferred Stock) would be entitled to elect a majority of
the Board. If, at any time on or after October 22, 1998 ("Trigger Date"), a
majority of the holders of each of the Series B Preferred Stock and the Series C
Preferred Stock elect to convert such Stock into Series D Preferred Stock, then
all shares of Series B Preferred Stock and Series C Preferred Stock will
automatically be converted into shares of Series D Preferred Stock on the date
of such election ("Conversion Date"). Immediately following such conversion, the
number of members of the Board will be increased by an additional number of
directors ("Conversion Directors") such that the percentage of the total Board
represented by the Conversion Directors and the Preferred Stock Directors
("Series D Directors") would correspond to the percentage of Common Stock owned
by the Series D Preferred Stock holders on an as-if-converted basis, provided
that the Series D Directors shall constitute less than two-thirds of the Board.
In such event, the Preferred Stock Directors would remain on the Board and the
vacancies created for the Conversion Directors would be filled by the Series D
Preferred Stock holders. Assuming conversion of all of the outstanding Series B
Preferred Stock and Series C Preferred Stock, the percentage of the Company's
outstanding common stock currently owned by the Series B Preferred Stock holders
is approximately 33% and the percentage of the Company's common stock currently
owned by the Series C Preferred Stock holders is approximately 37%. If such
Preferred Stock were converted into Series D Preferred Stock on or after the
Trigger Date, the aggregate percentage of the Company's common stock owned by
the Series D Preferred Stock holders would be approximately 70%. Thus, as a
result of such conversion, designees of the Series D Preferred Stock holders
would constitute a majority (but less than two-thirds) of the Board.
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The holders of Series D Preferred Stock will have the right to vote with the
holders of the Company's common stock with respect to all matters submitted to a
stockholder vote except, until the second annual meeting of stockholders after
the Conversion Date, for the election of directors. At and after the second
annual stockholders meeting, the positions of all directors whose terms have
expired will be subject to election by holders of the Company's common stock and
Series D Preferred Stock voting together as a class, with each share of Series D
Preferred Stock having the number of votes equal to the number of shares of the
Company's common stock into which such share is then convertible.
Notwithstanding the foregoing, if the Conversion Date is prior to October 14,
1999, then from the Conversion Date until the second subsequent annual
stockholders meeting, except as provided in the next sentence, none of the
following transactions may be effected by the Company, and neither Carlyle, GE
nor any other holder of Series D Preferred Stock shall participate in such
transactions, if any transferee of Carlyle or GE or any other person referred to
in the following clauses beneficially owns five percent (5%) or more of the
Company's voting shares: (i) any merger or consolidation of the Company or any
of its subsidiaries with or into such person; (ii) any sale, lease, exchange or
other disposition of all or any substantial part of the assets of the Company or
any of its subsidiaries to such other person; (iii) the issuance or delivery of
any voting securities of the Company or any of its subsidiaries to such other
person in exchange for cash, other assets or securities, or a combination
thereof; or (iv) any dissolution or liquidation of the Company. The foregoing
prohibition shall not apply with respect to a transaction approved by (i) at
least 80% of the Company's outstanding voting shares (which includes the
Company's common stock and the Series D Preferred Stock) or (ii) at least
two-thirds of the Company's directors (which must include, to the extent still a
director, either (A) the Joint Director (as defined herein), if such Joint
Director served in such position as of the Conversion Date or has been approved
by a majority of the directors who were Common Stock Directors (as defined
herein) as of the Conversion Date or (B) at least one director who was a Common
Stock Director prior to the Conversion Date). See "Description of Preferred
Stock."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KOVENS TRANSACTIONS
In November 1994, AHS issued Cal Kovens, who was a director of AHS until his
death on February 6, 1995, a warrant to purchase 200,000 shares of AHS common
stock at $0.25 per share in consideration of certain Gamma Knife financing
activities which Mr. Kovens assisted in facilitating. Pursuant to the terms of
the Merger, the warrant became a warrant to purchase 20,000 shares of the
Company's common stock at the exercise price of $2.50 per share. The warrant was
exercised by the estate of Mr. Kovens, of which Roz Kovens, spouse of Mr.
Kovens, is the personal representative, in November 1997. In addition, a loan to
a wholly owned subsidiary of AHS was secured by a letter of credit of $400,000
which was guaranteed by the estate of Mr. Kovens until September 30, 1997, when
the guarantee expired. See "--Transactions with Holders of AHS Series B
Preferred Stock."
TRANSACTIONS WITH FRANK E. EGGER
Since July 1, 1996, Mr. Egger, chairman of the Board, has been and continues
to be paid $85,000 per year for acquisition and financing activities pursuant to
a consulting agreement. In the event the agreement is terminated as a result of
(i) Mr. Egger becoming physically or mentally disabled, (ii) discretionary
action of the Board or (iii) a corporate reorganization that has the effect of
diminishing or impairing Mr. Egger's consulting responsibilities, he is entitled
to severance compensation equal to twelve months of compensation. See
"--Transactions with Holders of AHS Series B Preferred Stock."
TRANSACTIONS WITH GE
GE, as the primary creditor of AHS and MHC, had from time to time granted
AHS and MHC certain financial accommodations with respect to certain loans and
leases. In exchange for such accommodations, AHS and MHC issued certain
considerations to GE. As a prerequisite to the consummation of the Merger,
certain financial accommodations were provided by GE, the primary creditor of
each of AHS and MHC, and its affiliates. As a result, certain debt and operating
lease obligations of AHS and MHC were reduced in exchange for, among other
things, the issuance to GE immediately prior to the consummation of the Merger
of AHS Series C Preferred Stock and MHC Series B Preferred Stock. At the
effective time of the Merger, the AHS Series C Preferred Stock and MHC Series B
Preferred Stock issued to GE was converted into the right to receive such number
of shares of InSight Series A Preferred Stock which were convertible into the
Company's common stock representing approximately 48% of the Company's common
stock outstanding at the effective time of the Merger (after giving effect to
such conversion).
In addition, as part of the granting of certain financial accommodations
contemplated to be provided by GE, at the effective time of the Merger, warrants
previously issued to GE by AHS to acquire 1,589,072 shares of AHS common stock,
and warrants previously issued to GE by MHC to acquire 700,000 shares of MHC
common stock, were canceled without payment therefor. Furthermore, GE had the
right to receive for ten years annual payments ("Supplemental Service Fee")
under its maintenance agreements with the Company, AHS and MHC equal to 14% of
InSight pretax income, subject to certain adjustments, and further subject to
proportional reductions for certain post-Merger acquisitions. The Company
terminated the Supplemental Service Fee on October 14, 1997 as part of the
Recapitalization in exchange for the issuance to GE of 7,000 shares of Series C
Preferred Stock. In connection with the Recapitalization, the net proceeds from
the Carlyle investment were used to refinance a portion of the Company's
outstanding indebtedness to GE (approximately $20 million). At the initial
funding of the Senior Credit Facilities, all of the term loan facility was drawn
down to refinance all of the remaining GE indebtedness (approximately $50
million). In addition, the Company has purchased a majority of its MRI systems
from GE, through GEMS, and the Company currently leases a majority of its
diagnostic imaging and treatment systems from GEMS under a master lease
agreement, including 18 systems within a variable lease pool. See
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"Business--Operations--Equipment." GEMS also provides maintenance services with
respect to the Company's GE equipment.
TRANSACTIONS WITH HOLDERS OF AHS SERIES B PREFERRED STOCK
Pursuant to certain agreements among the Company, AHS and the holders of AHS
Series B Preferred Stock, including Mr. Egger, Roz Kovens and the estate of Cal
Kovens, the holders of the AHS Series B Preferred Stock agreed to waive any
rights to dividends, liquidation preferences, voting and redemption they might
have had in connection with the Merger and certain other rights. In
consideration therefor, upon the consummation of the Merger, the Company issued
to such holders, warrants to purchase an aggregate of 50,000 shares of the
Company's common stock (including 7,660 shares to Roz Kovens and 33,645 shares
to the estate of Mr. Kovens, which have since been exercised, and 2,268 shares
to Mr. Egger) at the exercise price of $5.64 per share, exercisable at any time
up to August 9, 2001. In addition, subject to certain conditions, the holders
have certain "piggy-back" registration rights to register the shares subject to
the warrants under the Securities Act.
TRANSACTIONS WITH SHATTUCK HAMMOND
On August 14, 1996, the Company entered into an agreement with Shattuck
Hammond, an investment banking firm located in New York in which a director of
the Company, Mr. Chamberlain, is a vice president, pursuant to which Shattuck
Hammond provides general strategic advisory and investment banking services. The
term of the agreement commenced July 1, 1996 and extended through December 31,
1997. The Company has agreed to extend the term of the agreement through
December 31, 1998. The Company is obligated to pay Shattuck Hammond $30,000 per
quarter. Shattuck Hammond also is entitled to separately negotiated fees for
certain mergers or acquisitions. The Company also issued Shattuck Hammond a
warrant to purchase 35,000 shares of the Company's common stock at an exercise
price of $5.50 per share, which vested cumulatively on a monthly basis over the
18 month term of the initial agreement. The warrant is now fully exercisable and
is exercisable at any time up to August 14, 2000. In addition, Shattuck Hammond
has certain "piggy-back" registration rights to register the shares subject to
the warrant under the Securities Act. In connection with the Recapitalization,
the Company paid Shattuck Hammond a fee of $500,000 for providing certain
advisory services.
TRANSACTIONS WITH HOLDERS OF PREFERRED STOCK
In lieu of an automatic grant, under the 1996 Directors' Stock Option Plan,
to each of the Series B Directors (appointed by Carlyle) and the Series C
Director (appointed by GE) of an option to purchase 15,000 shares of the
Company's common stock, at the request of such Preferred Stock Directors, upon
the date each of them became a Preferred Stock Director, the Company issued to
an affiliate of Carlyle a warrant to purchase 30,000 shares of the Company's
common stock at an exercise price of $7.25 per share and GE a warrant to
purchase 15,000 shares of the Company's common stock at an exercise price of
$10.00 per share. The Carlyle warrant vests cumulatively at the rate of 833.33
shares per month and the GE warrant vests cumulatively at the rate of 416.67
shares per month. The Carlyle warrant is exercisable at any time up to October
14, 2000 and the GE warrant is exercisable at any time up to November 20, 2000.
In connection with the Recapitalization, the Company paid to each of Carlyle
and GE a placement fee of $125,000, reimbursed Carlyle and GE an aggregate of
$500,000 for reasonable out-of-pocket expenses incurred and agreed to pay each
of Carlyle and GE an annual financial advisory fee equal to $50,000, payable
quarterly, for a two-year period.
TRANSACTIONS WITH BRIAN P. STONE
In connection with the acquisition by merger of Signal (the "Signal
Merger"), the Company paid to Mr. Stone approximately $2.9 million in cash in
consideration for tendering his shares of Signal's common
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stock in the Signal Merger. On May 18, 1998, at the consummation of the Signal
Merger, the Company and Mr. Stone entered into an employment agreement pursuant
to which Mr. Stone was appointed senior vice president-operations for an initial
term of one year. Thereafter, such employment agreement renews automatically for
additional one year terms unless terminated by either party pursuant to the
terms thereof. Under the terms of his employment agreement, Mr. Stone receives a
base salary of $165,000 per year, a stay bonus of $408,300 payable over four
years and a discretionary bonus the amount of which is based upon the financial
performance of the Company. Pursuant to his employment agreement, Mr. Stone also
received options to purchase 107,160 shares of the Company's common stock at
$12.57 per share. See "Security Ownership of Certain Beneficial Owners and
Management."
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DESCRIPTION OF SENIOR CREDIT FACILITIES
The Company entered into a Credit Agreement, dated as of October 14, 1997,
as amended on November 17, 1997, December 19, 1997, March 23, 1998 and June 12,
1998 (as so amended, the "Senior Credit Facilities"), among the Company, as the
Borrower, certain of the Company's subsidiaries named therein, as the
Guarantors, the financial institutions named therein, as the Lenders, and
NationsBank, N.A., as the Agent, pursuant to which the Company obtained a $150
million credit facility, composed of (a) a five-year $25 million revolving
credit facility, (b) a two-year $65 million acquisition facility with increasing
amortization over a five-year period and (c) a $60 million term loan facility
consisting of (i) a $20 million tranche with increasing amortization over a
five-year period and (ii) a $40 million tranche with increasing amortization
over a seven-year period. At March 31, 1998, approximately $8.3 million was
outstanding under the revolving credit facility, $2.9 million under the
acquisition facility and an aggregate of $59 million under the two term loan
facilities, for a total of $70.2 million outstanding under the Senior Credit
Facilities.
Concurrently with the issuance of the Outstanding Notes (the "Amendment
Date"), the Company amended the Senior Credit Facilities to, among other things,
(i) increase the acquisition facility from $65 million to $75 million, with a
two-year availability period and amortization over a five-year period from the
first anniversary of the Amendment Date, (ii) refinance and consolidate the
existing $20 million tranche term loan and $40 million tranche term loan into a
single $50 million term loan, with amortization over a six-year period from the
Amendment Date, and (iii) extend the termination date of the five-year $25
million revolving credit facility to the fifth anniversary of the Amendment
Date. The amendment also provided that, without consent of the Agent, advances
under the acquisition facility may not exceed $15 million with respect to any
single acquisition or $50 million for all acquisitions in any fiscal year of the
Company.
The Senior Credit Facilities contain customary representations and
warranties, affirmative and negative covenants and events of default.
Specifically, the Company is (i) obligated to maintain a number of covenants
keyed to the Company's financial conditions and performance, (ii) obligated to
limit liens on its assets to those incurred in the ordinary course of business
and for taxes and other similar obligations and (iii) subject to customary
covenants, including (A) disposition of assets only in the ordinary course of
business and generally at fair value and (B) restrictions on acquisitions,
mergers, consolidations, loans, leases, joint ventures, contingent obligations
and certain transactions with affiliates. The obligations of the Company under
the Senior Credit Facilities are secured by substantially all of the assets of
the Company, including a pledge of the capital stock of all of its subsidiaries,
in favor of the Agent. The Company's obligations are also guaranteed by certain
subsidiaries of the Company named in the Senior Credit Facilities and secured by
substantially all of the assets of such subsidiaries in favor of the Agent.
Specifically, the financial covenants of the Company were amended to require
the Company's total leverage ratio not to exceed 4.5:1, the senior leverage
ratio not to exceed 3.0:1, the interest coverage ratio not to be less than 2.0:1
and the fixed charge coverage ratio not to be less than 1.1:1, in each case
during the first two years after the Amendment Date, with certain adjustments
thereafter. Interest rates on the Senior Credit Facilities equal LIBOR plus 175
basis points, subject to a performance pricing.
The net proceeds of the issuance of the Outstanding Notes and the borrowing
under the term loan portion of the Senior Credit Facilities were or will be used
in part to repay all of the Company's outstanding indebtedness under the
acquisition facility and the revolving credit facility under the Senior Credit
Facilities. Upon consummation of the issuance of the Outstanding Notes, the
borrowing under the term loan portion of the Senior Credit Facilities and
application of the net proceeds therefrom, the acquisition facility and the
revolving credit facility became available to the Company in full for future
borrowings.
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DESCRIPTION OF NOTES
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS DESCRIPTION OF
NOTES TO (I) THE "AMENDED CREDIT AGREEMENT" REFER TO THE AMENDED CREDIT
AGREEMENT AND (II) THE "PREFERRED STOCK" REFER TO PREFERRED STOCK, EACH AS
DEFINED IN "DESCRIPTION OF NOTES--CERTAIN DEFINITIONS."
GENERAL
The Outstanding Notes were issued, and the Exchange Notes will be issued,
under an indenture dated as of June 1, 1998 (the "Indenture") among the Company,
as issuer, each of the Company's Restricted Subsidiaries (the "Subsidiary
Guarantors"), as Subsidiary Guarantors and State Street Bank and Trust Company,
N.A., as trustee (the "Trustee"), a copy of which has been filed as an exhibit
to the Registration Statement. The terms of the Exchange Notes are identical in
all material respects to the terms of the Outstanding Notes except that the
Exchange Notes have been registered under the Securities Act and are issued free
from any covenant regarding registration and except that, if the Exchange Offer
has not been consummated on or prior to December 9, 1998 or a shelf registration
statement is not declared effective when required, then the Company will pay
liquidated damages to each Holder of Outstanding Notes for the first 90 days
following such date in an amount equal to $.05 per week per $1,000 principal
amount of Outstanding Notes held by such Holder. The amount of liquidated
damages will increase by an additional $.05 per week per $1,000 principal amount
of Outstanding Notes at the beginning of each subsequent 90-day period until the
Exchange Offer is consummated or the shelf registration is declared effective,
up to a maximum amount of liquidated damages of $.30 per week per $1,000
principal amount of Outstanding Notes. The Exchange Notes and the Outstanding
Notes are treated as one series of Notes under the Indenture and holders thereof
are entitled to the benefit of the Indenture. Accordingly, unless specifically
stated to the contrary, the following description applies equally to all Notes.
Upon issuance of the Exchange Notes, the Indenture will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is subject to, and qualified in its entirety by,
reference to the provisions of the Indenture, including the definitions of
certain terms contained therein and those terms made part of the Indenture by
reference to the Trust Indenture Act. For definitions of certain capitalized
terms used in the following summary, see "Certain Definitions" below.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on June 15, 2008, are limited in aggregate principal
amount to $100 million and are senior subordinated unsecured obligations of the
Company. The Indenture provides for the issuance of up to $75 million aggregate
principal amount of additional Notes having identical terms and conditions to
the Notes offered hereby (the "Additional Notes"), subject to compliance with
the covenants contained in the Indenture. Any Additional Notes will be part of
the same issue as the Notes offered hereby and will vote on all matters with the
Notes offered hereby. For purposes of this "Description of the Notes," reference
to the Notes does not include Additional Notes. No offering of any such
Additional Notes is being or shall in any manner be deemed to be made by this
Prospectus. In addition, there can be no assurance as to when or whether the
Company will issue any such Additional Notes or as to the aggregate principal
amount of such Additional Notes. Interest on the Notes accrues at the rate of
9 5/8% per annum and is payable semiannually on each June 15 and December 15,
commencing December 15, 1998, to the Holders of record on the immediately
preceding June 1 and December 1. Interest on the Notes accrues from the most
recent date to which interest has been paid or, if no interest has been paid,
from June 12, 1998 (the "Issue Date"). Interest is computed on the basis of a
360-day year comprising twelve 30-day months.
The principal of and premium, if any, and interest on the Notes is payable
and the Notes are exchangeable and transferable, at the office or agency of the
Company in the City of New York maintained
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for such purposes (which initially will be the office of the Trustee located at
61 Broadway, 15th Floor, New York, New York 10006) or, at the option of the
Company, payment of interest may be paid by check mailed to the address of the
person entitled thereto as such address appears in the security register. The
Notes will be issued only in registered form without coupons and only in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange or redemption of
Notes, but the Company may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith.
Notes that remain outstanding after the consummation of the Exchange Offer
and Exchange Notes issued in connection with the Exchange Offer will be treated
as a single class of securities under the Indenture.
The Notes will not be entitled to the benefit of any sinking fund.
SUBORDINATION
The Notes are unsecured senior subordinated obligations of the Company. The
payment of principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full in cash or cash equivalents of Senior Indebtedness.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Indebtedness (including interest after the commencement
of any such proceeding at the rate specified in the applicable Senior
Indebtedness) before the Holders of Notes will be entitled to receive any
payment in respect of any Obligations with respect to the Notes, and until all
Obligations with respect to Senior Indebtedness are paid in full in cash or cash
equivalents, any distribution to which the Holders of Notes would be entitled
shall be made to the holders of Senior Indebtedness (except that Holders of
Notes may receive securities that are subordinated at least to the same extent
as the Notes to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness and Holders of Notes may recover payments made from the
trust described under the caption "Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities or from the trust described under the
caption "Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness which permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the Agent
Bank or the holders or the representative of the holders of any Designated
Senior Indebtedness. Payments on the Notes may and shall be resumed (a) in the
case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on which
the applicable Payment Blockage Notice is received. No new period of payment
blockage may be commenced by a Payment Blockage Notice unless and until (i) 360
days have elapsed since the first day of the effectiveness of the immediately
prior Payment Blockage Notice and (ii) all scheduled payments of principal,
premium, if any, and interest on the Notes that have come due have been paid in
full in cash. No nonpayment default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice, unless such default has been
cured or waived for a period of not less than 90 days.
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The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of any Event
of Default.
As a result of the subordination provisions described above, in the event of
an insolvency, bankruptcy, reorganization or liquidation of the Company,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and assets which would otherwise
be available to pay obligations in respect of the Notes will be available only
after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes. See
"Risk Factors--Subordination of Notes and Subsidiary Guarantees; Asset
Encumbrances." As of March 31, 1998, after giving pro forma effect to the
acquisition of Signal, the borrowing under the term loan portion of the Senior
Credit Facilities, the issuance of the Outstanding Notes and the application of
the net proceeds therefrom, the Company would have had $53.4 million of Senior
Indebtedness outstanding and $100 million available to be borrowed under the
Amended Credit Agreement, all of which would be Senior Indebtedness. The terms
of the Indenture permit the Company and its Restricted Subsidiaries to incur
additional Senior Indebtedness, subject to certain limitations, including
Indebtedness that may be secured by Liens on property of the Company and its
Restricted Subsidiaries. See the discussion below under the captions "Certain
Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock" and
"Certain Covenants--Liens." See "Risk Factors--Subordination of Notes and
Subsidiary Guarantees; Asset Encumbrances."
SUBSIDIARY GUARANTEES
Payment of the principal of (and premium, if any) and interest on the Notes,
when and as the same become due and payable, is guaranteed, jointly and
severally, on a senior subordinated and unsecured basis (the "Subsidiary
Guarantees") by the Subsidiary Guarantors. At the Closing Date, each of the
Company's Restricted Subsidiaries (other than Permitted Joint Ventures) became a
Subsidiary Guarantor. In addition, if the Company or any of its Restricted
Subsidiaries shall acquire or create another Subsidiary (other than any Foreign
Subsidiary and any Permitted Joint Venture), then such Subsidiary shall be
required to execute a Subsidiary Guarantee, in accordance with the terms of the
Indenture. See "Certain Covenants-- Guarantees of Indebtedness by Restricted
Subsidiaries." The obligations of the Subsidiary Guarantors under the Subsidiary
Guarantees are limited so as not to constitute a fraudulent conveyance under
applicable statutes. See "Risk Factors--Fraudulent Conveyance Statutes."
Each Subsidiary Guarantee is subordinated in right of payment, as set forth
in the Indenture, to the prior payment in full in cash or cash equivalents of
Senior Indebtedness of the relevant Subsidiary Guarantor.
Upon any distribution to creditors of a Subsidiary Guarantor in a
liquidation or dissolution of such Subsidiary Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to such
Subsidiary Guarantor or its property, an assignment for the benefit of creditors
or any marshaling of such Subsidiary Guarantor's assets and liabilities, the
holders of Senior Indebtedness of such Subsidiary Guarantor will be entitled to
receive payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Indebtedness (including interest after the commencement
of any such proceeding at the rate specified in the applicable Senior
Indebtedness of such Subsidiary Guarantor) before the Holders of Notes will be
entitled to receive any payment in respect of any Obligations with respect to
the relevant Subsidiary Guarantee, and until all Obligations with respect to
Senior Indebtedness of such Subsidiary Guarantor are paid in full in cash or
cash equivalents, any payment that would have been made under such Subsidiary
Guarantee shall be made to the holders of Senior Indebtedness of such Subsidiary
Guarantor (except that Holders of Notes may receive (i) Capital Stock of such
Subsidiary Guarantor (other than Disqualified Stock) and (ii) securities that
are subordinated at least to the same extent as such Subsidiary Guarantee to
Senior Indebtedness of such Subsidiary Guarantor and to any securities issued in
exchange for Senior Indebtedness of such Subsidiary Guarantor).
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Such Subsidiary Guarantor also may not make any payment upon or in respect
of its Subsidiary Guarantee (except in such subordinated securities of such
Subsidiary Guarantor) if (i) a default in the payment of the principal of,
premium, if any, or interest on Designated Senior Indebtedness of the relevant
Subsidiary Guarantor occurs and is continuing beyond any applicable period of
grace or (ii) any other default occurs and is continuing with respect to
Designated Senior Indebtedness of such Subsidiary Guarantor which permits
holders of the Designated Senior Indebtedness of such Subsidiary Guarantor as to
which such default relates to accelerate its maturity and the Trustee receives a
Payment Blockage Notice from the holders or the representative of the holders of
any Designated Senior Indebtedness of such Subsidiary Guarantor. Any payments
under any Subsidiary Guarantee may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in the case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received. No new period of payment
blockage may be commenced by a Payment Blockage Notice unless and until (i) 360
days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if any,
and interest on the Notes that have become due and payable have been paid in
full. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice, unless such default has been
cured or waived for a period of not less than 90 days.
As a result of the subordination provisions described above, in the event of
an insolvency, bankruptcy, reorganization or liquidation of a Subsidiary
Guarantor creditors of the relevant Subsidiary Guarantor who are holders of
Senior Indebtedness of such Subsidiary Guarantor may recover more, ratably, than
the holders of the Notes, and assets which would otherwise be available to pay
obligations in respect of the Notes will be available only after all Senior
Indebtedness of such Subsidiary Guarantor has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Notes. As of March 31, 1998, after giving pro forma effect to the acquisition of
Signal, the borrowing under the term loan portion of the Amended Credit
Agreement, the issuance of the Outstanding Notes and the application of net
proceeds therefrom, the Subsidiary Guarantors would have had $53.4 million of
Senior Indebtedness outstanding, all of which would have represented guarantees
of Indebtedness under the Amended Credit Agreement. The terms of the Indenture
permit Restricted Subsidiaries of the Company to incur additional Senior
Indebtedness, subject to certain limitations, including Indebtedness that may be
secured by Liens on property of the Restricted Subsidiaries. See the discussion
below under the captions "Certain Covenants--Incurrence of Indebtedness and
Issuance of Disqualified Stock" and "Certain Covenants--Liens."
The Indenture provides that upon a sale or other disposition to a Person not
an Affiliate of the Company of all or substantially all of the assets of any
Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or
other disposition to a Person not an Affiliate of the Company of all of the
Capital Stock of any Subsidiary Guarantor, by way of merger, consolidation or
otherwise, which transaction is carried out in accordance with the covenants
described below under the captions "Repurchase at the Option of Holders--Asset
Sales" or "Certain Covenants--Merger, Consolidation or Sale of Assets," so long
as (a) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to, such
release, (b) the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of "Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock" on the date on which such
release occurs, such Subsidiary Guarantor will be deemed automatically and
unconditionally released and discharged from all of its obligations under its
Subsidiary Guarantee without any further action on the part of the Trustee or
any holder of the Notes; PROVIDED that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests which secure any, Indebtedness of the Company shall also terminate
upon such sale, disposition or release.
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OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to June 15, 2003.
Thereafter, the Notes will be redeemable, at the option of the Company, as a
whole or from time to time in part, on not less than 30 nor more than 60 days'
prior notice to the Holders at the following Redemption Prices (expressed as
percentages of principal amount) together with accrued interest, if any, to the
redemption date (subject to the right of holders of record in the relevant
record date to receive interest due on an interest payment date), if redeemed
during the 12-month period beginning on June 15 of the years indicated below.
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------------------------------------------------- ------------
<S> <C>
2003............................................................ 104.8125%
2004............................................................ 103.2083%
2005............................................................ 101.6042%
2006 and thereafter............................................. 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time or from time to time prior to
June 15, 2001, the Company may redeem, on one or more occasions, up to 35% of
the sum of (i) the initial aggregate principal amount of the Notes and (ii) the
initial aggregate principal amount of any Additional Notes with the net proceeds
of one or more Equity Offerings at a redemption price equal to 109.625% of the
principal amount thereof, plus accrued interest, if any, to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on an interest payment date); PROVIDED that, immediately
after giving effect to such redemption, at least 65% of the sum of (x) the
initial aggregate principal amount of the Notes and (y) the initial aggregate
principal amount of any Additional Notes remains outstanding; PROVIDED FURTHER
that such redemptions shall occur within 60 days of the date of closing of each
Equity Offering.
If less than all the Notes or Additional Notes, if any, are to be redeemed,
the particular Notes to be redeemed will be selected not more than 60 days prior
to the redemption date by the Trustee by such method as the Trustee deems fair
and appropriate, PROVIDED that no Note of $1,000 in principal amount at maturity
or less shall be redeemed in part.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs at any time, then each Holder will have the
right to require that the Company purchase such Holder's Notes and Additional
Notes, if any, in whole or in part in integral multiples of $1,000, at a
purchase price in cash equal to 101% of the principal amount of such Notes, plus
accrued and unpaid interest, if any, to the date of purchase, pursuant to the
offer described below (the "Change of Control Offer") and the other procedures
set forth in the Indenture.
Within 30 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes and Additional Notes by first-class mail, postage prepaid, at its
address appearing in the security register, stating, among other things: (i) the
purchase price and the purchase date, which will be a Business Day no earlier
than 30 days nor later than 60 days from the date such notice is mailed or such
later date as is necessary to comply with requirements under the Exchange Act;
(ii) that any Note or Additional Note not tendered will continue to accrue
interest; (iii) that, unless the Company defaults in the payment of the purchase
price, any Notes or
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Additional Notes accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest after the Change of Control purchase date; and
(iv) certain other procedures that a Holder must follow to accept a Change of
Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes and Additional Notes that might be tendered by Holders of Notes and
Additional Notes seeking to accept the Change of Control Offer. The failure of
the Company to make or consummate the Change of Control Offer or pay the
applicable Change of Control purchase price when due would result in an Event of
Default and would give the Trustee and the Holders of Notes and Additional Notes
the rights described under "Events of Default and Remedies."
The Amended Credit Agreement provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. If
a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes and Additional Notes, if any, the Company could seek the
consent of its lenders to the purchase of Notes and Additional Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes and Additional Notes, if any. In
such case, the Company's failure to purchase tendered Notes and Additional Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Amended Credit Agreement. In such circumstances,
the subordination provisions in the Indenture would likely restrict payments to
the Holders of Notes and Additional Notes.
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, if
Holders of Notes and Additional Notes elect to require the Company to purchase
the Notes and Additional Notes and the Company elects to contest such election,
there can be no assurance as to how a court interpreting New York law would
interpret the phrase in many circumstances.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all the Notes validly tendered and not withdrawn under such Change of
Control Offer.
The existence of a Holder's right to require the Company to purchase such
Holder's Notes or Additional Notes upon a Change of Control may deter a third
party from acquiring the Company in a transaction that constitutes a Change of
Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford Holders of Notes or Additional
Notes the right to require the Company to repurchase such Notes or Additional
Notes in the event of a highly leveraged transaction or certain transactions
with the Company's management or its Affiliates, including a reorganization,
restructuring, merger or similar transaction involving the Company (including,
in certain circumstances, an acquisition of the Company by management or its
Affiliates) that may adversely affect Holders, if such transaction is not a
transaction defined as a Change of Control. See "Certain Definitions" below for
the definition of "Change of Control." A transaction involving the Company's
management or its Affiliates, or a transaction involving a recapitalization of
the Company, would result in a Change of Control if it is the type of
transaction specified in such definition.
The Company will comply with the applicable tender offer rules including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of
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Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
The Company will not, and will not permit any Restricted Subsidiary to,
create any restriction (other than restrictions existing under Indebtedness as
in effect on the Closing Date or in refinancings of such Indebtedness) that
would materially impair the ability of the Company to make a Change of Control
Offer to purchase the Notes or Additional Notes tendered for purchase.
Restrictions in the Indenture described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens
on its or their property, to make Restricted Payments and to make Asset Sales
may also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of the
Notes and Additional Notes, if any, and there can be no assurance that the
Company or the acquiring party will have sufficient financial resources to
effect such redemption or repurchase. In certain circumstances, such
restrictions and the restrictions on transactions with Affiliates may make more
difficult or discourage any leveraged buyout of the Company or any of its
Restricted Subsidiaries. While such restrictions cover a variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Notes and Additional Notes, if any,
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any Asset Sale unless (i) the consideration received by the Company or
such Restricted Subsidiary for such Asset Sale is not less than the fair market
value of the assets sold evidenced by a resolution of the board of directors of
such entity set forth in an officers' certificate delivered to the Trustee and
(ii) the consideration received by the Company or the relevant Restricted
Subsidiary in respect of such Asset Sale consists of at least 75% cash or cash
equivalents (for purposes of this clause (ii), cash and cash equivalents
includes (a) the principal amount of any Indebtedness for money borrowed (as
reflected in the Company's consolidated balance sheet) of the Company or any
Restricted Subsidiary that is assumed by any transferee of any such assets or
other property in such Asset Sale, but only to the extent that such assumption
is effected on a basis under which there is no further recourse to the Company
or any of its Restricted Subsidiaries with respect to such Indebtedness) and (b)
any securities, notes or other similar obligations received by the Company or
any such Restricted Subsidiary from such transferee that are converted within 90
days of the related Asset Sale by the Company or such Restricted Subsidiary into
cash or cash equivalents (to the extent of the net cash proceeds or the cash
equivalents (net of related costs) received upon such conversion)).
If the Company or any Restricted Subsidiary engages in an Asset Sale, the
Company may, at its option, within 12 months after such Asset Sale, (i) apply
all or a portion of the Net Cash Proceeds to the permanent reduction of amounts
outstanding under the Amended Credit Agreement (and to correspondingly reduce
the commitments, if any, with respect thereto) or to the repayment of other
Senior Indebtedness of the Company or a Restricted Subsidiary, PROVIDED that the
repayment of any Indebtedness incurred under the Amended Credit Agreement in
connection with the acquisition of any Facility with the proceeds of any
subsequent Sale and Leaseback Transaction relating to such Facility shall not
result in the permanent reduction of the amounts outstanding under the Amended
Credit Agreement or correspondingly permanently reduce the commitments
thereunder, or (ii) invest (or enter into a legally binding agreement to invest)
all or a portion of such Net Cash Proceeds in properties and assets to replace
the properties and assets that were the subject of the Asset Sale or in
properties and assets that will be used in businesses of the Company or its
Restricted Subsidiaries, as the case may be, existing on the Closing Date
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or in businesses the same, similar or reasonably related thereto. If any such
legally binding agreement to invest such Net Cash Proceeds is terminated, the
Company may, within 90 days of such termination or within 12 months of such
Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in
clause (i) or (ii) (without regard to the parenthetical contained in such clause
(ii)) above. Pending the final application of any such Net Proceeds, the Company
may temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in a manner that is not prohibited by the Indenture. The amount of such
Net Cash Proceeds not so used as set forth above in this paragraph constitutes
"Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5 million, the Company
will, within 30 days thereafter, make an offer to purchase (an "Excess Proceeds
Offer") from all Holders of Notes and Additional Notes, if any, on a pro rata
basis, in accordance with the procedures set forth in the Indenture, the maximum
principal amount (expressed as a multiple of $1,000) of Notes and Additional
Notes, if any, that may be purchased with the Excess Proceeds, at a purchase
price in cash equal to 100% of the principal amount thereof, plus accrued
interest, if any, to the date such offer to purchase is consummated. To the
extent that the aggregate principal amount of Notes and Additional Notes, if
any, tendered pursuant to such offer to purchase is less than the Excess
Proceeds, the Company may use such deficiency for general corporate purposes. If
the aggregate principal amount of Notes and Additional Notes, if any, validly
tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the
Notes and Additional Notes, if any, to be purchased will be selected on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, take any of the following actions:
(a) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Capital Stock of the Company or any Restricted
Subsidiary, other than (i) dividends or distributions payable solely in
Qualified Equity Interests or (ii) dividends or distributions by a
Restricted Subsidiary payable to the Company or another Wholly Owned
Restricted Subsidiary;
(b) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of Capital Stock, or any options, warrants or
other rights to acquire such shares of Capital Stock, of the Company, any
Restricted Subsidiary or any Affiliate of the Company (other than, in either
case, any such Capital Stock owned by the Company or any of its Wholly Owned
Restricted Subsidiaries);
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Pari Passu Indebtedness or
Subordinated Indebtedness; and
(d) make any Investment (other than a Permitted Investment) in any
Person (such payments or other actions described in (but not excluded from)
clauses (a) through (d) being referred to as "Restricted Payments"), unless
at the time of, and immediately after giving effect to, the proposed
Restricted Payment:
(i) no Default or Event of Default has occurred and is continuing,
(ii) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Disqualified Stock," and
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(iii) the aggregate amount of all Restricted Payments made after the
Closing Date does not exceed the sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company
during the period (taken as one accounting period) from the first day
of the Company's first fiscal quarter commencing after the Closing
Date to the last day of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the
time of such proposed Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income is a loss, minus 100% of such
amount); plus
(B) 100% of the aggregate net cash proceeds received by the
Company after the Closing Date from the issuance or sale (other than
to a Subsidiary) of either (1) Qualified Equity Interests of the
Company or (2) debt securities or Disqualified Stock that have been
converted into or exchanged for Qualified Stock of the Company,
together with the aggregate net cash proceeds received by the Company
at the time of such conversion or exchange.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions, so long as no Default or Event of Default has
occurred and is continuing or would occur:
(a) the payment of any dividend in cash or Qualified Equity Interests of
the Company within 60 days after the date of declaration thereof, if at the
declaration date such payment would not have been prohibited by the
foregoing provisions;
(b) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, Qualified Equity Interests of the Company;
(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Pari Passu Indebtedness or Subordinated
Indebtedness in exchange for, or out of the net cash proceeds of a
substantially concurrent issuance and sale (other than to a Subsidiary) of,
shares of Qualified Equity Interests of the Company;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Pari Passu Indebtedness or Subordinated Indebtedness
in exchange for, or out of the net cash proceeds of a substantially
concurrent issuance or sale (other than to a Subsidiary) of, Pari Passu
Indebtedness or Subordinated Indebtedness, respectively, so long as the
Company or a Restricted Subsidiary would be permitted to refinance such
original Pari Passu Indebtedness or Subordinated Indebtedness with such new
Pari Passu Indebtedness or Subordinated Indebtedness pursuant to clause (iv)
of the definition of Permitted Indebtedness;
(e) the repurchase of any Subordinated Indebtedness at a purchase price
not greater than 101% of the principal amount of such Subordinated
Indebtedness in the event of a Change of Control in accordance with
provisions similar to the "Change of Control" covenant; PROVIDED that, prior
to or simultaneously with such repurchase, the Company has made the Change
of Control Offer as provided in such covenant with respect to the Notes and
has repurchased all Notes validly tendered for payment in connection with
such Change of Control Offer;
(f) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company, options on
any such shares or related stock appreciation rights or similar securities
held by officers or employees or former officers or employees (or their
estates or beneficiaries under their estates) or by any employee benefit
plan, upon death, disability, retirement or termination of employment or
pursuant to the terms of any employee benefit plan or any other agreement
under which such shares of stock or related rights were issued; PROVIDED
that the aggregate
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cash consideration paid for such purchase, redemption, acquisition,
cancellation or other retirement of such shares of Capital Stock after the
Closing Date does not exceed $500,000 in any fiscal year; and
(g) Investments constituting Restricted Payments not to exceed $5
million at any one time outstanding.
The actions described in clauses (b), (c), (e), (f) and (g) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph but will reduce the amount that would otherwise
be available for Restricted Payments under clause (iii) of the first paragraph
of this covenant and the actions described in clauses (a) and (d) of the
preceding paragraph will be Restricted Payments that will be permitted to be
taken in accordance with this paragraph and will not reduce the amount that
would otherwise be available for Restricted Payments under clause (iii) of the
first paragraph of this covenant.
For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will
be deemed to have made an Investment in an amount equal to the greater of the
fair market value or net book value of the net assets of such Restricted
Subsidiary at the time of such designation as determined by the Board, and (ii)
any property transferred to or from an Unrestricted Subsidiary will be valued at
fair market value at the time of such transfer, as determined by the Board. The
amount of all Restricted Payments (other than cash) shall be the fair market
value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
whose resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an officer's certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required under "Certain Covenants--Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other Person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision will
be reduced by the lesser of (x) the net asset value of such Subsidiary at the
time it becomes a Restricted Subsidiary and (y) the initial amount of such
Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such Investment
(resulting from the payment of interest or dividends, loan repayment, transfer
of assets or otherwise, other than the redesignation of an Unrestricted
Subsidiary or other Person as a Restricted Subsidiary), to the extent such net
reduction is not included in the Company's Consolidated Net Income; PROVIDED
that the total amount by which the aggregate amount of all Restricted Payments
may be reduced may not exceed the lesser of (x) the cash proceeds received by
the Company and its Restricted Subsidiaries in connection with such net
reduction and (y) the initial amount of such Investment.
In computing the Consolidated Net Income of the Company for purposes of the
foregoing clause (iii)(A) of the first paragraph of this covenant, (i) the
Company may use audited financial statements for the portions of the relevant
period for which audited financial statements are available on the date of
determination and unaudited financial statements and other current financial
data based on the books and records of the Company for the remaining portion of
such period and (ii) the Company will be permitted to rely in good faith on the
financial statements and other financial data derived from its books and records
that are available on the date of determination. If the Company makes a
Restricted Payment that, at the time of the making of such Restricted Payment,
would in the good faith determination of the Company be permitted under the
requirements of the Indenture, such Restricted Payment will be deemed to have
been
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made in compliance with the Indenture notwithstanding any subsequent adjustments
made in good faith to the Company's financial statements affecting Consolidated
Net Income of the Company for any period.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Company will not, and will not permit any Restricted Subsidiary to,
create, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of, or otherwise incur (collectively, "incur"), any
Indebtedness (including Acquired Indebtedness and the issuance of Disqualified
Stock), except that the Company and any Subsidiary Guarantors may incur
Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for
the immediately preceding four full fiscal quarters for which internal financial
statements are available, taken as one accounting period, would have been equal
to at least (i) 2.00 to 1.0 from the Closing Date through and including June 30,
2000 and (ii) 2.25 to 1.0 thereafter.
In making the foregoing calculation for any four-quarter period that
includes the Closing Date, pro forma effect will be given to the Offering, as if
such transactions had occurred at the beginning of such four-quarter period. In
addition (but without duplication), in making the foregoing calculation, pro
forma effect will be given to: (i) the incurrence of such Indebtedness and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred and the
application of such proceeds occurred at the beginning of such four-quarter
period; (ii) the incurrence, repayment or retirement of any other Indebtedness
by the Company or its Restricted Subsidiaries since the first day of such
four-quarter period as if such Indebtedness was incurred, repaid or retired at
the beginning of such four-quarter period; and (iii) the acquisition (whether by
purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any company, entity or business acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first day
of such four-quarter period, as if such acquisition or disposition occurred at
the beginning of such four-quarter period. In making a computation under the
foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving
credit facility will be computed based on the average daily balance of such
Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at
the option of the Company, a fixed or floating rate of interest, interest
thereon will be computed by applying, at the option of the Company, either the
fixed or floating rate, and (C) the amount of any Indebtedness that bears
interest at a floating rate will be calculated as if the rate in effect on the
date of determination had been the applicable rate for the entire period (taking
into account any Hedging Obligations applicable to such Indebtedness if such
Hedging Obligations have a remaining term at the date of determination in excess
of 12 months).
Notwithstanding the foregoing, the Company may, and may permit its
Restricted Subsidiaries to, incur the following Indebtedness ("Permitted
Indebtedness"):
(i) Indebtedness of the Company or any Subsidiary Guarantor under the
Amended Credit Agreement (and the incurrence by any Subsidiary Guarantor of
guarantees thereof) in an aggregate principal amount at any one time
outstanding not to exceed $150 million, less any amounts applied to the
permanent reduction of such credit facilities pursuant to the provisions of
the covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales;"
(ii) Indebtedness represented by the Notes (other than the Additional
Notes) and the Subsidiary Guarantees;
(iii) Existing Indebtedness;
(iv) the incurrence by the Company of Permitted Refinancing Indebtedness
in exchange for, or the net proceeds of which are used to refund, refinance
or replace, any Indebtedness that is permitted to be incurred under clause
(ii) or (iii) above;
(v) Indebtedness owed by the Company to any Wholly Owned Restricted
Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary (PROVIDED that
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such Indebtedness is held by the Company or such Restricted Subsidiary);
PROVIDED, HOWEVER, that any Indebtedness of the Company owing to any such
Restricted Subsidiary is unsecured and subordinated in right of payment from
and after such time as the Notes shall become due and payable (whether at
Stated Maturity, acceleration, or otherwise) to the payment and performance
of the Company's obligations under the Notes;
(vi) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Obligations incurred in the ordinary course of business;
(vii) Indebtedness of the Company or any Restricted Subsidiary consisting
of guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock;
(viii) either (A) Capitalized Lease Obligations of the Company or any
Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or
secured by purchase money security interests so long as (x) such
Indebtedness is not secured by any property or assets of the Company or any
Restricted Subsidiary other than the property and assets so acquired and (y)
such Indebtedness is created within 60 days of the acquisition of the
related property; PROVIDED that the aggregate amount of Indebtedness under
clauses (A) and (B) does not exceed 5% of Consolidated Tangible Assets at
any one time outstanding;
(ix) Guarantees by any Restricted Subsidiary made in accordance with the
provisions of the covenant described under the caption "--Guarantees of
Indebtedness by Restricted Subsidiaries;"
(x) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within two business days of incurrence;
(xi) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(xii) the incurrence of Non-Recourse Indebtedness by Permitted Joint
Ventures; and
(xiii) Indebtedness of the Company, any Subsidiary Guarantor or any
Permitted Joint Venture not permitted by any other clause of this
definition, in an aggregate principal amount not to exceed $15 million at
any one time outstanding.
LIENS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien
securing Pari Passu Indebtedness or Subordinated Indebtedness of the Company on
or with respect to any of its property or assets, including any shares of stock
or Indebtedness of any Restricted Subsidiary, whether owned at the Closing Date
or thereafter acquired, or any income, profits or proceeds therefrom, or assign
or otherwise convey any right to receive income thereon, unless (i) in the case
of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien
on such property, assets or proceeds that is senior in priority to such Lien and
(ii) in the case of any Lien securing Pari Passu Indebtedness, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to or PARI PASSU with such Lien.
(b) The Company will not permit any Subsidiary Guarantor to, directly or
indirectly, create, incur, assume or suffer to exist any Lien securing Pari
Passu Indebtedness or Subordinated Indebtedness of such Subsidiary Guarantor on
or with respect to such Subsidiary Guarantor's properties or assets, including
any
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shares of stock or Indebtedness of any other Restricted Subsidiary, whether
owned at the date of the Indentures or thereafter acquired, or any income,
profits or proceeds therefrom, or assign or otherwise convey any right to
receive income thereon, unless (i) in the case of any Lien securing Pari Passu
Indebtedness of such Subsidiary Guarantor, each Subsidiary Guarantee of such
Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds
that is senior in priority to or PARI PASSU with such Lien and (ii) in the case
of any Lien securing Subordinated Indebtedness of such Subsidiary Guarantor,
each Subsidiary Guarantee of such Subsidiary Guarantor is secured by a Lien on
such property, assets or proceeds that is senior in priority to such Lien.
DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make
any other distributions on or in respect of its Capital Stock, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans or advances to the Company or any other Restricted Subsidiary or (d)
transfer any of its properties or assets to the Company or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of:
(i) any agreement in effect on the Closing Date;
(ii) customary non-assignment provisions of any lease governing a
leasehold interest of the Company or any Restricted Subsidiary;
(iii) the refinancing or successive refinancing of Indebtedness incurred
under the agreements in effect on the Closing Date, so long as such
encumbrances or restrictions are no more restrictive than those contained in
such original agreement;
(iv) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person,
so acquired;
(v) purchase money obligations for acquired property permitted under the
covenant entitled "--Incurrence of Indebtedness and Issuance of Disqualified
Stock" that impose restrictions of the nature described in clause (d) above
on the property so acquired;
(vi) any agreement for the sale of a Restricted Subsidiary or an asset
that restricts distributions by that Restricted Subsidiary or transfers of
such asset pending its sale;
(vii) secured Indebtedness otherwise permitted to be incurred pursuant to
the provisions of the covenant described above under the caption "--Liens"
that limits the right of the debtor to dispose of the assets securing such
Indebtedness;
(viii) restrictions on cash or other deposits or net worth imposed by
leases entered into in the ordinary course of business; and
(ix) Non-Recourse Indebtedness of any Permitted Joint Venture permitted
to be incurred under the Indenture.
LIMITATION ON LAYERING DEBT
The Company and each Subsidiary Guarantor will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness or guarantee,
as applicable, that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in any respect in right of payment to the Notes or such
Subsidiary Guarantor's Subsidiary Guarantee, respectively.
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MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company may not, in a single transaction or series of related
transactions, consolidate or merge with or into (whether or not the Company is
the surviving corporation), or directly and/or indirectly through its
Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Subsidiaries taken as a whole) in one or more
related transactions to, another corporation, Person or entity unless:
(a) either (i) the Company is the surviving corporation or (ii) in the
case of a transaction involving the Company, the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (the "Surviving Entity") is a corporation
organized or existing under the laws of the United States, any state thereof
or the District of Columbia and assumes all the obligations of the Company
under the Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee;
(b) immediately after giving effect to such transaction and treating any
obligation of the Company in connection with or as a result of such
transaction as having been incurred as of the time of such transaction, no
Default or Event of Default has occurred and is continuing;
(c) the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could, at the time of such
transaction and after giving PRO FORMA effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, incur
at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the first paragraph of "--Incurrence of
Indebtedness and Issuance of Disqualified Stock;"
(d) each Subsidiary Guarantor, unless it is the other party to the
transaction described above, has by supplemental indenture confirmed that
its Subsidiary Guarantee applies to the Surviving Entity's obligations under
the Indenture and the Notes;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the covenant described above under the caption "--Liens" are
complied with; and
(f) the Company delivers, or causes to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into any other Person or convey, sell, assign, transfer, lease or
otherwise dispose of its properties and assets substantially as an entirety to
any other Person (other than the Company or another Subsidiary Guarantor)
unless: (a) subject to the provisions of the following paragraph, the Person
formed by or surviving such consolidation or merger (if other than such
Subsidiary Guarantor) or to which such properties and assets are transferred
assumes all of the obligations of such Subsidiary Guarantor under the Indenture
and its Subsidiary Guarantee, pursuant to a supplemental indenture in form and
substance satisfactory to the Trustee, (b) immediately after giving effect to
such transaction, no Default or Event of Default has occurred and is continuing
and (c) the Subsidiary Guarantor delivers, or causes to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each stating that such
transaction complies with the requirements of the Indenture.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will, except in the
case of a lease, be discharged from all its obligations and covenants under the
Indenture and Notes.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any Restricted to, directly or
indirectly, enter into or suffer to exist any transaction with, or for the
benefit of, any Affiliate of the Company ("Interested Persons"), unless (a) such
transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's-length transaction with third parties who are not
Interested Persons and (b) the Company delivers to the Trustee (i) with respect
to any transaction or series of related transactions entered into after the
Closing Date involving aggregate payments in excess of $1 million, a resolution
of the Board set forth in an officers' certificate certifying that such
transaction or transactions complies with clause (a) above and that such
transaction or transactions have been approved by the Board (including a
majority of the Disinterested Directors) of the Company and (ii) with respect to
a transaction or series of related transactions involving aggregate payments
equal to or greater than $10 million, a written opinion as to the fairness to
the Company or such Restricted Subsidiary of such transaction or series of
transactions from a financial point of view issued by an accounting, appraisal
or investment banking firm, in each case of national standing.
The foregoing covenant does not restrict:
(A) transactions among the Company and/or its Restricted Subsidiaries;
(B) the Company from paying reasonable and customary regular
compensation and fees to directors of the Company or any Restricted
Subsidiary who are not employees of the Company or any Restricted
Subsidiary;
(C) transactions permitted by the provisions of the covenant described
under the caption "Certain Covenants--Restricted Payments;"
(D) advances to employees for moving, entertainment and travel expenses
and similar expenditures in the ordinary course of business and consistent
with past practice; and
(E) purchases of equipment, supplies and related services made on an
arm's length basis in the ordinary course of business by the Company, any
Restricted Subsidiary or any Permitted Joint Venture from any Affiliate.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company (a) will not permit any Restricted Subsidiary to issue any
Capital Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) and (b) will not, and will not permit any Restricted Subsidiary to,
transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any
Restricted Subsidiary to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); PROVIDED, HOWEVER, that this covenant will not prohibit
(i) the sale or other disposition of all, but not less than all, of the issued
and outstanding Capital Stock of a Restricted Subsidiary owned by the Company
and its Restricted Subsidiaries in compliance with the other provisions of the
Indenture, (ii) the sale or other
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disposition of a portion of the issued and outstanding Capital Stock of an
existing Wholly Owned Restricted Subsidiary if (A) as a result of such sale or
disposition, such Wholly Owned Restricted Subsidiary becomes a Permitted Joint
Venture and (B) at the time of such sale or disposition, the Company could make
an Investment in the remaining Capital Stock held by it or one of its Restricted
Subsidiaries in an amount equal to the amount of its remaining Investment in
such existing Restricted Subsidiary pursuant to the covenant entitled
"Restricted Payments," or (iii) the ownership by directors of director's
qualifying shares or the ownership by foreign nationals of Capital Stock of any
Restricted Subsidiary, to the extent mandated by applicable law.
The Company will not permit any Restricted Subsidiary to issue any Preferred
Stock.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered to
be paid or is paid to all Holders that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary that is not a
Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any
other manner become liable for the payment of any Indebtedness of the Company or
any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture
providing for a guarantee of payment of the Notes by such Restricted Subsidiary
on a senior subordinated basis and (b) with respect to any guarantee of
Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee is
subordinated to such Restricted Subsidiary's guarantee with respect to the Notes
at least to the same extent as such Subordinated Indebtedness is subordinated to
the Notes, PROVIDED that the foregoing provision will not be applicable to any
guarantee by any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary.
Any guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph may provide by its terms that it will be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer
to any Person not an Affiliate of the Company of all of the Company's and the
Restricted Subsidiaries' Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the guarantee
that resulted in the creation of such guarantee of the Notes, except a discharge
or release by or as a result of payment under such guarantee.
ISSUANCES OF GUARANTEES BY NEW RESTRICTED SUBSIDIARIES
The Company will provide to the Trustee, on the date that any Person (other
than a Foreign Subsidiary or Permitted Joint Ventures) becomes a Restricted
Subsidiary, a supplemental indenture to the Indenture, executed by such new
Restricted Subsidiary, providing for a full and unconditional guarantee on a
senior subordinated basis by such new Restricted Subsidiary of the Company's
obligations under the Notes and the Indenture to the same extent as that set
forth in the Indenture.
UNRESTRICTED SUBSIDIARIES
(a) The Board may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither
the Company nor any Restricted
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Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity, (iii) any Investment in such Subsidiary
made as a result of designating such Subsidiary an Unrestricted Subsidiary will
not violate the provisions of the covenant described under the caption
"--Restricted Payments," (iv) neither the Company nor any Restricted Subsidiary
has a contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than those that might be
obtained at the time from Persons who are not Affiliates of the Company, (v)
neither the Company nor any Restricted Subsidiary has any obligation to
subscribe for additional shares of Capital Stock or other equity interest in
such Subsidiary, or to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results, and (vi) such Unrestricted Subsidiary has at least one director on its
board of directors that is not a director or executive officer of the Company or
any of its Restricted Subsidiaries and has at least one executive officer of the
Company or any of its Restricted Subsidiaries. Notwithstanding the foregoing,
the Company may not designate any of its Subsidiaries existing as of the Closing
Date or any successor to any of them as an Unrestricted Subsidiary and may not
sell, transfer or otherwise dispose of any properties or assets of any such
Subsidiary to an Unrestricted Subsidiary, other than in the ordinary course of
business.
(b) The Board may designate any Unrestricted Subsidiary as a Restricted
Subsidiary; PROVIDED that (i) no Default or Event of Default has occurred and is
continuing following such designation and (ii) the Company would, at the time of
making such designation and giving such pro forma effect as if such designation
had been made at the beginning of the applicable four quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Disqualified Stock" (treating any
Indebtedness of such Unrestricted Subsidiary as the incurrence of Indebtedness
by a Restricted Subsidiary).
REPORTS
Whether or not the Company is required to file reports with the Commission,
the Company will file all such annual reports, quarterly reports and other
documents that the Company would be required to file if it were subject to
Section 13(a) or 15(d) under the Exchange Act. The Company will also be required
(a) to supply to the Trustee and each Holder, or supply to the Trustee for
forwarding to each such Holder, without cost to such Holder, copies of such
reports and other documents within 15 days after the date on which the Company
files such reports and documents with the Commission or the date on which the
Company would be required to file such reports and documents if the Company were
so required and (b) if filing such reports and documents with the Commission is
not accepted by the Commission or is prohibited under the Exchange Act, to
supply at the Company's cost copies of such reports and documents to any
prospective Holder promptly upon written request.
EVENTS OF DEFAULT AND REMEDIES
The following are "Events of Default" under the Indenture:
(a) default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days
(whether or not prohibited by the subordination provisions of the
Indenture);
(b) default in the payment of the principal of (or premium, if any, on)
any Note when due (whether or not prohibited by the subordination provisions
of the Indenture);
(c) failure to perform or comply with the Indenture provisions described
under the captions "--Repurchase at the Option of Holders--Change of
Control," "--Repurchase at the Option of
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Holders--Asset Sales," "--Certain Covenants--Restricted Payments,"
"Incurrence of Indebtedness and Issuance of Disqualified Stock" or
"--Merger, Consolidation or Sale of Assets;"
(d) default in the performance, or breach, of any covenant or agreement
of the Company or any Subsidiary Guarantor contained in the Indenture or in
any Subsidiary Guarantee (other than a default in the performance, or
breach, of a covenant or agreement that is specifically dealt with elsewhere
herein), and continuance of such default or breach for a period of 60 days
after written notice has been given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Notes (and Additional Notes, if any) then
outstanding;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of
Indebtedness of the Company or any Restricted Subsidiary, which issue
individually or in the aggregate has an aggregate outstanding principal
amount of not less than $5 million, and such default has resulted in such
Indebtedness becoming, whether by declaration or otherwise, due and payable
prior to the date on which it would otherwise become due and payable or (ii)
a default in any payment when due at final maturity of any such
Indebtedness;
(f) failure by the Company or any of its Restricted Subsidiaries to pay
one or more final judgments the uninsured portion of which exceeds in the
aggregate $5 million, which judgment or judgments are not paid, discharged
or stayed for a period of 60 days;
(g) any Subsidiary Guarantee ceases to be in full force and effect or is
declared null and void or any such Subsidiary Guarantor denies that it has
any further liability under any Subsidiary Guarantee, or gives notice to
such effect (other than by reason of the termination of the Indenture or the
release of any such Subsidiary Guarantee in accordance with the Indenture);
or
(h) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Notes (and Additional Notes, if any) then outstanding
may, and the Trustee at the request of such Holders will, declare the principal
of, and accrued interest on, all of the outstanding Notes immediately due and
payable and, upon any such declaration, such principal and such interest will
become due and payable immediately.
If an Event of Default specified in clause (h) above occurs and is
continuing, then the principal of and accrued interest on all of the outstanding
Notes will IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes (and Additional Notes, if any), by written notice to the
Company and the Trustee, may rescind such declaration and its consequences if:
(i) the Company has paid or deposited with the Trustee a sum sufficient to pay
(A) all overdue interest on all Notes, (B) all unpaid principal of (and premium,
if any, on) any outstanding Notes that has become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the Notes,
(C) to the extent that payment of such interest is lawful, interest upon overdue
interest and overdue principal at the rate borne by the Notes and (D) all sums
paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel; and (ii) all Events of Default, other than the non-payment of
amounts of principal of (or premium, if any, on) or interest on the Notes that
have become due solely by such declaration of acceleration, have been cured or
waived. No such rescission will affect any subsequent default or impair any
right consequent thereon.
No Holder has any right to institute any proceeding with respect to the
Indenture or any remedy thereunder, unless the Holders of at least 25% in
aggregate principal amount of the outstanding Notes
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(and Additional Notes, if any) have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding, the Trustee has failed
to institute any such proceeding within 60 days after receipt of such notice,
request and offer of indemnity and the Trustee, within such 60-day period, has
not received directions inconsistent with such written request by Holders of a
majority in aggregate principal amount of the outstanding Notes (and Additional
Notes, if any). Such limitations do not apply, however, to a suit instituted by
a Holder for the enforcement of the payment of the principal of, premium, if
any, or interest on such Note on or after the respective due dates expressed in
such Note.
The Holders of not less than a majority in aggregate principal amount of the
outstanding Notes and Additional Notes, if any, may, on behalf of the Holders of
all of the Notes and Additional Notes, if any, waive any past defaults under the
Indenture, except a default in the payment of the principal of (and premium, if
any) or interest on any Note, or in respect of a covenant or provision that
under the Indenture cannot be modified or amended without the consent of the
holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each Holder notice of the Default or Event
of Default within 90 days after the occurrence thereof. Except in the case of a
Default or an Event of Default in payment of principal of (and premium, if any,
on) or interest on any Notes, the Trustee may withhold the notice to the Holders
if a committee of its trust officers in good faith determines that withholding
such notice is in the interests of the Holders.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five days of any Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor, as such, shall have any
liability for any obligations of the Company or the Subsidiary Guarantors under
the Notes, the Indenture or the Subsidiary Guarantees, as applicable, or any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, terminate the obligations of
the Company and the Subsidiary Guarantors with respect to the outstanding Notes
("legal defeasance"). Such legal defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes, except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of (and premium, if any, on) and
interest on such Notes when such payments are due, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or
agency for payments in respect of the Notes and segregate and hold such payments
in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee
and (iv) the legal defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to terminate the obligations
of the Company and any Subsidiary Guarantor with respect to certain covenants
set forth in the Indenture and described under "Certain Covenants" above, and
any omission to comply with such obligations would not constitute a Default or
an Event of Default with respect to the Notes ("covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance: (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders, money in an amount, or U.S. Government
Obligations (as defined in the Indenture) that through the scheduled payment of
principal and interest thereon will
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provide money in an amount, or a combination thereof, sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay and
discharge the principal of (and premium, if any, on) and interest on the
outstanding Notes at maturity (or upon redemption, if applicable) of such
principal or installment of interest; (b) no Default or Event of Default has
occurred and is continuing on the date of such deposit or, insofar as an event
of bankruptcy under clause (h) of "Events of Default" above is concerned, at any
time during the period ending on the 91st day after the date of such deposit;
(c) such legal defeasance or covenant defeasance may not result in a breach or
violation of, or constitute a default under, the Indenture, the Amended Credit
Agreement or any other material agreement or instrument to which the Company or
any Subsidiary Guarantor is a party or by which it is bound; (d) in the case of
legal defeasance, the Company must deliver to the Trustee an opinion of counsel
stating that the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or since the date hereof, there has been a
change in applicable federal income tax law, to the effect, and based thereon
such opinion must confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such legal defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such legal defeasance had not occurred; (e) in the case of covenant defeasance,
the Company must have delivered to the Trustee an opinion of counsel to the
effect that the Holders of the outstanding Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred; and (f) the Company must have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to either the legal defeasance or
the covenant defeasance, as the case may be, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer document and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note for a
period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Modifications and amendments of the Indenture and any Subsidiary Guarantee
may be made by the Company, any affected Subsidiary Guarantor and the Trustee
with the consent of the Holders of a majority in aggregate outstanding principal
amount of the Notes (and Additional Notes, if any); PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount thereof or the rate
of interest thereon or any premium payable upon the redemption thereof, or
change the coin or currency in which any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or, in
the case of redemption, on or after the redemption date);
(b) amend, change or modify the obligation of the Company to make and
consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the covenant described under the covenant entitled
"Repurchase at the Option of the Holders--Asset Sales" or the obligation of
the Company to make and consummate a Change of Control offer in the event of
a Change of Control in
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accordance with the covenant entitled "Repurchase at the Option of the
Holders--Change of Control," including, in each case, amending, changing or
modifying any definition relating thereto;
(c) reduce the percentage in principal amount of outstanding Notes, the
consent of whose Holders is required for any waiver of compliance with
certain provisions of, or certain defaults and their consequences provided
for under, the Indenture;
(d) waive a default in the payment of principal of, or premium, if any,
or interest on the Notes or reduce the percentage or aggregate principal
amount of outstanding Notes the consent of whose Holders is necessary for
waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults;
(e) modify the ranking or priority of the Notes or the Subsidiary
Guarantee of any Subsidiary Guarantor; or
(f) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the Indenture other than in accordance with the
terms of the Indenture.
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Without the consent of any Holders, the Company and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental to the
Indenture for any of the following purposes: (1) to evidence the succession of
another Person to the Company and the assumption by any such successor of the
covenants of the Company in the Indenture and in the Notes; or (2) to add to the
covenants of the Company for the benefit of the Holders, or to surrender any
right or power herein conferred upon the Company; or (3) to add additional
Events of Defaults; or (4) to provide for uncertificated Notes in addition to or
in place of the certificated Notes; or (5) to evidence and provide for the
acceptance of appointment under the Indenture by a successor Trustee; or (6) to
secure the Notes; or (7) to cure any ambiguity, to correct or supplement any
provision in the Indenture that may be defective or inconsistent with any other
provision in the Indenture, or to make any other provisions with respect to
matters or questions arising under the Indenture, PROVIDED that such actions
pursuant to this clause do not adversely affect the interests of the Holders in
any material respect; or (8) to comply with any requirements of the Commission
in order to effect and maintain the qualification of the Indenture under the
Trust Indenture Act.
Notwithstanding the foregoing, neither the Company nor the Trustee may amend
any provisions of the Indenture or the Notes concerning (i) the subordination of
the Notes and the Subsidiary Guarantees or (ii) legal defeasance or covenant
defeasance without, in either case, the prior written consent of the Agent Bank,
acting on behalf of the Banks under the Amended Credit Agreement.
CONCERNING THE TRUSTEE
State Street Bank and Trust Company, N.A., the Trustee under the Indenture,
is the initial paying agent and registrar for the Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. Under the Indenture, the Holders of a majority in outstanding
principal amount of the Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain
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payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; PROVIDED, HOWEVER, that, if it
acquires any conflicting interest (as defined), it must eliminate such conflict
upon the occurrence of an Event of Default or else resign.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Exchange Notes will be issued in the form of
a global note (the "Global Note"). The Global Note will be deposited with, or on
behalf of, The Depository Trust Company (the "Depositary") and registered in the
name of the Depositary or its nominee. Investors may hold their beneficial
interests in the Global Note directly through the Depositary if they have an
account with the Depositary or indirectly through organizations which have
accounts with the Depositary.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Note will be limited to such extent.
Investors may hold their interests in the Global Note directly through Cedel
or Euroclear, if they are participants in such systems, or indirectly through
organizations which are participants in such systems. Investors may also hold
such interests through organizations other than Cedel or Euroclear that are
Participants in the DTC system. Cedel and Euroclear will hold such interests in
the Global Note on behalf of their participants through customers' securities
accounts in their respective names on the books of their respective
depositaries, which in turn will hold such interests in the Global Note in
customers' securities accounts in the depositaries' names on the books of DTC.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
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Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Notes in accordance with the normal procedures of DTC and in
accordance with the procedures set forth in the Indenture.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture then, upon surrender by
the Global Note Holder of the Global Notes, Certificated Notes will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made by
wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to Certificated Notes, the Company will make
all payments of principal, premium, if any, and interest by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issues is generally settled in clearinghouse or next-day funds. In
contrast, Notes represented by the Global Note are eligible to trade in the
PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System,
and any permitted secondary market trading activity in such Notes is, therefore,
required by the Depositary to be settled in immediately available funds. The
Company expects that secondary trading in the Certificated Notes will also be
settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in the Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear or Cedel) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a
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Global Note by or through a Euroclear or Cedel participant to a Participant in
DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person is merged with or into the Company or becomes a Subsidiary or
(b) assumed in connection with the acquisition of assets from such Person.
"Affiliate" means, with respect to any specified person, (a) any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person or (b) any other person that
owns, directly or indirectly, 5% or more of such specified person's Capital
Stock or any executive officer or director of any such specified person or other
person or, with respect to any natural person, any person having a relationship
with such person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified person, means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agent Bank" means NationsBank, N.A. and its successors under the Amended
Credit Agreement, in its capacity as agent.
"Amended Credit Agreement" means the Credit Agreement, dated as of October
14, 1997, as amended as of November 17, 1997, December 19, 1997, March 23, 1998
and June 12, 1998, among the Company, the lenders named therein and NationsBank,
N.A., as agent, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such facility
may be amended, restated, supplemented, refinanced, extended or otherwise
modified from time to time.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of merger, consolidation or
similar arrangement) (collectively, a "transfer") by the Company or any
Restricted Subsidiary other than in the ordinary course of business and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Shares of
Capital Stock of any of the Company's Restricted Subsidiaries (which shall be
deemed to include the sale, grant or conveyance of any interest in the income,
profits or proceeds therefrom), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (x) that
have a fair market value in excess of $1 million or (y) for Net Cash Proceeds in
excess of $1 million. For the purposes of this definition, the term "Asset Sale"
does not include (a) any transfer of properties or assets (i) that is governed
by the provisions of the Indenture described under "--Certain
Covenants--Consolidation, Merger or Sale of Assets" and "-- Restricted
Payments," (ii) between or among the Company and its Restricted Subsidiaries
pursuant to transactions that do not violate any other provision of the
Indenture or (iii) representing obsolete or permanently retired equipment and
facilities or (b) the sale or exchange of equipment in connection with the
purchase or other acquisition of other equipment, in each case used in the
business of the Company or its Restricted Subsidiaries as in existence on the
Closing Date or any business determined by the Board in its good faith judgment
to be reasonably related thereto.
"Banks" means the banks and other financial institutions that from time to
time are lenders under the Amended Credit Agreement.
"Board" means the Company's Board of Directors.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
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"Capital Stock" of any Person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such Person's equity interest (however designated), whether now
outstanding or issued after the Closing Date.
"Capitalized Lease Obligation" means, with respect to any Person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, in accordance with GAAP, has been recorded as a
capitalized lease.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) (other than Permitted Holders) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of more than 50% of the voting power of all classes
of Voting Stock of the Company; PROVIDED, HOWEVER, that upon any purchase
and/or subsequent conversion by any "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act) (other than Permitted
Holders), which at the time of such purchase and/or subsequent conversion
neither owns nor is acquiring any shares of common stock of the Company, of
any of the issued and outstanding shares of Series B Preferred Stock or
Series C Preferred Stock, the number of shares of common stock which shall
be deemed to be outstanding for the purpose of computing the percentage of
the voting power of all classes of Voting Stock of the Company acquired by
such "person" or "group" shall be determined on a basis that gives effect to
the conversion of both (A) the shares of Series B Preferred Stock or Series
C Preferred Stock, as applicable, that were purchased by such "person" or
"group" and (B) the shares of Series B Preferred Stock or Series C Preferred
Stock, as applicable, that continue to be owned by Permitted Holders after
such purchase and/or conversion by such "person" or "group" (without
requiring actual conversion of any of such shares of Series B Preferred
Stock or Series C Preferred Stock by the holders thereof);
(b) the Company, either individually or in conjunction with one or more
Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise
disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties of the
Company and the Subsidiaries, taken as a whole (either in one transaction or
a series of related transactions), including Capital Stock of the
Subsidiaries, to any person (other than the Company or a Restricted
Subsidiary);
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board (together with any new
directors (i) whose election by such Board or whose nomination for election
by the stockholders of the Company was approved by a vote of a majority of
the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved or (ii) elected or appointed by any of the Permitted
Holders) cease for any reason to constitute a majority of the Board then in
office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution, other than in a transaction that complies with
the provisions described under "Certain Covenants-- Consolidation, Merger or
Sale of Assets."
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Consolidated EBITDA" means, for any period, the sum of, without
duplication, Consolidated Net Income for such period, plus (or, in the case of
clause (d) below, plus or minus) the following items to the extent included in
computing Consolidated Net Income for such period (a) Fixed Charges for such
period, plus (b) the provision for federal, state, local and foreign income
taxes of the Company and its Restricted Subsidiaries for such period, plus (c)
the aggregate depreciation and amortization expense of the Company and its
Restricted Subsidiaries for such period, plus (d) any other non-cash charges for
such period, and minus non-cash credits for such period, other than non-cash
charges or credits resulting from changes in prepaid assets or accrued
liabilities in the ordinary course of business; PROVIDED that fixed charges,
income tax expense, depreciation and amortization expense and non-cash charges
and credits of a Restricted
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Subsidiary will be included in Consolidated EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income for such period.
"Consolidated Net Income" means, for any period, the net income (or net
loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary gains or losses (less all fees and expenses relating
thereto), (b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to Asset Sales, (c) the portion of net income (or
loss) of any Person (other than the Company or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which the Company or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any Restricted
Subsidiary in cash during such period, (d) the net income (or loss) of any
Person combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination and
(e) the net income (but not the net loss) of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary is at the date of determination restricted, directly
or indirectly, except to the extent that such net income is actually paid to the
Company or a Restricted Subsidiary thereof by loans, advances, intercompany
transfers, principal repayments or otherwise; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Net Income
will be reduced (to the extent not otherwise reduced in accordance with GAAP) by
an amount equal to (A) the amount of the Consolidated Net Income otherwise
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding common stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding common
stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Tangible Assets" means, as of the date of determination, the
total assets, less goodwill and other intangibles, shown on the balance sheet of
the Company and its Restricted Subsidiaries as of the most recent date for which
such a balance sheet is available, determined on a consolidated basis in
accordance with GAAP.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the Indenture the principal amount of which is $25
million or more and that has been specifically designated by the Company, in the
instrument creating or evidencing such Senior Indebtedness or in an officers'
certificate delivered to the Trustee, as "Designated Senior Indebtedness."
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board is required to deliver a resolution
of the Board, to make a finding or otherwise take action under the Indenture, a
member of the Board who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions.
"Disqualified Stock" means any class or series of Capital Stock that, either
by its terms, by the terms of any security into which it is convertible or
exchangeable or by contract or otherwise (i) is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the Holder
thereof, at any time prior to such final Stated Maturity or (iii) at the option
of the Holder thereof is convertible into or exchangeable for debt securities at
any time prior to such final Stated Maturity; PROVIDED that any Capital Stock
that would not constitute Disqualified Stock but for provisions therein giving
Holders thereof the right to cause the issuer thereof to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes will not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to
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the Holders of such Capital Stock than the provisions contained in the covenants
described under the captions "Repurchase at the Option of Holders--Change of
Control" and "--Asset Sales" described herein and such Capital Stock
specifically provides that the issuer will not repurchase or redeem any such
stock pursuant to such provision prior to the Company's repurchase of such Notes
as are required to be repurchased pursuant to the provisions contained in the
covenants described under the captions "Repurchase at the Option of
Holders--Change of Control" and "--Asset Sales."
"Equity Offering" means a public or private offering of Capital Stock (other
than Disqualified Stock) of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Amended Credit
Agreement) outstanding on the date of the Indenture and listed on a schedule to
the Indenture, until such amounts are repaid.
"Facility" means any premises, together with the diagnostic imaging and
treatment equipment installed therein, used by the Company in the conduct of the
business of providing diagnostic imaging and information, treatment and related
management services.
"Fixed Charges" means, for any period, without duplication, the sum of (a)
the amount that, in conformity with GAAP, would be set forth opposite the
caption "interest expense" (or any like caption) on a consolidated statement of
operations of the Company and its Restricted Subsidiaries for such period,
including, without limitation, (i) amortization of debt discount, (ii) the net
cost of interest rate contracts (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation, (iv) amortization of debt
issuance costs, and (v) the interest component of Capitalized Lease Obligations,
plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the
Company and any Restricted Subsidiary (to any Person other than the Company and
its Restricted Subsidiaries), computed on a tax effected basis, plus (c) all
interest on any Indebtedness of any Person guaranteed by the Company or any of
its Restricted Subsidiaries or secured by a lien on the assets of the Company or
any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that Fixed Charges will
not include (i) any gain or loss from extinguishment of debt, including the
write-off of debt issuance costs, and (ii) the fixed charges of a Restricted
Subsidiary to the extent (and in the same proportion) that the net income of
such Subsidiary was excluded in calculating Consolidated Net Income pursuant to
clause (e) of the definition thereof for such period.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of
Consolidated EBITDA for such period to Fixed Charges for such period.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a
jurisdiction other than the United States or a state thereof or the District of
Columbia and that has no material operations or assets in the United States.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person entered into in the ordinary course of business under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and other similar financial agreements or arrangements designed to
protect such Person against, or manage the exposure of such Person to,
fluctuations in interest rates, and (ii) forward exchange agreements, currency
swap, currency option and other similar financial agreements or arrangements
designed to protect such Person against, or manage the exposure of such Person
to, fluctuations in foreign currency exchange rates.
"Holder" means the Person in whose name a Note is, at the time of
determination, registered on the Registrar's books.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed, (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (d) every obligation of such Person issued or
assumed as the deferred purchase price of property or services, (e) the
attributable value of every Capitalized Lease Obligation of such Person, (f) all
Disqualified Stock of such Person valued at its maximum fixed repurchase price,
plus accrued and unpaid dividends, (g) all obligations of such Person under or
in respect of Hedging Obligations, and (h) every obligation of the type referred
to in clauses (a) through (g) of another Person and all dividends of another
Person the payment of which, in either case, such Person has guaranteed. For
purposes of this definition, the "maximum fixed repurchase price" of any
Disqualified Stock that does not have a fixed repurchase price will be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness is required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Stock, such fair market
value will be determined in good faith by the board of directors of the issuer
of such Disqualified Stock. Notwithstanding the foregoing, trade accounts
payable and accrued liabilities arising in the ordinary course of business and
any liability for federal, state or local taxes or other taxes owed by such
Person will not be considered Indebtedness for purposes of this definition.
"Investment" in any Person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to such Person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities issued by such Person, the acquisition (by purchase or otherwise) of
all or substantially all of the business or assets of such Person, or the making
of any investment in such Person, (ii) the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the
Capital Stock (or any other Investment), held by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary. Investments exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon, or with respect to, any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A Person will be deemed to own subject to a Lien any
property that such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or cash equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (a) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and
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investment banks) related to such Asset Sale, (b) provisions for all taxes
payable as a result of such Asset Sale, (c) payments made to retire Indebtedness
where such Indebtedness is secured by the assets that are the subject of such
Asset Sale, (d) amounts required to be paid to any Person (other than the
Company or any Restricted Subsidiary) owning a beneficial interest in the assets
that are subject to the Asset Sale and (e) appropriate amounts to be provided by
the Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the seller after such Asset Sale, including pension
and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Non-Recourse Indebtedness" means Indebtedness of a Permitted Joint Venture
(i) as to which neither the Company nor any of its Restricted Subsidiaries
(other than such Permitted Joint Venture), (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise), and (ii) the obligees of which
will have recourse for repayment of the principal of and interest on such
Indebtedness and any fees, indemnities, expense reimbursements or other amount
of whatsoever nature accrued or payable in connection with such Indebtedness
solely against the assets of such Permitted Joint Venture and not against any of
the assets of the Company or its Restricted Subsidiaries (other than such
Permitted Joint Venture).
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness
that ranks PARI PASSU in right of payment to the Notes and (b) with respect to
any Subsidiary Guarantee, Indebtedness that ranks PARI PASSU in right of payment
to such Subsidiary Guarantee.
"Permitted Business" means the Business conducted by the Company, its
Restricted Subsidiaries and Permitted Joint Ventures as of the date of the
Indenture and any and all diagnostic imaging and information businesses that in
the good faith judgment of the Board are reasonably related thereto.
"Permitted Holders" means (i) Carlyle Partners II, L.P., a Delaware limited
partnership, Carlyle Partners III, L.P., a Delaware limited partnership, Carlyle
International Partners II, L.P., a Cayman Islands exempted limited partnership,
Carlyle International Partners III, L.P., a Cayman Islands exempted limited
partnership, C/S International Partners, a Cayman Islands general partnership,
State Board of Administration of Florida, a separate account maintained pursuant
to an Investment Management Agreement dated as of September 6, 1996 among the
State Board of Administration of Florida, Carlyle Investment Group, L.P. and
Carlyle Investment Management, L.L.C., Carlyle Investment Group, L.P., a
Delaware limited partnership, Carlyle-InSight International Partners, L.P., a
Cayman Islands exempted limited partnership, and Carlyle-InSight Partners, L.P.,
a Delaware limited partnership, and their Affiliates (collectively, "Carlyle
Affiliates") and (ii) General Electric Company, a New York corporation, and its
Affiliates (collectively, "GE Affiliates").
"Permitted Investments" means any of the following:
(a) Investments in (i) securities with a maturity of one year or less
issued or directly and fully guaranteed or insured by the United States or
any agency or instrumentality thereof (PROVIDED that the full faith and
credit of the United States is pledged in support thereof); (ii)
certificates of deposit, Euro-dollar time deposits or acceptances with a
maturity of one year or less of any financial institution that is a member
of the Federal Reserve System having combined capital and surplus of not
less than $500,000,000; (iii) any shares of money market mutual or similar
funds having assets in excess of $500,000,000; (iv) repurchase obligations
with a term not exceeding seven days for underlying securities of the types
described in clauses (i) and (ii) above entered into with any financial
institution meeting the qualifications specified in clause (ii) above; and
(v) commercial paper with a maturity of
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one year or less issued by a corporation that is not an Affiliate of the
Company and is organized under the laws of any state of the United States or
the District of Columbia and having a rating (A) from Moody's Investors
Service, Inc. of at least P-1 or (B) from Standard & Poor's Ratings Group of
at least A-1;
(b) Investments by the Company or any Wholly Owned Restricted Subsidiary
in another Person, if as a result of such Investment (i) such other Person
becomes a Restricted Subsidiary that is a Subsidiary Guarantor or (ii) such
other Person is merged or consolidated with or into, or transfers or conveys
all or substantially all of its assets to, the Company or a Restricted
Subsidiary that is a Subsidiary Guarantor;
(c) Investments by the Company or a Restricted Subsidiary in the Company
or a Subsidiary Guarantor;
(d) Investments in existence on the Closing Date;
(e) promissory notes or other evidence of Indebtedness received as a
result of Asset Sales permitted under the covenant entitled "Repurchase at
the Option of Holders--Asset Sales;"
(f) loans or advances to officers, directors and employees of the
Company or any of its Restricted Subsidiaries made in the ordinary course of
business after the date of the Indenture in an amount not to exceed $1
million in the aggregate at any one time outstanding;
(g) any Investment by the Company or any Restricted Subsidiary of the
Company in Permitted Joint Ventures made after the Closing Date having an
aggregate fair market value, when taken together with all other Investments
made pursuant to this clause (g) that are at the time outstanding, not
exceeding in the aggregate 5% of the Consolidated Tangible Assets of the
Company as of the last day of the most recent full fiscal quarter ending
immediately prior to the date of such Investment (with the fair market value
of each Investment being measured at the time made and without giving effect
to subsequent changes in value); and
(h) other Investments that do not exceed $20 million in the aggregate at
any one time outstanding.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board, (i) at least 50% of whose Capital Stock with
voting power under ordinary circumstances to elect directors (or Persons having
similar or corresponding powers and responsibilities) is at the time owned
(beneficially or directly) by the Company and/or by one or more Restricted
Subsidiaries of the Company and if the Company owns more than 50% of the Capital
Stock of the Permitted Joint Venture, such Permitted Joint Venture is a
Restricted Subsidiary of the Company, (ii) all of whose Indebtedness is Non-
Recourse Indebtedness, (iii) which is engaged in a Permitted Business, and (iv)
in which any Investment made as a result of designating such Person a Permitted
Joint Venture will not violate the provisions of the covenant described under
the caption "--Restricted Payments"; provided that each of Berwyn Magnetic
Resonance Center, LLC, Garfield Imaging Center, Ltd., MRI Associates, L.P.,
Tom's River Imaging Associates, L.P., St. John's Regional Imaging Center, LLC,
Dublin Diagnostic Imaging, LLC, Buckhead Imaging, LLC, MedFinancial, LLC,
Connecticut Lithotripsy LLC, Northern Indiana Oncology Center of Porter Memorial
Hospital, LLC and Northwest Magnetic Imaging shall be deemed to be a Permitted
Joint Venture. Any such designation (other than with respect to the Persons
identified in the preceding sentence) shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution giving effect to such
designation and an officer's certificate certifying that such designation
complied with the foregoing provisions.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
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PROVIDED that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded plus the lesser of
the amount of any premium required to be paid in connection with such
refinancings pursuant to the terms of such indebtedness or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary of the Company that is the obligor
on the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's preferred or preference stock, whether now
outstanding or issued after the Closing Date, and including, without limitation,
all classes and series of preferred or preference stock of such Person.
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any Person means any and all Capital Stock of such
Person, other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Restricted Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
"Senior Bank Debt" means the Obligations outstanding under the Amended
Credit Agreement.
"Senior Indebtedness" means (i) the Senior Bank Debt and any Hedging
Obligations in respect thereof and (ii) any other Indebtedness permitted to be
incurred by the Company or any Subsidiary Guarantor under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is subordinated in right of payment to any
Indebtedness for money borrowed. Notwithstanding anything to the contrary in the
foregoing, Senior Indebtedness will not include (i) Indebtedness evidenced by
the Notes, (ii) Indebtedness of the Company that is expressly subordinated in
right of payment to any Senior Indebtedness of the Company or the Notes, (iii)
Indebtedness of the Company that by operation of law is subordinate to any
general unsecured obligations of the Company, (iv) Indebtedness of the Company
to the extent incurred in violation of the Indenture, (v) any liability for
federal, state or local taxes or other taxes, owed or owing by the Company, (vi)
trade account payables owed or owing by the Company, (vii) amounts owed by the
Company for compensation to employees or for services rendered to the Company,
(viii) Indebtedness of the Company to any Restricted Subsidiary or any other
Affiliate of the Company, (ix) Disqualified Stock of the Company and (x)
Indebtedness which when incurred and without respect to any election under
Section 1111(b) of Title 11 of the United States Code is without recourse to the
Company or any Restricted Subsidiary.
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"Significant Subsidiary" means any Restricted Subsidiary of the Company
that, together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Subsidiaries, (b) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the
most recently available consolidated financial statements of the Company for
such fiscal year or (c) was organized or acquired after the beginning of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such entire fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness or any installment of interest
thereon is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment to the Notes or
the Subsidiary Guarantees issued by such Subsidiary Guarantor, as the case may
be.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Subsidiary Guarantors" means, collectively, all Restricted Subsidiaries
that are incorporated in the United States or a State thereof or the District of
Columbia (other than Permitted Joint Ventures); PROVIDED that any Person that
becomes an Unrestricted Subsidiary in compliance with the "Restricted Payments"
covenant shall not be included in "Subsidiary Guarantors" after becoming an
Unrestricted Subsidiary.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the
Board as an Unrestricted Subsidiary in accordance with the "Unrestricted
Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the Holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes has, or might have, voting power by reason of the happening of
any contingency).
"Weighted Average Life" means, as of the date of determination with respect
to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a)
the sum of the products of (i) the number of years from the date of
determination to the date or dates of each successive scheduled principal or
liquidation value payment of such Indebtedness or Disqualified Stock,
respectively, multiplied by (ii) the amount of each such principal or
liquidation value payment by (b) the sum of all such principal or liquidation
value payments.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of
the outstanding voting securities (other than directors' qualifying shares or
shares of foreign Restricted Subsidiaries required to be owned by foreign
nationals pursuant to applicable law) of which are owned, directly or
indirectly, by the Company.
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DESCRIPTION OF PREFERRED STOCK
Pursuant to the Recapitalization, the Company issued (i) to Carlyle, 25,000
shares of the Company's Convertible Preferred Stock, Series B (the "Series B
Preferred Stock") and warrants to purchase 250,000 shares of the Company's
common stock at the current exercise price of $10.00 per share and (ii) to GE,
7,000 shares of Series C Preferred Stock and an additional 20,953 shares of the
Company's Convertible Preferred Stock, Series C (the "Series C Preferred Stock")
in exchange for all of GE's shares of the Company's Convertible Preferred Stock,
Series A.
The Series B Preferred Stock and the Series C Preferred Stock (collectively,
"Preferred Stock") rank equally and their terms are substantially the same. The
Preferred Stock has a liquidation preference of $1,000 per share and ranks
senior to all other classes of outstanding capital stock with respect to
dividend distributions and distributions upon the liquidation, winding up and
dissolution of the Company. It will participate in any dividends paid with
respect to the Company's common stock. There is no mandatory or optional
redemption provision for the Preferred Stock. The 25,000 shares of Series B
Preferred Stock is initially convertible, at the option of the holders thereof,
into an aggregate of 2,985,075 shares of the Company's common stock, and the
27,953 shares of Series C Preferred Stock are initially convertible, at the
option of the holders thereof, into an aggregate of 3,337,581 shares of the
Company's common stock, in each case at an initial conversion price of $8.375
per share. The Preferred Stock may be converted in whole at any time, and may be
converted in part substantially contemporaneously with the Board-approved sale
of a holder's Preferred Stock to a third party, the consummation of a public
offering of the Company's common stock and the consummation of a private sale of
the Company's common stock after April 14, 1999. The Series B Preferred Stock
and the Series C Preferred Stock may together be converted into the Company's
Convertible Preferred Stock, Series D (the "Series D Preferred Stock") on or
after October 22, 1998.
As 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
each 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 votes with the Company's common stock on an as-if-converted basis on all
matters except the election of directors, provided that the aggregate number of
votes cast by GE and Carlyle does not exceed 37% of all votes entitled to be
cast on such matters.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Board is currently fixed at nine. Six directors ("Common Stock
Directors") are elected by the Company's common stockholders, one of whom (the
"Joint Director") is to be proposed by Carlyle and GE and approved by a majority
of the Board in its sole discretion. Of the three remaining directors
("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 Company's common stockholders. As long as Carlyle and certain affiliates
thereof own an aggregate of at least 50% of the Series B Preferred Stock, the
holders of the Series B Preferred Stock will have the right to elect two
Preferred Stock Directors and as long as Carlyle and certain affiliates thereof
own an aggregate of at least 25% of such stock, such holders will have the right
to elect one Preferred Stock Director. As long as GE and its affiliates own an
aggregate of at least 25% of the Series C Preferred Stock it will have the right
to elect one Preferred Stock Director. If any such ownership percentage falls
below the applicable threshold, the Preferred Stock Director(s) formerly
entitled to be elected by Carlyle or GE, as the case may be, will thereafter be
elected by the Company's common stockholders. As of June 1, 1998, the Board
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consisted of eight directors, five of whom are Common Stock Directors and three
of whom are Preferred Stock Directors. The Joint Director vacancy has not yet
been filled.
All of the Series B Preferred Stock and the Series C Preferred Stock may be
converted at any time into Series D Preferred Stock. The Series D Preferred
Stock allows the number of directors to be automatically increased to a number
which would permit each of Carlyle and GE, by filling the newly created
vacancies, to achieve representation on the Board proportionate to their
respective common stock ownership percentages on an as-if-converted basis, but
would limit such representation to less than two thirds of the Board for a
certain period of time, as further described below. 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 Company's common stock and will be convertible into 6,322,660 shares of the
Company's common stock.
Holders of the Preferred Stock 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 its common stock. Holders of the Preferred Stock are also entitled to
certain demand and "piggyback" registration rights.
Each of Carlyle and GE has agreed (i) not to transfer, sell, assign or
pledge to any person other than an affiliate, or dispose of, any interest in any
shares of Series B Preferred Stock or Series C Preferred Stock without the prior
approval of the Board, in its sole discretion, and (ii) not to transfer, sell or
assign to an affiliate any interest in any shares of Series B Preferred Stock or
Series C Preferred Stock if such affiliate is engaged in the provision of
diagnostic services to the health care industry. In addition, until the earlier
to occur of April 14, 1999 or the conversion of the Preferred Stock into Series
D Preferred Stock, each of Carlyle and GE has agreed not to transfer, sell or
assign to any person any of the Company's common stock issuable upon conversion
of the Preferred Stock (the "Conversion Shares") without the prior approval of a
majority of the Board in its sole discretion, other than a transfer (i) to an
affiliate, (ii) permitted under Rule 144 of the Securities Act, (iii) pursuant
to a registered offering pursuant to the registration rights agreements with
Carlyle and GE or (iv) pursuant to a transaction available to all stockholders
of the Company on the same terms as to Carlyle or GE, as applicable, which has
been approved by a majority of the Board. If the Preferred Stock is converted
into Series D Preferred Stock prior to April 14, 1999, then until the second
annual stockholders meeting after such conversion date, additional restrictions
apply to the ability of GE or Carlyle to transfer Series D Preferred Stock or
the common stock issuable upon the conversion thereof or to cause the Company to
engage in certain transactions.
The foregoing description of the rights, preferences and privileges of the
Series B Preferred Stock as set forth in the Certificate of Designation,
Preferences and Rights of Convertible Preferred Stock, Series B (the "Series B
Certificate of Designation"), the Series C Preferred Stock as set forth in the
Certificate of Designation, Preferences and Rights of Convertible Preferred
Stock, Series C (the "Series C Certificate of Designation") and the Series D
Preferred Stock as set forth in the Certificate of Designation, Preferences and
Rights of Convertible Preferred Stock, Series D (the "Series D Certificate of
Designation") does not purport to be complete and is subject to and qualified in
its entirety by reference to the Series B Certificate of Designation, the Series
C Certificate of Designation and the Series D Certificate of Designation, copies
of which are filed with the Commission as Exhibits 3.2, 3.3 and 3.4,
respectively, to the Company's Annual Report on Form 10-K for the year ended
June 30, 1997.
121
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations to persons who acquired the Outstanding Notes on original
issuance for cash and who hold the Exchange Notes subsequent to the Exchange
Offer. It does not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), proposed, temporary and final Treasury
Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now
in effect, all of which are subject to change (possibly with retroactive effect)
or different interpretations. This summary is not intended to be wholly
applicable to all categories of investors, some of which, such as dealers in
securities, banks, financial institutions, insurance companies and tax-exempt
organizations, may be subject to special rules. In addition, this summary is
limited to persons that will hold the Notes as a "capital asset" within the
meaning of Section 1221 of the Code. Further, this summary does not address the
effect of any applicable United States federal estate tax or any state, local or
other tax laws. ACCORDINGLY, INVESTORS CONSIDERING THE PURCHASE OF EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF
THE UNITED STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL, OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
The exchange of an Outstanding Note by a holder for an Exchange Note should
not constitute a taxable exchange and thus should not result in income, gain or
loss to holders of Notes who participate in the Exchange Offer or to the
Company. Such holders should have the same adjusted basis and holding period in
the Exchange Notes immediately after the exchange as the holders had in the
Outstanding Notes immediately prior to the exchange. As used herein, the term
"United States Holder" means a beneficial owner of the Outstanding Notes or
Exchange Notes that is, for United States federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation or other entity
created or organized under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which its subject to federal
income taxation regardless of its source, or (iv) a trust subject to the primary
supervision of a U.S. court and the control of one or more U.S. fiduciaries. A
"Foreign Holder" is any holder of Outstanding Notes or Exchange Notes that is
not a United States Holder.
UNITED STATES HOLDERS
STATED INTEREST. A United States Holder of a Note will be required to
include interest on a Note in gross income for Federal income tax purposes in
accordance with the holder's method of tax accounting.
SALE, EXCHANGE OR REDEMPTION OF A NOTE. Upon a taxable sale, exchange or
redemption of a Note, a United States Holder generally will recognize capital
gain or loss equal to the difference between the amount realized (other than any
amount received attributable to accrued interest on a Note that was not
previously included in gross income, which amount will be treated as interest
income) and the holder's tax basis in the Note. Such capital gain or loss will
be long-term capital gain or loss if the Holder's holding period in the Note is
more than one year at the time of such disposition. In general, in the case of a
non-corporate United States Holder, capital gains recognized on Notes held (i)
one year or less will be taxed at ordinary income tax rates, (ii) more than one
year but 18 months or less will be taxed at a maximum rate of 28% and (iii) more
than 18 months will be taxed at a maximum rate of 20%. In addition, holders
should consult their own tax advisers regarding the availability and effect of a
certain tax election to mark-to-market Notes held on January 1, 2001.
FOREIGN HOLDERS
Payments of principal and interest on the Notes to a Foreign Holder
generally will not be subject to United States Federal withholding tax provided
that (a) the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (b) the holder is not a controlled foreign corporation that is related to
the Company through stock
122
<PAGE>
ownership and (c) either (1) the beneficial owner of the Note, under penalties
of perjury, provides the Company or its agent with its name and address and
certifies that it is not a United States person or (2) a securities clearing
organization, bank, or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") certifies to the Company or its agent, under penalties of perjury,
that such a statement has been received from the beneficial owner by it or
another financial institution and furnishes to the Company or its agent a copy
thereof.
A Foreign Holder that does not qualify for the exception from withholding
tax described above would generally be subject to the United States withholding
tax at a flat rate of 30% (or a lower applicable treaty rate) on payments of
interest, unless the Foreign Holder's income from the Notes is effectively
connected with a U.S. trade or business of the holder. A Foreign Holder
generally will be taxed in the same manner as a United States corporation or
resident with respect to such income if it is effectively connected with the
conduct of a trade or business in the United States. Such effectively connected
income received by a Foreign Holder which is a corporation may in certain
circumstances be subject to an additional "branch profits tax" at a 30% rate or,
if applicable, a lower treaty rate.
A Foreign Holder generally will not be subject to United States Federal
income or withholding tax on gain realized on the sale, exchange or redemption
of the Notes unless (i) the holder is an individual who was present in the
United States for 183 days or more during the taxable year and certain other
requirements are met, or (ii) the gain is effectively connected with the conduct
of a trade or business of the holder in the United States.
The IRS recently issued Treasury Regulations, generally effective for
payments made after December 31, 1998, concerning the withholding of tax and
reporting for certain amounts paid to non-resident individuals and foreign
corporations. Among other things, these Treasury Regulations may require Foreign
Holders to furnish new certification of their foreign status after December 31,
1998. Prospective purchasers of Notes should consult their tax advisors
concerning the applicability and effect of such Treasury Regulations on an
investment in the Notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note and payments of the proceeds
of the sale of a Note to certain noncorporate United States Holders, and a 31%
backup withholding tax may apply to such payment if the United States Holder (i)
fails to furnish or certify his correct taxpayer identification number ("TIN")
to the payor in the manner required, (ii) is notified by the IRS that he has
failed to report payments of interest or dividends properly or (iii) under
certain circumstances, fails to certify that he has not been notified by the IRS
that he is subject to backup withholding for failure to report interest or
dividend payments.
The payment of interest on the Notes to Foreign Holders (or purported
Foreign Holders) generally will not be subject to information reporting and
backup withholding if the Company (or its paying agent) has received the
certification described in (c) above under the caption "Foreign Holders" and
neither the Company nor its paying agent has actual knowledge that the holder is
a United States person. The proceeds paid to a Foreign Holder upon the sale of a
Note by or through a United States office of a broker will be subject to
information reporting and backup withholding unless the holder provides the
certification described in (c) above or otherwise establishes an exception. The
proceeds paid to a Foreign Holder upon the sale of a Note by or through a
foreign office of a broker generally will not be subject to a backup withholding
tax. However, such proceeds will be subject to information reporting if the
broker is (i) a United States person, (ii) a "controlled foreign corporation"
for United States federal income tax purposes, or (iii) a foreign person 50% or
more of whose gross income for certain periods is effectively connected with the
conduct of a trade or business in the United States, unless the broker has
documentary evidence in its files that the holder is not a United States person
and the broker has no knowledge to the contrary.
123
<PAGE>
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States Federal income tax
liability provided the required information is furnished to the IRS.
PLAN OF DISTRIBUTION
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Outstanding Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver this Prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer who
holds Outstanding Notes acquired for its own account as a result of
market-making activities or other trading activities (an "Exchanging Dealer") in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes. For a period (the "Exchange Offer Registration Period") the longer of (A)
the period until consummation of the Exchange Offer and (B) two years after the
effectiveness of the Registration Statement (unless, in the case of (B), all
resales of Exchange Notes covered by the Registration Statement have been made),
the Company will make this Prospectus, as amended or supplemented, available to
any Exchanging Dealer for use in connection with any such resale; provided,
however, that the Company shall not be required to maintain the effectiveness of
the Registration Statement for more than 60 days following the consummation of
the Exchange Offer unless the Company has been notified in writing on or prior
to the 60th day following the consummation of the Exchange Offer by one or more
broker-dealers that such holder has received Exchange Notes as to which it will
be required to deliver this Prospectus upon resale. In addition, until December
, 1998, (90 days after the date of this Prospectus), all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from the exchange of Outstanding
Notes for Exchange Notes by broker-dealers. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, or at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through broker-dealers who may receive compensation in the form of commissions
or concessions from any such broker-dealer and/or the purchasers of any Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any person that
participates in the distribution of such Exchange Notes may be deemed an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such broker-dealers may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions or concessions of any broker-dealers and will indemnify
the holders of the Outstanding Notes (including Exchanging Dealers)
participating in the Exchange Offer against certain liabilities, including
liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of
notice from the Company of (i) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (ii) the receipt by the Company of any
notification with respect to the suspension of the qualification of the Notes
included therein for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose; or (iii) the happening of any event that
requires the
124
<PAGE>
making of any changes in the Registration Statement or this Prospectus so that,
as of such date, the Registration Statement or this Prospectus does not include
an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein (in the case of this Prospectus, in
light of the circumstances under which they were made) not misleading (which
notice the Company agrees to advise to any broker-dealer that has provided in
writing to the Company a telephone or facsimile number and address for notices),
such broker-dealer will suspend the use of this Prospectus until the Company has
amended or supplemented this Prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented Prospectus to such
broker-dealer or until it is advised is writing by the Company that the use of
this Prospectus may be resumed and has received copies of any amendments or
supplements thereto. If the Company gives any such notice to suspend the use of
the Prospectus, it will extend the Exchange Offer Registration Period by the
number of days during the period from and including the date of the giving of
such notice to and including the date when broker-dealers shall have received
(x) copies of the supplemented or amended Prospectus necessary to permit resales
of Exchange Notes or (y) such advice in writing.
LEGAL MATTERS
Certain legal matters will be passed upon on behalf of the Company by Arent
Fox Kintner Plotkin & Kahn, PLLC, Washington, D.C.
EXPERTS
The financial statements of InSight Health Services Corp. and subsidiaries
as of June 30, 1997 and 1996, and for the year ended June 30, 1997 and for the
six months ended June 30, 1996, included in this Registration Statement, have
been audited by Arthur Andersen LLP, independent certified public accountants,
as stated in their report appearing herein and have been so included in reliance
upon the report of such firm upon their authority as experts in accounting and
auditing.
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows of Maxum Health Corp. and subsidiaries for each of the two years
in the period ended December 31, 1995, included in this Registration Statement,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and have been so included in reliance upon the
report of such firm upon their authority as experts in accounting and auditing.
The financial statements of Signal Medical Services, Inc. as of December 31,
1997 and 1996 and for each of the years in the two-year period ended December
31, 1997, included in this Registration Statement, have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, as stated in their
report appearing herein and have been so included in reliance upon the report of
such firm upon their authority as experts in accounting and auditing.
The financial statements of Mobile Imaging Consortium as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996, included in this Registration Statement, have been audited by Baker
Newman & Noyes LLC, independent certified public accountants, as stated in their
report appearing herein and have been so included in reliance upon the report of
such firm upon their authority as experts in accounting and auditing.
125
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-----------
<S> <C>
Report of Independent Public Accountants............................................................ F-2
Report of Independent Public Accountants............................................................ F-3
Consolidated Balance Sheets as of June 30, 1997 and 1996............................................ F-4
Consolidated Statements of Operations for the Year Ended June 30, 1997, the Six Months Ended June
30, 1996 and the Years Ended December 31, 1995 and 1994........................................... F-6
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995, the
Six Months Ended June 30, 1996 and the Year Ended June 30, 1997................................... F-7
Consolidated Statements of Cash Flows for the Year Ended June 30, 1997, the Six Months Ended June
30, 1996 and the Years Ended December 31, 1995 and 1994........................................... F-8
Notes to Consolidated Financial Statements.......................................................... F-9
Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited) and June 30, 1997............ F-31
Condensed Consolidated Statements of Operations (unaudited) for the Nine Months Ended March 31, 1998
and 1997.......................................................................................... F-33
Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31,
1998 and 1997..................................................................................... F-34
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended March 31, 1998
and 1997.......................................................................................... F-35
Notes to Condensed Consolidated Financial Statements (unaudited).................................... F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited the accompanying consolidated balance sheets of INSIGHT
HEALTH SERVICES CORP. (a Delaware corporation) and subsidiaries as of June 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended June 30, 1997 and for the
six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InSight
Health Services Corp. and subsidiaries as of June 30, 1997 and 1996, and results
of their operations and their cash flows for the year ended June 30, 1997 and
for the six months ended June 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
October 14, 1997 (except
with respect to the
matter discussed in Note
15, as to which the date
is July 29, 1998).
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To Maxum Health Corp.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Maxum Health Corp. and
Subsidiaries (MHC) for each of the two years in the period ended December 31,
1995. Our audits also include the related financial statement schedule of
valuation and qualifying accounts. These financial statements and schedule are
the responsibility of MHC's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of MHC's operations and its cash flows for
each of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying 1995 and 1994 financial statements have been prepared
assuming that MHC will continue as a going concern. As discussed in Note 3 to
the financial statements, MHC is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its operations. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in Notes 1
and 3. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 1, 1996
F-3
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 7,135 $ 6,864
Trade accounts receivable, net............................................................ 15,645 12,916
Other receivables, net.................................................................... 358 973
Other current assets...................................................................... 1,554 1,708
--------- ---------
Total current assets.................................................................... 24,692 22,461
--------- ---------
PROPERTY AND EQUIPMENT:
Vehicles.................................................................................. 968 978
Land, building and leasehold improvements................................................. 9,589 8,602
Computer and office equipment............................................................. 3,855 3,638
Diagnostic and related equipment.......................................................... 28,193 18,113
Equipment and vehicles under capital leases............................................... 8,086 10,479
--------- ---------
50,691 41,810
Less: Accumulated depreciation and amortization......................................... 16,203 11,958
--------- ---------
Property and equipment, net............................................................. 34,488 29,852
--------- ---------
INVESTMENT IN PARTNERSHIPS.................................................................. 402 359
--------- ---------
OTHER ASSETS................................................................................ 5,468 749
--------- ---------
INTANGIBLE ASSETS, net...................................................................... 33,272 16,965
--------- ---------
$ 98,322 $ 70,386
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of equipment and other notes............................................ $ 11,901 $ 6,585
Current portion of capital lease obligations............................................ 3,561 2,638
Accrued equipment related costs......................................................... 2,882 3,249
Accounts payable and other accrued expenses............................................. 8,822 8,328
Accrued payroll and related costs....................................................... 2,521 1,775
Current portion of deferred gain on debt restructure.................................... 745 1,053
---------- ----------
Total current liabilities............................................................. 30,432 23,628
---------- ----------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion......................................... 54,421 31,653
Capital lease obligations, less current portion......................................... 3,312 3,988
Accrued securities litigation settlement................................................ -- 1,900
Deferred gain on debt restructure, less current portion................................. 728 1,467
Other long-term liabilities............................................................. 744 831
---------- ----------
Total long-term liabilities........................................................... 59,205 39,839
---------- ----------
COMMITMENTS (Note 8)
MINORITY INTEREST......................................................................... 2,000 1,515
---------- ----------
STOCKHOLDERS' EQUITY:
Convertible Series A preferred stock, $.001 par value, 3,500,000 shares authorized;
2,501,760 outstanding at June 30, 1997 and 1996, respectively, with a liquidation
preference of $24,000 ................................................................ 6,750 6,750
Common stock, $.001 par value, 25,000,000 shares authorized, 2,714,725 and 2,710,240
shares outstanding at June 30, 1997 and 1996, respectively............................ 3 3
Additional paid-in capital.............................................................. 23,100 23,100
Accumulated deficit..................................................................... (23,168) (24,449)
---------- ----------
Total stockholders' equity............................................................ 6,685 5,404
---------- ----------
$ 98,322 $ 70,386
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Contract services........................................ $ 47,827 $ 20,045 $ 38,976 $ 36,393
Patient services......................................... 42,706 5,853 10,605 8,228
Other.................................................... 2,530 562 1,028 1,247
----------- ----------- ------------ ------------
Total revenues......................................... 93,063 26,460 50,609 45,868
----------- ----------- ------------ ------------
COSTS OF OPERATIONS:
Costs of services........................................ 50,564 15,899 28,772 26,067
Provision for doubtful accounts.......................... 1,506 617 1,669 1,124
Equipment leases......................................... 18,396 6,957 14,464 14,581
Depreciation and amortization............................ 9,871 3,947 3,873 3,667
----------- ----------- ------------ ------------
Total costs of operations.............................. 80,337 27,420 48,778 45,439
----------- ----------- ------------ ------------
GROSS PROFIT (LOSS)........................................ 12,726 (960) 1,831 429
CORPORATE OPERATING EXPENSES............................... 7,431 2,127 3,372 4,040
----------- ----------- ------------ ------------
INCOME (LOSS) FROM COMPANY OPERATIONS...................... 5,295 (3,087) (1,541) (3,611)
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS.......... 468 138 348 834
----------- ----------- ------------ ------------
OPERATING INCOME (LOSS).................................... 5,763 (2,949) (1,193) (2,777)
OTHER INCOME (EXPENSE):
Interest expense, net.................................... (4,055) (1,144) (1,626) (1,206)
Provision for securities litigation settlement........... -- -- (1,500) --
Gain on sale of partnership interests.................... -- -- -- 4,957
----------- ----------- ------------ ------------
(4,055) (1,144) (3,126) 3,751
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.......................... 1,708 (4,093) (4,319) 974
PROVISION FOR INCOME TAXES................................. 427 65 -- 160
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................... 1,281 (4,158) (4,319) 814
EXTRAORDINARY ITEM--Net gain on debt extinguishment........ -- 3,179 -- 3,342
----------- ----------- ------------ ------------
NET INCOME (LOSS).......................................... $ 1,281 $ (979) $ (4,319) $ 4,156
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item.................. $ 0.24 $ (2.99) $ (3.21) $ 0.58
----------- ----------- ------------ ------------
Net income (loss)........................................ $ 0.24 $ (0.70) $ (3.21) $ 2.96
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Weighted average number of common shares outstanding..... 5,440,315 1,389,271 1,344,832 1,402,435
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- -------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT WARRANT CAPITAL
--------- ------ ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993............ -- $-- 2,949,488 $ 29 $ 7 $19,679
Stock issued under employee purchase
plan.................................. -- -- 3,927 -- -- 1
Surrender of 132,750 shares of treasury
stock in settlement of stockholder
note receivable....................... -- -- -- -- -- --
Net income.............................. -- -- -- -- -- --
--------- ------ ---------- --------- --------- ----------
BALANCE AT DECEMBER 31, 1994............ -- -- 2,953,415 29 7 19,680
Stock issued under employee purchase
plan.................................. -- -- 51,640 1 -- 13
Net loss................................ -- -- -- -- -- --
--------- ------ ---------- --------- --------- ----------
BALANCE AT DECEMBER 31, 1995............ -- -- 3,005,055 30 7 19,693
Issuance of Series A Preferred Stock and
cancellation of common stock
warrant............................... 1,250,880 3,375 -- -- (7) --
Acquisition of IHC...................... 1,250,880 3,375 1,349,908 1 -- 3,644
Retirement of MHC's treasury stock...... -- -- -- -- -- (265)
Reset the par value of InSight common
stock issued in exchange for MHC'S
common stock.......................... -- -- (1,644,723) (28) -- 28
Net loss................................ -- -- -- -- -- --
--------- ------ ---------- --------- --------- ----------
BALANCE AT JUNE 30, 1996................ 2,501,760 6,750 2,710,240 3 -- 23,100
Stock options exercised................. -- -- 4,485 -- -- --
Net income.............................. -- -- -- -- -- --
--------- ------ ---------- --------- --------- ----------
BALANCE AT JUNE 30, 1997................ 2,501,760 $6,750 2,714,725 $ 3 $ -- $23,100
--------- ------ ---------- --------- --------- ----------
--------- ------ ---------- --------- --------- ----------
<CAPTION>
STOCKHOLDER
ACCUMULATED NOTE TREASURY
DEFICIT RECEIVABLE STOCK TOTAL
----------- ----------- -------- -------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993............ $(23,307) $ (110) $ (155) $(3,857)
Stock issued under employee purchase
plan.................................. -- -- -- 1
Surrender of 132,750 shares of treasury
stock in settlement of stockholder
note receivable....................... -- 110 (110) --
Net income.............................. 4,156 -- -- 4,156
----------- ----------- -------- -------
BALANCE AT DECEMBER 31, 1994............ (19,151) -- (265) 300
Stock issued under employee purchase
plan.................................. -- -- -- 14
Net loss................................ (4,319) -- -- (4,319)
----------- ----------- -------- -------
BALANCE AT DECEMBER 31, 1995............ (23,470) -- (265) (4,005)
Issuance of Series A Preferred Stock and
cancellation of common stock
warrant............................... -- -- -- 3,368
Acquisition of IHC...................... -- -- -- 7,020
Retirement of MHC's treasury stock...... -- -- 265 --
Reset the par value of InSight common
stock issued in exchange for MHC'S
common stock.......................... -- -- -- --
Net loss................................ (979) -- -- (979)
----------- ----------- -------- -------
BALANCE AT JUNE 30, 1996................ (24,449) -- -- 5,404
Stock options exercised................. -- -- -- --
Net income.............................. 1,281 -- -- 1,281
----------- ----------- -------- -------
BALANCE AT JUNE 30, 1997................ $(23,168) $ -- $ -- $ 6,685
----------- ----------- -------- -------
----------- ----------- -------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................... $ 1,281 $ (979) $ (4,319) $ 4,156
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization...................................... 9,871 4,022 4,060 3,913
Amortization of deferred gain on debt restructure.................. (1,047) -- -- --
Gain on disposal of assets......................................... (113) (133) (35) (112)
Provision for securities litigation settlement..................... -- -- 1,500 --
Gain on sale of partnership interests.............................. -- -- -- (4,957)
Operating expenses financed by issuance of debt.................... -- 1,015 2,330 2,672
Extraordinary gain on debt extinguishments......................... -- (3,179) -- (3,342)
Cash provided by (used in) changes in operating assets and
liabilities:
Payments for restructure costs..................................... -- -- -- (700)
Receivables........................................................ (1,664) (174) (524) (38)
Other current assets............................................... 157 (851) (110) 782
Accounts payable and other current liabilities..................... (1,143) 975 (1,089) 1,088
----------- ----------- ------------ ------------
Net cash provided by operating activities.......................... 7,342 696 1,813 3,462
----------- ----------- ------------ ------------
INVESTING ACTIVITIES:
Cash acquired in acquisition of IHC.................................. -- 5,489 -- --
Acquisition of Centers and Mobile Facilities......................... (18,566) -- (1,855) (510)
Acquisition of customer contracts and intangibles.................... -- -- (2,108) --
Proceeds from sales of assets........................................ 347 369 745 1,358
Proceeds from sale of partnership interests.......................... -- -- -- 5,007
Additions to property and equipment.................................. (7,102) (960) (548) (349)
(Increase) decrease in other assets................................ (4,937) 195 190 582
----------- ----------- ------------ ------------
Net cash provided by (used in) investing activities................ (30,258) 5,093 (3,576) 6,088
----------- ----------- ------------ ------------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease obligations............. (11,026) (2,302) (6,020) (4,752)
Proceeds from issuance of debt....................................... 33,728 1,507 2,689 268
Net repayments on revolving note payable............................. -- -- -- (250)
Other................................................................ 485 -- 14 1
----------- ----------- ------------ ------------
Net cash provided by (used in) financing activities................ 23,187 (795) (3,317) (4,733)
----------- ----------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:...................... 271 4,994 (5,080) 4,817
Cash, beginning of period............................................ 6,864 1,870 6,950 2,133
----------- ----------- ------------ ------------
Cash, end of period.................................................. $ 7,135 $ 6,864 $ 1,870 $ 6,950
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
SUPPLEMENTAL INFORMATION (Note 13)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER
InSight Health Services Corp. (InSight or the Company) is a Delaware
corporation formed on February 23, 1996 in connection with the Agreement and
Plan of Merger, dated as of February 26, 1996 (Merger Agreement), among American
Health Services Corp., a Delaware corporation (AHS), Maxum Health Corp., a
Delaware corporation (MHC or Maxum), InSight and two wholly owned subsidiaries
of InSight, AHSC Acquisition Company, a Delaware corporation (AHSC Acquisition),
and MXHC Acquisition Company, a Delaware corporation (MXHC Acquisition).
Pursuant to the terms of the Merger Agreement, (i) AHSC Acquisition merged with
and into AHS and MXHC Acquisition merged with and into Maxum (collectively, the
Merger), (ii) each outstanding share of common stock, par value $.03 per share,
of AHS (AHS Common Stock) was converted into the right to receive one-tenth of a
share of common stock, par value $.001 per share, of InSight (InSight Common
Stock), (iii) each outstanding share of Series B Senior Convertible Preferred
Stock, par value $.03 per share, of AHS (AHS Series B Preferred Stock) which was
convertible into 100 shares of AHS Common Stock was converted into the right to
receive 10 shares of InSight Common Stock, (iv) each outstanding share of Series
C Preferred Stock, par value $.03 per share, of AHS (AHS Series C Preferred
Stock), which was issued immediately prior to the consummation of the Merger,
was converted into the right to receive 1.25088 shares of Series A Preferred
Stock, par value $.001 per share, of InSight (InSight Series A Preferred Stock),
(v) each outstanding share of common stock, par value $.01 per share, of Maxum
(Maxum Common Stock) was converted into the right to receive .598 of a share of
InSight Common Stock, (vi) each outstanding share of Series B Preferred Stock,
par value $.01 per share, of Maxum (Maxum Series B Preferred Stock), which was
issued immediately prior to the consummation of the Merger, was converted into
the right to receive 83.392 shares of InSight Series A Preferred Stock, and
(vii) each outstanding option, warrant or other right to purchase AHS Common
Stock and Maxum Common Stock was converted into the right to acquire, on the
same terms and conditions, shares of InSight Common Stock, with the number of
shares and exercise price applicable to such option, warrant or other right
adjusted based on the applicable exchange ratio for the underlying AHS Common
Stock or Maxum Common Stock.
Concurrent with the consummation of the Merger, AHS and MHC completed a debt
restructuring with General Electric Company (GE), the primary creditor of MHC
and AHS. This restructuring resulted in the reduction of certain debt and
operating lease obligations and cancellation of certain stock warrants of MHC
and AHS in exchange for, among other things, the issuance to GE, immediately
prior to the consummation of the Merger, of Maxum Series B Preferred Stock and
AHS Series C Preferred Stock. In connection with this restructuring, MHC
recorded the extinguishment of $9.0 million of long-term debt obligations and an
extraordinary gain representing the difference in the carrying value ($9.0
million) of the debt obligations settled over the fair value ($3.4 million) of
the Maxum Series B Preferred Stock issued to GE. In accordance with the
provisions of troubled debt accounting, a portion of the extraordinary gain,
equal to the sum of the current and long-term portions of future interest
payable on all remaining GE debt and capital lease obligations of $1.0 million
and $1.5 million, respectively, was deferred and will be reduced by future
interest payments over the terms of the respective debt instruments.
At the effective time of the Merger, MHC Series B Preferred Stock and AHS
Series C Preferred Stock issued to GE was converted into the right to receive
such number of shares of InSight Series A Preferred Stock that is convertible
into such number of shares of InSight Common Stock representing approximately
48% of InSight Common Stock outstanding at the effective time of the Merger
(after giving effect to such conversion). Under an amended equipment maintenance
service agreement, GE will also be entitled to receive certain supplemental
service fee payments based on future pretax income of InSight.
On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC).
F-9
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. MERGER (CONTINUED)
The Merger was accounted for using the purchase method of accounting in
accordance with generally accepted accounting principles. MHC is treated as the
acquiror for accounting purposes, based upon the relative revenues, book values
and other factors. The Consolidated Financial Statements presented herein for
the six months ended June 30, 1996 and for the years ended December 31, 1995 and
1994, respectively, represent the operating results of MHC only.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF BUSINESS
The Company provides diagnostic imaging, treatment and related services to
hospitals, physicians and their patients through its imaging network in 26
states throughout the United States, with a substantial presence in California,
primarily Los Angeles County, and northern Texas, primarily the Dallas/Ft. Worth
metroplex. The Company's services are provided through a network of 35 mobile
magnetic resonance imaging (MRI) facilities (Mobile Facilities), 28 fixed-site
MRI facilities (Fixed Facilities), 10 multi-modality imaging centers (Centers),
two Leksell Stereotactic Gamma Unit treatment centers (Gamma Knife), and one
radiation oncology center. An additional radiation oncology center is operated
by the Company as a part of one of its Centers.
B. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of InSight and
its wholly owned subsidiaries, MHC and IHC (Note 1). The Company's investment
interests in partnerships (the Partnerships) are accounted for under the equity
method of accounting for ownership of 50 percent or less when the Company does
not exercise significant control over the operations of the Partnership and does
not have primary responsibility for the Partnership's long-term debt. The
Company's consolidated financial statements include two Partnerships which have
been accounted for under the equity method (Note 12).
At June 30, 1997 and 1996, respectively, the Company has consolidated two 50
percent owned Partnerships and one less than 50 percent owned limited liability
company. Since the Company controls the operations of these 50 percent or less
owned entities and is primarily responsible for the associated long-term debt,
management believes that consolidation of these entities is the most meaningful
financial statement presentation (Note 12).
Significant intercompany balances have been eliminated.
C. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
D. REVENUE RECOGNITION
Revenues from contract services (primarily Mobile Facilities) and from
patient services (primarily Centers) are recognized when services are provided.
Patient services revenues are presented net of related contractual adjustments.
Equipment rental revenues, management fees and other revenues are recognized
over the applicable contract period. Revenues collected in advance are recorded
as unearned revenue.
F-10
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. CASH EQUIVALENTS
Cash equivalents are generally composed of highly liquid investments with
original maturities of three months or less, such as certificates of deposit and
commercial paper.
F. PROPERTY AND EQUIPMENT
Property and equipment are depreciated and amortized on the straight-line
method using the following estimated useful lives:
<TABLE>
<S> <C>
Vehicles..................................................... 3 to 8 years
7 to 19
Buildings.................................................... years
Term of
Leasehold improvements....................................... lease
Computer and office equipment................................ 3 to 5 years
Diagnostic and related equipment............................. 5 to 8 years
Term of
Equipment and vehicles under capital leases.................. lease
</TABLE>
The Company capitalizes expenditures for improvements and major renewals.
Maintenance, repairs and minor replacements are charged to operations as
incurred. When assets are sold or otherwise disposed of, the cost and related
reserves are removed from the accounts and any resulting gain or loss is
included in the results of operations.
G. INTANGIBLE ASSETS
The Company assesses the recoverability of its intangible assets (including
goodwill) by determining whether the intangible asset balance can be recovered
over the remaining amortization period through projected nondiscounted future
cash flows. If projected future cash flows indicate that the unamortized
intangible asset balances will not be recovered, an adjustment is made to reduce
the net intangible asset to an amount consistent with projected future cash
flows discounted at the Company's incremental borrowing rate. Cash flow
projections, although subject to a degree of uncertainty, are based on trends of
historical performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
The Company has classified as goodwill the cost in excess of fair value of
the net assets acquired in purchase transactions. Intangible assets are
amortized on the straight-line basis over the following periods (See Note 6):
<TABLE>
<S> <C>
6 to 20
Goodwill...................................................... years
Non-compete agreements........................................ 5 to 7 years
Certificates of need.......................................... 6 years
</TABLE>
H. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which requires the asset and liability method of
accounting for income taxes.
F-11
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. INCOME (LOSS) PER COMMON SHARE
The number of shares used in computing income (loss) per common share is
equal to the weighted average number of common and common equivalent shares
outstanding during the respective period, adjusted retroactively for the
conversion of Maxum Common Stock into InSight Common Stock as a result of the
Merger. Common stock equivalents relating to options, warrants and convertible
preferred stock are excluded for all periods prior to June 30, 1997 because they
are antidilutive.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of financial instruments are estimated using available market
information and other valuation methodologies. The fair value of the Company's
financial instruments is estimated to approximate the related book value, unless
otherwise indicated.
K. NEW PRONOUNCEMENTS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock Based Compensation". As permitted
under the standard, the Company continued to account for employee stock options
in accordance with APB Opinion No. 25 and made necessary pro forma disclosures
mandated by SFAS No. 123. The adoption of this standard had no impact on the
Company's results of operations.
In fiscal 1998, the Company will be required to adopt SFAS No. 129,
"Disclosure of Information about Capital Structure", which continues the
existing requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of companies
subject to portions of its requirements. The adoption of this standard will have
no effect on the Company's results of operations.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 128,
"Earnings per Share (EPS)". This standard is effective for both interim and
annual reporting periods ending after December 15, 1997. SFAS No. 128 replaces
primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
computed by dividing reported earnings by weighted average shares outstanding.
Diluted EPS is computed in the same way as fully diluted EPS, except that the
calculation now uses the average share price for the reporting period to compute
dilution from options under the treasury stock method. Management believes that
adoption of this standard will not have a significant impact on earnings per
share.
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information." FASB Nos. 130 and 131 are effective for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The Company
believes that adoption of these standards will not have a material impact on the
Company.
L. RECLASSIFICATIONS
Reclassifications have been made to certain 1996, 1995 and 1994 amounts to
conform to the 1997 presentation.
F-12
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PRIOR RESTRUCTURE OF MHC'S OPERATIONS AND FINANCIAL OBLIGATIONS
As of December 31, 1995, MHC did not have the resources to support its
existing debt service and lease requirements and an obligation to settle pending
securities litigation. The accompanying 1995 and 1994 financial statements were
prepared on a going concern basis, and accordingly did not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities had MHC been unable to
continue as a going concern. In June 1996, the financial accommodation
transactions with GE were closed and the Merger was consummated (Note 1).
4. ACQUISITIONS
In June 1996, InSight, MHC and IHC completed the Merger (Note 1). The Merger
was accounted for under the purchase method with MHC being treated as the
acquiror for accounting purposes.
In September 1996, InSight purchased certain assets of a Fixed Facility in
California for approximately $2.8 million in cash.
In May 1997, InSight purchased certain assets, primarily Mobile Facilities
in Maine and New Hampshire. InSight paid approximately $6.8 million in cash and
assumed certain equipment related liabilities of approximately $1.9 million.
In June 1997, InSight purchased certain assets of a Center in Tennessee.
InSight paid approximately $9.0 million in cash and assumed certain equipment
related liabilities of approximately $1.9 million.
In May 1997, the Company entered into a definitive agreement to purchase
certain assets of a Center in Ohio. As part of the definitive agreement, the
Company deposited approximately $5.5 million into an escrow account. At June 30,
1997 this deposit is included in other assets.
These acquisitions were accounted for under the purchase method.
Accordingly, the results of related operations have been included in the
consolidated financial statements since the applicable acquisition dates. The
pro forma effects of these acquisitions, as if they had occurred as of January
1, 1996, are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................................................ $ 104,370 $ 50,092
Expenses............................................................................ 102,285 54,286
------------- -------------
Income (loss) before extraordinary item............................................. 2,085 (4,194)
Extraordinary item.................................................................. -- 3,179
------------- -------------
Net income (loss)................................................................... $ 2,085 $ (1,015)
------------- -------------
------------- -------------
Income (loss) per share before extraordinary item................................... $ 0.38 $ (1.55)
------------- -------------
------------- -------------
Net income (loss) per share......................................................... $ 0.38 $ (0.37)
------------- -------------
------------- -------------
</TABLE>
The pro forma results for 1997 and 1996 include $0.8 million and $0.7
million of amortization of intangibles, respectively, and $1.7 million and $0.8
million of interest expense, respectively, related to these acquisitions. The
pro forma results in 1996 do not include the interest and lease savings
resulting from the Merger.
F-13
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. TRADE RECEIVABLES
Trade receivables are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Trade receivables........................................................................... $ 26,271 $ 23,004
Less: Allowances for doubtful accounts and contractual adjustments.......................... 7,491 7,808
Allowances for professional fees....................................................... 3,135 2,280
--------- ---------
Net trade receivables..................................................................... $ 15,645 $ 12,916
--------- ---------
--------- ---------
Net trade receivables arise from revenue generated by:
Patient services............................................................................ $ 9,199 $ 7,362
Contract services........................................................................... 5,431 4,693
Other....................................................................................... 1,015 861
--------- ---------
Net trade receivables..................................................................... $ 15,645 $ 12,916
--------- ---------
--------- ---------
</TABLE>
Receivables related to patient services revenues are due primarily from
managed care organizations, patients' private insurance companies and government
payors. Receivables arising from contract service revenues are due primarily
from hospitals.
The allowance for doubtful accounts and contractual adjustments include
management's estimate of the amounts expected to be written off on specific
accounts and for write offs on other as yet unidentified accounts included in
accounts receivable. In estimating the write offs and adjustments on specific
accounts, management relies on a combination of in-house analysis and a review
of contractual payment rates from private health insurance programs or under the
federal Medicare program. In estimating the allowance for unidentified write
offs and adjustments, management relies on historical experience. The amounts
the Company will ultimately realize could differ materially in the near term
from the amounts assumed in arriving at the allowance for doubtful accounts and
contractual adjustments in the financial statements at June 30, 1997.
The Company reserves a contractually agreed upon percentage at several of
its Centers, averaging 20 percent of the accounts receivable balance from
patients, for payments to radiologists for interpreting the results of the
diagnostic imaging procedures. Payments to radiologists are only due when
amounts are received. At that time, the balance is transferred from the
allowance account to a professional fees payable account.
F-14
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Intangible assets....................................................... $ 35,290 $ 17,861
Less: Accumulated amortization.......................................... 2,018 896
--------- ---------
$ 33,272 $ 16,965
--------- ---------
--------- ---------
Goodwill................................................................ $ 32,804 $ 16,382
Non-compete agreements.................................................. 175 245
Customer service contracts.............................................. -- 113
Certificates of need.................................................... 125 158
Other................................................................... 168 67
--------- ---------
$ 33,272 $ 16,965
--------- ---------
--------- ---------
</TABLE>
In connection with the Company's acquisitions in 1997 and the Merger in 1996
(Note 1), the Company recorded $17.6 million and $13.6 million of intangible
assets, respectively. Projected future cash flows for two of MHC's Centers at
June 30, 1996 indicated that the unamortized goodwill of $1.4 million and the
unamortized deferred organizational costs of $0.1 million related to these two
Centers were not recoverable. Therefore, in accordance with the Company's
policy, the intangible assets related to these Centers were written down during
the six months ended June 30, 1996. Amortization of intangible assets was $1.4
million, $1.9 million (including the $1.5 million discussed above), $0.6 million
and $0.2 million for the year ended June 30, 1997, for the six months ended June
30, 1996 and for the years ended December 31, 1995, and 1994, respectively.
7. EQUIPMENT AND OTHER NOTES PAYABLE
Equipment and other notes payable consists of the following (amounts in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Notes payable to GE, bearing interest at rates which range from 9.16 percent to 12.5
percent, maturing at various dates through August 2004. The notes are secured by
substantially all of the Company's assets............................................. $ 62,329 $ 36,072
Notes payable to banks and third parties bearing interest rates which range from 8.13
percent to 11 percent, maturing at various dates through September 2000. The notes are
primarily secured by certain buildings and diagnostic equipment....................... 3,993 2,166
--------- ---------
Total equipment and other notes payable................................................ 66,322 38,238
Less: Current portion.................................................................. 11,901 6,585
--------- ---------
Long-term equipment and other notes payable............................................ $ 54,421 $ 31,653
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EQUIPMENT AND OTHER NOTES PAYABLE (CONTINUED)
Scheduled maturities of equipment and other notes payable at June 30, 1997,
are as follows (amounts in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 11,901
1999............................................................... 13,574
2000............................................................... 12,472
2001............................................................... 8,095
2002............................................................... 6,840
Thereafter......................................................... 13,440
---------
$ 66,322
---------
---------
</TABLE>
The terms of the notes payable to GE include certain restrictive covenants
which, among others, limit capital expenditures and restrict payment of
dividends. As of June 30, 1997, the Company was in compliance with these
covenants.
Interest paid, including amounts deferred as part of the debt restructuring,
on debt related to GE for the year ended June 30, 1997, for the six months ended
June 30, 1996 and the years ended December 31, 1995 and 1994, was $4.0 million,
$0.8 million, $1.0 million and $0.6 million, respectively.
8. LEASE OBLIGATIONS AND COMMITMENTS
The Company is leasing diagnostic equipment, certain other equipment and its
office facilities under various capital and operating leases. Future minimum
scheduled rental payments required under these noncancelable leases at June 30,
1997, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1998............................................................. $ 4,107 $ 16,148
1999............................................................. 2,258 11,282
2000............................................................. 1,256 5,831
2001............................................................. 98 3,346
2002............................................................. -- 1,230
Thereafter....................................................... -- 2,062
--------- -----------
Total minimum lease payments............................................. 7,719 $ 39,899
-----------
-----------
Less: Amounts representing interest...................................... 846
---------
Present value of capital lease obligations............................... 6,873
Less: Current portion.................................................... 3,561
---------
Long term capital lease obligations...................................... $ 3,312
---------
---------
</TABLE>
As of June 30, 1997, a substantial amount of equipment leased by the Company
is subject to contingent rental adjustments dependent on certain operational
factors through 1999. The Company's future operating and capital lease
obligations to GE were approximately $24.8 million and $2.6 million,
respectively.
Rental expense for diagnostic equipment and other equipment for the year
ended June 30, 1997, for the six months ended June 30, 1996 and for the years
ended December 31, 1995 and 1994, was
F-16
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASE OBLIGATIONS AND COMMITMENTS (CONTINUED)
$18.3 million, $7.0 million, $14.5 million and $14.6 million, respectively.
These amounts include contingent rental expense of $0.3 million, $0.2 million,
$0.5 million and $0.8 million for the year ended June 30, 1997, for the six
months ended June 30, 1996 and for the years ended December 31, 1995 and 1994,
respectively.
The Company occupies office facilities under lease agreements expiring
through June 2007. Rental expense for these facilities for the year ended June
30, 1997, for the six months ended June 30, 1996 and for the years ended
December 31, 1995 and 1994, was $1.9 million, $0.3 million, $0.6 million and
$0.6 million, respectively.
Under the terms of the amended equipment service agreement with GE (Note 1),
GE is entitled to receive a supplemental service fee equal to 14% of pretax
income, subject to certain adjustments. During the year ended June 30, 1997 the
Company recorded a provision of approximately $0.3 million in connection with
this agreement.
InSight is engaged, from time to time, in the defense of lawsuits arising
out of the ordinary course and conduct of its business and has insurance
policies covering such potential insurable losses where such coverage is
cost-effective. InSight believes that the outcome of any such lawsuits will not
have a material adverse impact on InSight's business.
9. CAPITAL STOCK
WARRANTS--During 1997, InSight issued warrants to purchase 50,000 shares of
its common stock at an exercise price of $5.64 per share to the previous
preferred stockholders of IHC. InSight also issued a warrant to purchase 35,000
shares of its common stock at an exercise price of $5.50 per share to an
investment banking firm. InSight also issued a warrant to purchase 15,000 shares
of its common stock at an exercise price of $5.50 per share to a consultant. In
connection with the Merger, InSight assumed a warrant to purchase 20,000 shares
of its common stock at an exercise price of $2.50 per share issued to the estate
of Cal Kovens, a former director of IHC.
STOCK OPTIONS--The Company has two stock option plans which provide for the
granting of incentive and nonstatutory stock options to key employees,
independent contractors and non-employee directors. Incentive stock options must
have an exercise price of at least the fair market value of its common stock on
the grant date. Options become vested cumulatively over various periods up to
four years from the grant date, are exercisable in whole or in installments, and
expire five or ten years from the grant date. In addition, MHC has a stock
option plan and IHC has two stock option plans which provided for the granting
of incentive or nonstatutory stock options to key employees, non-employee
directors and independent contractors. Pursuant to the Merger, the Company
assumed all of MHC's and IHC's outstanding options at June 26, 1996. No shares
are available for future grants under the MHC and IHC plans.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. SFAS No. 123 was issued in 1995 and,
if fully adopted, changes the methods for recognition of cost on plans similar
to those of the Company. Adoption of SFAS No. 123 is optional, however pro forma
disclosures as if the Company had adopted the cost recognition method are
required. Had compensation cost for stock options awarded under this plan been
determined consistent with SFAS
F-17
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK (CONTINUED)
No. 123, the Company's net income and earnings per share would have reflected
the following pro forma amounts:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1997 1996
------------ -------------
<S> <C> <C> <C>
Net Income (Loss): As Reported............................... $ 1,281,000 $ (979,000)
Pro Forma................................. 966,000 (1,055,000)
Primary EPS: As Reported............................... 0.24 (0.70)
Pro Forma................................. 0.18 (0.76)
</TABLE>
The Company may grant options for up to 446,433 shares under one plan and
158,000 shares under the second plan. A summary of the status of the Company's
two stock option plans at June 30, 1997 and 1996 and changes during the periods
then ended is presented below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period..................... 369,918 $ 2.37 204,068 $ 3.04
Granted................................................ 233,000 6.19 195,850 3.23
Exercised.............................................. 4,485 2.50 30,000 0.25
Forfeited.............................................. -- -- -- --
Expired................................................ 25,000 13.85 -- --
--------- ------ --------- ------
Outstanding at end of period........................... 573,433 $ 3.98 369,918 $ 3.15
--------- ------ --------- ------
--------- ------ --------- ------
Exercisable at end of period........................... 296,416 $ 2.12 263,378 $ 4.25
--------- ------ --------- ------
--------- ------ --------- ------
Weighted average fair value of options granted......... $ 5.04 $ 2.61
</TABLE>
272,230 of the options outstanding at June 30, 1997 have exercise prices of
$0.10 to $2.50, a weighted average exercise price of $0.86 and a weighted
average remaining contractual life of 6.35 years. 255,430 of these options are
exercisable. 58,000 of the options outstanding at June 30, 1997 have exercise
prices of $3.75 to $5.50, a weighted average exercise price of $5.25 and a
weighted average remaining contractual life of 8.98 years. 16,200 of these
options are exercisable. 223,000 of the options outstanding at June 30, 1997
have exercise prices of $6.25 to $7.00, a weighted average exercise price of
$6.30 and a weighted average remaining contractual life of 9.25 years. 4,583 of
these options are exercisable. 20,203 of the options outstanding at June 30,
1997 have exercise prices of $15.64 to $16.20, a weighted average exercise price
of $15.80 and a weighted average remaining contractual life of 4.19 years.
20,203 of these options are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Black Scholles pricing model with the following assumptions used for the
grants in fiscal periods 1997 and 1996; weighted average risk-free interest rate
of 7.02 percent and 6.75 percent; expected dividend yields of 0.00 percent; and
a weighted average contractual life of 8.08 and 9.29 years, respectively.
F-18
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The provision for income taxes for the year ended June 30, 1997 was computed
using effective tax rates calculated as follows:
<TABLE>
<S> <C>
Federal statutory tax rate........................................... 34.0%
State income taxes, net of federal benefit........................... 1.2
Permanent items, including goodwill, non-deductible merger costs..... 41.8
Utilization of deferred tax assets................................... (52.0)
---------
Net effective tax rate............................................... 25.0%
---------
---------
</TABLE>
The provision for income taxes includes income taxes currently payable and
those deferred because of temporary differences between the financial statements
and tax bases of assets and liabilities. The provision for income taxes for the
year ended June 30, 1997 consisted of the following (amounts in thousands):
<TABLE>
<S> <C>
Current provision
Federal........................................................... $ 1,268
State............................................................. 47
---------
1,315
---------
Deferred taxes arising from temporary differences:
State income taxes................................................ (31)
Accrued expenses.................................................. (629)
Deferred gain on debt restructure................................. (368)
Reserves.......................................................... 31
Other............................................................. 109
---------
(888)
---------
Total provision................................................... $ 427
---------
---------
</TABLE>
The components of the Company's deferred tax asset as of June 30, 1997 and
1996, respectively, which arise due to timing differences between financial and
tax reporting and net operating loss (NOL) carryforwards are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Reserves.............................................................. $ 1,714 $ 1,683
Accrued expenses (not currently deductible)........................... 604 1,233
Deferred gain on debt restructure..................................... 519 887
Depreciation and amortization......................................... (139) 77
Other................................................................. 550 157
NOL carryforwards..................................................... 15,748 15,601
Valuation allowances.................................................. (18,996) (19,638)
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
</TABLE>
F-19
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
As of June 30, 1997, the Company had NOL carryforwards of approximately
$38.5 million, expiring in 2004 through 2010. As a result of the Merger, there
will be a substantial limitation on the use of these NOL carryforwards.
A valuation allowance is provided against the deferred tax asset when it is
more likely than not that the deferred tax asset will not be realized. The
Company has established a valuation allowance for the deferred tax allowance for
the deferred tax asset as, in management's best estimate, it is not likely to be
realized in the near term.
11. RETIREMENT SAVINGS PLANS
The Company has a 401(k) profit sharing plan (Company Plan), which is
available to all eligible employees, pursuant to which the Company matches a
percentage of employee contributions to the Company Plan. Company contributions
of $335,000 were made for the year ended June 30, 1997.
The Company, through MHC, had a 401(k) profit sharing plan (MHC Plan) for
all MHC employees, pursuant to which MHC matched a percentage of employee
contributions to the Plan and made additional contributions on behalf of the
employees at the discretion of its Board of Directors. Contributions of $50,000,
$100,000 and $62,000 were made during the six months ended June 30, 1996 and the
years ended December 31, 1995 and 1994, respectively. MHC contributions of
$12,000 in 1994 were funded with forfeitures.
The Company, through IHC, had a 401(k) profit sharing plan (IHC Plan) for
all IHC employees, pursuant to which IHC matched a percentage of employee
contributions to the IHC Plan. In 1997, the Company combined the MHC Plan and
the IHC Plan into the Company Plan.
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The Company, through MHC, has direct ownership in two Partnerships at June
30, 1997, both of which operate Centers. In June 1996, the MHC closed one of the
Centers and is currently in the process of dissolving the Partnership. MHC owns
43.75% and 50% of these Partnerships, serves as the managing general partner and
provides certain management services under agreements expiring in 2007. These
Partnerships are accounted for under the equity method since the Company does
not exercise significant control over the operations of these Partnerships or
does not have primary responsibility for the
F-20
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS (CONTINUED)
Partnership's long-term debt. Set forth below is certain financial data of these
Partnerships (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Combined Financial Position:
Current assets:
Cash..................................................................... $ 444 $ 549
Trade receivables, less allowances....................................... 729 721
Other.................................................................... 21 31
Property and equipment, net................................................ 143 442
--------- ---------
Total assets............................................................... 1,337 1,743
Current liabilities........................................................ (141) (358)
Due to MHC................................................................. (49) (269)
Long-term liabilities...................................................... (40) (226)
--------- ---------
Net assets................................................................. $ 1,107 $ 890
--------- ---------
--------- ---------
</TABLE>
Set forth below are the combined operating results of the Partnerships and
the Company's equity in earnings of the Partnerships (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------------
1997 1996 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Operating Results:
Net revenues....................................................... $ 4,353 $ 2,346 $ 4,455 $ 13,456
Expenses........................................................... 3,284 2,002 3,636 9,217
----------- ----------- --------- ---------
Net income......................................................... $ 1,069 $ 344 $ 819 $ 4,239
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Equity in Earnings:
Share of net income of Partnerships................................ $ 468 $ 138 $ 348 $ 876
Minority interest.................................................. -- -- -- (42)
----------- ----------- --------- ---------
Equity in earnings of Partnerships................................. $ 468 $ 138 $ 348 $ 834
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
Revenues of the Partnerships are recognized when services are provided to
patients at established billing rates or at the amount realizable under
agreements with third party payors, with the provision for contractual
adjustments deducted to report net patient services revenues. The Partnerships'
patient receivables are generally reimbursed by managed care organizations,
and/or patient's private insurance companies, with the remainder of the patient
receivables reimbursed by health care plans and government payors.
F-21
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS (CONTINUED)
Lease Commitments of the Partnerships exist under various operating leases
for equipment and office space. Future minimum lease payments for the
Partnerships' noncancelable leases as of June 30, 1997, are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
OPERATING
-----------
<S> <C>
1998............................................................................... $ 570
1999............................................................................... 142
-----
$ 712
-----
-----
</TABLE>
The Company, through IHC, has direct ownership in two Partnerships and one
limited liability company, all of which operate Centers. IHC owns 50% of each of
the Partnerships and 35% of the limited liability company. Since the Company
controls the operations and is primarily responsible for the associated
long-term debt, the Centers have been included in the Company's consolidated
balance sheet at June 30, 1997 and 1996. Set forth below is the summarized
combined financial data of the Company's 50% or less owned and controlled
entities which are consolidated (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1997
-----------
<S> <C>
Condensed Combined Statement of Operations Data:
Net revenues................................................................... $ 7,106
Expenses....................................................................... 5,151
Provision for center profit distribution....................................... 1,019
-----------
Net income..................................................................... $ 936
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Condensed Combined Balance Sheet Data:
Current assets........................................................... $ 2,596 $ 2,327
Total assets............................................................. 4,288 3,955
Current liabilities...................................................... 727 1,019
Long-term debt........................................................... 424 416
Minority interest equity................................................. 1,702 1,391
</TABLE>
In December 1994, MHC sold the common stock of three wholly owned
subsidiaries, whose primary operations were equity interests of approximately
20% in each of three Partnerships that provided lithotripsy services, for
approximately $5.0 million in cash. MHC's investment in and share of earnings of
these Partnerships had been reported in MHC's financial statements using the
equity method of accounting. This transaction resulted in a pretax gain of
approximately $5.0 million in 1994. In addition, two other Partnerships which
provided services through mobile MRI and CT facilities were terminated in 1994.
MHC leased equipment to certain Partnerships under direct financing leases
and operating leases, and arranged for equipment maintenance services. In
connection with providing these and other services, MHC received management fees
related to certain Partnerships. Revenues related to these Partnership
F-22
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS (CONTINUED)
activities included in MHC's financial statements for the year ended December
31, 1994 were $1.3 million. Substantially all of these revenues relate to
Partnerships that were sold or terminated in 1994.
At June 30, 1996, the Company had a receivable of $0.3 million related to
certain lease and operating expenses of the two existing Partnerships that are
accounted for under the equity method of accounting.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------------
1997 1996 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Interest paid........................................................ $ 5,114 $ 1,011 $ 1,411 $ 879
Equipment additions under capital leases............................. 1,779 238 8,117 2,779
Prepaid insurance premiums financed.................................. 208 555 430
Debt and accrued interest extinguished with issuance of preferred
stock.............................................................. -- (9,066) -- --
Deferred and accrued interest gain on debt restructure............... -- 2,519 -- --
Preferred stock issued............................................... -- 3,375 -- --
Cancellation of common stock warrant................................. -- (7) -- --
</TABLE>
14. SUBSEQUENT EVENT
On October 14, 1997, InSight consummated a recapitalization
(Recapitalization) pursuant to which (a) certain investors affiliated with TC
Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank
headquartered in Washington, D.C., made a cash investment of $25 million in the
Company and received therefor (i) 25,000 shares of newly issued Convertible
Preferred Stock, Series B, par value $0.001 per share (Series B Preferred
Stock), initially convertible, at the option of the holders thereof, in the
aggregate into 2,985,075 shares of common stock, and (ii) warrants (Carlyle
Warrants) to purchase up to 250,000 shares of common stock at the current
exercise price of $10.00 per share; (b) General Electric Company (GE) (i)
surrendered its rights under the amended equipment service agreement to receive
supplemental service fee payments equal to 14% of pretax income (see Note 8,
above) in exchange for (i) the issuance of 7,000 shares of newly issued
Convertible Preferred Stock, Series C, par value $0.001 per share (Series C
Preferred Stock) initially convertible, at the option of the holders thereof, in
the aggregate into 835,821 shares of common stock, and (ii) warrants (the GE
Warrants) to purchase up to 250,000 shares of common stock at the current
exercise price of $10.00 per share, (for which the Company will record a
non-recurring expense of approximately $6.7 million in the second quarter of
fiscal 1998), and (ii) agreed to exchange all of its InSight Series A Preferred
Stock, on the business day (Second Closing) after all waiting periods with
respect to GE's filing under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, have expired or been terminated, for an additional 20,953
shares of Series C Preferred Stock, initially convertible, at the option of the
holders thereof, in the aggregate into 2,501,760 shares of common stock; and (c)
the Company executed a Credit Agreement with NationsBank, N.A. pursuant to which
NationsBank, as agent, committed to provide, subject to the satisfaction of
customary conditions, a total of $125 million in senior secured credit,
F-23
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENT (CONTINUED)
including (i) a $50 million term loan facility consisting of a $20 million
tranche with increasing amortization over a five year period and a $30 million
tranche principally repayable in years 6 and 7, (ii) a $25 million revolving
working capital facility with a five-year maturity, and (iii) a $50 million
acquisition facility, which may be increased by up to an additional $25 million
upon the satisfaction of certain conditions, including commitments from
participating lenders (Bank Financing).
The terms of the Series B Preferred Stock and the Series C Preferred Stock
(collectively, Preferred Stock) are substantially the same. The Preferred Stock
has a liquidation preference of $1,000 per share. It will participate in any
dividends paid with respect to the common stock. There is no mandatory or
optional redemption provision for the Preferred Stock. The Series B Preferred
Stock is initially convertible, at the option of the holders thereof, into
2,985,075 shares of common stock, and the Series C Preferred Stock will, as of
the Second Closing, be initially convertible, at the option of the holders
thereof, into 3,337,581 shares of common stock, in each case at an initial
conversion price of $8.375 per share.
For so long as Carlyle and its affiliates own at least 33% of the Series B
Preferred Stock or GE and its affiliates own at least 33% of the Series C
Preferred Stock, respectively, the approval of at least 67% of the holders of
such series of Preferred Stock is required before the Company may take certain
actions including, but not limited to, amending its certificate of incorporation
or bylaws, changing the number of directors or the manner in which directors are
selected, incurring indebtedness in excess of $15 million in any fiscal year,
issuing certain equity securities below the then current market price or the
then applicable conversion price, acquiring equity interests or assets of
entities for consideration equal to or greater than $15 million, and engaging in
mergers for consideration equal to or greater than $15 million. The Preferred
Stock will vote with the common stock on an as-if-converted basis on all matters
except the election of directors, subject to an aggregate maximum Preferred
Stock percentage of 37% of all votes entitled to be cast on such matters.
Assuming the conversion of all of the Series B Preferred Stock into common stock
and the exercise of all of the Carlyle Warrants, Carlyle would own approximately
31% of the common stock of the Company, on a fully diluted basis. Assuming the
conversion of all of the Series C Preferred Stock after the Second Closing and
the exercise of the GE Warrants, GE would own approximately 34% of the common
stock of the Company, on a fully diluted basis.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the Board) is currently fixed at
nine. Six directors (Common Stock Directors) are to be elected by the common
stockholders, one of whom (Joint Director) is to be proposed by Carlyle and GE
and approved by a majority of the Board in its sole discretion. Of the three
remaining directors (Preferred Stock Directors), two are to be elected by the
holders of the Series B Preferred Stock and one is to be elected by the holders
of the Series C Preferred Stock, in each case acting by written consent and
without a meeting of the common stockholders. As long as Carlyle and certain
affiliates thereof own an aggregate of at least 50% of the Series B Preferred
Stock, the holders of the Series B Preferred Stock will have the right to elect
two Preferred Stock Directors and as long as Carlyle and certain affiliates
thereof own an aggregate of at least 25% of such stock, such holders will have
the right to elect one Preferred Stock Director. As long as GE and its
affiliates own an aggregate of at least 25% of the Series C Preferred Stock it
will have the right to elect one Preferred Stock Director. If any such ownership
percentage falls below the applicable threshold, the Preferred Stock Director(s)
formerly entitled to be elected by Carlyle or GE, as the case may be, will
thereafter be elected by the common stockholders.
At any time after the first anniversary of the initial funding of the Bank
Financing, all of the Series B Preferred Stock and the Series C Preferred Stock
may be converted into a newly created Convertible
F-24
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENT (CONTINUED)
Preferred Stock, Series D, par value $0.001 per share (Series D Preferred
Stock). The Series D Preferred Stock allows the number of directors to be
automatically increased to a number which would permit each of Carlyle and GE,
by filling the newly created vacancies, to achieve representation on the Board
proportionate to their respective common stock ownership percentages on an
as-if-converted basis but would limit such representation to less than two
thirds of the Board of Directors for a certain period of time. The Series D
Preferred Stock has a liquidation preference of $0.001 per share but no
mandatory or optional redemption provision. It will participate in any dividends
paid with respect to the common stock and will be convertible into 6,322,660
shares of common stock. Presently, the Board consists of seven directors, five
of whom are Common Stock Directors and two of whom are Preferred Stock
Directors. GE intends to wait until the Second Closing to elect its Preferred
Stock Director. The vacancy created for the Joint Director has not yet been
filled.
Holders of the Preferred Stock also have a right of first offer with respect
to future sales in certain transactions or proposed transactions not involving a
public offering by the Company of its common stock or securities convertible
into common stock. Holders of the Preferred Stock are also entitled to certain
demand and "piggyback" registration rights.
Set forth below is an unaudited pro forma condensed consolidated balance
sheet as of June 30, 1997, as if the transaction described above had occurred on
June 30, 1997 (amounts in thousands):
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
AS REPORTED ADJUSTMENTS TOTAL
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets........................................ $ 24,692 $ 1,477 $ 26,169
Property and equipment, net........................... 34,488 -- 34,488
Investment in partnerships............................ 402 -- 402
Other assets.......................................... 5,468 3,100 8,568
Intangible assets..................................... 33,272 -- 33,272
----------- ----------- ----------
$ 98,322 $ 4,577 $ 102,899
----------- ----------- ----------
----------- ----------- ----------
Current liabilities................................... $ 30,432 $ (10,054) $ 20,378
Long-term liabilities................................. 59,205 (9,276) 49,929
Minority interest..................................... 2,000 -- 2,000
Stockholders' equity.................................. 6,685 23,907 30,592
----------- ----------- ----------
$ 98,322 $ 4,577 $ 102,899
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The unaudited pro forma condensed consolidated balance sheet as of June 30,
1997 gives effect to the issuance of $25 million of Series B Preferred Stock and
the draw down of the $50 million term loan Bank Financing, which was used to
repay approximately $70 million in outstanding notes payable and to pay
approximately $5 million in transaction costs.
15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Notes are guaranteed by certain
of the Company's wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several. Separate financial
statements of the Guarantor Subsidiaries are not presented because the Company's
management has determined that they would not be material to investors. The
following
F-25
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
supplemental financial information sets forth, on an unconsolidated basis,
balance sheets, statement of operations, and statement of cash flows information
for the Company ("Parent Company Only"), for the Guarantor Subsidiaries and for
the Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). The
supplemental financial information reflects the investments of the Company and
the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using
the equity method of accounting. The supplemental financial information is
presented for the periods as of June 30, 1996 and 1997, and for the year ended
June 30, 1997 only, as the Non-Guarantor Subsidiaries are not included in the
consolidated financial statements prior to that date.
F-26
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
(AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------- ----------- --------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ -- $ 5,845 $ 1,290 $ -- $ 7,135
Trade accounts receivable,
net........................... -- 12,888 2,757 -- 15,645
Other receivables, net.......... -- 148 210 -- 358
Intercompany accounts
receivable.................... 29,852 1,166 507 (31,525) --
Other current assets............ -- 1,485 69 -- 1,554
----------- ------- ------ --------------- -------
Total current assets........ 29,852 21,532 4,833 (31,525) 24,692
Property and equipment, net....... -- 32,435 2,053 -- 34,488
Investment in partnerships........ -- 402 -- -- 402
Investment in consolidated
subsidiaries.................... (23,167) 2,675 -- 20,492 --
Other assets...................... -- 5,468 -- -- 5,468
Intangible assets, net............ -- 32,527 745 -- 33,272
----------- ------- ------ --------------- -------
$ 6,685 $ 95,039 $ 7,631 $ (11,033) $ 98,322
----------- ------- ------ --------------- -------
----------- ------- ------ --------------- -------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of equipment and
other notes..................... $ -- $ 15,149 $ 313 $ -- $ 15,462
Accounts payable and other accrued
expenses........................ -- 14,321 649 -- 14,970
Intercompany accounts payable..... -- 30,359 1,166 (31,525) --
----------- ------- ------ --------------- -------
Total current liabilities... -- 59,829 2,128 (31,525) 30,432
Equipment and other notes, less
current portion................. -- 56,904 829 -- 57,733
Other long-term liabilities....... -- 1,472 -- -- 1,472
Minority interest................. -- -- 2,000 -- 2,000
Stockholders' equity (deficit).... 6,685 (23,166) 2,674 20,492 6,685
----------- ------- ------ --------------- -------
$ 6,685 $ 95,039 $ 7,631 $ (11,033) $ 98,322
----------- ------- ------ --------------- -------
----------- ------- ------ --------------- -------
</TABLE>
F-27
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
(AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------- ----------- --------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ -- $ 5,554 $ 1,310 $ -- $ 6,864
Trade accounts receivable, net...... -- 10,491 2,425 -- 12,916
Other receivables, net.............. -- 693 280 -- 973
Intercompany accounts receivable.... 29,852 1,699 51 (31,602) --
Other current assets................ -- 1,623 85 -- 1,708
----------- ------- ------ ------- -------
Total current assets............ 29,852 20,060 4,151 (31,602) 22,461
Property and equipment, net........... -- 27,918 1,934 -- 29,852
Investment in partnerships............ -- 359 -- -- 359
Investment in consolidated
subsidiaries........................ (24,448) 1,767 -- 22,681 --
Other assets.......................... -- 749 -- -- 749
Intangible assets, net................ -- 16,140 825 -- 16,965
----------- ------- ------ ------- -------
$ 5,404 $ 66,993 $ 6,910 $ (8,921) $ 70,386
----------- ------- ------ ------- -------
----------- ------- ------ ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment and other
notes............................... $ -- $ 8,920 $ 303 $ -- $ 9,223
Accounts payable and other accrued
expenses............................ -- 13,731 674 -- 14,405
Intercompany accounts payable......... -- 29,903 1,699 (31,602) --
----------- ------- ------ ------- -------
Total current liabilities....... -- 52,554 2,676 (31,602) 23,628
Equipment and other notes, less
current portion..................... -- 34,689 952 -- 35,641
Other long-term liabilities........... -- 4,198 -- -- 4,198
Minority interest..................... -- -- 1,515 -- 1,515
Stockholders' equity (deficit)........ 5,404 (24,448) 1,767 22,681 5,404
----------- ------- ------ ------- -------
$ 5,404 $ 66,993 $ 6,910 $ (8,921) $ 70,386
----------- ------- ------ ------- -------
----------- ------- ------ ------- -------
</TABLE>
F-28
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
(AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------- ----------- --------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ -- $ 78,294 $ 14,769 $ -- $ 93,063
Costs of operations................... -- 67,505 12,832 -- 80,337
----------- ------- ------- ------- -------
Gross profit........................ -- 10,789 1,937 -- 12,726
Corporate operating expenses.......... -- 7,431 -- -- 7,431
----------- ------- ------- ------- -------
Income (loss) from company
operations........................ -- 3,358 1,937 -- 5,295
Equity in earnings of unconsolidated
partnerships........................ -- 468 -- -- 468
----------- ------- ------- ------- -------
Operating income (loss)............. -- 3,826 1,937 -- 5,763
Interest expense, net................. -- 3,946 109 -- 4,055
----------- ------- ------- ------- -------
Income (loss) before income taxes... -- (120) 1,828 -- 1,708
Provision for income taxes............ -- 427 -- -- 427
----------- ------- ------- ------- -------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries...................... -- (547) 1,828 -- 1,281
Equity in income (loss) of
consolidated subsidiaries........... 1,281 1,828 (3,109) --
----------- ------- ------- ------- -------
Net income (loss)................... $ 1,281 $ 1,281 $ 1,828 $ (3,109) $ 1,281
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
</TABLE>
F-29
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss).................. $ 1,281 $ 1,281 $ 1,828 $ (3,109) $ 1,281
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Total depreciation and
amortization................... -- 9,501 370 -- 9,871
Amortization of deferred gain on
debt restructure............... -- (1,047) -- -- (1,047)
Gain on disposal of assets....... -- (113) -- -- (113)
Equity in income (loss) of
consolidated subsidiaries...... (1,281) (1,828) -- 3,109 --
Cash provided by (used in) changes
in operating working capital:
Receivables, net................. -- (1,402) (262) -- (1,664)
Intercompany receivables, net.... -- 989 (989) -- --
Other current assets............. -- 141 16 -- 157
Accounts payable and other
current liabilities............ -- (1,118) (25) -- (1,143)
----------- ------- ------ ------- -------
Net cash provided by operating
activities................... -- 6,404 938 -- 7,342
----------- ------- ------ ------- -------
INVESTING ACTIVITIES:
Additions to property and
equipment........................ -- (6,693) (409) -- (7,102)
Acquisitions of imaging centers.... -- (18,566) -- -- (18,566)
Proceeds from sales of assets...... -- 347 -- -- 347
Other.............................. -- (4,937) -- -- (4,937)
----------- ------- ------ ------- -------
Net cash used in investing
activities................... -- (29,849) (409) -- (30,258)
----------- ------- ------ ------- -------
FINANCING ACTIVITIES:
Payments on debt and capital lease
obligations...................... -- (10,913) (113) -- (11,026)
Proceeds from issuance of debt..... -- 33,728 -- -- 33,728
Other.............................. -- 921 (436) -- 485
----------- ------- ------ ------- -------
Net cash provided by (used in)
financing activities......... -- 23,736 (549) -- 23,187
----------- ------- ------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ -- 291 (20) -- 271
CASH AND CASH EQUIVALENTS:
Beginning of period................ -- 5,554 1,310 -- 6,864
----------- ------- ------ ------- -------
End of period...................... $ -- $ 5,845 $ 1,290 $ -- $ 7,135
----------- ------- ------ ------- -------
----------- ------- ------ ------- -------
</TABLE>
F-30
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
xxxxxxxxxxxxxxxxxxxxxx
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
----------- ---------
<S> <C> <C>
(UNAUDITED)
ASSETS
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.
F-31
<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
----------- ----------
<S> <C> <C>
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
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 at
March 31, 1998..................................................................... 23,923 --
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: 2,805,660* 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>
* Adjusted from 2,799,463 shares as set forth in the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1998, to reflect a
reconciliation of the records of the Company and its transfer agent as of
such date with respect to the exchange of common stock of IHC and MHC in the
Merger and the issuance of the Company's common stock upon the exercise of
certain options.
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-32
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED 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 condensed consolidated
financial statements.
F-33
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED 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.
F-34
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONDENSED 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.
F-35
<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).
F-36
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. MERGER AND RECAPITALIZATION (CONTINUED)
On October 14, 1997, InSight consummated a recapitalization
(Recapitalization) pursuant to which (a) certain investors affiliated with TC
Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank
headquartered in Washington, D.C., made a cash investment of $25 million in the
Company and received therefor (i) 25,000 shares of newly issued Convertible
Preferred Stock, Series B of the Company, par value $0.001 per share (Series B
Preferred Stock), initially convertible, at the option of the holders thereof,
in the aggregate into 2,985,075 shares of Common Stock, and (ii) warrants
(Carlyle Warrants) to purchase up to 250,000 shares of Common Stock at an
exercise price of $10.00 per share; (b) GE (i) surrendered its rights under the
amended equipment service agreement to receive supplemental service fee payments
equal to 14% of pretax income in exchange for (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.
F-37
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. MERGER AND RECAPITALIZATION (CONTINUED)
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 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.
F-38
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. INTERIM FINANCIAL STATEMENTS (CONTINUED)
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
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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>
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
----------- -----------
<S> <C> <C>
(UNAUDITED)
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
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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
F-39
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. INCOME (LOSS) PER SHARE (CONTINUED)
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
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.
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
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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>
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's payment obligations under the Notes are guaranteed by certain
of the Company's wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several. Separate financial
statements of the Guarantor Subsidiaries are not presented because the Company's
management has determined that they would not be material to investors. The
following supplemental financial information sets forth, on an unconsolidated
basis, balance sheet, statement of operations, and statement of cash flows
information for the Company ("Parent Company Only"), for the Guarantor
Subsidiaries and for the Company's other subsidiaries (the "Non-Guarantor
Subsidiaries"). The supplemental financial information reflects the investments
of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting.
F-40
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 6,910 $ 2,740 $ -- $ 9,650
Trade accounts receivable, net... -- 19,043 2,631 -- 21,674
Other receivables, net........... -- 190 140 -- 330
Intercompany accounts
receivable..................... 130,664 4,851 -- (135,515) --
Other current assets............. -- 2,009 140 -- 2,149
----------- --------------- ------- --------------- --------
Total current assets........... 130,664 33,003 5,651 (135,515) 33,803
Property and equipment, net........ -- 43,166 3,579 -- 46,745
Investments in partnerships........ -- 495 -- -- 495
Investments in consolidated
subsidiaries..................... (24,620) 2,359 -- 22,261 --
Other assets....................... -- 2,471 -- -- 2,471
Intangible assets, net............. -- 42,464 809 -- 43,273
----------- --------------- ------- --------------- --------
$ 106,044 $ 123,958 $ 10,039 $ (113,254) $ 126,787
----------- --------------- ------- --------------- --------
----------- --------------- ------- --------------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of equipment and
other notes...................... $ 4,218 $ 1,346 $ 142 $ -- $ 5,706
Accounts payable and other accrued
expenses......................... -- 14,277 628 -- 14,905
Intercompany accounts payable...... -- 130,664 4,851 (135,515) --
----------- --------------- ------- --------------- --------
Total current liabilities...... 4,218 146,287 5,621 (135,515) 20,611
Equipment and other notes, less
current portion.................. 65,982 1,611 188 -- 67,781
Other long term liabilities........ -- 680 -- -- 680
Minority interest.................. -- -- 1,871 -- 1,871
Stockholders' equity (deficit)..... 35,844 (24,620) 2,359 22,261 35,844
----------- --------------- ------- --------------- --------
$ 106,044 $ 123,958 $ 10,039 $ (113,254) $ 126,787
----------- --------------- ------- --------------- --------
----------- --------------- ------- --------------- --------
-- -- -- -- --
</TABLE>
F-41
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
(AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ -- $ 74,511 $ 11,162 $ -- $ 85,673
Costs of operations............... -- 59,706 9,985 -- 69,691
----------- ------- ------- ----- -------
Gross profit.................... -- 14,805 1,177 -- 15,982
Corporate operating expenses...... -- 6,510 -- -- 6,510
Provision for supplemental service
fee termination................. -- 6,309 -- -- 6,309
----------- ------- ------- ----- -------
Income (loss) from company
operations...................... -- 1,986 1,177 -- 3,163
Equity in earnings of
unconsolidated partnerships..... -- 480 -- -- 480
----------- ------- ------- ----- -------
Operating income (loss)........... -- 2,466 1,177 -- 3,643
Interest expense, net............. -- 4,449 216 -- 4,665
----------- ------- ------- ----- -------
Income (loss) before income
taxes........................... -- (1,983) 961 -- (1,022)
Provision for income taxes........ -- 431 -- -- 431
Income (loss) before equity in
income (loss) of consolidated
subsidiaries.................... -- (2,414) 961 -- (1,453)
Equity in income (loss) of
consolidated subsidiaries....... (1,453) 961 492 --
----------- ------- ------- ----- -------
Net income (loss)................. $ (1,453) $ (1,453) $ 961 $ 492 $ (1,453)
----------- ------- ------- ----- -------
----------- ------- ------- ----- -------
</TABLE>
F-42
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Revenues.......................... $ -- $ 57,297 $ 10,832 $ -- $ 68,129
Costs of operations............... -- 50,059 9,468 -- 59,527
----------- ------- ------- ------- -------
Gross profit.................... -- 7,238 1,364 -- 8,602
Corporate operating expenses...... -- 5,343 -- -- 5,343
----------- ------- ------- ------- -------
Income (loss) from company
operations.................... -- 1,895 1,364 -- 3,259
Equity in earnings of
unconsolidated partnerships..... -- 364 -- -- 364
----------- ------- ------- ------- -------
Operating income (loss)......... -- 2,259 1,364 -- 3,623
Interest expense, net............. -- 2,657 84 -- 2,741
----------- ------- ------- ------- -------
Income (loss) before income
taxes......................... -- (398) 1,280 -- 882
Provision for income taxes........ -- 134 -- -- 134
----------- ------- ------- ------- -------
Income (loss) before equity in
income (loss) of consolidated
subsidiary.................... -- (532) 1,280 -- 748
Equity in income (loss) of
consolidated subsidiaries....... 748 1,280 (2,028) --
----------- ------- ------- ------- -------
Net income (loss)............... $ 748 $ 748 $ 1,280 $ (2,028) $ 748
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
</TABLE>
F-43
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).................. $ (1,453) $ (1,453) $ 961 $ 492 $ (1,453)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Total depreciation and
amortization................... -- 10,437 349 -- 10,786
Amortization of deferred gain on
debt restructure............... -- (1,355) -- -- (1,355)
Provision for supplemental
service fee termination........ -- 6,309 -- -- 6,309
Equity in income (loss) of
consolidated subsidiaries...... 1,453 (961) -- (492) --
Cash provided by (used in) changes
in operating working capital:
Receivables, net................. -- (4,916) 196 -- (4,720)
Intercompany receivables, net.... (93,812) 89,620 4,192 -- --
Other current assets............. -- (624) (71) -- (695)
Accounts payable and other
current liabilities............ -- 1,210 (21) -- 1,189
----------- --------------- ------- ------- --------
Net cash provided by operating
activities................... (93,812) 98,267 5,606 -- 10,061
----------- --------------- ------- ------- --------
INVESTING ACTIVITIES:
Additions to property and
equipment........................ -- (13,421) (1,812) -- (15,233)
Acquisitions of imaging centers.... -- (12,890) -- -- (12,890)
Other.............................. -- (861) (127) -- (988)
----------- --------------- ------- ------- --------
Net cash used in investing
activities................... -- (27,172) (1,939) -- (29,111)
----------- --------------- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred
stock............................ 23,346 -- -- -- 23,346
Stock options and warrants
exercised........................ 266 -- -- -- 266
Payment of loan fees............... -- (2,210) -- -- (2,210)
Payments on debt and capital lease
obligations...................... (2,700) (79,337) (948) -- (82,985)
Proceeds from issuance of debt..... 72,900 10,241 136 -- 83,277
Other.............................. -- 1,276 (1,405) -- (129)
----------- --------------- ------- ------- --------
Net cash provided by (used in)
financing activities......... 93,812 (70,030) (2,217) -- 21,565
----------- --------------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ -- 1,065 1,450 -- 2,515
CASH AND CASH EQUIVALENTS:
Beginning of period................ -- 5,845 1,290 -- 7,135
----------- --------------- ------- ------- --------
End of period...................... $ -- $ 6,910 $ 2,740 $ -- $ 9,650
----------- --------------- ------- ------- --------
----------- --------------- ------- ------- --------
</TABLE>
F-44
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
--------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).................. $ 748 $ 748 $ 1,280 $ (2,028)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Total depreciation and
amortization................... -- 7,087 273 --
Amortization of deferred gain on
debt restructure............... -- (797) -- --
Equity in income (loss) of
consolidated subsidiaries...... (748) (1,280) -- 2,028
Cash provided by (used in) changes
in operating working capital:
Receivables, net................. -- (221) (245) --
Intercompany receivables, net.... -- 326 (326) --
Other current assets............. -- (520) 30 --
Accounts payable and other
current liabilities............ -- 492 (211) --
----- ------ ------ -------
Net cash provided by operating
activities................... -- 5,835 801 --
----- ------ ------ -------
INVESTING ACTIVITIES:
Additions to property and
equipment........................ -- (2,307) (100) --
Acquisitions of imaging centers.... -- (2,766) -- --
Other.............................. -- 351 -- --
----- ------ ------ -------
Net cash used in investing
activities................... -- (4,722) (100) --
----- ------ ------ -------
FINANCING ACTIVITIES:
Payments on debt and capital lease
obligations...................... -- (7,488) (239) --
Proceeds from issuance of debt..... -- 5,139 -- --
Other.............................. -- 766 (352) --
----- ------ ------ -------
Net cash provided by (used in)
financing activities......... -- (1,583) (591) --
----- ------ ------ -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ -- (470) 110 --
CASH AND CASH EQUIVALENTS:
Beginning of period................ -- 5,554 1,310 --
----- ------ ------ -------
End of period...................... $ -- $ 5,084 $ 1,420 $ --
----- ------ ------ -------
----- ------ ------ -------
<CAPTION>
CONSOLIDATED
-------------------
<S> <C>
(AMOUNTS IN THOUSANDS
OPERATING ACTIVITIES:
Net income (loss).................. $ 748
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Total depreciation and
amortization................... 7,360
Amortization of deferred gain on
debt restructure............... (797)
Equity in income (loss) of
consolidated subsidiaries...... --
Cash provided by (used in) changes
in operating working capital:
Receivables, net................. (466)
Intercompany receivables, net.... --
Other current assets............. (490)
Accounts payable and other
current liabilities............ 281
------
Net cash provided by operating
activities................... 6,636
------
INVESTING ACTIVITIES:
Additions to property and
equipment........................ (2,407)
Acquisitions of imaging centers.... (2,766)
Other.............................. 351
------
Net cash used in investing
activities................... (4,822)
------
FINANCING ACTIVITIES:
Payments on debt and capital lease
obligations...................... (7,727)
Proceeds from issuance of debt..... 5,139
Other.............................. 414
------
Net cash provided by (used in)
financing activities......... (2,174)
------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ (360)
CASH AND CASH EQUIVALENTS:
Beginning of period................ 6,864
------
End of period...................... $ 6,504
------
------
</TABLE>
F-45
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report........................................................................ F-47
Balance Sheets as of December 31, 1997 and 1996..................................................... F-48
Statements of Income for the Years Ended December 31, 1997 and 1996................................. F-49
Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996................... F-50
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............................. F-51
Notes to Financial Statements....................................................................... F-52
Balance Sheets (unaudited) as of March 31, 1998 and 1997............................................ F-60
Statements of Income and Retained Earnings (unaudited) for the Three Months Ended March 31, 1998 and
1997.............................................................................................. F-61
Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 1998 and 1997............. F-62
Notes to Financial Statements....................................................................... F-63
</TABLE>
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Signal Medical Services, Inc.:
We have audited the accompanying balance sheets of Signal Medical Services,
Inc. as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signal Medical Services,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
January 9, 1998
F-47
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 1,847,000 667,000
Accounts receivables, net of allowance of $101,000 and $44,000..................... 3,219,000 2,388,000
Other receivables.................................................................. 52,000 11,000
Prepaid expenses and other assets.................................................. 93,000 90,000
------------- ------------
Total current assets............................................................. 5,211,000 3,156,000
------------- ------------
Property and equipment:
Medical equipment.................................................................. 23,607,000 18,430,000
Furniture, fixtures and other equipment............................................ 390,000 291,000
------------- ------------
23,997,000 18,721,000
Less accumulated depreciation and amortization..................................... 10,762,000 7,112,000
------------- ------------
Property and equipment, net...................................................... 13,235,000 11,609,000
------------- ------------
Other assets, net.................................................................... 580,000 488,000
------------- ------------
$ 19,026,000 15,253,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 627,000 425,000
Accrued compensation............................................................... 792,000 583,000
Accrued maintenance................................................................ 259,000 64,000
Other accrued expenses and other liabilities....................................... 869,000 838,000
Short-term borrowings.............................................................. -- 294,000
Current portion of long-term debt.................................................. 3,227,000 3,314,000
Current portion of capital lease obligation........................................ 309,000 --
------------- ------------
Total current liabilities........................................................ 6,083,000 5,518,000
Long-term debt....................................................................... 3,712,000 4,447,000
Accrued taxes........................................................................ 1,008,000 771,000
Deferred income taxes................................................................ 801,000 389,000
Other liabilities.................................................................... 380,000 140,000
Long-term portion of capital lease obligation........................................ 1,545,000 --
------------- ------------
Total liabilities................................................................ 13,529,000 11,265,000
------------- ------------
Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares
authorized, issued and outstanding, redeemable at $33.34 per share................. 2,000,000 2,000,000
Stockholders' equity:
Common stock, $.01 par value, 110,000 shares authorized, 33,500 shares issued...... -- --
Additional paid-in capital......................................................... 156,000 156,000
Retained earnings.................................................................. 3,841,000 2,332,000
Less cost of 17,580 treasury shares.................................................. (500,000) (500,000)
------------- ------------
Total stockholders' equity....................................................... 3,497,000 1,988,000
------------- ------------
Commitments and contingencies
$ 19,026,000 15,253,000
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revenues........................................................................... $ 20,704,000 17,852,000
------------- -------------
Operating costs and expenses:
Operating costs.................................................................. 7,455,000 6,592,000
Selling, general and administrative.............................................. 2,701,000 2,257,000
Lease expense.................................................................... 3,697,000 3,140,000
Depreciation and amortization.................................................... 3,676,000 3,200,000
Interest expense, net of interest income of $27,000 and $26,000.................. 654,000 827,000
------------- -------------
Total operating costs and expenses............................................. 18,183,000 16,016,000
------------- -------------
Income before income taxes..................................................... 2,521,000 1,836,000
Income Taxes 1,012,000 735,000
------------- -------------
Net Income..................................................................... $ 1,509,000 1,101,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......................... $ -- 156,000 1,231,000 (500,000) 887,000
Net Income.......................................... -- -- 1,101,000 -- 1,101,000
----------- ----------- ---------- ---------- ------------
Balance, December 31, 1996.......................... -- 156,000 2,332,000 (500,000) 1,988,000
Net Income.......................................... -- -- 1,509,000 -- 1,509,000
----------- ----------- ---------- ---------- ------------
Balance, December 31, 1997.......................... $ -- 156,000 3,841,000 (500,000) 3,497,000
----------- ----------- ---------- ---------- ------------
----------- ----------- ---------- ---------- ------------
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 1,509,000 1,101,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 3,676,000 3,200,000
Change in assets and liabilities:
Increase in accounts receivable............................................... (831,000) (288,000)
Decrease (increase) in other receivables...................................... (41,000) 56,000
Increase in prepaid expenses and other current assets......................... (3,000) (39,000)
Decrease (increase) in other assets........................................... 66,000 (84,000)
Increase in accounts payable, accrued expenses and other liabilities.......... 1,526,000 1,029,000
------------- -------------
Net cash provided by operating activities................................... 5,902,000 4,975,000
------------- -------------
Cash flows used in investing activities:
Additions to medical equipment, furniture and fixtures............................ (3,421,000) (2,918,000)
Investment in joint ventures...................................................... (185,000) --
------------- -------------
Net cash used in investing activities....................................... (3,606,000) (2,918,000)
------------- -------------
Cash flows used in financing activities:
Net decrease in short-term borrowings............................................. (294,000) (156,000)
Proceeds from long-term debt...................................................... 2,720,000 475,000
Repayment of long-term debt....................................................... (3,542,000) (3,151,000)
------------- -------------
Net cash used in financing activities....................................... (1,116,000) (2,832,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents................................ 1,180,000 (775,000)
Cash and cash equivalents, beginning of period...................................... 667,000 1,442,000
------------- -------------
Cash and cash equivalents, end of period............................................ $ 1,847,000 667,000
------------- -------------
------------- -------------
Cash paid for income taxes.......................................................... $ 807,000 381,000
------------- -------------
------------- -------------
Cash paid for interest.............................................................. 599,000 850,000
------------- -------------
------------- -------------
Capital lease obligation incurred................................................... $ 1,854,000 --
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Signal Medical Services, Inc. (the Company) provides fixed site and
mobile magnetic resonance imaging (MRI), computer tomography (CT),
general radiology and lithotripsy equipment and operations under
contracts with hospitals and other health care providers throughout the
United States. The Company's customer contracts at December 31, 1997 are
primarily with health care providers in the northeastern and southeastern
United States.
During 1997, the Company developed and began operating several new
ventures, which are jointly owned by the Company and its respective joint
venture partners. These joint ventures include a medical billing and
collection company, a mobile lithotripsy joint venture and a mobile x-ray
and ultrasound company. The Company's investment in these joint ventures
totaled $185,000 and is included in other assets. The Company also began
managing two newly developed multi-modality imaging centers in which the
Company expects to acquire a 50% ownership interest during the first
quarter of 1998. The Company's ownership interest in these joint ventures
varies from 35% to 60%, and the operating results of these joint ventures
was not material to the Company's 1997 financial statements.
(b) REVENUE RECOGNITION
Revenues are recognized at the time equipment and related services are
provided, generally on a fee-per-procedure or daily fee basis.
(c) MEDICAL EQUIPMENT AND FURNITURE AND FIXTURES
Medical equipment and furniture and fixtures are stated at cost.
Depreciation and amortization are provided on the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
2 to 7
Medical equipment...................................... years
2 to 5
Furniture, fixtures and other equipment................ years
</TABLE>
Repairs and maintenance expenditures are charged to expense as incurred.
Leased property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability.
Amortization of capitalized leased assets is computed on the
straight-line method over the term of the lease or estimated useful life
of the equipment, whichever is shorter.
Property acquired under capital leases consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Medical Equipment....................................... $ 1,854,000 --
Accumulated Amortization................................ -- --
------------ ------------
$ 1,854,000 --
------------ ------------
------------ ------------
</TABLE>
(d) OTHER ASSETS
Other assets include deferred financing costs and certain deferred costs
incurred in connection with the Company's contracts with health care
providers. These assets are being amortized using the straight-line
method over the terms of the related debt and contracts which range from
5 to 7 years. Accumulated amortization amounted to $258,000 in 1997 and
$178,000 in 1996.
F-52
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid short-term investments with an original maturity of three
months or less to be cash equivalents. At December 31, 1997, cash and
cash equivalents consisted primarily of cash invested in a money market
account and overnight investment account.
(f) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(g) USE OF ESTIMATES
Management of the Company has made several estimates and assumptions
relating to the reporting of certain assets, including the allowance for
doubtful receivables, and liabilities and the disclosure of continent
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
The components of the allowance for doubtful receivables for the years
ended December 31, 1997 and 1996 were as follows:
<TABLE>
<S> <C>
Balance at January 1, 1996................................ $ 55,000
Charged to operating costs............................ --
Write-offs............................................ (11,000)
---------
Balance at December 31, 1996.............................. 44,000
Charged to operating costs............................ 40,000
Write-offs............................................ --
Other................................................. 17,000
---------
Balance at December 31, 1997.............................. $ 101,000
---------
---------
</TABLE>
(h) RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified
to conform to the 1997 presentation.
(i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, on January 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the
F-53
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amount by which the carrying amount of the assets exceed the fair value
of the assets. Adoption of this Statement did not have any impact on the
Company's financial position, results of operations, or liquidity.
(2) LEASES
The Company leases certain medical equipment, office space and fixed site
MRI operating space. Future minimum lease commitments under noncancelable
leases with a term of 12 months or more are as follows at December 31,
1997:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
1998.............................................................. $ 446,000 $ 1,166,000
1999.............................................................. 432,000 1,062,000
2000.............................................................. 405,000 565,000
2001.............................................................. 378,000 341,000
2002.............................................................. 351,000 94,000
Thereafter........................................................ 322,000 --
------------ ------------
Total minimum lease payments.................................... 2,334,000 $ 3,228,000
------------
------------
Amounts representing interest..................................... (480,000)
------------
Present value of net minimum payments........................... 1,854,000
Current portion................................................... (309,000)
------------
Long-term portion of capital lease obligation................. $ 1,545,000
------------
------------
</TABLE>
Total operating lease expense for medical equipment amounted to $3,697,000
in 1997 and $3,140,000 in 1996. Other rent expense, which is included in
selling, general and administrative expenses, totaled $125,000 for 1997 and
$122,000 for 1996, respectively.
(3) INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 CURRENT DEFERRED TOTAL
- ---------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
U.S. Federal.............................................. $ 451,000 355,000 806,000
State and Local........................................... 149,000 57,000 206,000
---------- --------- ----------
600,000 412,000 1,012,000
---------- --------- ----------
---------- --------- ----------
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------------------------
U.S. Federal.............................................. 341,000 296,000 637,000
State and Local........................................... 70,000 28,000 98,000
---------- --------- ----------
$ 411,000 324,000 735,000
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-54
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) INCOME TAXES (CONTINUED)
Income tax expense differed from the amount computed by applying the U.S.
federal income tax rate of 34% to pretax income in 1997 and 1996. As a result of
the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ---------------------------
% OF PRETAX % OF PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS
------------ --------------- ---------- ---------------
<S> <C> <C> <C> <C>
"Expected" tax expense....................................... $ 857,000 34% $ 624,000 34%
State corporation taxes, net of federal tax benefit.......... 136,000 5% 65,000 4%
Other........................................................ 19,000 1% 46,000 2%
-- --
------------ ----------
$ 1,012,000 40% $ 735,000 40%
-- --
-- --
------------ ----------
------------ ----------
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful receivables.................................................. $ 33,000 17,000
Option compensation expense......................................................... 43,000 43,000
Unamortized start-up and organization costs incurred prior to inception of business
operations........................................................................ -- 5,000
Compensated absences, principally due to accrual for financial reporting purposes... 41,000 34,000
Alternative minimum tax credit carryforward......................................... -- 373,000
Net operating loss carryforwards.................................................... -- 27,000
Other liabilities................................................................... 346,000 190,000
State tax credit.................................................................... -- 34,000
Other............................................................................... 3,000 9,000
------------ ------------
Total gross deferred tax assets................................................... 466,000 732,000
------------ ------------
Deferred tax liabilities
Medical equipment, furniture and fixtures, and other assets principally due to
differences in depreciation and amortization.................................... 1,267,000 1,121,000
------------ ------------
Total gross deferred tax liabilities.............................................. 1,267,000 1,121,000
------------ ------------
Net deferred tax liability.......................................................... $ 801,000 389,000
------------ ------------
------------ ------------
</TABLE>
Management has concluded that it is more likely than not that the Company
will have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by current tax law to allow for the
utilization of the deductible amounts generating the deferred tax asset and,
therefore, no valuation allowance is required.
(4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK
On April 3, 1992, 60,000 shares of $.01 par value series A redeemable
convertible cumulative preferred stock were issued to SMSI Holding, Inc., a
wholly owned subsidiary of Anthem Blue Cross and Blue Shield of Connecticut,
Inc. at $33.34 per share. Each share of series A preferred stock is convertible
F-55
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK (CONTINUED)
into one share of common stock at any time after the date of issuance. In the
event of a public offering of common stock by the Company, the preferred stock
will automatically be converted into shares of common stock, provided that the
offering price per share and gross proceeds from the offering are not less than
$66.68 and $5,000,000 respectively.
On or after April 1, 1997, the series A preferred stock is redeemable at
$33.34 per share plus any unpaid dividends at the option of SMSI Holding, Inc.
Upon liquidation, dissolution or winding up of the Company, the holders of the
series A preferred stock shall be entitled to receive, before any distribution
is made to the holders of common stock of the Company, a distribution of $33.34
per share plus any unpaid dividends. The series A preferred stock accumulates a
dividend at an annual rate of $2.33 per share through March 31, 1994 and $3.00
per share from April 1, 1994 to March 31, 1997 payable upon a liquidation,
dissolution or winding up, conversion or redemption, consolidation or merger of
the Company. The amount of accumulated and unpaid series A preferred stock
dividends was $820,000 at December 31, 1997. The holders of the series A
preferred stock are entitled to one vote per share of common stock into which
the preferred stock is convertible.
(5) STOCKHOLDERS' EQUITY
On April 3, 1992, 33,500 shares of $.01 par value common stock were issued
to the founders of the Company.
The Company has a fixed option plan. Under the 1994 Employee Stock Option
Plan, the Company may grant options to its employees for up to 18,000 shares of
common stock. The exercise price of each option equals the fair value of the
Company's stock on the date of grant, and an option's maximum term is ten years.
Options generally vest over a period of one to three years. At December 31,
1997, all options were fully vested.
The Company has elected to adopt the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Accordingly, no compensation cost has been recognized for stock
options issued. The impact on net income in 1997 and 1996 had the Company
adopted FAS 123 would have been immaterial. Options granted, exercised and
outstanding under this plan were as follows:
<TABLE>
<CAPTION>
EXERCISE EXERCISE
1997 PRICE 1996 PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........................................ 14,790 -- 13,790 $ 18.00
Granted................................................................. -- -- 1,000 83.00
Exercised............................................................... -- -- -- --
--------- --------- -----------
Outstanding at end of year.............................................. 14,790 14,790
--------- ---------
--------- ---------
Fair value of options granted during the year........................... $ -- $ 36.65
--------- ---------
--------- ---------
</TABLE>
The fair value of stock options granted during 1996 were estimated on the
date of grant using the minimum value method with the following assumptions:
risk-free interest rate of 6.0 percent, expected life of 10 years, and no
dividends.
F-56
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) RELATED PARTY TRANSACTION
On April 3, 1992, the Company loaned $35,000, at an interest rate of 9%, to
an officer and common stockholder of the Company. Interest is due April 1st of
each year and 34% of the officer's annual bonus, if any, must be paid toward the
outstanding principal balance. The remaining balance of the note December 31,
1997 and 1996 was $0 and $9,000, respectively, and is included in other
receivables.
The Company made advances to its employees and joint ventures which totaled
approximately $32,000 and $21,000 as of December 31, 1997 and 1996,
respectively. These advances are included in other receivables.
(7) SHORT-TERM BORROWINGS
The Company has a $1,500,000 line of credit from Anthem Blue Cross and Blue
Shield of Connecticut, Inc. Borrowings under this line bear interest at the
three-month LIBOR rate plus 2% (7.81% at December 31, 1997). The amounts
outstanding at December 31, 1997 and 1996 were $0 and $294,000, respectively.
The weighted average interest rate on the line of credit during 1997 and 1996
was 8.57%, respectively.
F-57
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) LONG-TERM DEBT
The following schedule summarizes long-term debt at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Term notes with banks:
$450,000, interest fixed at 7.90%; due in 48 equal monthly principal payments through
May 1, 1997......................................................................... $ -- 38,000
$2,500,000, interest fixed at 7.90% through November 1998, variable thereafter; due in
84 equal monthly principal payments through December 1, 2000........................ 1,071,000 1,429,000
$3,000,000, interest fixed at 9.50%; due in 60 equal monthly principal payments
through June 1, 1999................................................................ 900,000 1,500,000
$824,444, interest fixed at 9.65% through December 1, 1996, variable thereafter; due
in 47 equal monthly principal payments through October 1, 1998...................... 176,000 386,000
$1,950,000, interest fixed at 9.95% through January 1, 1998, variable thereafter; due
in 48 equal monthly principal payments through December 1, 1998..................... 487,000 975,000
$750,000, interest fixed at 9.40%; due in 36 equal monthly principal payments through
January 10, 1998.................................................................... -- 250,000
$900,000, interest fixed at 9.40%; due in 35 equal monthly principal payments through
January 10, 1998.................................................................... -- 308,000
$1,200,000, interest fixed at 8.75%; due in 48 equal monthly principal payments
through September 11, 1999.......................................................... 525,000 825,000
$2,100,000, interest fixed at 8.40%; due in 48 equal monthly principal payments
through December 14, 1999........................................................... 1,050,000 1,575,000
$475,000, interest fixed at 8.46%; due in 24 equal monthly principal payments through
December 31, 1998................................................................... 237,000 475,000
$795,000, interest fixed at 8.95%; due in 60 equal monthly principal payments through
February 28, 2002................................................................... 663,000 --
$950,000, interest fixed at 8.90%; due in 60 equal monthly principal payments through
August 1, 2002...................................................................... 887,000 --
$975,000, interest fixed at 8.49%; due in 60 equal monthly principal payments through
October 31, 2002.................................................................... 943,000 --
------------ ------------
6,939,000 7,761,000
Less current maturities............................................................... 3,227,000 3,314,000
------------ ------------
$ 3,712,000 4,447,000
------------ ------------
------------ ------------
</TABLE>
F-58
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998........................................................... $3,227,000
1999........................................................... 1,951,000
2000........................................................... 901,000
2001........................................................... 544,000
2002........................................................... 316,000
Thereafter..................................................... --
---------
$6,939,000
---------
---------
</TABLE>
The term notes contain covenants which, among other things, require
maintenance of certain ratios of liabilities to tangible net worth, debt service
coverage and minimum levels of liquid investments and profitability.
The term notes are secured by the medical equipment purchased with the note
proceeds, the related service contacts with hospital customers and other assets
of the Company.
The Company has a $5,000,000 capital expenditure line of credit with a
financial institution under which it finances equipment acquisitions on a
long-term basis. Interest is at market rates determined at the time of each
drawdown under the line. The unused portion of this line at December 31, 1997
was $5,000,000.
(9) CONTINGENCIES
The Company entered into an agreement in 1993 in which it became the
guarantor of a loan between Citrus Memorial Health Foundation, Inc., a customer,
and a bank. This loan had an outstanding principal balance of approximately
$577,000 at December 31, 1997. In September 1994, the Company entered into a
similar loan guarantee with Manchester Memorial Hospital and the same bank. This
loan had an outstanding principal balance of approximately $1,027,000 at
December 31, 1997.
On December 29, 1997, the Company entered in an agreement under which it
became a guarantor of a credit facility between Whitney Imaging Center, LLC
(WIC) and Shoreline Imaging Center, LLC (SIC) as the borrowers and a bank.
Proceeds from the credit facility are being used to finance the development of
the two multi-modality imaging centers owned by WIC and SIC and managed by the
Company. The credit facility is also guaranteed by the owners of WIC and SIC and
is secured by the assets of WIC, SIC and their owners. The Company's guaranty is
unsecured. The total amount committed by the bank under the credit facility is
$2,450,000. Outstanding borrowings under the facility at December 31, 1997
totaled $1,319,000.
In the event that the debtors default under these loans, the Company could
become liable for all unpaid interest and principal. As of December 31, 1997,
the debtors were current as to interest and principal payments under the loans.
F-59
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 1,642,000 1,013,000
Accounts receivables, net........................................................ 3,397,000 2,571,000
Other receivables................................................................ 239,000 6,000
Prepaid expenses and other assets................................................ 121,000 139,000
------------- -------------
Total current assets........................................................... 5,399,000 3,729,000
------------- -------------
Property and equipment:
Medical equipment, net........................................................... 12,174,000 10,705,000
Furniture, fixtures and other equipment, net..................................... 112,000 91,000
------------- -------------
Property and equipment, net.................................................... 12,286,000 10,796,000
------------- -------------
Other assets, net.................................................................. 660,000 546,000
------------- -------------
$ 18,345,000 15,071,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 235,000 326,000
Accrued compensation............................................................. 516,000 371,000
Accrued maintenance.............................................................. 258,000 126,000
Other accrued expenses and other liabilities..................................... 1,112,000 778,000
Current portion of long-term debt................................................ 2,993,000 3,304,000
Current portion of capital lease obligation...................................... 309,000 --
------------- -------------
Total current liabilities...................................................... 5,423,000 4,905,000
Long-term debt..................................................................... 3,130,000 4,391,000
Accrued taxes...................................................................... 1,307,000 838,000
Deferred income taxes.............................................................. 912,000 419,000
Other liabilities.................................................................. 139,000 176,000
Long-term portion of capital lease obligation...................................... 1,468,000 --
------------- -------------
Total liabilities.............................................................. 12,379,000 10,729,000
------------- -------------
Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares
authorized, issued and outstanding, redeemable at $33.34 per share............... 2,000,000 2,000,000
Stockholders' equity:
Common stock..................................................................... -- --
Additional paid-in capital....................................................... 156,000 156,000
Retained earnings................................................................ 4,310,000 2,686,000
Less cost of treasury shares....................................................... (500,000) (500,000)
------------- -------------
Total stockholders' equity..................................................... 3,966,000 2,342,000
------------- -------------
$ 18,345,000 15,071,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues.............................................................................. $ 5,622,000 $ 5,085,000
------------ ------------
Operating costs and expenses:
Operating costs..................................................................... 2,067,000 1,735,000
Selling, general and administrative................................................. 845,000 706,000
Lease expense....................................................................... 686,000 989,000
Depreciation and amortization....................................................... 1,058,000 888,000
Interest expense, net of interest income of $15,000 and $1,000...................... 171,000 178,000
------------ ------------
Total operating costs and expenses................................................ 4,827,000 4,496,000
------------ ------------
Income before income taxes........................................................ 795,000 589,000
Income Taxes.......................................................................... 326,000 235,000
------------ ------------
Net Income........................................................................ $ 469,000 $ 354,000
------------ ------------
Retained earnings, beginning of period................................................ 3,841,000 2,332,000
------------ ------------
Retained earnings, end of period...................................................... 4,310,000 2,686,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 469,000 354,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 1,058,000 888,000
Change in assets and liabilities:
Increase in accounts receivable................................................. (178,000) (183,000)
Decrease (increase) in other receivables........................................ (187,000) 5,000
Increase in prepaid expenses and other current assets........................... (28,000) (49,000)
Decrease (increase) in other assets............................................. (82,000) (65,000)
Decrease in accounts payable, accrued expenses and other liabilities............ (257,000) (176,000)
------------ ------------
Net cash provided by operating activities..................................... 795,000 774,000
------------ ------------
Cash flows used in investing activities:
Additions to medical equipment, furniture and fixtures.............................. (107,000) (68,000)
------------ ------------
Net cash used in investing activities......................................... (107,000) (68,000)
------------ ------------
Cash flows used in financing activities:
Net decrease in short-term borrowings............................................... -- (294,000)
Proceeds from long-term debt........................................................ -- 795,000
Repayment of long-term debt......................................................... (893,000) (861,000)
------------ ------------
Net cash used in financing activities......................................... (893,000) (360,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents.................................. (205,000) 346,000
Cash and cash equivalents, beginning of period........................................ 1,847,000 667,000
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 1,642,000 1,013,000
------------ ------------
------------ ------------
Cash paid for income taxes............................................................ $ 68,000 236,000
------------ ------------
------------ ------------
Cash paid for interest................................................................ 159,000 170,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE>
SIGNAL MEDICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) BASIS OF PRESENTATION
In the opinion of management, the financial information reflects all
adjustments which are necessary to a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented and are of a normal recurring nature, unless otherwise disclosed
in this report.
The statements should be read in conjunction with the notes to the financial
statements of Signal Medical Services, Inc. (the Company) as of and for the
years ended December 31, 1997 and 1996.
(2) ACQUISITION BY INSIGHT HEALTH SERVICES CORP.
On May 18, 1998, the stock of the Company was acquired by InSight Health
Services Corp., a leading provider of diagnostic imaging and related
information services based in Newport Beach, California. The purchase price
consisted of $46 million (subject to certain post-closing adjustments),
including the assumption of indebtedness.
(3) NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about
Segments of an Enterprise and Related Information." FASB Nos. 130 and 131
are effective for fiscal years beginning after December 15, 1997, with
earlier adoption permitted. The Company believes that adoption of these
standards does not have a material impact on the Company.
F-63
<PAGE>
MOBILE IMAGING CONSORTIUM
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-----------
<S> <C>
Independent Auditors' Report........................................................................ F-65
Combined Balance Sheets as of December 31, 1996 and 1995............................................ F-66
Combined Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.................. F-67
Combined Statements of Partners' Capital Accounts for the Years Ended December 31, 1996, 1995 and
1994.............................................................................................. F-68
Combined Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.............. F-69
Notes to Financial Statements....................................................................... F-70
Combining Balance Sheet as of December 31, 1996..................................................... F-75
Combining Balance Sheet as of December 31, 1995..................................................... F-76
Combining Statement of Income for the Year Ended December 31, 1996.................................. F-77
Combining Statement of Income for the Year Ended December 31, 1995.................................. F-78
Combining Statement of Income for the Year Ended December 31, 1994.................................. F-79
</TABLE>
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Mobile Imaging Consortium--Maine
Mobile Imaging Consortium--New Hampshire
We have audited the accompanying combined balance sheets of Mobile Imaging
Consortium, consisting of Mobile Imaging Consortium--Maine (a Maine limited
partnership) and Mobile Imaging Consortium--New Hampshire (a Maine general
partnership), as of December 31, 1996 and 1995, and the related combined
statements of income, partners' capital accounts and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Partnerships' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Mobile Imaging
Consortium as of December 31, 1996 and 1995, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in accordance with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The combining details appearing
in conjunction with the combined financial statements are presented for purposes
of additional analysis and are not a required part of the basic combined
financial statements. Such additional information has been subjected to the
auditing procedures applied in our audits of the basic combined financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic combined financial statements taken as a whole.
<TABLE>
<S> <C>
/s/ BAKER NEWMAN & NOYES
--------------------------
January 20, 1997 Baker Newman & Noyes
Limited Liability Company
</TABLE>
F-65
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents............................................................. $ 381,591 $ 972,134
Accounts receivable, net of contractual and bad debt allowances of $463,000 for 1996
and $260,000 for 1995 (note 3)...................................................... 1,350,324 1,069,537
Prepaid expenses and other current assets............................................. 177,340 164,131
------------ ------------
Total current assets.............................................................. 1,909,255 2,205,802
Property and equipment:
Leasehold improvements.............................................................. 2,501 2,501
Equipment........................................................................... 2,775,368 2,518,317
Equipment under capital leases (note 5)............................................. 4,106,512 3,743,960
Furniture and fixtures.............................................................. 7,592 7,592
------------ ------------
6,891,973 6,272,370
Less accumulated depreciation and amortization...................................... 5,201,323 4,026,953
------------ ------------
Net property, plant and equipment................................................... 1,690,650 2,245,417
Other assets, net..................................................................... 12,386 38,374
------------ ------------
$ 3,612,291 $ 4,489,593
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses................................................. $ 247,415 $ 338,644
Current portion of long-term debt (note 4)............................................ 131,017 208,993
Current portion of obligations under capital leases (note 5).......................... 1,077,732 766,813
------------ ------------
Total current liabilities......................................................... 1,456,164 1,314,450
Long-term debt, less current portion (note 4)......................................... 67,555 --
Obligations under capital leases, less current portion (note 5)....................... 454,245 1,222,621
Commitments and contingencies (notes 9 and 10)
Partners' capital..................................................................... 1,634,327 1,952,522
------------ ------------
$ 3,612,291 $ 4,489,593
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-66
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Net scan revenue (note 7)............................................. $ 7,299,625 $ 6,499,166 $ 5,981,629
Interest.............................................................. 9,264 27,991 8,885
Other................................................................. 139,143 58,993 74,100
------------ ------------ ------------
Total revenue....................................................... 7,448,032 6,586,150 6,064,614
Expenses:
Payroll, fringe and related taxes..................................... 1,007,573 935,134 999,538
Management fees (note 8).............................................. 147,265 140,729 130,000
Hospital maintenance fees............................................. 141,175 129,247 115,554
Professional fees..................................................... 267,991 159,793 128,597
Tractor expenses...................................................... 83,583 64,631 65,573
Repairs and maintenance............................................... 509,285 472,797 479,196
Cryogens.............................................................. 116,777 110,527 109,000
Film and medical supplies............................................. 469,499 349,280 327,407
Insurance............................................................. 126,259 124,646 124,099
Utilities............................................................. 72,963 70,664 69,456
Rent.................................................................. 30,266 36,841 36,471
Property taxes........................................................ 53,316 88,006 86,969
Bad debts............................................................. 198,370 -- 125,387
Depreciation.......................................................... 1,174,370 1,282,300 1,289,777
Amortization.......................................................... 24,009 34,079 34,078
Interest.............................................................. 189,924 290,755 387,437
Other................................................................. 203,602 159,971 174,820
------------ ------------ ------------
Total operating expenses............................................ 4,816,227 4,489,400 4,683,359
------------ ------------ ------------
Net income.............................................................. $ 2,631,805 $ 2,096,750 $ 1,381,255
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-67
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINED STATEMENTS OF PARTNERS' CAPITAL ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
GENERAL LIMITED GENERAL
PARTNERS PARTNERS PARTNERS
(MIC-ME) (MIC-ME) (MIC-NH) TOTAL
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993.............................. $ 603,184 $ 487,992 $ 264,141 $ 1,355,317
Net income.............................................. 756,610 521,074 103,571 1,381,255
Partner distributions (note 6).......................... (638,480) (442,320) (325,000) (1,405,800)
------------- ------------- ----------- -------------
Balance, December 31, 1994.............................. 721,314 566,746 42,712 1,330,772
Net income.............................................. 1,040,369 710,246 346,135 2,096,750
Partner distributions (note 6).......................... (710,000) (490,000) (275,000) (1,475,000)
------------- ------------- ----------- -------------
Balance, December 31, 1995.............................. 1,051,683 786,992 113,847 1,952,522
Net income.............................................. 1,334,745 906,496 390,564 2,631,805
Partner distributions (note 6).......................... (1,505,000) (1,020,000) (425,000) (2,950,000)
------------- ------------- ----------- -------------
Balance, December 31, 1996.............................. $ 881,428 $ 673,488 $ 79,411 $ 1,634,327
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
</TABLE>
See accompanying notes.
F-68
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 2,631,805 $ 2,096,750 $ 1,381,255
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 1,174,370 1,282,300 1,289,777
Amortization................................................... 24,009 34,079 34,078
Loss on disposal of asset...................................... -- 1,653 --
Changes in current assets and liabilities:
Increase in accounts receivable.............................. (280,787) (209,038) (269,491)
Increase in prepaid expenses and other current assets........ (13,209) (19,975) (67,583)
Decrease in other assets..................................... 1,979 -- --
Increase (decrease) in accounts payable and accrued
expenses................................................... (91,229) (15,580) 103,229
------------- ------------- -------------
Net cash provided by operating activities.......................... 3,446,938 3,170,189 2,471,265
Cash flows from investing activities:
Purchases of property and equipment................................ (257,051) (103,173) (48,611)
Purchases of investments........................................... -- -- (255,068)
Proceeds from sale of investments.................................. -- 255,068 --
------------- ------------- -------------
Net cash provided (used) by investing activities................... (257,051) 151,895 (303,679
Cash flows from financing activities:
Proceeds from issuance of long-term debt........................... 256,324 93,164 --
Principal payments of long-term debt............................... (266,745) (529,300) (393,694)
Principal payments on capital lease obligations.................... (820,009) (689,084) (619,329)
Distributions to partners.......................................... (2,950,000) (1,475,000) (1,405,800)
------------- ------------- -------------
Net cash used by financing activities.............................. (3,780,430) (2,600,220) (2,418,823)
------------- ------------- -------------
Net increase (decrease) in cash...................................... (590,543) 721,864 (251,237)
Cash at beginning of year............................................ 972,134 250,270 501,506
------------- ------------- -------------
Cash at end of year.................................................. $ 381,591 $ 972,134 $ 250,269
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Interest paid...................................................... $ 189,924 $ 294,107 $ 384,085
------------- ------------- -------------
------------- ------------- -------------
Supplemental schedule of noncash investing and financing activities:
Acquisition of property and equipment through obligations under
capital leases................................................... $ 362,552 $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-69
<PAGE>
MOBILE IMAGING CONSORTIUM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The combined financial statements are prepared on the accrual basis of
accounting. The combined financial statements include the accounts of Mobile
Imaging Consortium--Maine (A Maine Limited Partnership) and Mobile Imaging
Consortium--New Hampshire (A Maine General Partnership). All transactions and
balances between the two partnerships have been eliminated in combination.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated using
straight-line and accelerated methods over the estimated useful lives of the
assets. Assets capitalized under capital lease obligations are amortized over
the term of the related leases.
ORGANIZATION COSTS
Organization costs incurred in relation to the commencement of the
respective Partnership's activities have been capitalized and are amortized over
five years using the straight-line method.
SYNDICATION COSTS
Syndication costs incurred in forming the respective partnerships are
deducted from partners' capital in the combined financial statements.
INCOME TAXES
No provision or benefit for income taxes has been included in the combined
financial statements since any taxable income or loss passes through to, and is
reportable by, the respective partners individually.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates related to contractual and bad debt allowances are
especially significant. Actual results could differ from those estimates.
2. ORGANIZATION
Mobile Imaging Consortium--Maine ("MIC-ME") is a limited partnership formed
under the laws of the State of Maine in October, 1991. The Partnership operates
two mobile magnetic resonance imaging systems which primarily serve hospitals
throughout Maine. The general partners have exclusive responsibility for the
control of all aspects of the Partnership's business.
Mobile Imaging Consortium--New Hampshire ("MIC-NH") is a general partnership
formed under the laws of the State of Maine in January, 1993. The Partnership
operates a mobile magnetic resonance imaging system which primarily serves three
hospitals in New Hampshire.
F-70
<PAGE>
MOBILE IMAGING CONSORTIUM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. ORGANIZATION (CONTINUED)
The two partnerships have similar general and limited partners. In addition,
both partnerships are managed by the same management agent, Joseph J. Bean
Associates. The management agent performs all recordkeeping functions on behalf
of the partners. In addition, the management agent is responsible for allocating
certain shared expenses incurred on behalf of both partnerships.
3. BUSINESS AND CREDIT CONCENTRATIONS
Nearly all of the patients served by the Partnerships are from Maine or New
Hampshire. No single patient accounted for more than five percent of the
combined revenues for 1996, 1995, or 1994, and no account receivable from any
patient exceeded five percent of total combined accounts receivable at December
31, 1996 and 1995.
MIC-NH maintains contracts with three hospitals located in New Hampshire and
generates all of its revenues under these contracts. The hospitals, in turn,
charge the individual patients. Therefore, MIC-NH had receivable balances from
only three parties as of December 31, 1996 and 1995.
MIC-ME submits the charges for substantially all of its patients to third
parties for full or partial payment. No single third-party payor accounted for
more than ten percent of total combined accounts receivable at December 31, 1996
and 1995.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Long-term debt consists of the following:
Variable rate note payable to a bank, due in
monthly installments of principal and interest
of $38,795 through May 1996; secured by
equipment....................................... $ -- $ 157,235
7.16% note payable to a financial institution, due
in monthly installments of $10,663 including
principal and interest through May 1996......... -- 51,758
8.55% note payable to a financial institution, due
in monthly installments of $7,776 including
principal and interest through September 1998;
secured by equipment............................ 151,170 --
7.81% note payable to a financial institution, due
in monthly installments of $9,792 including
principal and interest through May 1996......... 47,402 --
-------------- --------------
198,572 208,993
Less current installments of long-term debt....... (131,017) (208,993)
-------------- --------------
$ 67,555 $ --
-------------- --------------
-------------- --------------
</TABLE>
F-71
<PAGE>
MOBILE IMAGING CONSORTIUM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
4. LONG-TERM DEBT (CONTINUED)
Principal installments of long-term debt are as follows as of December 31,
1996:
<TABLE>
<S> <C>
1997.............................................. $ 131,017
1998.............................................. 67,555
--------------
$ 198,572
--------------
--------------
</TABLE>
5. LEASES
The Partnership is obligated under several capital leases for equipment as
follows:
At December 31, 1996 and 1995, the gross amount of equipment and related
accumulated amortization recorded under the capital leases is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Equipment....................................................... $ 4,106,512 $ 3,743,960
Less accumulated amortization................................... (2,711,410) (1,884,091)
------------- -------------
$ 1,395,102 $ 1,859,869
------------- -------------
------------- -------------
</TABLE>
The future minimum capital lease payments as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Future mininmum lease payments
1997............................................................ $1,182,024
1998............................................................ 482,467
---------
1,664,491
Less imputed interest (weighted average rate of 10.1%).......... 132,514
Present value of future minimum lease payments.................. 1,531,997
Current portion of obligations under capital leases............. 1,077,732
---------
Long-term portion of obligations under capital leases........... $ 454,245
---------
---------
</TABLE>
The lease agreements generally provide for fair market value purchase
options at the end of the lease terms.
6. PARTNERS' CAPITAL AND INCOME DISTRIBUTIONS
The allocation of net income or losses and distributions of cash flow are in
accordance with the terms of each respective partnership agreement. For MIC-NH,
the five general partners are distributed their pro-rata share of net income or
losses and distributions of cash flow. For MIC-ME, the four general partners, as
a group, and the limited partners, share equally in the first $100,000 of net
income or loss, allocated to the individual partners in each group based on
their pro-rata ownership interest. Likewise, the first $100,000 of distributions
of cash flow are allocated in this manner. Any income or losses or distributions
of cash flow exceeding $100,000 are allocated 60% to the general partners and
40% to the limited partners. Allocations within each group of partners are based
on each partners pro-rata ownership interest of the group.
F-72
<PAGE>
MOBILE IMAGING CONSORTIUM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. NET SCAN REVENUE
Net scan revenue consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Gross scan revenue............................... $ 8,888,277 $ 7,967,895 $ 6,984,102
Less contractual adjustments..................... (1,588,652) (1,468,729) (1,002,473)
------------- ------------- -------------
Net scan revenue................................. $ 7,299,625 $ 6,499,166 $ 5,981,629
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
8. RELATED PARTY TRANSACTIONS
As noted in note 1, the financial statements include the accounts of MIC-ME
and MIC-NH.
Certain shared expenses, such as insurance and supplies, are incurred by
MIC-ME and are charged to MIC-NH. These charges have been eliminated in the
combination of the two entities in the accompanying financial statements.
Charges from MIC-ME to MIC-NH for shared expenses were $48,000, $48,000, and
$93,365 for the years ended December 31, 1996, 1995 and 1994, respectively.
Joseph J. Bean Associates ("JBA") provides operational and financial
management services to both Partnerships. JBA is a party related to the
Partnerships through Joseph J. Bean, who either individually or through an
interest in another entity, acts as a general or limited partner in both
Partnerships. MIC-ME paid management fees of $90,159, $86,038, and $78,000 to
JBA for the years ended December 31, 1996, 1995 and 1994, respectively. MIC-NH
paid management fees of $57,106, $54,691, and $52,000 to JBA for the years ended
December 31, 1996, 1995 and 1994, respectively.
In addition, the Partnerships lease office space from JBA under an operating
lease agreement. The initial term of the lease is three years from May 1, 1996
to April 30, 1999. At that time the lease terms will automatically renew, unless
notice of termination is executed, for a term of 22 months through February 28,
2001. The Partnerships have an option to renew the lease for an additional term
of 10 years. Future lease payments for the remaining term of the lease,
including the automatic renewal period, are as follows:
<TABLE>
<S> <C>
1997............................................... $ 24,839
1998............................................... 25,164
1999............................................... 19,691
2000............................................... 17,117
2001............................................... 2,871
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Partnerships maintains several service contracts with hospitals located
in Maine and New Hampshire as well as contracts with third-party agencies. The
hospital service contracts have various lengths and payment terms. MIC-ME's
contracts are primarily based on the hospital's referral of patients to the
Partnership in return for compensation for the use of the hospital's physical
facilities. MIC-NH's contracts generally stipulate charges directly to the
hospital based on the volume of procedures performed.
The Partnerships also maintain contracts with various third-party payors
under which rates have been negotiated for service to patients who are insured
by these parties.
F-73
<PAGE>
MOBILE IMAGING CONSORTIUM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
It is anticipated that the hospital service contracts will be assumed by a
successor entity pursuant to an agreement described in note 10. The contracts
with third-party payors are expressly excluded from the agreement.
MIC-ME is involved in a dispute with the City of Portland regarding
jurisdiction for property tax assessment on the Partnership's mobile assets. The
City of Portland contends that it has jurisdiction to assess property taxes
based on the location of the Partnership's general offices. MIC-ME contends that
the mobile assets are subject to taxes from the jurisdictions in which the
assets are located on the assessment date, April 1.
The outcome of this matter is uncertain as of December 31, 1996. The
Partnership has estimated its potential liability in the event of an unfavorable
outcome and has included such amounts in the accompanying financial statements.
10. SALE OF PARTNERSHIPS' ASSETS AND ASSUMPTION OF LIABILITIES
In January, 1997 the Partnerships executed an Asset Purchase and Liabilities
Assumption Agreement (the "Agreement") with InSight Health Corp. ("InSight"), a
Delaware corporation. The Agreement stipulates that InSight will purchase all
operational assets and goodwill with the exception of cash on hand, accounts
receivable, and other items as specified in the Agreement. The Agreement also
stipulates that InSight will have no rights or liabilities with regard to the
property tax matter as described in note 9.
Pursuant to the Agreement, the Partnerships are required to deposit
collections of pre-sale accounts receivable into an escrow account up to
$1,000,000 as indemnification for InSight. The escrow will be released to the
Partnerships in equal amounts each quarter subsequent to the Agreement date,
barring any claims made by InSight as described in the Agreement.
The Agreement stipulates that InSight will assume substantially all
liabilities, contracts, leases and operating agreements upon execution of the
Agreement, except those as specifically documented in the Agreement or schedules
thereto.
Finally, the Agreement includes clauses which prohibit the corporate general
partners and the individual limited partners of the Partnerships from competing
with InSight in Maine and New Hampshire. The specific provisions dictate that
the parties will not compete in the area of nuclear magnetic resonance imaging
for a term of five years and in the area of CT scanning for a period of three
years. The Agreement also includes consulting and non-compete provisions for
Joseph J. Bean, individually, and Joseph J. Bean Associates, the management
agent of the Partnerships.
F-74
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINING BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
COMBINED
MIC-NEW DECEMBER 31,
MIC-MAINE HAMPSHIRE ELIMINATIONS 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 271,260 $ 110,331 $ -- $ 381,591
Accounts receivable, net................................. 1,220,066 130,258 -- 1,350,324
Prepaid expenses and other current assets................ 155,298 22,042 -- 177,340
Due from affiliates...................................... -- 1,315 (1,315) --
------------ ------------ ------------ ------------
Total current assets................................... 1,646,624 263,946 (1,315) 1,909,255
Property and equipment:
Leasehold improvements................................. 2,501 -- -- 2,501
Equipment.............................................. 2,664,599 110,769 -- 2,775,368
Equipment under capital leases......................... 1,944,195 2,162,317 -- 4,106,512
Furniture and fixtures................................. 7,592 -- -- 7,592
------------ ------------ ------------ ------------
4,618,887 2,273,086 -- 6,891,973
Less accumulated depreciation and amortization......... 3,714,639 1,486,684 -- 5,201,323
------------ ------------ ------------ ------------
Net property and equipment............................. 904,248 786,402 -- 1,690,650
Other assets, net........................................ -- 12,386 -- 12,386
------------ ------------ ------------ ------------
$ 2,550,872 $ 1,062,734 $ (1,315) $3,612,291
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses.................... $ 232,912 $ 14,503 $ -- $ 247,415
Due to affiliates........................................ 1,315 -- (1,315) --
Current portion of long-term debt........................ 114,900 16,117 -- 131,017
Current portion of capital lease obligations............. 532,156 545,576 -- 1,077,732
------------ ------------ ------------ ------------
Total current liabilities.............................. 881,283 576,196 (1,315) 1,456,164
Long-term debt, less current portion..................... 67,555 -- -- 67,555
Obligations under capital leases, less current portion... 47,118 407,127 -- 454,245
Partners' capital........................................ 1,554,916 79,411 -- 1,634,327
------------ ------------ ------------ ------------
$ 2,550,872 $ 1,062,734 $ (1,315) $3,612,291
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-75
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINING BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
COMBINED
MIC-NEW DECEMBER 31,
MIC-MAINE HAMPSHIRE ELIMINATIONS 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 780,033 $ 192,101 $ -- $ 972,134
Accounts receivable, net................................. 962,906 106,631 -- 1,069,537
Prepaid expenses and other current assets................ 139,881 24,250 -- 164,131
Due from affiliates...................................... 34,106 -- (34,106) --
------------ ------------ ------------ ------------
Total current assets................................... 1,916,926 322,982 (34,106) 2,205,802
Property and equipment:
Leasehold improvements................................. 2,501 -- -- 2,501
Equipment.............................................. 2,432,798 85,519 -- 2,518,317
Equipment under capital leases......................... 1,808,893 1,935,067 -- 3,743,960
Furniture and fixtures................................. 7,592 -- -- 7,592
------------ ------------ ------------ ------------
4,251,784 2,020,586 -- 6,272,370
Less accumulated depreciation and amortization......... 3,001,415 1,025,538 -- 4,026,953
------------ ------------ ------------ ------------
Net property and equipment............................. 1,250,369 995,048 -- 2,245,417
Other assets, net........................................ 16,080 22,294 -- 38,374
------------ ------------ ------------ ------------
$ 3,183,375 $ 1,340,324 $ (34,106) $4,489,593
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses.................... $ 303,520 $ 35,124 $ -- $ 338,644
Due to affiliates........................................ -- 34,106 (34,106) --
Current portion of long-term debt........................ 191,395 17,598 -- 208,993
Current portion of capital lease obligations............. 381,593 385,220 -- 766,813
------------ ------------ ------------ ------------
Total current liabilities.............................. 876,508 472,048 (34,106) 1,314,450
Obligations under capital leases, less current portion... 468,192 754,429 -- 1,222,621
Partners' capital........................................ 1,838,675 113,847 -- 1,952,522
------------ ------------ ------------ ------------
$ 3,183,375 $ 1,340,324 $ (34,106) $4,489,593
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-76
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED
MIC-NEW DECEMBER 31,
MIC-MAINE HAMPSHIRE ELIMINATIONS 1995
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Scan revenue........................................ $ 5,592,590 $ 1,707,035 $ -- $7,299,625
Interest............................................ 8,119 1,145 -- 9,264
Other............................................... 154,873 32,270 (48,000) 139,143
------------ --------------- ------------ ------------
Total revenue..................................... 5,755,582 1,740,450 (48,000) 7,448,032
Expenses:
Payroll, fringe and related taxes................... 746,493 261,080 -- 1,007,573
Management fees..................................... 90,159 57,106 -- 147,265
Hospital maintenance fees........................... 141,175 -- -- 141,175
Professional fees................................... 215,099 52,892 -- 267,991
Tractor expenses.................................... 68,702 14,881 -- 83,583
Repairs and maintenance............................. 334,216 175,069 -- 509,285
Cryogens............................................ 60,250 56,527 -- 116,777
Film and medical supplies........................... 458,991 10,508 -- 469,499
Insurance........................................... 84,785 41,474 -- 126,259
Utilities........................................... 71,719 49,244 (48,000) 72,963
Rent................................................ 30,266 -- -- 30,266
Property taxes...................................... 53,316 -- -- 53,316
Bad debts........................................... 198,370 -- -- 198,370
Depreciation........................................ 713,224 461,146 -- 1,174,370
Amortization........................................ 14,100 9,909 -- 24,009
Interest............................................ 92,603 97,321 -- 189,924
Other............................................... 140,873 62,729 -- 203,602
------------ --------------- ------------ ------------
Total operating expenses.......................... 3,514,341 1,349,886 (48,000) 4,816,227
------------ --------------- ------------ ------------
Net income.......................................... $ 2,241,241 $ 390,564 $ -- $2,631,805
------------ --------------- ------------ ------------
------------ --------------- ------------ ------------
</TABLE>
F-77
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINED
MIC-NEW DECEMBER 31,
MIC-MAINE HAMPSHIRE ELIMINATIONS 1995
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Scan revenue........................................ $ 4,863,716 $ 1,635,450 $ -- $6,499,166
Interest............................................ 24,999 2,992 -- 27,991
Other............................................... 105,192 1,801 (48,000) 58,9933
------------ --------------- ------------ ------------
Total revenue..................................... 4,993,907 1,640,243 (48,000) 6,586,150
Expenses:
Payroll, fringe and related taxes................... 709,021 266,113 -- 975,134
Management fees..................................... 86,038 54,691 -- 140,729
Hospital maintenance fees........................... 129,247 -- -- 129,247
Professional fees................................... 124,097 35,696 -- 159,793
Tractor expenses.................................... 64,631 -- -- 64,631
Repairs and maintenance............................. 311,408 161,389 -- 472,797
Cryogens............................................ 54,000 56,527 -- 110,527
Film and medical supplies........................... 333,859 15,421 -- 349,280
Insurance........................................... 82,143 42,503 -- 124,646
Utilities........................................... 69,575 49,089 (48,000) 70,664
Rent................................................ 36,841 -- -- 36,841
Property taxes...................................... 88,006 -- -- 88,006
Bad debts........................................... -- -- -- 198,370
Depreciation........................................ 863,542 418,758 -- 1,282,300
Amortization........................................ 24,170 9,909 -- 34,079
Interest............................................ 166,611 124,144 -- 290,755
Other............................................... 100,103 59,868 -- 159,971
------------ --------------- ------------ ------------
Total operating expenses.......................... 3,243,292 1,294,108 (48,000) 4,489,400
------------ --------------- ------------ ------------
Net income............................................ $ 1,750,615 $ 346,135 $ -- $2,096,750
------------ --------------- ------------ ------------
------------ --------------- ------------ ------------
</TABLE>
F-78
<PAGE>
MOBILE IMAGING CONSORTIUM
COMBINING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMBINED
MIC-NEW DECEMBER 31,
MIC-MAINE HAMPSHIRE ELIMINATIONS 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Scan revenue........................................... $ 4,563,281 $ 1,418,348 $ -- $5,981,629
Interest............................................... 7,898 987 -- 8,885
Other.................................................. 167,465 -- (93,365) 74,100
------------ ------------ ------------ ------------
Total revenue........................................ 4,738,644 1,419,335 (93,365) 6,064,614
Expenses:
Payroll, fringe and related taxes...................... 728,913 270,625 -- 999,538
Management fees........................................ 78,000 52,000 -- 130,000
Hospital maintenance fees.............................. 115,554 -- -- 115,554
Professional fees...................................... 105,410 23,187 -- 128,597
Tractor expenses....................................... 65,573 -- -- 65,573
Repairs and maintenance................................ 342,652 136,544 -- 479,196
Cryogens............................................... 54,000 55,000 -- 109,000
Film and medical supplies.............................. 313,867 13,540 -- 327,407
Insurance.............................................. 81,863 42,236 -- 124,099
Rent................................................... 36,471 -- -- 36,471
Utilities.............................................. 68,253 49,203 (48,000) 69,456
Property Taxes......................................... 86,969 -- -- 86,969
Bad debts.............................................. 125,387 -- -- 125,387
Depreciation........................................... 892,060 397,717 -- 1,289,777
Amortization........................................... 24,170 9,908 -- 34,078
Interest............................................... 227,885 159,552 -- 387,437
Other.................................................. 113,933 106,252 (45,365) 174,820
------------ ------------ ------------ ------------
Total operating expenses............................. 3,460,960 1,315,764 (93,365) 4,683,359
------------ ------------ ------------ ------------
Net income............................................... $ 1,277,684 $ 103,571 $ -- $1,381,255
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-79
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH SOLICITATION IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary........................................ 1
Risk Factors................................... 13
Use of Proceeds................................ 23
Exchange Offer................................. 23
Capitalization................................. 29
Unaudited Pro Forma Combined Condensed
Financial Statements.......................... 30
Selected Historical Consolidated Financial and
Operating Data................................ 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 39
The Diagnostic Imaging Industry................ 53
Business....................................... 55
Management..................................... 68
Executive Compensation......................... 71
Security Ownership of Certain Beneficial Owners
and Management................................ 76
Certain Relationships and Related
Transactions.................................. 84
Description of Senior Credit Facilities........ 87
Description of Notes........................... 88
Description of Preferred Stock................. 120
Certain Federal Income Tax Considerations...... 122
Plan of Distribution........................... 124
Legal Matters.................................. 125
Experts........................................ 125
Index to InSight Health Services Corp.
Consolidated Financial Statements............. F-1
Index to Signal Medical Services, Inc.
Financial Statements.......................... F-46
Index to Mobile Imaging Consortium Financial
Statements.................................... F-64
</TABLE>
UNTIL DECEMBER , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
HEALTH SERVICES CORP.
$100,000,000
9 5/8% SERIES B SENIOR SUBORDINATED NOTES
DUE 2008
--------------
PROSPECTUS
--------------
SEPTEMBER , 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Bylaws provide that the directors and
officers of the Company may be indemnified and held harmless by the Company to
the fullest extent permitted by the General Corporation Law of the State of
Delaware against certain liabilities that those persons may incur in their
capacities as directors or officers. The Company has also entered into
indemnification agreements with each of its directors and executive officers.
See "Executive Compensation--Indemnification Agreements." In addition, the
Company's Certificate of Incorporation states that, to the fullest extent
permitted by the General Corporation Law of the State of Delaware, a director of
the Company shall not be liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director.
A policy of directors' and officers' liability insurance is maintained by
the Company which insures directors and officers for losses as a result of
claims against the directors and officers of the Company in their capacity as
directors and officers and also reimburses the Company for payments made
pursuant to the indemnity provisions described above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*3.1 Certificate of Incorporation of InSight, previously filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (No. 333-02935), filed April 24, 1996.
*3.2 Amended and Restated Bylaws of InSight, previously filed and incorporated herein by reference from the
Company's Annual Report on Form 10-K filed October 14, 1997.
*3.3 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B, of
InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form
10-K, filed October 14, 1997.
*3.4 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C, of
InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form
10-K, filed October 14, 1997.
*3.5 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D, of
InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form
10-K, filed October 14, 1997.
*4.1 Indenture, dated as of June 1, 1998, by and among the Company, the Subsidiary Guarantors and State
Street Bank and Trust Company, as Trustee (including forms of the Outstanding Notes and Exchange
Notes).
*4.2 Form of Outstanding Note (contained in Exhibit 4.1).
*4.3 Form of Exchange Note (contained in Exhibit 4.1).
*4.4 Purchase Agreement, dated as of June 9, 1998, by and among the Company, the Subsidiary Guarantors and
the Initial Purchasers.
*4.5 Registration Rights Agreement, dated as of June 12, 1998, by and among the Company, the Subsidiary
Guarantors and the Initial Purchasers.
5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC as to the legality of the securities being
registered.
*10.1 InSight's 1998 Employee Stock Option Plan.
*10.2 InSight's 1997 Management Stock Option Plan.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*10.3 Credit Agreement dated as of October 14, 1997, as amended November 17, 1997, December 19, 1997, March
23, 1998 and amended and restated as of June 12, 1998, among the Company, the Subsidiary Guarantors (as
defined therein), NationsBank, N.A., as Agent, and the Lenders (as defined therein).
*10.4 Agreement and Plan of Merger dated as of February 26, 1996, by and among InSight, AHS, AHSC Acquisition
Company, MHC and MXHC Acquisition Company, previously filed and incorporated herein by reference from
the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.5 Asset Purchase and Liabilities Assumption Agreement dated as of January 3, 1997, by and among InSight
Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New
Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on
Form 8-K, filed June 16, 1997.
*10.6 Amendment No. 1 to Asset Purchase and Liabilities Assumption Agreement dated as of May 30, 1997, by and
among InSight Health Corp., Mobile Imaging Consortium--New Hampshire, previously filed and incorporated
herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997.
*10.7 Asset Purchase and Liabilities Assumption Agreement dated as of June 20, 1997, by and between InSight
Health Corp. and Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient Center), previously filed and
incorporated herein by reference from the Company's Current Report on Form 8-K, filed July 14, 1997.
*10.8 Master Debt Restructuring Agreement by and among General Electric Company acting through GE Medical
Systems, General Electric Capital Corporation, InSight, AHS and MHC (without schedules and exhibits)
previously filed and incorporated herein by reference from the Company's Registration Statement on Form
S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.9 Registration Rights Agreement by and between General Electric Company acting through GE Medical Systems
and InSight, previously filed and incorporated herein by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.10 Master Service Agreement Addendum by and among General Electric Company acting through GE Medical
Systems, InSight, AHS and MHC, previously filed and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.11 InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from
the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.12 InSight's 1996 Employee Stock Option Plan, previously filed and incorporated herein by reference from
the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.13 Form of Indemnification Agreement between InSight and each of its directors and executive officers,
previously filed and incorporated herein by reference from the Company's Registration Statement on Form
S-4 (Registration Statement No. 333-02935), filed April 29, 1996.
*10.14 Agreements and form of warrants with holders of Series B Preferred Stock of AHS, previously filed and
incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*10.15 AHS 1987 Stock Option Plan, previously filed and incorporated herein by reference from Post-Effective
Amendment No. 4 on Form S-1 to AHS's Registration Statement (Registration No. 33-00088), filed
September 5, 1985.
*10.16 AHS 1992 Option and Incentive Plan, previously filed and incorporated herein by reference from AHS's
Registration Statement on Form S-8 (Registration No. 33-51532), filed September 1, 1992.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*10.17 MHC 1989 Stock Option Plan, Amended and Restated as of October 28, 1993, previously filed and
incorporated herein by reference from MHC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
*10.18 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated March 28, 1996,
previously filed and incorporated herein by reference from the Company's Registration Statement on Form
S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.19 Executive Employment Agreement between InSight and E. Larry Atkins dated as of February 25, 1996,
previously filed and incorporated herein by reference from the Company's Registration Statement on Form
S-4 (Registration No. 333-02935), filed May 9, 1996.
*10.20 Executive Employment Agreement between InSight and Glenn P. Cato dated as of May 1, 1996, previously
filed and incorporated herein by reference from the Company's Amendment No. 1 to the Registration
Statement on Form S-4 (Registration No. 333-02935), filed May 9, 1996.
*10.21 Form of Executive Employment Agreement between InSight and various officers of InSight, previously
filed and incorporated herein by reference from the Company's Registration Statement on Form S-4
(Registration No. 333-02935), filed April 29, 1996.
*10.22 Nonqualified Stock Option Agreement, dated August 17, 1994, between MHC and Leonard H. Habas,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for
the six months ended June 30, 1996.
*10.23 Nonqualified Stock Option Agreement, dated August 17, 1994, between MHC and Ronald G. Pantello,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for
the six months ended June 30, 1996.
*10.24 Warrant Certificate No. S-1 dated August 14, 1996 in the name of Shattuck Hammond Partners, Inc.,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K,
filed October 14, 1997.
*10.25 Warrant Certificate No. L-1 dated March 11, 1997 in the name of Anthony J. LeVecchio, previously filed
and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14,
1997.
*10.26 Form of Stock Option Agreement between InSight and non-employee directors of InSight relating to
InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14, 1997.
*10.27 Form of Stock Option Agreement between InSight and employees of InSight relating to InSight's 1996
Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's
Annual Report on Form 10-K, filed October 14, 1997.
*10.28 Agreement and Plan of Merger dated as of April 15, 1998 among InSight, SMSI Acquisition Company, Signal
Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell,
previously filed and incorporated herein by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, filed May 13, 1998.
*10.29 First Amendment to Agreement and Plan of Merger dated as of May 15, 1998 by and among InSight, SMSI
Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W.
Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
*10.30 Second Amendment to Agreement and Plan of Merger dated as of May 18, 1998 by and among InSight, SMSI
Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W.
Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
12.1 Computation of Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of the Company.
23.1 Consent of Arent Fox Kintner Plotkin & Kahn, PLLC (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*23.3 Consent of KPMG Peat Marwick LLP.
*23.4 Consent of Deloitte & Touche LLP.
*23.5 Consent of Baker Newman & Noyes LLC.
*24.1 Powers of Attorney for the Company (contained on the signature pages of the Registration Statement).
25.1 Statement of Eligibility of Trustee on Form T-1.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letters to DTC Participants.
*99.4 Form of Letter to Clients and Form of Instruction to Book-Entry Transfer Participant.
</TABLE>
- ------------------------
* previously filed
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company is filed herewith:
Report of Independent Public Accountants
II. Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) That, for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
II-4
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(d) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(e) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(f) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form (including
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request), within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means; and to arrange or
provide for a facility in the United States for the purpose of responding to
such requests; and
(g) To supply by means of a post-effective amendment all information
concerning a transaction and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the New York, New York, on
September 22, 1998.
<TABLE>
<S> <C> <C>
INSIGHT HEALTH SERVICES CORP.
By: /s/ THOMAS V. CROAL
-----------------------------------------
Name: Thomas V. Croal
Office: Senior Executive Vice President,
Chief Operating Officer and
Chief Financial Officer (Principal
Financial
and Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL E. ASPINWALL*
- ------------------------------ Director September 22, 1998
Michael E. Aspinwall
Director, President and
/s/ E. LARRY ATKINS* Chief Executive Officer
- ------------------------------ (Principal Executive September 22, 1998
E. Larry Atkins Officer)
/s/ GRANT R. CHAMBERLAIN*
- ------------------------------ Director September 22, 1998
Grant R. Chamberlain
- ------------------------------ Director
David W. Dupree
- ------------------------------ Director, Chairman of the
Frank E. Egger Board
/s/ LEONARD H. HABAS*
- ------------------------------ Director September 22, 1998
Leonard H. Habas
- ------------------------------ Director
Ronald G. Pantello
/s/ GLENN A. YOUNGKIN*
- ------------------------------ Director September 22, 1998
Glenn A. Youngkin
*By: /s/ THOMAS V. CROAL
- ------------------------------
Thomas V. Croal, pursuant September 22, 1998
to powers of attorney
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, each
of the following registrants have duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, California, on September 22, 1998.
<TABLE>
<S> <C>
INSIGHT HEALTH CORP.
RADIOSURGERY CENTERS, INC.
MAXUM HEALTH SERVICES CORP.
QUEST FINANCIAL SERVICES, INC.
MTS ENTERPRISES, INC.
DIAGNOSTEMPS, INC.
MAXUM HEALTH CORP.
MAXUM HEALTH SERVICES OF NORTH TEXAS, INC.
NDDC, INC.
DIAGNOSTIC SOLUTIONS CORP.
MAXUM HEALTH SERVICES OF ARLINGTON, INC.
MAXUM HEALTH SERVICES OF DALLAS, INC.
OPEN MRI, INC.
RADIOLOGY SERVICES CORP.
MISSISSIPPI MOBILE TECHNOLOGY, INC.
SIGNAL MEDICAL SERVICES, INC.
By: /s/ E. LARRY ATKINS*
--------------------------------------------
E. Larry Atkins
Sole Director (Principal Executive Officer)
By: /s/ BRIAN G. DRAZBA
--------------------------------------------
Brian G. Drazba
Senior Vice President--Finance and
Controller (Principal Financial and
Accounting Officer)
*By: /s/ BRIAN G. DRAZBA
--------------------------------------------
Brian G. Drazba, pursuant
to power of attorney
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements for INSIGHT HEALTH SERVICES CORP. included in this Form
10-K and have issued our report thereon dated October 14, 1997. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index to consolidated financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
October 14, 1997
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND END OF
PERIOD EXPENSES OTHER PERIOD
------------ ---------- -------- ----------
<S> <C> <C> <C> <C>
December 31, 1994:
Allowance for doubtful accounts..................................... $1,664 $ 1,124 $ (1,233)(A) $1,555
Allowance for contractual adjustments............................... 1,030 2,692 (2,384)(A) 1,338
Inventory reserve................................................... 830 -- (830)(B) --
------ ---------- -------- ----------
Total............................................................... $3,524 $ 3,816 $ (4,447) $2,893
------ ---------- -------- ----------
------ ---------- -------- ----------
December 31, 1995:
Allowance for doubtful accounts..................................... $1,555 $ 1,669 $ (1,489)(A) $1,735
Allowance for contractual adjustments............................... 1,338 4,512 (4,302)(A) 1,548
------ ---------- -------- ----------
Total............................................................... $2,893 $ 6,181 $ (5,791) $3,283
------ ---------- -------- ----------
------ ---------- -------- ----------
June 30, 1996:
Allowance for doubtful accounts..................................... $1,735 $ 617 $ (63)(A)(C) $2,289
Allowance for contractual adjustments............................... 1,548 3,440 531(A)(C) 5,519
------ ---------- -------- ----------
Total............................................................... $3,283 $ 4,057 $ 468 $7,808
------ ---------- -------- ----------
------ ---------- -------- ----------
June 30, 1997:
Allowance for doubtful accounts..................................... $2,289 $ 1,506 $ (1,453)(A) $2,342
Allowance for contractual adjustments............................... 5,519 17,483 (17,853)(A) 5,149
------ ---------- -------- ----------
Total............................................................... $7,808 $18,989 $(19,305) $7,491
------ ---------- -------- ----------
------ ---------- -------- ----------
</TABLE>
- ------------------------
(A) Write offs of uncollectible accounts.
(B) MHC sold all inventory on hand in 1994.
(C) In connection with the Merger, MHC acquired the valuation and qualifying
accounts related to IHC.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
*3.1 Certificate of Incorporation of InSight, previously filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 24, 1996.
*3.2 Amended and Restated Bylaws of InSight, previously filed and incorporated herein by reference from the
Company's Annual Report on Form 10-K, filed October 14, 1997.
*3.3 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B, of InSight,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K,
filed October 14, 1997.
*3.4 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C, of InSight,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K,
filed October 14, 1997.
*3.5 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D, of InSight,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K,
filed October 14, 1997.
*4.1 Indenture, dated as of June 1, 1998, by and among the Company, the Subsidiary Guarantors and State
Street Bank and Trust Company, as Trustee (including forms of the Outstanding Notes and Exchange
Notes).
*4.2 Form of Outstanding Note (contained in Exhibit 4.1).
*4.3 Form of Exchange Note (contained in Exhibit 4.1).
*4.4 Purchase Agreement, dated as of June 9, 1998, by and among the Company, the Subsidiary Guarantors and
the Initial Purchasers.
*4.5 Registration Rights Agreement, dated as of June 12, 1998, by and among the Company, the Subsidiary
Guarantors and the Initial Purchasers.
5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC as to the legality of the securities being registered.
*10.1 InSight's 1998 Employee Stock Option Plan.
*10.2 InSight's 1997 Management Stock Option Plan.
*10.3 Credit Agreement dated as of October 14, 1997, as amended November 17, 1997, December 19, 1997, March
23, 1998 and amended and restated as of June 12, 1998, among the Company, the Subsidiary Guarantors
(as defined therein), NationsBank, N.A., as Agent, and the Lenders (as defined therein).
*10.4 Agreement and Plan of Merger dated as of February 26, 1996, by and among InSight, AHS, AHSC Acquisition
Company, MHC and MXHC Acquisition Company, previously filed and incorporated herein by reference from
the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.5 Asset Purchase and Liabilities Assumption Agreement dated as of January 3, 1997, by and among InSight
Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New
Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on
Form 8-K, filed June 16, 1997.
*10.6 Amendment No. 1 to Asset Purchase and Liabilities Assumption Agreement dated as of May 30, 1997, by and
among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging
Consortium--New Hampshire, previously filed and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 16, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.7 Asset Purchase and Liabilities Assumption Agreement dated as of June 20, 1997, by and between InSight
Health Corp. and Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient Center), previously filed and
incorporated herein by reference from the Company's Current Report on Form 8-K, filed July 14, 1997.
*10.8 Master Debt Restructuring Agreement by and among General Electric Company acting through GE Medical
Systems, General Electric Capital Corporation, InSight, AHS and MHC (without schedules and exhibits)
previously filed and incorporated herein by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.9 Registration Rights Agreement by and between General Electric Company acting through GE Medical Systems
and InSight, previously filed and incorporated herein by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.10 Master Service Agreement Addendum by and among General Electric Company acting through GE Medical
Systems, InSight, AHS and MHC, previously filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.11 InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from
the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.12 InSight's 1996 Employee Stock Option Plan, previously filed and incorporated herein by reference from
the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.13 Form of Indemnification Agreement between InSight and each of its directors and executive officers,
previously filed and incorporated herein by reference from the Company's Registration Statement on
Form S-4 (Registration Statement No. 333-02935), filed April 29, 1996.
*10.14 Agreements and form of warrants with holders of Series B Preferred Stock of AHS, previously filed and
incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration
No. 333-02935), filed April 29, 1996.
*10.15 AHS 1987 Stock Option Plan, previously filed and incorporated herein by reference from Post-Effective
Amendment No. 4 on Form S-1 to AHS's Registration Statement (Registration No. 33-00088), filed
September 5, 1985.
*10.16 AHS 1992 Option and Incentive Plan, previously filed and incorporated herein by reference from AHS's
Registration Statement on Form S-8 (Registration No. 33-51532), filed September 1, 1992.
*10.17 MHC 1989 Stock Option Plan, Amended and Restated as of October 28, 1993, previously filed and
incorporated herein by reference from MHC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
*10.18 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated March 28, 1996,
previously filed and incorporated herein by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.19 Executive Employment Agreement between InSight and E. Larry Atkins dated as of February 25, 1996,
previously filed and incorporated herein by reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-02935), filed April 29, 1996.
*10.20 Executive Employment Agreement between InSight and Glenn P. Cato dated as of May 1, 1996, previously
filed and incorporated herein by reference from the Company's Amendment No. 1 to the Registration
Statement on Form S-4 (Registration No. 333-02935), filed May 9, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.21 Form of Executive Employment Agreement between InSight and various officers of InSight, previously filed
and incorporated herein by reference from the Company's Registration Statement on Form S-4
(Registration No. 333-02935), filed April 29, 1996.
*10.22 Nonqualified Stock Option Agreement, dated August 17, 1994, between MHC and Leonard H. Habas, previously
filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six
months ended June 30, 1996.
*10.23 Nonqualified Stock Option Agreement, dated August 17, 1994, between MHC and Ronald G. Pantello,
previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K
for the six months ended June 30, 1996.
*10.24 Warrant Certificate No. S-1 dated August 14, 1996 in the name of Shattuck Hammond Partners, Inc.,
incorporated herein by reference from the Company's Annual Report on Form 10-K filed October 14, 1997.
*10.25 Warrant Certificate No. L-1 dated March 11, 1997 in the name of Anthony J. LeVecchio, previously filed
and incorporated by reference from and previously filed with the Company's Annual Report on Form 10-K
filed October 14, 1997.
*10.26 Form of Stock Option Agreement between InSight and non-employee directors of InSight relating to
InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference
from the Company's Annual Report on Form 10-K filed October 14, 1997.
*10.27 Form of Stock Option Agreement between InSight and employees of InSight relating to InSight's 1996
Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's
Annual Report on Form 10-K filed October 14, 1997.
*10.28 Agreement and Plan of Merger dated as of April 15, 1998 among InSight, SMSI Acquisition Company, Signal
Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell,
previously filed and incorporated herein by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, filed
May 13, 1998.
*10.29 First Amendment to Agreement and Plan of Merger dated as of May 15, 1998 by and among InSight, SMSI
Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W.
Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
*10.30 Second Amendment to Agreement and Plan of Merger dated as of May 18, 1998 by and among InSight, SMSI
Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W.
Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
12.1 Computation of Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of the Company.
23.1 Consent of Arent Fox Kintner Plotkin & Kahn, PLLC (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP.
*23.3 Consent of KPMG Peat Marwick LLP.
*23.4 Consent of Deloitte & Touche LLP.
*23.5 Consent of Baker Newman & Noyes LLC.
*24.1 Powers of Attorney for the Company (contained on the signature pages of the Registration Statement).
25.1 Statement of Eligibility of Trustee on Form T-1.
*99.1 Form of Letter of Transmittal.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letters to DTC Participants.
*99.4 Form of Letter to Clients and Form of Instruction to Book-Entry Transfer Participant.
</TABLE>
- ------------------------
* previously filed
<PAGE>
EXHIBIT 5.1
September 25, 1998
The Board of Directors
InSight Health Services Corp.
4400 MacArthur Boulevard, Suite 800
Newport Beach, California 92660
Ladies and Gentlemen:
We have acted as special counsel to InSight Health Services Corp., a
Delaware corporation (the "Company"), and each of the wholly-owned subsidiaries
set forth in Schedule A hereto (the "Subsidiary Guarantors"), in connection with
the public offering by the Company of $100,000,000 aggregate principal amount of
its 9 5/8% Series B Senior Subordinated Notes due 2008 (the "Exchange Notes"),
which will be guaranteed, on a senior subordinated basis pursuant to the
guarantees (the "Subsidiary Guarantees") by the Subsidiary Guarantors. The
Exchange Notes are to be issued pursuant to an exchange offer (the "Exchange
Offer") in exchange for a like principal amount of the issued and outstanding
9 5/8% Senior Subordinated Notes due 2008 of the Company (the "Outstanding
Notes") under an Indenture, dated as of June 1, 1998 (the "Indenture"), between
the Company, the Subsidiary Guarantors and State Street Bank and Trust Company,
N.A., as trustee (the "Trustee"), as contemplated by the Registration Rights
Agreement dated June 12, 1998 (the "Registration Rights Agreement") by and among
the Company, the Subsidiary Guarantors and NationsBanc Montgomery Securities
LLC, Morgan Stanley & Co. Incorporated and Sutro & Co. Incorporated.
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Securities Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-4 (File No. 333-60573) as filed with the Securities and
Exchange Commission (the "Commission") on August 4, 1998, as amended, under the
Securities Act, the "Registration Statement"); (ii) the Registration Rights
Agreement; (iii) the Indenture; (iv) the Form T-1 of the Trustee filed as an
exhibit to the Registration Statement; and (v) the form of Exchange Note,
including the form of Subsidiary Guarantee. We have also examined originals or
copies, certified or otherwise identified to our satisfaction, of such records
of the Company and the Subsidiary Guarantors and such agreements, certificates
of officers or other representatives of the Company and the Subsidiary
Guarantors and
<PAGE>
others, and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein. In
rendering the opinions set forth below, we do not express any opinion as to the
applicability or effect of any fraudulent transfer or similar law.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents, we have assumed that all parties executing such
documents had the power, corporate or other, to enter into and perform all
obligations thereunder and have also assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such parties
of such documents (except for the execution and delivery of the Indenture, the
Exchange Notes and the Subsidiary Guarantees by the Company and the Subsidiary
Guarantors, as applicable, insofar as execution and delivery are matters
governed by New York law) and the validity and binding effect thereof (except,
insofar as the Company and the Subsidiary Guarantors are concerned, for the
Indenture, the Exchange Notes and the Subsidiary Guarantees, in each case to the
extent specifically addressed and subject to the qualifications stated herein).
As to any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon oral or written
statements and representations of officers or other representatives of the
Company, the Subsidiary Guarantors and others.
We have also assumed that the issuance and sale of the Exchange Notes
by the Company and the issuance of the Subsidiary Guarantees by the Subsidiary
Guarantors and the execution and delivery of the Indenture, the Notes and the
Subsidiary Guarantees and the performance of the respective obligations of the
Company and of the Subsidiary Guarantors thereunder, and the consummation of the
transactions contemplated thereby, do not and will not conflict with,
contravene, violate or constitute a default under (i) any leases, indenture,
instrument or other agreement to which the Company or the Subsidiary Guarantors
is subject, (ii) any rule, law or regulation to which the Company or the
Subsidiary Guarantors is subject, (iii) any judicial or administrative order or
decree of any governmental authority to which the Company or the Subsidiary
Guarantors is subject, or (iv) any consent, approval, license, authorization or
validation of, or filing, recording or registration with, any governmental
authority.
Members of our firm are admitted to the bar in the State of New York.
The opinions expressed in this letter concern only the effect of the laws
(excluding the
2
<PAGE>
principles of conflicts of laws) of the State of New York, the General
Corporation Law of the State of Delaware and federal law as currently in effect,
and we do not express any opinion as to the laws of any other jurisdiction. We
assume no obligation to supplement this letter if any of the applicable laws
change in any manner.
Based upon and subject to the foregoing and the limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that when (i) the Registration Statement becomes effective and the
Indenture has been qualified under the Trust Indenture Act of 1938, as amended
(the "Trust Indenture Act"), and (ii) the Exchange Notes have been duly executed
and authenticated in accordance with the terms of the Indenture and have been
delivered upon consummation of the Exchange Offer against receipt of Outstanding
Notes surrendered in exchange therefor in accordance with the terms of the
Exchange Offer, the Exchange Notes and Subsidiary Guarantees will be validly
issued and will constitute valid and binding obligations of the Company and the
Subsidiary Guarantors, respectively, except to the extent that the validity and
binding nature thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or transfer, preferential transfers or
distributions by corporations to shareholders or other laws now or hereafter in
effect relating to rights of creditors or other obligees generally.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the captions "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission. The opinions expressed in this letter
are limited to the matters set forth in this letter, and no other opinions
should be inferred beyond the matters expressly stated.
Very truly yours,
/s/
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
3
<PAGE>
Exhibit 12.1
InSight Health Services Corp.
Ratio of Earnings to Fixed Charges
(dollars in thousands, except ratio of earning to fixed charges)
<TABLE>
<CAPTION>
Years Ended
------------------------------
Nine Months Ended Year Ended Six Months Ended December 31, December 31,
March 31, 1998 June 30, 1997 June 30, 1996 1995 1994
----------------- ------------- ----------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Ratio of earnings
to fixed changes -- 1.2x -- -- 1.2x
Fixed charge
coverage deficiency $ 1,022 -- $ 4,093 $ 4,319 --
Fixed charges:
Interest expense $ 4,665 $ 4,055 $ 1,144 $ 1,626 $ 1,206
Rent expense 4,896 6,735 2,485 5,134 5,139
----------------- ------------- ----------------- ------------ ------------
Total fixed charges $ 9,561 $10,790 $ 3,629 $ 6,760 $ 6,345
----------------- ------------- ----------------- ------------ ------------
----------------- ------------- ----------------- ------------ ------------
Pretax income (loss) $(1,022) $ 1,708 $(4,093) $(4,319) $ 974
Add fixed charges 9,561 10,790 3,629 6,760 6,345
----------------- ------------- ----------------- ------------ ------------
Earnings $ 8,539 $12,498 $ (464) $ 2,441 $ 7,319
----------------- ------------- ----------------- ------------ ------------
----------------- ------------- ----------------- ------------ ------------
</TABLE>
<PAGE>
Exhibit 25.1
Securities and Exchange Commission
Washington, DC 20549
FORM T-1
__________________________________
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility of a
Trustee Pursuant to Section 305(b)(2)__________
STATE STREET BANK AND TRUST COMPANY, N.A.
(Exact name of trustee as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
United States 13-3191724
(Jurisdiction of incorporation or organization (IRS Employer Identification No.)
if not a U.S. national bank)
61 Broadway, New York, New York 10006
(Address of principal executive offices) (Zip Code)
</TABLE>
State Street Bank and Trust Company, N.A.
61 Broadway, 15th Floor, New York, NY 10006
(212) 612-3000
(Name, address and telephone number of agent for service)
__________________________________
INSIGHT HEALTH SERVICES CORP.
(Exact name of obligor as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 33-0702770
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4400 MacArthur Boulevard, Newport Beach, CA 92660
(Address of principal executive offices) (Zip Code)
</TABLE>
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
(Title of indenture securities)
<PAGE>
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to
which it is subject.
Office of the Comptroller of the Currency, Washington, D.C.
Federal Deposit Insurance Corporation, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
The Obligor is not an affiliate of the trustee or its parents,
State Street Bank and Trust Company.
(See Notes below)
Item 3. through Item 15. Not Applicable
Item 16. List of Exhibits.
List below all Exhibits A-E are incorporated by reference to the
Registration Statement No. 333-53759 of Columbus McKinnon Corporation as
part of the statement of eligibility and attached thereto.
1. Copy of the articles of association of the trustee as now in
effect, filed as Exhibit A.
2. Copy of the certification of authority of the trustee to commence
business, if not contained in the articles of association filed as
Exhibit R.
3. Copy of the authorization of the trustee to exercise corporate
trust powers, if such authorization is not contained in the
documents specified in paragraph (1) OR (2) above, filed as
Exhibit C.
4. Copy of the existing by-laws of the trustee, filed as Exhibit D.
5. The consent of United States institutional trustees required by
Section 321(b) of the Act, filed as Exhibit E.
6. Copy of the latest report of condition of the trustee filed
pursuant to law or the requirements of its supervising or
examining authority, filed as Exhibit F.
NOTES
In answering any item in this statement of eligibility which
relates to matters peculiarly within the knowledge of the obligor or any
underwriter for the obligor, the trustee has relied upon information furnished
to it by the obligor and the underwriters, and the trustee disclaims
responsibility for the accuracy or completeness of such information.
<PAGE>
The answer furnished to Item 2. of this statement will be
amended, if necessary, to reflect any facts which differ from those stated and
which would have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939,
as amended, State Street Bank and Trust Company, N.A., a corporation
organized and existing under the laws of the United States of America has
caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City and State of New
York, on July 31, 1998.
STATE STREET BANK AND TRUST COMPANY, N.A.
BY: /s/ ORNULF THORESEN
--------------------------------
Ornulf Thoresen
Vice President
<PAGE>
Consolidated Report of Condition for Insured Commerical
and State--Chartered Savings Banks for June 30, 1998
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
Schedule RC--Balance Sheet
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Mil Thou
- -------------------------------------------------------------------------------------------------- ---- --- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions:
a. Noninterest-bearing balances and currenty and coin(1), (2) .............................. 0081 18,028 1.a.
b. Interest-bearing balances(3) ............................................................ 0071 0 1.b.
2. Securities:
a. Paid-to-maturity securities (from Schedule RC-3, column A) .............................. 1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-3, column D) ............................ 1773 75 2.b.
3. Federal funds sold(4) and securities purchased under agreements to resell ................... 1380 0 3.
4. Loans and lease financing receivables:
a. Loans and leases, net of unerned income (from schedule RC-C: ... RCON 2122 0 4.a.
b. LESS: Allowance for loan and lease losses ...................... RCON 3123 0 4.b.
c. LESS: Allocated transfer risk reserve .......................... RCON 3128 0 4.a.
d. Loans and leases, net of unearned income, allowance, and reserve
(Item 4.a minus 4.b and 4.c) ............................................................ 2125 0 4.d.
5. Trading assets .............................................................................. 3545 0 5.
6. Premises and fixed assets (including capitalized leases) .................................... 2145 64 6.
7. Other real estate owned (from Schedule RC-M) ................................................ 2150 0 7.
8. Investments in unconsolidatd subsidiaries and associated companies (from Schedule RC-M) ..... 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding ................................ 2155 0 9.
10. Intangible assets (from Schedule RC-M) ...................................................... 2143 0 10.
11. Other assets (from Schedule RC-F) ........................................................... 2160 429 11.
12. a. Total assets (sum of items 1 through 11) ................................................ 0170 18,596 12.a.
b. Losses deferred pursuant to 12 U.S.C 1823(j) ............................................ 0306 0 12.b.
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(j) (sum of items
12.a. and 12.6) ......................................................................... 0307 18,596 12.c.
</TABLE>
- ----------------
(1) Includes cash items in process of collection and unposted debits.
(2) The amount reported in this item must be greater than or equal to the
sum of Schedule RC-M, items 3.a and 3.b.
(3) Includes time certificates of deposit not held for trading.
(4) Report "term federal funds sold" in Schedule RC, item 4.a, "Loans and
leases, net of unearned income," and in Schedule RC-C, part I.
<PAGE>
Schedule RC--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Mil Thou
- -------------------------------------------------------------------------------------------------- ---- --- ------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C
from Schedule RC-E)................................................................... 2200 0 13.a
(1) Noninterest-bearing (1)............................... RCON 6631 0 13.a.(1)
(2) Interest-bearing...................................... RCON 6636 0 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IDE's..........................
(1) Noninterest-bearing (1)............................................................
(2) Interest-bearing...................................................................
14. Federal funds purchased (2) and securities sold under agreements to repurchase.............. 2800 0 14.
15. a. Demand notes issued to the U.S. Treasury................................................ 2840 0 15.a.
b. Trading liabilities..................................................................... 3548 0 15.b.
16. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
a. With a remaining maturity of one year or less........................................... 2332 0 16.a.
b. With a remaining maturity of more than one year through three years..................... A547 0 16.b.
c. With a remaining maturity of more than three years...................................... A548 0 16.c.
17. Not applicable
18. Bank's liability on acceptances executed and outstanding.................................... 3920 0 18.
19. Subordinated notes and debentures (3)....................................................... 3200 0 19.
20. Other liabilities (from Schedule RC-G)...................................................... 2930 5,940 20.
21. Total liabilities (sum of items 13 through 20).............................................. 2948 5,940 21.
22. Not applicable
EQUTIY CAPITAL
23. Perpetual preferred stock and related surplus............................................... 3838 0 23.
24. Common stock................................................................................ 3230 500 24.
25. Surplus (exclude all surplus related to preferred stock).................................... 3839 2,000 25.
26. a. Undivided profits and capital reserves.................................................. 3632 10,156 26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities.................. 8434 0 26.b.
27. Cumulative foreign currency translation adjustments.........................................
28. a. Total equity capital (sum of items 23 through 27)....................................... 3210 12,656 28.a.
b. Losses deferred pursuant to 12 U.S.C. 1823(j)........................................... 0306 0 28.b.
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 28.a. and 28.b)......................................................... 3559 12,656 28.c.
29. Total liabilities, equity capital, and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 21 and 28.c)................................................................. 2257 10,596 29.
</TABLE>
Memorandum
To be reported only with the March Report of Condition.
<TABLE>
<CAPTION>
Number
------
<S> <C> <C> <C>
1. Indicate in the box at the right the number of the statement
below that best describes the most comprehensive level of
auditing work performed for the bank by independent external
auditors as of any date during 1997............................ RCON 6724 N/A M.1.
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the consolidated
holding company (but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
- ------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Report "term federal funds purchased" in Schedule RC, item 16, "Other
borrowed money."
(3) Includes limited-life preferred stock and related surplus.
