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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28622
INSIGHT HEALTH SERVICES CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0702770
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
4400 MACARTHUR BLVD., SUITE 800, NEWPORT BEACH, CA 92660
(Address of principal executive offices) (Zip code)
(949) 476-0733
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or informative statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _______
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 15, 1999 (based on the closing price on the NASDAQ
Small Cap Market on that date) was $17,578,769. The number of shares
outstanding of the Registrant's Common Stock as of September 15, 1999 was
2,880,321.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the next Annual Meeting of Stockholders of
the Registrant are incorporated herein by reference in Part III.
Certain exhibits are incorporated herein by reference as set forth in Item
14(a)(3), Exhibits, in Part IV.
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PART I
ITEM 1. BUSINESS
The principal executive offices of InSight Health Services Corp. (the "Company"
or "InSight") are located at 4400 MacArthur Blvd., Suite 800, Newport Beach,
California 92660, and its telephone number is (949) 476-0733.
RECAPITALIZATION AND FINANCING
On October 14, 1997, InSight consummated a recapitalization ("Recapitalization")
pursuant to which (a) certain investors affiliated with TC Group, LLC and its
affiliates (collectively, "Carlyle"), a private merchant bank headquartered in
Washington, D.C., made a cash investment of $25 million in the Company and
received therefor (i) 25,000 shares of newly issued convertible preferred stock,
Series B of the Company, par value $0.001 per share ("Series B Preferred
Stock"), initially convertible, at the option of the holders thereof, in the
aggregate into 2,985,075 shares of common stock, and (ii) warrants (the "Carlyle
Warrants") to purchase up to 250,000 shares of common stock at an exercise price
of $10.00 per share; (b) General Electric Company ("GE") (i) surrendered its
rights under the amended equipment service agreement to receive supplemental
service fee payments equal to 14% of pretax income (see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below) in exchange for (A) the issuance of 7,000 shares of newly issued
convertible preferred stock, Series C of the Company, par value $0.001 per share
("Series C Preferred Stock"), initially convertible, at the option of GE, in the
aggregate into 835,821 shares of common stock, and (B) warrants (the "GE
Warrants") to purchase up to 250,000 shares of common stock at an exercise price
of $10.00 per share, and (ii) exchanged all of its convertible preferred stock,
Series A of the Company, for an additional 20,953 shares of Series C Preferred
Stock, initially convertible, at the option of GE, in the aggregate into
2,501,760 shares of common stock; and (c) the Company executed a credit
agreement with Bank of America, N.A. (formerly NationsBank, N.A.) ("BofA")
pursuant to which BofA, as agent and lender, provided a total of $125 million in
senior secured credit financing including (i) a $50 million term loan facility
consisting of a $20 million tranche with increasing amortization over a
five-year period and a $30 million tranche with increasing amortization over a
seven-year period, principally repayable in years 6 and 7, (ii) a $25 million
revolving working capital facility with a five-year maturity, and (iii) a $50
million acquisition facility (the "Bank Financing"). Initial funding under the
Bank Financing occurred on October 22, 1997 and, on December 19, 1997, the Bank
Financing was increased to a total of $150 million by converting $10 million of
outstanding debt under the acquisition facility to the seven-year tranche (which
was thereby increased to $40 million) and increasing the acquisition facility to
$65 million.
Pursuant to the terms of the Recapitalization, the number of directors
comprising the Company's Board of Directors (the "Board") is currently fixed at
nine. Six directors (the "Common Stock Directors") are elected by the common
stockholders, one of whom (the "Joint Director") is to be proposed by Carlyle
and GE and approved by a majority of the Board in its sole discretion. Of the
three remaining directors (the "Preferred Stock Directors"), two are elected by
the holders of the Series B Preferred Stock and one elected by the holders of
the Series C Preferred Stock, in each case acting by written consent and without
a meeting of the common stockholders. As long as Carlyle and certain affiliates
thereof own an aggregate of at least 50% of the Series B Preferred Stock,
originally purchased thereby, the holders of the Series B Preferred Stock will
have the right to elect two Preferred Stock Directors and as long as Carlyle and
certain affiliates thereof own an aggregate of at least 25% of such stock, such
holders will have the right to elect one Preferred Stock Director. As long as GE
and its affiliates own an aggregate of at least 25% of the Series C Preferred
Stock, originally purchased thereby, GE will have the right to elect one
Preferred Stock Director. If any such ownership percentage falls below the
applicable threshold, the Preferred Stock Director(s) formerly entitled to be
elected by Carlyle or GE, as the case may be, will thereafter be elected by the
common stockholders. The Board currently consists of seven directors, four of
whom are Common Stock Directors and three of whom are Preferred Stock Directors.
There is a vacancy in the Common Stock Directors, as a result of the resignation
of E. Larry Atkins, the Company's President and Chief Executive Officer and a
Common Stock Director, on July 12, 1999. The vacancy created for the Joint
Director has not yet been filled.
The common stockholders currently are entitled to elect a majority of the
Board. Under certain circumstances, 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 holders of the Series D Preferred
Stock would be entitled to elect a majority of the Board. If 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
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("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 outstanding common stock currently owned by the Series B
Preferred Stock holders is approximately 33% and the percentage of 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, the aggregate percentage of 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. The less than
two-thirds limitation would expire at the second annual stockholders' meeting
after the Conversion Date.
On June 12, 1998, the Company completed a refinancing of substantially all of
the Company's long-term debt through the issuance of $100 million of 9 5/8%
senior subordinated notes (the "Notes") due 2008. Concurrently with the issuance
of the Notes, the Company entered into an amendment to and restatement of the
Bank Financing, pursuant to which, the Company refinanced and consolidated its
prior $20 million tranche and $40 million tranche into a $50 million term loan
facility with a six-year amortization, a $25 million revolving working capital
facility with a five-year maturity and a $75 million acquisition facility with a
six-year maturity.
CENTERS IN OPERATION
The Company provides diagnostic imaging, treatment and related management
services in 31 states throughout the United States. The Company's services
are provided through a network of 77 mobile magnetic resonance imaging
("MRI") facilities ("Mobile Facilities"), 35 fixed-site MRI facilities
("Fixed Facilities"), 22 multi-modality imaging centers ("Centers"), five
mobile lithotripsy facilities, one Leksell Stereotactic Gamma Unit ("Gamma
Knife") treatment center, and one radiation oncology center. An additional
radiation oncology center is operated by the Company as part of one of its
Centers. The Company's operations are located throughout the United States,
with a substantial presence in California, Texas, New England, the Carolinas
and the Midwest (Illinois, Indiana and Ohio).
At its Centers, the Company offers other services in addition to MRI, including
computed tomography ("CT"), diagnostic and fluoroscopic x-ray, mammography,
diagnostic ultrasound, lithotripsy, nuclear medicine, nuclear cardiology, and
cardiovascular services. The Company offers additional services through a
variety of arrangements including equipment rental, technologist services and
training/applications, marketing, radiology management services, patient
scheduling, utilization review and billing and collection services.
DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY
During approximately the last 20 years there has been a major effort undertaken
by the medical and scientific communities to develop cost-effective diagnostic
imaging technologies and to minimize the risks associated with the application
of such technologies. The major categories of diagnostic imaging systems
currently offered in the medical marketplace are conventional x-ray, CT
scanners, digital ultrasound systems, computer-based nuclear gamma cameras,
radiography/fluoroscopy systems and MRI systems, each of which (other than
conventional x-ray) represents the marriage of computer technology and various
medical imaging modalities. Patients exposed to x-rays and to gamma rays
employed in nuclear medicine receive potentially harmful ionizing radiation.
Much of the thrust of product development during the period has been to reduce
the hazards associated with conventional x-ray and nuclear medicine techniques
and to develop new, virtually harmless imaging technologies such as ultrasound
and MRI.
MRI: The Company believes that the introduction of MRI technology into the
health care marketplace marked a significant advance in diagnostic medicine.
Magnetic resonance is a technique that utilizes low energy radiowaves to
manipulate protons (usually hydrogen) in the body. MRI systems place patients in
a magnetic field. Once in the magnetic field, the protons in a patient's body
will tend to align with the magnetic field. Radio frequency ("RF") waves,
produced by a radio antenna coil, which surrounds the body part to be imaged,
are "pulsed" against the magnetic field. The RF energy is then turned off, and
the protons are observed for different types of behavior, movement or
"relaxation." Different tissues have different relaxation times, depending on
the amount of hydrogen or water in each proton. The data on each proton's
behavior is collected digitally by the system's computer and then reconstructed
into cross-sectional images in three-dimensional planes of orientation. The
resulting image reproduces soft tissue anatomy (as found in the brain, spinal
cord and interior ligaments of body joints such as the knee) with
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superior clarity, not available by any other currently existing imaging
modality. A typical MRI examination takes from 20 to 45 minutes. MRI systems are
typically priced in the range of $0.9 million to $2 million each, depending upon
the system configuration, magnet design and field strength.
There are no known hazards to the general population from magnetic and RF fields
of the intensity to which a patient is exposed in a clinical MRI system.
Equipment literature nonetheless recommends that, until further information is
available, pregnant women should be scanned only under limited circumstances.
Furthermore, MRI magnets may disrupt the operation of cardiac pacemakers and may
react with ferrous clips utilized in various surgical procedures, so that
individuals with such devices may be excluded from examination with MRI systems,
and access to the area surrounding the MRI facility may also be controlled to
avoid these possible hazards. Additionally, some MRI examinations require
injection of a paramagnetic contrast material. Although it is extremely unusual,
some patients may develop a significant adverse reaction to this contrast
material; however, chances of fatalities as a result of such reaction are
remote.
Because the signals used to produce magnetic resonance images contain both
chemical and structural information, 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.
OPEN MRI: Recent technological advances in software and gradient coil technology
for MRI systems have allowed equipment with lower magnetic field strength and
open architecture design to offer significantly improved image quality. Most
Open MRI systems use permanent electromagnetic technology, which substantially
lowers both siting and service costs, but does not provide images as efficiently
as high-field 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 each.
CT: CT technology consists of a doughnut-shaped gantry structure into which a
patient, resting on a remotely controlled couch assembly, is positioned to scan
the anatomical region of interest. The scanning process is performed by the
rotation of a high output x-ray tube around the patient. The x-ray tube emits a
thin fan-shaped beam of x-rays that passes through the patient and is absorbed
by an array of x-ray detectors located on the opposite side of the patient from
the x-ray tube. The detected x-rays are then converted into digital measurements
of x-ray intensity directly proportional to the density of the portion of the
patient through which the beam passes. These digital measurements of x-ray
intensity are then processed by a specialized image reconstruction computer
system into a cross-sectional image of the anatomical region of interest. The
patient is then indexed on the couch and another scan performed and then
another, creating a "stack" of cross-sectional images constituting the complete
diagnostic imaging procedure.
Typical scanning times for a single cross-sectional image are in the one second
to six second range. A complete CT examination takes from 15 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 each, depending upon the specific
performance characteristics of the systems. Based on the fact that CT systems
have been commercially marketed for approximately 20 years, the Company believes
that CT is a relatively mature technology and, therefore, not subject to
significant risk of obsolescence.
Certain CT examinations require the injection of an iodine-based contrast
material, allowing for better visualization of the anatomy. Although it is very
unusual, some patients may develop a significant adverse reaction to this
contrast material. Fatalities as a result of such reaction have occurred but are
rare. In an effort to scan only appropriate patients, all patients are required
to answer a questionnaire, which helps to identify those patients who may suffer
an adverse reaction to this contrast material.
ULTRASOUND: Ultrasound systems emit, detect and process high frequency sound
waves to generate images of soft tissues and internal body organs. The sound
waves used in ultrasound do not involve ionizing radiation and are not known to
cause any harmful effects to the patient.
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NUCLEAR MEDICINE: Nuclear medicine gamma cameras, which are based upon the
detection of gamma radiation generated by radioactive pharmaceuticals injected
or inhaled into the body, are used to provide information about organ function
as opposed to anatomical structure.
X-RAY: X-ray is the most common energy source used in imaging the body and is
now employed in the three following imaging modalities: (i) conventional x-ray
systems, the oldest method of imaging, are typically used to image bones and
contrast-enhanced vasculature and organs and constitute the largest number of
installed systems; (ii) CT scanners utilize computers to produce cross-sectional
images of particular organs or areas of the body; and (iii) digital x-ray
systems add computer image processing capability to conventional x-ray systems.
RADIATION ONCOLOGY: Radiation oncology generally uses external beam radiation
from a linear accelerator to treat cancer with ionizing radiation of the same
type, but at higher doses, as for diagnostic x-rays. In addition to x-rays,
certain linear accelerators have the capacity to produce electrons. While x-ray
radiation can penetrate the body a certain distance before delivering its
maximum dose, and therefore can treat internal structures, electrons have less
penetrating ability and permit the clinician to treat superficial lesions.
Radiation oncology also includes brachytherapy, which implants radioactive
sources directly into or near a tumor.
LITHOTRIPSY: Lithotripsy is a non-invasive procedure for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive recovery periods associated with surgery.
Lithotripters shatter kidney stones through the use of extracorporeal
shockwaves, following which the resulting kidney stone fragments pass out of the
body naturally.
GAMMA KNIFE: The Gamma Knife is a state-of-the-art radiosurgical device used to
treat intracranial neoplasma and vascular anomalies, which are inaccessible or
unsuitable for conventional invasive surgery. The Gamma Knife was designed to
provide neurosurgeons and radiation therapists with the ability to perform
radiosurgery, using high-energy gamma rays, instead of conventional invasive
techniques (open surgery), thereby generally eliminating the risk of infection
and intracerebral bleeding. The Gamma Knife delivers a single high dose of
ionizing radiation emanating from 201 individual Cobalt 60 sources focused on a
common target producing an intense concentration of radiation at the target
site, destroying the lesion while spreading the entry radiation dose uniformly
and harmlessly over the patient's skull. The Gamma Knife treatment requires no
open surgical intervention, no lengthy hospital stay and no risk of
post-surgical bleeding or infection. When compared to the average length of stay
and costs associated with conventional surgery, the Gamma Knife greatly reduces
the cost of neurosurgical treatment. Typical treatment time is approximately 10
to 15 minutes per area of interest. In addition, other applications for the
Gamma Knife are currently being developed. Investigative work is being conducted
to treat patients for chronic pain and motion disorders such as Parkinson's
disease, epilepsy and trigeminal neuralgia. These applications represent an
expanded market for the Gamma Knife. The current selling price of a Gamma Knife
system is approximately $3 million.
BUSINESS STRATEGY
The Company believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through
consolidation. The Company's strategy is to further develop and expand regional
diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The strategy of the Company is focused on the
following components: (i) to further participate in the consolidation occurring
in the diagnostic imaging industry by continuing to build its market presence in
its existing regional diagnostic imaging networks through geographically
disciplined acquisitions; (ii) to develop or acquire additional regional
networks in strategic locations where the Company can offer a broad range of
services to its customers and realize increased economies of scale; (iii) to
continue to market current diagnostic imaging applications through its existing
facilities to optimize and increase overall procedure volume; (iv) to strengthen
the regional diagnostic imaging networks by focusing on managed care customers;
(v) to implement a variety of new products and services designed to further
leverage its core business strengths, including: Open MRI systems and the
radiology co-source product which involves the joint ownership and management of
the physical and technical operations of the multi-modality radiology department
of a hospital or multi-specialty physician group.
In fiscal 1999, the Company completed two acquisitions as follows: a 70%
interest in a partnership which owns four Centers and two Fixed Facilities in
Buffalo, New York and; and a 100% interest in three Centers and two Fixed
Facilities in Phoenix, Arizona. The Company utilized its Bank Financing to
fund the purchase price of these acquisitions.
In addition, on July 22, 1999, the Company opened its second radiology co-source
outpatient Center in Granada Hills, California, which was financed with
internally generated funds.
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GOVERNMENT REGULATION
The health care industry is highly regulated and changes in laws and regulations
can be significant. Changes in the law or new interpretation of existing laws
can have a material effect on permissible activities of 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.
ANTI-KICKBACK STATUTES: The Company is subject to federal and state laws, which
govern financial and other arrangements between health care providers. These
include the federal anti-kickback statute which prohibits bribes, kickbacks,
rebates and any other direct or indirect remuneration in return for or to induce
the referral of an individual to a person for the furnishing, directing or
arranging of services, items or equipment for which payment may be made in whole
or in part under Medicare, Medicaid or other federal health care programs.
Violation of the anti-kickback statute may result in criminal penalties and
exclusion from the Medicare and other federal health care programs. Many states
have enacted similar statutes, which are not limited to items and services paid
for under Medicare or a federally funded health care program. In recent years,
there has been increasing scrutiny by law enforcement authorities, the
Department of Health and Human Services ("HHS"), the courts and Congress of
financial arrangements between health care providers and potential sources of
patient and similar referrals of business to ensure that such arrangements are
not designed as mechanisms to pay for patient referrals. HHS interprets the
anti-kickback statute broadly to apply, under certain circumstances, to
distributions of partnership and corporate profits to investors who refer
federal health care program patients to a corporation or partnership in which
they have an ownership interest and to payments for service contracts and
equipment leases that are designed to provide direct or indirect remuneration
for patient referrals or similar opportunities to furnish reimbursable items or
services. In July 1991, HHS issued "safe harbor" regulations that set forth
certain provisions which, if met, will assure that health care providers and
other parties who refer patients or other business opportunities, or who provide
reimbursable items or services, will be deemed not to violate the anti-kickback
statute. The Company is also subject to separate laws governing the submission
of false claims. The Company believes that its operations materially comply with
the anti-kickback statutes.
STARK II; STATE PHYSICIAN SELF-REFERRAL LAWS: A federal law, commonly known as
the "Stark Law" or "Stark II," also imposes civil penalties and exclusions for
referrals for "designated health services" by physicians to certain entities
with which they have a financial relationship (subject to certain exceptions).
"Designated health services" include, among other things, radiology services,
including MRIs, CTs and ultrasound, and inpatient and outpatient hospital
services. The law applies only to services reimbursable by Medicare or Medicaid.
The Stark Law is self-effectuating and does not require implementing regulation;
however, while implementing regulations have been issued relating to referrals
for clinical laboratory services, final regulations have not been issued
regarding the other designated health services. In addition, several states in
which the Company operates have enacted or are considering legislation that
prohibits "physician self-referral" arrangements or requires physicians to
disclose to their patients any financial interest they may have with a health
care provider whom they recommend. Possible sanctions for violating these
provisions include loss of licensure and civil and criminal sanctions. Such
state laws vary from state to state and seldom have been interpreted by the
courts or regulatory agencies. Nonetheless, strict enforcement of these
requirements is likely. Although the Company believes its operations materially
comply with these federal and state physician self-referral laws, there can be
no assurance that Stark II or other regulations will not be interpreted or
changed in a manner that would have a material adverse effect on the Company's
business, financial condition or results of operations.
FDA PREMARKET APPROVALS: The U.S. Food and Drug Administration ("FDA") has
issued the requisite premarket approval for all of the MRI, CT, lithotripsy and
Gamma Knife systems utilized by the Company. The Company does not believe that
any further FDA approval is required in connection with equipment currently in
operation or proposed to be operated.
RADIOLOGIST LICENSING: The radiologists with whom 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. The Company does not believe that such
laws and regulations will either prohibit or require licensure approval of its
business operations, although no assurances can be made that such laws and
regulations will not be interpreted to extend such prohibitions or requirements
to the Company's operations.
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LIABILITY INSURANCE: The hospitals and physicians who use the Company's
diagnostic imaging systems are involved in the delivery of health care services
to the public and, therefore, are exposed to the risk of liability claims. The
Company's position is that it does not engage in the practice of medicine. The
Company provides only the equipment and technical components of diagnostic
imaging, including certain limited nursing services, and has not experienced any
material losses due to claims for malpractice. Nevertheless, claims for
malpractice have been asserted against the Company in the past and any future
claims, if successful, could result in substantial damage awards to the
claimants, which may exceed the limits of any applicable insurance coverage. The
Company maintains professional liability insurance in amounts it believes are
adequate for its business of providing diagnostic imaging, treatment and
management services. In addition, the radiologists or other health care
professionals with whom the Company contracts are required by such contracts to
carry adequate medical malpractice insurance. Successful malpractice claims
asserted against the Company, to the extent not covered by the Company's
liability insurance, could have a material adverse effect on the Company's
business, financial condition and results of operations.
INDEPENDENT PHYSIOLOGICAL LABORATORIES; INDEPENDENT DIAGNOSTIC TREATMENT
FACILITIES: Under past Medicare policy, imaging centers generally participated
in the Medicare program as either medical groups or, subject to the discretion
of individual Medicare carriers, Independent Physiological Laboratories
("IPLs"). The IPL is a loosely defined Medicare provider category that is not
specifically authorized to provide imaging services. Accordingly, certain
carriers permit IPLs to provide imaging services and others do not. In the past,
the Company has preferred, to the extent possible, to operate 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"). Under these
regulations, imaging centers have the option to participate in the Medicare
program as either IDTFs or medical groups. The Company believes that the
impact of the IDTF regulations is likely to be positive overall. Accordingly,
the Company is in the process of converting most of its imaging centers to
IDTFs, except in those states where the medical group model is required. In
addition, since the IDTF designation is new, it is unclear to what extent and
in what manner IDTFs will be monitored by HCFA, but it is probable that HCFA
will exercise increased oversight of IDTFs compared to IPLs, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
CERTIFICATES OF NEED: Some states require hospitals and certain other health
care facilities to obtain a certificate of need ("CON") or similar regulatory
approval prior to the commencement of certain healthcare operations or services
and/or the acquisition of major medical equipment including MRI and Gamma Knife
systems. CON regulations may limit or preclude the Company from providing
diagnostics imaging services or systems in certain states. 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.
REIMBURSEMENT OF HEALTH CARE COSTS
MEDICARE: Beginning in late 1983, prospective payment regulations became
effective under the federal Medicare program. The Medicare program provides
reimbursement for hospitalization, physician, diagnostic and certain other
services to eligible persons 65 years of age and over and certain others.
Providers of service are paid by the federal government in accordance with
regulations promulgated by the HHS and generally accept said payment, with
nominal co-insurance amounts required to be paid by the service recipient, as
payment in full. In general, these regulations provide for a specific
prospective payment to reimburse hospitals for inpatient treatment services
based upon the diagnosis of the patient. Although outpatient services are
presently exempt from prospective payment reimbursement, Congress has instructed
the Prospective Payment Assessment Commission to study alternative methods for
reimbursing hospitals for outpatient services, including prospective payment
methods, and the Medicare program has adopted fee schedules for some diagnostic
services. Congressional and regulatory action in fiscal 1998 imposed additional
requirements on the eligibility of certain diagnostic services for reimbursement
by the Medicare
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program, including 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 services offered by the Company and could indirectly adversely affect
the Company's business, financial condition and results of operations.
MEDICAID: The Medicaid program is a combined federal and state program providing
coverage for low-income persons. The specific services offered and reimbursement
methods vary from state to state. In many states, Medicaid reimbursement is
patterned after the Medicare program. Changes in Medicaid program reimbursement
are not expected to have a material adverse impact on the Company's business,
financial condition and results of operations.
MANAGED CARE: Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs") attempt to control the cost of health care services.
Managed care contracting has become very competitive and reimbursement schedules
are at or below Medicare reimbursement levels. The development and expansion of
HMOs, PPOs and other managed care organizations within the Company's regional
networks could have a negative impact on utilization of the Company's services
in certain markets and/or affect the revenue per procedure which the Company can
collect, since such organizations will exert greater control over patients'
access to diagnostic imaging services, the selection of the provider of such
services and the reimbursement thereof. The Company also expects that the excess
capacity of equipment in the United States may negatively impact operations
because of the competition among health care providers for contracts with all
types of managed care organizations. As a result of such competition, the length
of term of any contracts, which the Company may obtain, and the payment to the
Company for such services may also be negatively affected. See "Customers and
Fees".
PRIVATE INSURANCE: Private health insurance programs generally have authorized
the payment for the Company's services on satisfactory terms and HCFA has
authorized reimbursement under the federal Medicare program for all diagnostic
imaging and treatment services currently being provided by the Company. However,
if Medicare reimbursement is reduced, the Company believes that private health
insurance programs will also reduce reimbursement in response to reductions in
government reimbursement, which could have an adverse impact on the Company's
business.
SALES AND MARKETING
The Company selectively invests in marketing and sales resources and activities
for the purpose of obtaining new sources of revenues for the Company, expanding
business relationships, growing revenues at its existing facilities and
maintaining present business alliances and contractual agreements. Marketing
activities include efforts to contact physicians, education programs on new
applications and uses of technology, customer service programs and contracting
with insurance payors for volume discounts. Sales activities principally focus
on hospital customers who purchase Mobile Facility services from the Company or
enter into other more extensive relationships for Fixed Facility partnerships or
radiology department management services.
COMPETITION
The health care industry in general, and the market for diagnostic imaging
services in particular, are highly competitive. The Company competes principally
on the basis of its reputation for productive and cost-effective quality
services. 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 CON and licensure
requirements, if any. Historically, smaller hospitals have been reluctant to
purchase imaging and treatment equipment. This reluctance, however, has
encouraged the entry of start-up ventures and more established business
operations into the diagnostic services business. As a result, there is
significant excess capacity in the diagnostic imaging business in the United
States, which negatively affects utilization and reimbursement.
8
<PAGE>
CUSTOMERS AND FEES
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 and
are generally paid pursuant to hospital contracts with a life span of up to five
years for Mobile Facilities and up to ten years for Fixed Facilities. Patient
services revenues are services billed directly to patients or third party payors
(generally managed care organizations, Medicare, Medicaid, commercial insurance
carriers and worker's compensation funds), on a fee-for-service basis and are
primarily earned through Centers and certain Fixed and Mobile Facilities.
The Company's Fixed Facility operations are principally dependent on the
Company's ability (either directly or indirectly through its hospital customers)
to attract referrals from physicians and other health care providers
representing a variety of specialties. The Company's eligibility to provide
service in response to a referral is often dependent on the existence of a
contractual arrangement with the referred patient's insurance carrier (primarily
if the insurance is provided by a managed care organization). The Company
currently has in excess of 400 contracts with managed care organizations for
diagnostic imaging services provided at the Company's Fixed Facilities primarily
on a discounted fee-for-service basis. Managed care contracting has become very
competitive and reimbursement schedules are at or below Medicare reimbursement
levels. A significant decline in referrals and/or reimbursement rates would
adversely affect the Company's business, financial condition and results of
operations. See "Managed Care".
The Company's contract services revenues represent approximately 53% of total
revenues. Each year approximately one-quarter to one-third of the contract
services agreements for Mobile Facilities are subject to renewal. It is expected
that some high volume customer accounts will elect not to renew their agreements
and instead will purchase or lease their own diagnostic imaging equipment and
some customers may choose an alternative services provider.
In the past, when such agreements have not been renewed, the Company has been
able to obtain replacement contracts. While some replacement accounts have
initially been smaller than the lost accounts, such replacement accounts'
revenues have generally increased over the term of the contract; however, new
and renewal contracts may not offset revenues from customers electing not to
renew their contracts with the Company. Although the non-renewal of a single
customer contract would not have a material impact on the Company's contract
services revenues, non-renewal of several contracts could have a material impact
on contract services revenues.
In addition, the Company's contract services revenues with regard to its Mobile
Facilities in certain markets depend in part on some hospital accounts with high
volume. If the future reimbursement levels of such hospitals were to decline or
cease or if such hospitals were to become financially insolvent and if such
agreements were not replaced with new accounts or with the expansion of services
on existing accounts, the Company's contract services revenues would be
adversely affected. No single source accounts for more than 10% of the Company's
total revenues.
DIAGNOSTIC IMAGING AND OTHER EQUIPMENT
The Company has estimated that it has invested approximately $119 million since
June 1996, to replace and upgrade diagnostic imaging systems and to purchase new
systems. As a result, the Company has technologically advanced, state-of-the-art
diagnostic imaging equipment. The Company owns or leases 166 diagnostic imaging
and treatment systems, of which 114 are conventional MRI systems, 24 are Open
MRI systems, 20 are CT systems, five are lithotripters, two are radiation
oncology systems and one is a Gamma Knife. The Company owns 96 of its imaging
and treatment systems and has operating leases for the remaining 70 systems. Of
the Company's 114 conventional MRI systems, 51% have a magnet strength of 1.5
Tesla and 36% have a magnet strength of 1.0 Tesla. Currently, the industry
standard magnet strength for fixed and mobile systems is 1.5 Tesla. The Company
is in the process of upgrading or replacing its remaining conventional MRI
systems from magnet strengths of less than 1.0 Tesla to magnet strengths of at
least 1.0 Tesla. Ten of the Company's Open MRI systems are less than one year
old.
The Company's master lease agreement with GE Medical Systems ("GEMS") includes a
variable lease arrangement for 12 of the Company's 70 leased imaging and
treatment systems, which can significantly reduce the Company's downside cash
flow risk. Under the Company's standard operating lease agreement with GEMS, the
Company pays approximately $30,000 per month to lease each system. Under the
variable rate election, the Company may choose to pay a monthly rental fee
averaging $18,000 per system, plus 40% of the operating profits generated by
such system, or to store idle systems at a fixed location for a monthly payment
to GEMS of $1,500 per system,
9
<PAGE>
representing approximately half of the monthly maintenance costs for an idle
system. The Company's variable lease arrangement with GEMS covers most of the
Company's older systems, which the Company either has upgraded or expects to
replace within the next 18 to 24 months. As of September 1, 1999, the Company
had elected the variable lease option with respect to two of the 12 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.
The Company continues to evaluate the mix of its MRI equipment in response to
changes in technology and to the surplus capacity in the marketplace. The
overall technological competitiveness of the Company's equipment continues to
improve through upgrades, disposal and/or trade-in of older equipment and the
purchase or execution of leases for new equipment.
Several substantial companies are presently engaged in the manufacture of MRI
(including Open MRI), CT and other diagnostic imaging equipment, including
GEMS, Hitachi Medical Systems, Phillips Medical Systems North America
Company, Picker International, Inc., and Siemens Medical Systems, Inc. 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.
EMPLOYEES
As of September 1, 1999, the Company had approximately 1,030 full-time and 70
part-time employees. None of the Company's employees are covered by a collective
bargaining agreement. Management believes its employee relations to be
satisfactory.
FORWARD-LOOKING STATEMENTS DISCLOSURE
Except for the historical information contained in this report, certain
statements contained herein are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995, which involve a number
of risks and uncertainties, including, but not limited to, availability of
financing; limitations and delays in reimbursement by third-party payors;
contract renewals and financial stability of customers; technology changes;
governmental regulation; conditions within the health care environment;
adverse utilization trends for certain diagnostic imaging procedures;
aggressive competition; general economic factors; the Company's inability to
carry out its business strategy due to rising purchase prices of imaging
centers and companies; successful integration of acquisitions; and the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission (the "SEC").
ITEM 2. PROPERTIES
The Company leases approximately 20,000 square feet of office space for its
executive offices in Newport Beach, California, under a lease expiring in 2001,
approximately 11,800 square feet of office space for its eastern regional
offices in Farmington, Connecticut, under a lease expiring in 2002,
approximately 4,400 square feet of office space for a billing office in
Merrillville, Indiana, under a lease expiring in 2003 and approximately 5,400
square feet of office space for a billing office in Santa Ana, California, under
a lease expiring in 2008. The Company believes its facilities are adequate for
its reasonably foreseeable needs. In addition, the following table sets forth
the other principal properties used as imaging or treatment facilities by the
Company as of June 30, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ---------------- ----------- --------
<S> <C> <C>
OWNED:
Granada Hills Open MRI Center (1) 2,200 Granada Hills, California
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
Chattanooga Outpatient Center 14,700 Chattanooga, Tennessee
10
<PAGE>
Harbor/UCLA Diagnostic Imaging Center (1) 15,000 Torrance, California
Diagnostic Outpatient Center (1) 17,800 Hobart, Indiana
LEASED:
Lockport MRI - Maple Road 500 Williamsville, New York
Buckhead Imaging 1,500 Atlanta, Georgia
Diagnostic Imaging Center - N. 18th Place 1,800 Phoenix, Arizona
Lockport MRI 2,200 N. Tonawanda, New York
Lockport MRI 2,400 Lockport, New York
Redwood City MRI 2,900 Redwood City, California
Diagnostic Imaging Center 3,100 Tempe, Arizona
Lockport MRI - Youngs Road 3,800 Tonawanda, New York
Dublin Imaging 3,900 Dublin, Ohio
Lockport MRI 4,000 Williamsville, New York
Open MRI of Orange County 4,000 Santa Ana, California
Washington Magnetic Resonance Center 4,100 Whittier, California
Diagnostic Imaging Center - 15th Avenue 4,700 Phoenix, Arizona
Imaging Center at Murfreesboro 5,000 Murfreesboro, Tennessee
Marshwood Imaging 5,000 Scarborough, Maine
Lockport MRI 5,200 East Amherst, New York
Diagnostic Imaging Center 5,800 Peoria, Arizona
Maxum Diagnostic Center - Preston Road 5,800 Dallas/Plano, Texas
Open MRI of Hayward 6,400 Hayward, California
Central Maine Imaging Center 7,250 Lewiston, Maine
St. John's Regional Imaging Center 7,700 Oxnard, California
Ocean Medical Imaging Center 8,700 Tom's River, New Jersey
Diagnostic Imaging Center - E. Thomas Road 10,600 Phoenix, Arizona
Broad Street Imaging Center 12,700 Columbus, Ohio
Maxum Diagnostic Center - Forest Lane 18,500 Dallas, Texas
InSight Mountain Diagnostics 19,100 Las Vegas, Nevada
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.
In fiscal 1998, the Company completed the purchase of 77,690 square feet of land
in Ft. Worth, Texas, upon which the Company intended to build a Center to which
certain existing operations in Ft. Worth would be relocated; however, the
Company is currently evaluating its options.
In fiscal 1999, the Company completed the purchase of two buildings
(approximately 14,700 square feet) in Chattanooga, Tennessee, in which the
Chattanooga Outpatient Center is located. The Company also completed the sale of
the building (approximately 19,100 square feet) in Las Vegas, Nevada in which
InSight Mountain Diagnostics is located and entered into a lease expiring in
2014.
In connection with the acquisition in Phoenix, Arizona, the Company assumed (i)
a lease for approximately 7,000 square feet of storage space in Tempe, Arizona,
under a lease expiring in 1999; and (ii) a lease for approximately 5,300 square
feet of office space in Nashville, Tennessee, under a lease expiring in 2002,
which the Company is intending to sublease.
ITEM 3. 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 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, financial condition and
results of operations.
On May 8, 1998, Medical Synergies, Inc. ("MSI") and its subsidiary, The Center
for Diagnostic Medical Services, Inc. ("CDMSI"), filed a complaint against
InSight Health Corp. ("IHC") and certain of its then current officers, E. Larry
Atkins, Thomas V. Croal, Glenn P. Cato, Robert N. LaDouceur and Michael A.
Boylan, in the District Court of Dallas County, Texas. Plaintiffs alleged 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'
11
<PAGE>
complaint included claims of anticipatory repudiation of an alleged agreement,
fraud, negligent misrepresentation, tortious interference with contract,
tortious interference with prospective business relations and attorneys' fees
based on breach or repudiation of the alleged agreement. The complaint requested
a judgment for actual, compensatory and consequential damages in an unspecified
amount, punitive and exemplary damages in an unspecified amount, pre-judgment
and post-judgment interest, attorneys' fees, expenses, costs and disbursements.
The case was 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.
On April 13, 1999, the parties negotiated a settlement of the lawsuit at a
mediation and a formal settlement agreement was executed by all parties. The
settlement agreement was subject to approval by the bankruptcy court in the
bankruptcies of MSI and CDMSI. The bankruptcy court approved the settlement on
July 8, 1999. Under the terms of the settlement, IHC on behalf of all
defendants, paid the plaintiffs an immaterial monetary settlement for all of the
plaintiffs' claims and the plaintiffs and defendants mutually released each
other from any further claims. On July 14, 1999, the lawsuit was dismissed by
the District Court. A portion of the settlement and the Company's attorney's
fees will be reimbursed by the Company's insurance company.
On June 15, 1999, InfoTech Software Corporation ("InfoTech") filed a
complaint against IHC, Shawn P. Railey, Jason P. Gardner and Alchemy Software
Corporation ("Alchemy") in the District Court of Dallas County, Texas. The
plaintiff alleges that, among other things, in March 1994, Maxum Health Corp.
("MHC"), an affiliate of IHC, entered into an agreement with InfoTech to
design and implement a custom information system for MHC and that MHC
received only a license to use the software and did not have the right to
sublicense or otherwise provide third parties access to InfoTech's software
or to modify it. InfoTech further alleges that defendants Railey and Gardner,
former InfoTech employees, resigned from InfoTech and formed Alchemy,
conspired to and did steal the IHC project from InfoTech and are now
providing services to IHC. The plaintiff's complaint includes claims of
unfair competition, breach of contract, collusion, business disparagement and
tortious interference with contractual relations. The complaint requests a
judgment for actual and exemplary damages in unspecified amounts, attorney's
fees, pre-judgment and post judgment interest, costs and disbursements. The
defendants have filed an answer to the complaint and discovery has commenced
and is continuing. The Company believes the plaintiff's claims are without
merit and intends to vigorously defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the national over-the-counter market and
quoted on the NASDAQ Small Cap Market under the symbol "IHSC". The following
table sets forth the high and low prices as reported by NASDAQ for the Company's
common stock for the quarters indicated. The prices (rounded to the nearest 1/8
or nearest 1/32 where applicable) represent quotations between dealers without
adjustment for mark-up, markdown or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED LOW HIGH
<S> <C> <C>
September 30, 1998 6 12
December 31, 1998 4 1/2 9
March 31, 1999 5 8
June 30, 1999 4 15/16 9
12
<PAGE>
September 30, 1997 4 1/4 7 3/4
December 31, 1997 6 1/2 17 3/4
March 31, 1998 10 1/2 18
June 30, 1998 10 3/4 14 3/8
</TABLE>
The Company has never paid a cash dividend on its common stock and does not
expect to do so in the foreseeable future. The Company's credit agreement with
its primary lender and the indenture governing publicly-issued debt securities
of the Company contain restrictions on its ability to pay dividends on its
common stock.
As of September 15, 1999, the Company's records indicate that there were in
excess of 1,981 beneficial holders of common stock and approximately 449
stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
On June 26, 1996, in connection with the Agreement and Plan of Merger among
the Company, IHC (formerly American Health Services Corp., a Delaware
corporation) ("AHS"), and MHC, AHS and MHC became wholly owned subsidiaries
of the Company (the "Merger"). The Merger was accounted for using the
purchase method of accounting in accordance with generally accepted
accounting principles. MHC has been treated as the acquirer for accounting
purposes, based upon relative revenues, book values and other factors. The
selected consolidated financial data presented as of and for the years ended
June 30, 1999, 1998 and 1997, the six months ended June 30, 1996 and 1995
(unaudited), and for the years ended December 31, 1995 and 1994 has been
derived from the Company's audited consolidated financial statements and
should be read in conjunction with such consolidated financial statements and
related notes as of and for the years ended June 30, 1999, 1998 and 1997, and
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this report.
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
----------------------
YEARS ENDED JUNE 30, JUNE 30, JUNE 30, DECEMBER 31,
-------------------------------- --------------------
1999 1998 1997 1996 (1) 1995(1) (9)1995 (1) 1994 (1)
---------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 161,992 $ 119,018 $92,273 $26,460 $24,434 $50,609 $45,868
Operating income (loss) (2) (3) 17,422 7,770 5,774 (2,949) (331) (1,193) (2,777)
Interest expense, net 14,500 6,827 4,066 1,144 648 1,626 1,206
Net income (loss) (4) (5) (6) (7) 6,112 512 1,281 (979) (979) (4,319) 4,156
Income (loss) per common and converted preferred
share (8):
Basic $ 0.67 $ 0.06 $ 0.25 $ (0.70) $ (0.73) $ (3.21) $ 3.04
Diluted $ 0.65 $ 0.06 $ 0.24 $ (0.70) $ (0.73) $ (3.21) $ 2.96
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------------------------------------- --------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995 (1) 1994 (1)
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $ 24,651 $ 36,109 $ (6,162) $ (1,441) $ (2,228) $ 1,587
Property and equipment, net 90,671 75,146 34,060 29,349 12,386 5,272
Intangible assets 80,327 74,831 32,579 16,216 4,047 1,194
Total assets 238,304 231,592 97,271 69,313 28,306 22,592
Total long-term liabilities 161,116 155,642 59,205 39,839 19,723 9,575
Stockholders' equity (deficit) 44,106 37,858 6,685 5,404 (4,005) 300
</TABLE>
(1) The selected consolidated financial data represents historical data of
MHC only.
(2) Includes a provision for supplemental service fee termination of $6.3
million in 1998.
(3) Includes a provision for reorganization and other costs of $3.3
million in 1999.
(4) Includes a provision for securities litigation settlement of $1.5
million in 1995.
(5) Includes a gain on sale of partnership interests of $4.9 million in
1994.
(6) Includes an extraordinary gain on debt extinguishment of $3.2 million
and $3.3 million in 1996 and 1994, respectively.
(7) Includes an income tax benefit of $3.5 million in 1999.
(8) Amounts are computed on a pro forma basis as if the reset of par value
of MHC common stock and related conversion into the Company's common
stock had occurred on January 1, 1994.
(9) Unaudited.
(10) No cash dividends have been paid on the Company's common stock for the
periods indicated above.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this report that are not purely historical or which
might be considered an opinion or projection concerning the Company or its
business, whether express or implied, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include statements regarding the Company's expectations,
intentions, plans or strategies regarding the future, including statements
related to the Year 2000 Issue. All forward-looking statements included in this
report are based upon information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those described or implied in such forward-looking
statements because of certain factors which could affect the Company. Such
forward-looking statements should be evaluated in light of factors described in
the Company's periodic filings with the SEC, on Forms 10-K, 10-Q and 8-K (if
any) and the factors described under "Risk Factors" in the Company's
Registration Statement on Form S-4, filed with the SEC on August 4, 1998, and
any amendments thereto.
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with Item 1. "Business", and Item 8.
"Financial Statements and Supplementary Data", included elsewhere in this
report.
ACQUISITIONS
The Company believes a consolidation in the diagnostic imaging industry is
occurring and is necessary in order to provide surviving companies the
opportunity to achieve operating and administrative efficiencies through
consolidation. The Company's strategy is to further develop and expand
regional diagnostic imaging networks that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service and
convenience to its customers. The strategy of the Company is focused on the
following components: (i) to further participate in the consolidation
occurring in the diagnostic imaging industry by continuing to build its
market presence in its existing regional diagnostic imaging networks through
geographically disciplined acquisitions; (ii) to develop or acquire
additional regional networks in strategic locations where the Company can
offer a broad range of services to its customers and realize increased
economies of scale; (iii) to continue to market current diagnostic imaging
applications through its existing facilities to optimize and increase overall
procedure volume; (iv) to strengthen the regional diagnostic imaging networks
by focusing on managed care customers; (v) to implement a variety of new
products and services designed to further leverage its core business
strengths, including: Open MRI systems and the radiology co-source product,
which involves the joint ownership and management of the physical and
technical operations of the multi-modality radiology department of a hospital
or multi-specialty physician group. The Company believes that long-term
viability is contingent upon its ability to successfully execute its business
strategy.
In fiscal 1997, the Company completed three acquisitions as follows: a Fixed
Facility in Hayward, California; Mobile Facilities in Maine and New Hampshire;
and a Center in Chattanooga, Tennessee. All three transactions included the
purchase of assets and assumption of certain equipment related liabilities. The
cumulative purchase price for these acquisitions was approximately $18.6
million.
In fiscal 1998, the Company completed four acquisitions as follows: a Center
in Columbus, Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in
Redwood City, California; and a Center in Las Vegas, Nevada. In connection
with the purchase of the Center in Columbus, Ohio, the Company also acquired
a majority ownership interest in a new Center in Dublin, Ohio. All
transactions included the purchase of assets and assumption of certain
equipment related liabilities. The cumulative purchase price for these
acquisitions was approximately $18.4 million.
In fiscal 1998, the Company also acquired all of the capital stock of Signal
Medical Services, Inc. ("Signal") through the merger of Signal into a wholly
owned subsidiary of the Company. The purchase price was approximately $45.7
million. The Signal assets primarily consisted of Mobile Facilities in the
Northeastern and Southeastern United States.
In addition, in fiscal 1998, the Company installed three Open MRI Fixed
Facilities in Atlanta, Georgia; Scarborough, Maine; and Santa Ana, California;
and opened its first radiology co-source outpatient Center in Oxnard,
California, all of which were financed through GE. Effective December 31, 1997,
the Company terminated its agreement to operate a Gamma Knife Center and entered
into an agreement to dissolve a partnership related to a Fixed Facility in
Seattle, Washington.
14
<PAGE>
In fiscal 1999, the Company completed two acquisitions as follows: a 70%
interest in a partnership which owns four Centers and two Fixed Facilities in
Buffalo, New York; and a 100% interest in three Centers and two Fixed
Facilities in Phoenix, Arizona. The cumulative purchase price for these two
acquisitions was approximately $16.9 million. In addition, on July 22, 1999,
the Company opened its second radiology co-source outpatient center in
Granada Hills, California, which was financed with internally generated funds.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company operates in a capital intensive, high fixed cost industry that
requires significant amounts of working capital to fund operations, particularly
the initial start-up and development expenses of new operations and yet is
constantly under external pressure to contain costs and reduce prices. Revenues
and cash flows have been adversely affected by an increased collection cycle,
competitive pressures and major restructurings within the health care industry.
This adverse effect on revenues and cash flow is expected to continue. (See Item
1. "Business-Business Strategy").
The Company continues to pursue acquisition opportunities. The Company
believes that the expansion of its business through acquisitions is a key
factor in maintaining profitability. Generally, acquisition opportunities are
aimed at increasing revenues and profits, and maximizing utilization of
existing capacity; however, the Company has incurred and will continue to
incur costs for the salaries, benefits and travel expenses of its business
development team. Incremental operating profit resulting from future
acquisitions will vary depending on geographic location, whether facilities
are Mobile or Fixed, the range of services provided and the Company's ability
to integrate the acquired businesses into its existing infrastructure. Since
the Merger, the Company has completed ten acquisitions as discussed above. No
assurance can be given, however, that the Company will be able to identify
suitable acquisition candidates and thereafter complete such acquisitions on
terms acceptable to the Company.
As noted above (see Item 1. "Business-Recapitalization and Financing"), the
Company consummated the Recapitalization on October 14, 1997, pursuant to which
(a) the Company issued to Carlyle 25,000 shares of Series B Preferred Stock
having a liquidation preference of $1,000 per share and warrants to purchase
250,000 shares of Common Stock at an exercise price of $10.00 per share,
generating net proceeds to the Company (after related transaction costs of
approximately $2.0 million) of approximately $23.0 million; (b) the Company
issued to GE 7,000 shares of Series C Preferred Stock, with a liquidation
preference of $1,000 per share, in consideration of the termination of GE's
right to receive supplemental service fee payments equal to 14% of the Company's
pretax income, warrants to purchase 250,000 shares of common stock at an
exercise price of $10.00 per share, and an additional 20,953 shares of Series C
Preferred Stock in exchange for all of GE's shares of Series A Preferred Stock;
and (c) the Company executed a credit agreement with BofA which included (i) a
$50 million term loan facility consisting of a $20 million tranche with
increasing amortization over a five-year period and a $30 million tranche with
increasing amortization over a seven-year period, principally repayable in years
6 and 7, (ii) a $25 million revolving working capital facility with a five-year
maturity, and (iii) a $50 million acquisition facility. Initial funding under
the Bank Financing occurred on October 22, 1997 and, on December 19, 1997, the
Bank Financing was increased to a total of $150 million by converting $10
million of outstanding debt under the acquisition facility to the seven-year
tranche (which was thereby increased to $40 million) and increasing the
acquisition facility to $65 million. The net proceeds from the Carlyle
investment were used to refinance a portion of the outstanding GE indebtedness
(approximately $20 million). At the initial funding of the Bank Financing, all
of the term loan facility was drawn down to refinance all of the remaining GE
indebtedness (approximately $50 million) and approximately $8 million of the
revolving facility was drawn down for working capital purposes. The terms of the
Series B Preferred Stock and the Series C Preferred Stock, as well as the Bank
Financing, contain certain restrictions on the Company's ability to act without
first obtaining a waiver or consent from Carlyle, GE and BofA.
On June 12, 1998, the Company completed a refinancing of substantially all of
its debt through the issuance of $100 million of Notes. The Notes bear interest
at 9.625%, with interest payable semi-annually and mature in June 2008. The
Notes are redeemable at the option of the Company, in whole or in part, on or
after June 15, 2003. The Notes are unsecured senior subordinated obligations of
the Company and are subordinated in right of payment to all existing and future
senior indebtedness, as defined in the indenture, of the Company, including
borrowings under the Bank Financing. The terms of the Notes contain certain
restrictions on the Company's ability to act without first obtaining consent of
the noteholders.
Concurrently with the issuance of the Notes, the Company entered into an
amendment to, and restatement of the Bank Financing, pursuant to which, among
other things, the Company refinanced and consolidated its prior $20 million
tranche term loan and $40 million tranche term loan into a $50 million term
loan, with a six-year amortization. Borrowings under the $50 million term loan
bear interest at LIBOR plus 1.75%. The Company utilized a portion of the net
proceeds from the Notes, together with the net proceeds of the borrowing under
the term
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loan portion of the Bank Financing to repay outstanding indebtedness under the
Bank Financing. The remaining net proceeds of approximately $28.8 million were
used for general corporate purposes. At June 30, 1999, there was approximately
$42.5 million in borrowings under the term loan.
As part of the amendment to the Bank Financing, the Company has available a $25
million working capital facility with a five-year maturity and a $75 million
acquisition facility with a six-year maturity. Borrowings under both credit
facilities bear interest at LIBOR plus 1.75%. The Company is required to pay an
annual unused facility fee of between 0.375% and 0.5%, payable quarterly, on
unborrowed amounts under both facilities, of which the Company paid
approximately $0.5 million during the year ended June 30, 1999. At June 30,
1999, there was approximately $3.1 million in borrowings under the working
capital facility and $16.3 million in borrowings under the acquisition facility.
Net cash provided by operating activities was approximately $10.9 million for
the year ended June 30, 1999. Cash provided by operating activities resulted
primarily from net income before depreciation and amortization (approximately
$31.0 million), offset by an increase in accounts receivable (approximately
$8.3 million), and a reduction in accounts payable and other current
liabilities (approximately $7.6 million). The increase in accounts receivable
is due primarily to the Company's acquisition and development activities.
Net cash used in investing activities was approximately $47.2 million for the
year ended June 30, 1999. Cash used in investing activities resulted
primarily from the Company purchasing new diagnostic imaging equipment or
upgrading its existing diagnostic imaging equipment (approximately $18.4
million), offset by the sale of the building in which a Center is located in
Las Vegas, Nevada (approximately $3.6 million) and from the Company's
acquisition and development activities, net of cash acquired (approximately
$27.2 million), which included the purchase of two buildings in which a
Center is located in Chattanooga, Tennessee (approximately $3.2 million).
Net cash provided by financing activities was approximately $5.9 million for the
year ended June 30, 1999, resulting primarily from borrowings of long-term debt
(approximately $23.8 million), offset by principal payments of debt and capital
lease obligations (approximately $17.5 million).
The Company has committed to purchase or lease in connection with the
development of new Mobile Facilities and replacement of diagnostic imaging
equipment at Fixed and Mobile Facilities, at an aggregate cost of
approximately $23 million, 16 MRI systems for delivery during the year ending
June 30, 2000. The Company expects to use internally generated funds or
operating leases from GE to finance the purchase of such equipment. In
addition, the Company previously committed to purchase or lease from GE, at
an aggregate cost of approximately $29 million, including siting costs, 24
Open MRI systems for delivery and installation. As of June 30, 1999, the
Company had installed 16 of such Open MRI systems: four at existing Centers,
three in newly opened Fixed Facilities, and nine in Mobile Facilities which
operate in existing networks serviced by conventional Mobile Facilities. On
August 30, 1999, the Company sold one Open MRI system, which it intended to
install in a Fixed Facility at a hospital in Houston, Texas, to the hospital.
As of August 31, 1999, the Company has a remaining commitment to purchase or
lease seven of such Open MRI systems, at an aggregate cost of approximately
$9 million. The Company may purchase, lease or upgrade other MRI systems as
opportunities arise to place new equipment into service when new contract
services agreements are signed, existing agreements are renewed, acquisitions
are completed, or new imaging centers are developed in accordance with the
Company's business strategy.
The Company's lease expense for diagnostic imaging equipment and other
miscellaneous equipment for the year ended June 30, 1999 was approximately
$18.5 million. The operating leases generally provide the Company with the
ability to purchase the equipment at fair market value at the end of the
lease or at a negotiated amount during the term of the lease. As of June 30,
1999, the Company believes the leased equipment could be purchased for
approximately $85 million. The purchase of the leased equipment would require
the Company to obtain satisfactory financing and the consent of its lenders.
The Company believes that, based on current levels of operations and anticipated
growth, its cash from operations, together with other available sources of
liquidity, including borrowings available under the Bank Financing, will be
sufficient through June 30, 2001 to fund anticipated capital expenditures and
make required payments of principal and interest on its debt, including payments
due on the Notes and obligations under the Bank Financing. In addition, the
Company continually evaluates potential acquisitions and expects to fund such
acquisitions from its available sources of liquidity, including borrowings under
the Bank Financing. The Company's acquisition strategy, however, may require
sources of capital in addition to that currently available to the Company, and
no assurance can be given that the Company will be able to raise any such
necessary additional funds on terms acceptable to the Company or at all.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
REVENUES: Revenues increased approximately 36.1% from approximately $119.0
million for the year ended June 30, 1998, to approximately $162.0 million for
the year ended June 30, 1999. This increase was due primarily to the
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acquisitions and opened facilities discussed above (approximately $31.2 million)
and an increase in contract services, patient services and other revenues
(approximately $14.0 million) at existing facilities, partially offset by the
termination of a Fixed Facility and a Gamma Knife Center in 1998 (approximately
$2.2 million).
Contract services revenues increased approximately 53.5% from approximately
$55.7 million for the year ended June 30, 1998, to approximately $85.5 million
for the year ended June 30, 1999. This increase was due primarily to the
acquisitions discussed above (approximately $18.1 million) and an increase at
existing facilities (approximately $11.7 million). The increase at existing
facilities was due to higher utilization (approximately 10%) offset by a decline
in reimbursement from customers, primarily hospitals (approximately 3%).
Contract services revenues, primarily earned by its Mobile Facilities,
represented approximately 53% of total revenues for the year ended June 30,
1999. Each year approximately one-quarter to one-third of the contract
services agreements are subject to renewal. It is expected that some high
volume customer accounts will elect not to renew their agreements and instead
will purchase or lease their own diagnostic imaging equipment and some
customers may choose an alternative services provider. In the past where
agreements have not been renewed, the Company has been able to obtain
replacement customer accounts. While some replacement accounts have initially
been smaller than the lost accounts such replacement accounts revenues have
generally increased over the term of the agreement. The non-renewal of a
single customer agreement would not have a material impact on the Company's
contract services revenues; however, non-renewal of several agreements could
have a material impact on contract services revenues.
In addition, the Company's contract services revenues with regard to its
Mobile Facilities in certain markets depend in part on some customer accounts
with high volume. If the future reimbursement levels of such customers were
to decline or cease or if such customers were to become financially insolvent
and if such agreements were not replaced with new accounts or with the
expansion of services on existing accounts, the Company's contract services
revenues would be adversely affected.
Patient services revenues increased approximately 23.3% from approximately $59.7
million for the year ended June 30, 1998, to approximately $73.6 million for the
year ended June 30, 1999. This increase was due primarily to the acquisitions
and opened centers discussed above (approximately $11.7 million) and an increase
in revenues at existing facilities (approximately $4.4 million). The increase at
existing facilities was due to higher utilization (approximately 9%), partially
offset by declines in reimbursement from third party payors (approximately 1%)
and reduced revenues from the termination of a Fixed Facility and a Gamma Knife
Center in fiscal 1998 (approximately $2.2 million).
Management believes that any future increases in revenues at existing
facilities can only be achieved by higher utilization and not by increases in
procedure prices; however, slower start-ups of new operations, excess
capacity of diagnostic imaging equipment, increased competition, and the
expansion of managed care may impact utilization and make it difficult for
the Company to achieve revenue increases in the future, absent the execution
of provider agreements with managed care companies and other payors, and the
execution of the Company's business strategy, particularly acquisitions. The
Company's operations are principally dependent on its ability (either
directly or indirectly through its hospital customers) to attract referrals
from physicians and other health care providers representing a variety of
specialties. The Company's eligibility to provide service in response to a
referral is often dependent on the existence of a contractual arrangement
with the referred patient's insurance carrier (primarily if the insurance is
provided by a managed care organization). Managed care contracting has become
very competitive and reimbursement schedules are at or below Medicare
reimbursement levels, and a significant decline in referrals could have a
material impact on the Company's revenues.
COSTS OF OPERATIONS: Costs of operations increased approximately 35.4% from
approximately $96.7 million for the year ended June 30, 1998, to approximately
$130.9 million for the year ended June 30, 1999. This increase was due primarily
to an increase in costs due to the acquisitions and opened centers discussed
above (approximately $25.4 million) and an increase in costs at existing
facilities (approximately $9.9 million), offset by the elimination of costs at
the two terminated facilities discussed above (approximately $1.1 million).
Costs of operations, as a percent of total revenues, decreased from
approximately 81.3% for the year ended June 30, 1998, to approximately 80.8% for
the year ended June 30, 1999. The percentage decrease is due primarily to
reduced costs in service supplies, equipment maintenance, and equipment lease
and depreciation costs as a result of the Company negotiating favorable supply
contracts and upgrading its existing diagnostic imaging equipment. The decrease
is offset by higher salaries and benefits and marketing costs.
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PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the
Recapitalization and Bank Financing discussed above, the Company issued to GE
7,000 shares of Series C Preferred Stock to terminate GE's rights to receive
supplemental service fee payments equal to 14% of the Company's pretax income.
The Series C Preferred Stock was valued at $7.0 million and, during the year
ended June 30, 1998, the Company recorded a one-time provision of approximately
$6.3 million, net of amounts previously accrued, for the Preferred Stock
issuance.
PROVISION FOR REORGANIZATION AND OTHER COSTS: In the fourth quarter of fiscal
1999, the Company recorded a one-time provision for reorganization and other
costs of $3.3 million, consisting of the following: The Company realigned its
corporate and regional organization to improve financial performance and
operating efficiencies and recorded a provision with respect to the related
employee severances and office closing costs of approximately $1.8 million.
Additionally, in connection with its business strategy, the Company evaluated
a number of potential acquisitions in the last six months of fiscal 1999
which it did not complete. The Company has recorded a provision of
approximately $0.7 million for legal, accounting and consulting costs
associated with certain potential acquisitions that the Company determined
were no longer consistent with its strategic objectives. Finally, the Company
reevaluated its information systems in light of organizational changes and
developed a new strategic plan to modify and reimplement its proprietary
radiology information system. Accordingly, the Company recorded a provision
with respect to related software and other capitalized costs of approximately
$0.8 million.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 22.5%, from approximately $8.9 million for the year ended June
30, 1998, to approximately $10.9 million for the year ended June 30, 1998.
This increase was due primarily to (i) increased salaries, benefits and
travel costs associated with the Company's acquisition and development
activities, (ii) increased occupancy and communication costs, and (iii)
additional information systems costs, offset by reduced legal costs.
Corporate operating expenses, as a percentage of total revenues, decreased
from approximately 7.5% for the year ended June 30, 1998, to approximately
6.7% for the year ended June 30, 1999.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 113.2% from
approximately $6.8 million for the year ended June 30, 1998, to approximately
$14.5 million for the year ended June 30, 1999. This increase was due primarily
to additional debt related to (i) the issuance of Notes discussed above, which
increased the Company's effective interest rate, (ii) the acquisitions discussed
above, and (iii) the Company upgrading its existing diagnostic imaging
equipment, offset by reduced interest as a result of amortization of long-term
debt.
PROVISION FOR INCOME TAXES: Provision for income taxes decreased from
approximately $0.4 million for the year ended June 30, 1998, to a benefit of
approximately $3.2 million for the year ended June 30, 1999. The decrease in
provision is due to the Company recording a reduction to the valuation
allowance of approximately $3.5 million to recognize anticipated benefits
from the utilization of certain net operating loss carryforwards available
for use in fiscal 2000.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.65 for the year ended June 30,
1999, compared to net income per common and converted preferred share of $0.06
for the same period in 1998. Excluding the one-time provision for reorganization
and other costs and the benefit for income taxes discussed above, net income per
common and converted preferred share on a diluted basis for the year ended June
30, 1999 would have been $0.63. Excluding the one-time provision for
supplemental service fee termination discussed above, net income per common and
converted preferred share on a diluted basis for the year ended June 30, 1998
would have been $0.83. The decrease in net income per common and converted
preferred share before such provisions and benefit is the result of (i) the
additional shares outstanding as a result of the Recapitalization discussed
above, (ii) increased interest expense, and (iii) a decrease in earnings from
unconsolidated partnerships as a result of the installation of new diagnostic
imaging equipment, offset by increased income from company operations.
YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES: Revenues increased approximately 29.0% from approximately $92.2
million for the year ended June 30, 1997, to approximately $119.0 million for
the year ended June 30, 1998. This increase was due primarily to the
acquisitions discussed above (approximately $20.0 million) and an increase in
contract services, patient services and other revenues (approximately $8.2
million) at existing facilities. Contract services revenues increased
approximately 16.5% from approximately $47.8 million for the year ended June
30, 1997, to approximately $55.7 million for the year ended June 30, 1998.
This increase was due primarily to the acquisitions discussed above
(approximately $4.0 million) and an increase at existing facilities
(approximately $3.9 million). The increase at existing facilities was due to
higher utilization (approximately 17%) offset by a decline in reimbursement
from customers, primarily hospitals (approximately 4%).
Patient services revenues increased approximately 42.5% from approximately $41.9
million for the year ended June
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30, 1997, to approximately $59.7 million for the year ended June 30, 1998.
This increase was due primarily to the acquisitions discussed above
(approximately $15.9 million) and an increase in revenues at existing
facilities (approximately $3.4 million). The increase at existing facilities
was due to higher utilization (approximately 11%), partially offset by
declines in reimbursement from third party payors (approximately 4%) and
reduced revenues from the termination of a Fixed Facility and a Gamma Knife
Center in fiscal 1998 (approximately $1.5 million).
COSTS OF OPERATIONS: Costs of operations increased approximately 21.5% from
approximately $79.6 million for the year ended June 30, 1997, to approximately
$96.7 million for the year ended June 30, 1998. This increase was due primarily
to an increase in costs due to the acquisitions discussed above (approximately
$14.7 million) and an increase in costs at existing facilities (approximately
$4.7 million), offset by the elimination of costs at the two terminated
facilities discussed above (approximately $2.3 million).
Costs of operations, as a percent of total revenues, decreased from
approximately 86.3% for the year ended June 30, 1997, to approximately 81.3% for
the year ended June 30, 1998. The decrease in percent is due primarily to
reduced costs in service supplies, equipment maintenance, and equipment lease
and depreciation costs as a result of the Company negotiating favorable supply
contracts and upgrading its existing diagnostic imaging equipment. The decrease
is offset by higher salaries and benefits and marketing costs.
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the
Recapitalization and Bank Financing, the Company issued to GE 7,000 shares of
Series C Preferred Stock to terminate GE's rights to receive supplemental
service fee payments equal to 14% of the Company's pretax income. The Series C
Preferred Stock was valued at $7.0 million and, during the year ended June 30,
1998, the Company recorded a one-time provision of approximately $6.3 million,
net of amounts previously accrued, for the Preferred Stock issuance.
CORPORATE OPERATING EXPENSES: Corporate operating expenses increased
approximately 20.3%, from approximately $7.4 million for the year ended June 30,
1997, to approximately $8.9 million for the year ended June 30, 1998. This
increase was due primarily to additional consulting, legal and travel costs
associated with the Company's acquisition activities. Corporate operating
expenses, as a percentage of total revenues, decreased from approximately 8.1%
for the year ended June 30, 1997, to approximately 7.5% for the year ended June
30, 1998.
INTEREST EXPENSE, NET: Interest expense, net increased approximately 65.9% from
approximately $4.1 million for the year ended June 30, 1997, to approximately
$6.8 million for the year ended June 30, 1998. This increase was due primarily
to additional debt related to (i) the acquisitions discussed above
(approximately $3.6 million), (ii) additional debt related to the issuance of
Notes discussed above, and (iii) additional debt related to the Company
upgrading its existing diagnostic imaging equipment, offset by reduced interest
as a result of (i) the reduction in interest rate and the extinguishment of
approximately $23.0 million in long-term debt relating to the Recapitalization
and Bank Financing (approximately $1.9 million) and (ii) amortization of
long-term debt.
INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income
per common and converted preferred share was $0.06 for the year ended June 30,
1998, compared to net income per common and converted preferred share of $0.24
for the same period in 1997. Excluding the one-time provision for supplemental
service fee termination, net income per common and converted preferred share on
a diluted basis would have been $0.83. The improvement in net income per common
and converted preferred shares before provision for supplemental service fee
termination is the result of (i) increased income from company operations and
(ii) an increase in earnings from unconsolidated partnerships, offset by (i)
increased interest expense, and (ii) the provision for income taxes.
NEW PRONOUNCEMENTS
In fiscal 2001, the Company will be required to adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives, Instruments and
Hedging Activities", as deferred and amended by SFAS No. 137. The Company
believes the adoption of this standard will not have a material impact on the
Company's financial condition or results of operations.
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
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miscalculations of critical financial and operational information as well as
failures of equipment controlling date-sensitive microprocessors. In addition,
miscalculations or failures could be caused by the fact that the Year 2000 is a
leap year.
STATE OF READINESS: The Company started to formulate a plan to address the Year
2000 Issue in late 1995. To date, the Company's primary focus has been on its
own internal information technology systems, including all types of systems in
use by the Company in its operations, marketing, finance and human resources
departments, and to deal with the most critical systems first. The Company has
developed a Year 2000 Plan to address all of its Year 2000 Issues. The Company
has given its Executive Vice President and Chief Information Officer 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 involves 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 substantially all of its internal
information technology systems. As a result of delays in obtaining information,
the Company now estimates that it will complete the assessment of its remaining
internal information technology systems by November 15, 1999 and will then
establish a timetable for the renovation phase of the remaining technology
systems. The Company has already completed the renovation of approximately 60%
of its information technology systems, including modifying and upgrading
software and developing and purchasing new software, and continues to renovate
the portions of such systems for which assessment is complete. The Company has
begun the testing and implementation phases. The Company's goal is to complete
such phases by November 15, 1999, although complications arising from
unanticipated acquisitions might cause some delay.
The Company is assessing the potential for Year 2000 problems with the
information systems of its customers and vendors. The Company has sent to the
majority of its vendors, customers, business partners, landlords and other
third parties, questionnaires and letters to confirm their Year 2000
readiness. The Company is reviewing the responses and evaluating whether any
further action is necessary. The Company has extended the date to complete
such assessment to November 15, 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 finalize its discussions
with most of such parties by November 15, 1999 in an attempt to determine the
extent to which the Company is vulnerable to those parties' possible failure to
become Year 2000 ready.
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
substantially completed its assessment of 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 (i) that certain identified MRI and CT equipment is Year 2000 ready,
(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
prior to December 31, 1999. The Company is in the process of contacting the
other vendors of its diagnostic imaging equipment. While progress has been slow,
the Company has received some information from such other vendors 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. In addition, the Company is utilizing other resources at its disposal,
e.g. equipment vendor web sites, to assist in its assessment. As a result of
these delays, the Company now expects to complete its assessment by November 1,
1999, subject to equipment vendor response, and that renovation will be
completed by November 15, 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.
In September 1998, the Company began 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. The
Company has experienced delays in responses, which have caused the Company to
extend the completion of the assessment to November 15, 1999.
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COSTS TO ADDRESS YEAR 2000 ISSUE: The Company estimates on a preliminary
basis that the cost of assessment, renovation, testing and implementation of
its internal information technology systems and diagnostic imaging equipment
will range from approximately $500,000 to $1,500,000, primarily relating to
capital expenditures for the replacement of diagnostic imaging equipment, if
required. To date, the Company has incurred costs of approximately $100,000
relating to consultants, additional personnel, programming, new software and
hardware, software upgrades and travel expenses. The Company expects that
such costs will be funded through internally generated funds. This estimate,
based on currently available information, will be updated as the Company
continues its assessment and proceeds with renovation, testing and
implementation and may be adjusted upon receipt of more information from the
Company's vendors, customers and other third parties and upon the design and
implementation of the Company's contingency plan. In addition, the
availability and cost of consultants and other personnel trained in this area
and unanticipated acquisitions might materially affect the estimated costs.
RISKS TO THE COMPANY: The Company's Year 2000 Issue involves significant risks.
There can be no assurance that the Company will succeed in implementing the Year
2000 Plan. 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 is in the process of developing a contingency plan
to address unavoided or unavoidable Year 2000 risks with internal information
technology systems and with customers, vendors and other third parties, which is
expected to be submitted to the Company's senior management for review by
November 1, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure relates primarily to interest rates, where
the Company will periodically use interest rate swaps to hedge interest rates on
long-term debt under its Bank Financing. The Company does not engage in
activities using complex or highly leveraged instruments.
At June 30, 1999, the Company had outstanding an interest rate swap, converting
$38.5 million of its term loan floating rate debt to fixed rate debt. Since the
majority of the Company's debt has historically been fixed-rate debt, the impact
of the interest rate swap has not been material on the Company's weighted
average interest rate.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
for the Years Ended June 30, 1999, 1998 and 1997
<TABLE>
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PAGE NUMBER
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<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 23
CONSOLIDATED BALANCE SHEETS 24
CONSOLIDATED STATEMENTS OF INCOME 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 26
CONSOLIDATED STATEMENTS OF CASH FLOWS 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28-50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 57
SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 58
</TABLE>
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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, 1999 and
1998, and the related consolidated statements of income, stockholders'
equity and cash flows for the years ended June 30, 1999, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InSight Health Services
Corp. and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for the years ended June 30, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
September 24, 1999
23
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,294 $ 44,740
Trade accounts receivables, net 35,987 25,663
Other current assets 3,952 3,050
Deferred income taxes 3,350 --
--------- ---------
Total current assets 57,583 73,453
--------- ---------
PROPERTY AND EQUIPMENT, net 90,671 75,146
INVESTMENTS IN PARTNERSHIPS 1,415 1,523
OTHER ASSETS 8,308 6,639
INTANGIBLE ASSETS, net 80,327 74,831
--------- ---------
$ 238,304 $ 231,592
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment and other notes $ 10,580 $ 7,978
Current portion of capital lease obligations 1,863 2,162
Accounts payable and other accrued expenses 20,489 27,204
--------- ---------
Total current liabilities 32,932 37,344
--------- ---------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion 153,986 144,637
Capital lease obligations, less current portion 6,201 10,021
Other long-term liabilities 929 984
--------- ---------
Total long-term liabilities 161,116 155,642
--------- ---------
COMMITMENTS (Note 9)
MINORITY INTEREST 150 748
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares authorized:
Convertible Series B preferred stock, 25,000 shares outstanding at
June 30, 1999 and 1998, with a liquidation preference of $25,000
as of June 30, 1999 23,923 23,923
Convertible Series C preferred stock, 27,953 shares outstanding at
June 30, 1999 and 1998, with a liquidation preference
of $27,953 as of June 30, 1999 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares authorized,
2,879,071 and 2,824,090 shares outstanding at June 30, 1999 and 1998,
respectively 3 3
Additional paid-in capital 23,551 23,415
Accumulated deficit (16,544) (22,656)
--------- ---------
Total stockholders' equity 44,106 37,858
--------- ---------
$ 238,304 $ 231,592
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
24
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(Amounts in thousands,
except share and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Contract services $ 85,491 $ 55,661 $ 47,827
Patient services 73,565 59,669 41,916
Other 2,936 3,688 2,530
----------- ----------- -----------
Total revenues 161,992 119,018 92,273
----------- ----------- -----------
COSTS OF OPERATIONS:
Costs of services 85,317 62,378 50,015
Provision for doubtful accounts 2,618 1,871 1,483
Equipment leases 18,522 17,023 18,396
Depreciation and amortization 24,468 15,441 9,740
----------- ----------- -----------
Total costs of operations 130,925 96,713 79,634
----------- ----------- -----------
Gross profit 31,067 22,305 12,639
PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION -- 6,309 --
PROVISION FOR REORGANIZATION AND OTHER COSTS 3,300 -- --
CORPORATE OPERATING EXPENSES 10,893 8,933 7,431
----------- ----------- -----------
Income from company operations 16,874 7,063 5,208
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 548 707 566
----------- ----------- -----------
Operating income 17,422 7,770 5,774
INTEREST EXPENSE, net 14,500 6,827 4,066
----------- ----------- -----------
Income before income taxes 2,922 943 1,708
PROVISION (BENEFIT) FOR INCOME TAXES (3,190) 431 427
----------- ----------- -----------
Net income $ 6,112 $ 512 $ 1,281
----------- ----------- -----------
----------- ----------- -----------
INCOME PER COMMON AND CONVERTED PREFERRED SHARE:
Basic $ 0.67 $ 0.06 $ 0.25
----------- ----------- -----------
----------- ----------- -----------
Diluted $ 0.65 $ 0.06 $ 0.24
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED
PREFERRED SHARES OUTSTANDING:
Basic 9,158,041 7,964,238 5,214,531
----------- ----------- -----------
----------- ----------- -----------
Diluted 9,375,531 8,271,298 5,440,315
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE>
INSIGHT HEALTH SERVICES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------
Series A Series B Series C
-------------------------- --------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 2,501,760 $ 6,750 -- $ -- -- $ --
Stock options exercised -- -- -- -- -- --
Net income -- -- -- -- -- --
------------ ------------ ----------- ---------- --------- -------------
BALANCE AT JUNE 30, 1997 2,501,760 6,750 -- -- -- --
Stock options and warrants exercised -- -- -- -- -- --
Sale of Series B preferred stock -- -- 25,000 23,923 -- --
Exchange of Series A for Series C
preferred stock (2,501,760) (6,750) -- -- 20,953 6,173
Supplemental service fee termination -- -- -- -- 7,000 7,000
Adjustment for fractional shares
on MHC and IHC exchange -- -- -- -- -- --
Net income -- -- -- -- -- --
------------ ------------ ----------- ---------- --------- -------------
BALANCE AT JUNE 30, 1998 -- -- 25,000 23,923 27,953 13,173
Stock options exercised -- -- -- -- -- --
Common stock issued -- -- -- -- -- --
Net income -- -- -- -- -- --
------------ ------------ ----------- ---------- --------- -------------
BALANCE AT JUNE 30, 1999 -- $ -- 25,000 $ 23,923 27,953 $ 13,173
------------ ------------ ----------- ---------- --------- -------------
------------ ------------ ----------- ---------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 2,710,240 $ 3 $ 23,100 $ (24,449) $ 5,404
Stock options exercised 4,485 -- -- -- --
Net income -- -- -- 1,281 1,281
----------- ------------- ----------- ------------ ------------
BALANCE AT JUNE 30, 1997 2,714,725 3 23,100 (23,168) 6,685
Stock options and warrants exercised 110,372 -- 315 -- 315
Sale of Series B preferred stock -- -- -- -- 23,923
Exchange of Series A for Series C
preferred stock -- -- -- -- (577)
Supplemental service fee termination -- -- -- -- 7,000
Adjustment for fractional shares
on MHC and IHC exchange (1,007) -- -- -- --
Net income -- -- -- 512 512
----------- ------------- ----------- ------------ ------------
BALANCE AT JUNE 30, 1998 2,824,090 3 23,415 (22,656) 37,858
Stock options exercised 52,596 -- 115 -- 115
Common stock issued 2,385 -- 21 -- 21
Net income -- -- -- 6,112 6,112
----------- ------------- ----------- ------------ ------------
BALANCE AT JUNE 30, 1999 2,879,071 $ 3 $ 23,551 $ (16,544) $ 44,106
----------- ------------- ----------- ------------ ------------
----------- ------------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1999, 1998 AND 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,112 $ 512 $ 1,281
Adjustments to reconcile net income
to net cash provided by operating activities:
Total depreciation and amortization 24,887 15,749 9,740
Amortization of deferred gain on debt restructure (75) (1,384) (1,047)
Provision for supplemental service fee termination -- 6,309 --
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables (8,324) (5,853) (1,518)
Other current assets (4,106) (316) 160
Accounts payable and other accrued expenses (7,602) 3,199 (1,138)
--------- --------- ---------
Net cash provided by operating activities 10,892 18,216 7,478
--------- --------- ---------
INVESTING ACTIVITIES:
Cash acquired in acquisitions 850 4,174 --
Acquisition of Centers and Mobile Facilities (28,046) (56,720) (18,566)
Additions to property and equipment (18,440) (23,644) (6,868)
Other (1,565) (1,978) (4,943)
--------- --------- ---------
Net cash used in investing activities (47,201) (78,168) (30,377)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 23,346 --
Proceeds from stock options and warrants exercised 115 315 --
Proceeds from issuance of common stock 21 -- --
Payment of loan financing costs -- (6,483) --
Principal payments of debt and capital lease obligations (17,495) (150,928) (10,998)
Proceeds from issuance of debt 23,820 231,480 33,728
Other (598) 78 474
--------- --------- ---------
Net cash provided by financing activities 5,863 97,808 23,204
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: (30,446) 37,856 305
Cash, beginning of year 44,740 6,884 6,579
--------- --------- ---------
Cash, end of year $ 14,294 $ 44,740 $ 6,884
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 14,923 $ 7,048 $ 5,114
Equipment additions under capital leases 1,507 7,517 1,779
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
InSight Health Services Corp. (the Company) provides diagnostic imaging,
treatment and related management services in 31 states throughout the
United States. InSight's services are provided through a network of 77
mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 35
fixed-site MRI facilities (Fixed Facilities), 22 multi-modality imaging
centers (Centers), 5 mobile lithotripsy facilities, one Leksell
Stereotactic Gamma Knife treatment center, and one radiation oncology
center. An additional radiation oncology center is operated by the Company
as part of one of its Centers. The Company's operations are located
throughout the United States, with a substantial presence in California,
Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and
Ohio).
At its Centers, the Company offers other services in addition to MRI
including computed tomography (CT), diagnostic and fluoroscopic x-ray,
mammography, diagnostic ultrasound, lithotripsy, nuclear medicine, nuclear
cardiology, and cardiovascular services. The Company offers additional
services through a variety of arrangements including equipment rental,
technologist services and training/applications, marketing, radiology
management services, patient scheduling, utilization review and billing
and collection services.
b. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The Company's investment interests in
partnerships or limited liability companies (Partnerships) are accounted
for under the equity method of accounting for ownership of 50 percent or
less when the Company does not exercise significant control over the
operations of the Partnership and does not have primary responsibility for
the Partnership's long-term debt. The Company's investment interests in
Partnerships are consolidated for ownership of 50 percent or greater owned
entities when the Company exercises significant control over the operations
and is primarily responsible for the associated long-term debt (Note 13).
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 Fixed Facilities and Centers) are recognized
when services are provided. Patient services revenues are presented net of
related contractual adjustments. Equipment rental revenues, management fees
and other revenues are recognized over the applicable contract period.
Revenues collected in advance are recorded as unearned revenue.
e. CASH EQUIVALENTS
Cash equivalents are generally composed of highly liquid investments with
original maturities of three months or less, such as certificates of
deposit and commercial paper.
f. PROPERTY AND EQUIPMENT
Property and equipment are depreciated and amortized on the straight-line
method using the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Vehicles 3 to 8 years
Buildings 7 to 20 years
28
<PAGE>
Leasehold improvements Term of lease
Computer and office equipment 3 to 5 years
Diagnostic and related equipment 5 to 8 years
Equipment and vehicles under capital leases Term of lease
</TABLE>
The Company capitalizes expenditures for improvements and major renewals.
Maintenance, repairs and minor replacements are charged to operations as
incurred. When assets are sold or otherwise disposed of, the cost and
related reserves are removed from the accounts and any resulting gain or
loss is included in the results of operations.
g. INTANGIBLE ASSETS
The Company 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:
<TABLE>
<CAPTION>
<S> <C>
Goodwill 5 to 20 years
Other 3 to 7 years
</TABLE>
The Company assesses the ongoing 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.
h. INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. A valuation allowance is provided against a deferred tax asset
when it is more likely than not that the deferred tax asset will not be
realized.
i. INCOME PER COMMON AND CONVERTED PREFERRED SHARE
The Company reports basic and diluted earnings per share (EPS) for
common and converted preferred stock. 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.
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
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related
Information," in 1999. This standard requires disclosure of reportable
segments based on such factors as products and services, geography, legal
structure, management structure or any manner by which a company's
management distinguishes major operating units. Management believes that
there are no differences between the Company's reported financial
statements and segment information, as defined, for the periods presented.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
in 1999. This standard requires that all items that meet the definition
of components of comprehensive income be reported in a separate
financial statement for the period in which they are recognized.
Components of comprehensive income include revenues, expenses, gains and
losses that under generally accepted accounting principles are included
in comprehensive income, but excluded from net income. There are no
differences between the Company's net income, as reported and
comprehensive income, as defined, for the periods presented.
29
<PAGE>
In fiscal 2001, the Company will be required to adopt SFAS No. 133,
"Accounting for Derivatives, Instruments and Hedging Activities", as
deferred and amended by SFAS No. 137. The Company believes the adoption
of this standard will not have a material impact on the Company's
financial condition or results of operations.
l. RECLASSIFICATIONS
Reclassifications have been made to certain 1998 and 1997 amounts to
conform to the 1999 presentation.
2. RECAPITALIZATION AND FINANCING
On October 14, 1997, the Company 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) 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 in exchange for
(A) the issuance of 7,000 shares of newly issued convertible preferred stock,
Series C of the Company, par value $0.001 per share (Series C Preferred Stock)
initially convertible, at the option of GE, in the aggregate into 835,821 shares
of common stock , for which the Company recorded a non-recurring expense of
approximately $6.3 million, and (B) warrants (GE Warrants) to purchase up to
250,000 shares of common stock at an exercise price of $10.00 per share and (ii)
exchanged all of its convertible preferred stock, Series A of the Company, for
an additional 20,953 shares of Series C Preferred Stock, initially convertible,
at the option of GE, in the aggregate into 2,501,760 shares of common stock; and
(c) the Company executed a credit agreement with Bank of America, N.A. (formerly
NationsBank, N.A.) (BofA) pursuant to which BofA, as agent and lender, provided
a total of $125 million in senior secured credit financing (Bank Financing),
including (i) a $50 million term loan facility consisting of a $20 million
tranche with increasing amortization over a five-year period and a $30 million
tranche with increasing amortization over a seven-year period, principally
repayable in years 6 and 7, (ii) a $25 million revolving working capital
facility with a five-year maturity, and (iii) a $50 million acquisition
facility. Initial funding under the Bank Financing occurred on October 22, 1997
and, on December 19, 1997, the Bank Financing was increased to a total of $150
million by converting $10 million of outstanding debt under the acquisition
facility to the seven-year tranche (which was thereby increased to $40 million)
and increasing the acquisition facility to $65 million.
The terms of the Series B Preferred Stock and the Series C Preferred Stock
(collectively, Preferred Stock) are substantially the same. The Preferred Stock
has a liquidation preference of $1,000 per share. It will participate in any
dividends paid with respect to the common stock. There is no mandatory or
optional redemption provision for the Preferred Stock. The Preferred Stock is
convertible into an aggregate of 6,322,656 shares of common stock.
For so long as Carlyle and its affiliates own at least 33% of the Series B
Preferred Stock or GE and its affiliates own at least 33% of the Series C
Preferred Stock, respectively, the approval of at least 67% of the holders of
such series of Preferred Stock is required before the Company may take certain
actions including, but not limited to, amending its certificate of incorporation
or bylaws, changing the number of directors or the manner in which directors are
selected, incurring indebtedness in excess of $15 million in any fiscal year,
issuing certain equity securities below the then current market price or the
then applicable conversion price, acquiring equity interests or assets of
entities for consideration equal to or greater than $15 million, and engaging in
mergers for consideration equal to or greater than $15 million. The Preferred
Stock will vote with the common stock on an as-if-converted basis on all matters
except the election of directors, subject to an aggregate maximum Preferred
Stock percentage of 37% of all votes entitled to be cast on such matters.
Assuming the conversion of all of the Series B Preferred Stock into common stock
and the exercise of all of the Carlyle Warrants, Carlyle would own approximately
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 35% of the common stock of the Company, on
a fully diluted basis.
30
<PAGE>
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 of common stock in certain transactions or proposed transactions
not involving a public offering by the Company of its common stock or securities
convertible into common stock. Holders of the Preferred Stock are also entitled
to certain demand and "piggyback" registration rights.
On June 12, 1998, the Company completed a refinancing of substantially all of
the Company's long-term debt through the issuance of $100 million of 9 5/8%
senior subordinated notes (Notes) due 2008. Concurrent with the issuance of the
Notes, the Company entered into an amendment to and restatement of the Bank
Financing, pursuant to which the Company refinanced and consolidated its prior
$20 million tranche and $40 million tranche into a $50 million term loan
facility with a six-year amortization, (ii) a $25 million revolving working
capital facility with a five-year maturity and (iii) a $75 million acquisition
facility with a six-year maturity (see Note 8).
3. PROVISION FOR REORGANIZATION AND OTHER COSTS
In the fourth quarter of fiscal 1999, the Company recorded a one-time provision
for reorganization and other costs of $3.3 million, consisting of the following:
The Company realigned its corporate and regional organization to improve
financial performance and operating efficiencies and recorded a provision with
respect to the related employee severances and office closing costs of
approximately $1.8 million. Additionally, in connection with its business
strategy, the Company evaluated a number of potential acquisitions in the last
six months of fiscal 1999 which it did not complete. The Company has recorded a
provision of approximately $0.7 million for legal, accounting and consulting
costs associated with certain potential acquisitions that the Company determined
were no longer consistent with its strategic objectives. Finally, the Company
reevaluated its information systems in light of organizational changes and
developed a new strategic plan to modify and reimplement its proprietary
radiology information system. Accordingly, the Company recorded a provision with
respect to related software and other capitalized costs of approximately $0.8
million.
31
<PAGE>
4. TRADE ACCOUNTS RECEIVABLES
Trade accounts receivables are comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Trade accounts receivables $ 60,785 $ 41,971
Less: Allowances for doubtful accounts and contractual adjustments 17,822 11,399
Allowances for professional fees 6,976 4,909
-------- --------
Trade accounts receivables, net $ 35,987 $ 25,663
-------- --------
-------- --------
</TABLE>
The allowance for doubtful accounts and contractual adjustments include
management's estimate of the amounts expected to be written off on specific
accounts and for write offs on other 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, 1999.
The Company reserves a contractually agreed upon percentage at several of its
Centers and Fixed Facilities, averaging 20 percent of the accounts receivable
balance from patients, for payments to radiologists for interpreting the results
of the diagnostic imaging procedures. Payments to radiologists are only due when
amounts are received. At that time, the balance is transferred from the
allowance account to a professional fees payable account.
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are comprised of the following
(amounts in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Vehicles $ 2,015 $ 1,085
Land, building and leasehold improvements 18,003 16,736
Computer and office equipment 16,496 8,391
Diagnostic and related equipment 91,743 69,025
Equipment and vehicles under capital leases 6,025 6,025
-------- --------
134,282 101,262
Less: Accumulated depreciation and amortization 43,611 26,116
-------- --------
Property and equipment, net $ 90,671 $ 75,146
-------- --------
-------- --------
</TABLE>
32
<PAGE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Intangible assets $ 89,714 $ 79,546
Less: Accumulated amortization 9,387 4,715
-------- --------
$ 80,327 $ 74,831
-------- --------
-------- --------
Net intangible assets:
Goodwill $ 79,163 $ 73,794
Other 1,164 1,037
-------- --------
$ 80,327 $ 74,831
-------- --------
-------- --------
</TABLE>
Amortization of intangible assets was approximately $4.7 million, $2.8 million
and $1.4 million for the years ended June 30, 1999, 1998 and 1997, respectively.
In 1997, the Company completed three acquisitions as follows: a Fixed
Facility in Hayward, California; Mobile Facilities in Maine and New
Hampshire; and a Center in Chattanooga, Tennessee. All three transactions
included the purchase of assets and assumption of certain equipment related
liabilities. The cumulative purchase price for these acquisitions was
approximately $18.6 million.
In 1998, the Company completed four acquisitions as follows: a Center in
Columbus, Ohio; a Center in Murfreesboro, Tennessee, a Fixed Facility in
Redwood City, California; and a Center in Las Vegas, Nevada. In connection
with the purchase of the Center in Columbus, Ohio, the Company also acquired
a majority ownership interest in a new Center in Dublin, Ohio. All
transactions included the purchase of assets and assumption of certain
equipment related liabilities. The cumulative purchase price for these
acquisitions was approximately $18.4 million.
Additionally, in 1998, the Company acquired all of the capital stock of
Signal Medical Services, Inc. (Signal), through the merger of Signal into a
wholly owned subsidiary of the Company. The purchase price was approximately
$45.7 million. The Signal assets primarily consisted of Mobile Facilities in
the Northeastern and Southeastern United States.
In 1999, the Company completed two acquisitions as follows: a 70% interest in
a partnership which owns four Centers and two Fixed Facilities in Buffalo,
New York; and a 100% interest in three Centers and two Fixed Facilities in
Phoenix, Arizona. The cumulative purchase price for these two acquisitions
was approximately $16.9 million.
A summary of the Company's 1999 acquisitions consists of the following
(amounts in thousands):
<TABLE>
<S> <C>
Total purchase price $16,896
Estimated fair market value of net assets acquired 6,726
--------
Goodwill $10,170
--------
--------
</TABLE>
7. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses are comprised of the following
(amounts in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Accounts payable $ 3,711 $ 6,946
Accrued equipment related costs 1,748 6,105
Accrued payroll and related costs 6,048 5,174
Other accrued expenses 8,982 8,979
-------- --------
$ 20,489 $ 27,204
-------- --------
-------- --------
</TABLE>
33
<PAGE>
8. EQUIPMENT AND OTHER NOTES PAYABLE
Equipment and other notes payable are comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Unsecured senior subordinated notes payable, bearing interest at 9.625 percent,
interest payable semi-annually, principal due in June 2008. $ 100,000 $ 100,000
Notespayable to bank, bearing interest at LIBOR plus 1.75 percent (6.93 percent
at June 30, 1999), principal and interest payable quarterly, maturing in
June 2004. The note is secured by substantially all of the Company's assets. 61,800 50,000
Notespayable to GE, bearing interest at rates which range from 8.60 percent to
8.75 percent, maturing at various dates through May 2005. The notes are
primarily secured by certain buildings and diagnostic equipment. 1,934 1,360
Notespayable 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. 832 1,255
--------- ---------
Total equipment and other notes payable 164,566 152,615
Less: Current portion 10,580 7,978
--------- ---------
Long-term equipment and other notes payable $ 153,986 $ 144,637
--------- ---------
--------- ---------
</TABLE>
Scheduled maturities of equipment and other notes payable at June 30, 1999, are
as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 10,580
2001 10,767
2002 11,203
2003 17,082
2004 14,319
Thereafter 100,615
---------
$ 164,566
---------
---------
</TABLE>
The Company has a $25 million revolving working capital facility, which
expires in June 2003 and a $75 million acquisition six-year facility, which
expires in June 2004. Borrowings under both credit facilities bear interest
at LIBOR plus 1.75%. The Company is also required to pay an unused facility
fee of between .375% and .5% on unborrowed amounts under both facilities.
There were borrowings of approximately $3.0 million and $16.3 million,
respectively, under these facilities at June 30, 1999.
The credit agreement related to the Bank Financing and the indenture related
to the Notes contain limitations on additional borrowings, capital
expenditures, dividend payments and certain financial covenants. As of June
30, 1999, the Company was in compliance with these covenants.
During 1998, the Company entered into an interest rate swap agreement with a
bank to hedge against the effects of increases in the interest rates associated
with the Company's floating rate debt. The swap agreement initially had a
notional amount of $40.0 million and expires in 2001. The fair value of the
interest rate swap is the estimated amount that the Company would receive or pay
to terminate the agreement at the reporting date, taking into account current
interest rates at the reporting date, and the current creditworthiness of the
swap counter-parties. At June 30, 1999, the estimated fair market value of the
interest rate swap, and the effective fixed interest rate due on the remaining
notional amount is as follows:
<TABLE>
<CAPTION>
Effective
Maximum
Notional Interest Fair Market
Amount Rate Value
------ -------- -----
<S> <C> <C>
$ 38.5 million 5.72% $ 62,000
</TABLE>
34
<PAGE>
9. 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,
1999 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Capital Operating
------------- -----------
<S> <C> <C>
2000 $ 2,479 $ 23,316
2001 1,948 18,798
2002 1,794 15,536
2003 1,777 12,382
2004 1,371 7,307
Thereafter 475 8,155
------- --------
Total minimum lease payments 9,844 $ 85,494
--------
--------
Less: Amounts representing interest 1,780
-------
Present value of capital lease obligations 8,064
Less: Current portion 1,863
-------
Long-term capital lease obligations $ 6,201
-------
-------
</TABLE>
As of June 30, 1999, certain equipment leased by the Company is subject to
contingent rental adjustments dependent on certain operational factors. The
Company's future operating and capital lease obligations to GE were
approximately $63.8 million and $7.9 million, respectively.
Rental expense for diagnostic equipment and other equipment for the years ended
June 30, 1999, 1998 and 1997 was $18.5 million, $17.0 million and $18.3 million,
respectively. These amounts include contingent rental expense of $0.1 million
and $0.3 million for the years ended June 30, 1998 and 1997, respectively. No
contingent rental expense was paid for the year ended June 30, 1999.
The Company occupies facilities under lease agreements expiring through April
2009. Rental expense for these facilities for the years ended June 30, 1999,
1998 and 1997 was $3.7 million, $2.8 million and $1.9 million, respectively.
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 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, financial condition and
results of operations.
35
<PAGE>
On June 15, 1999, InfoTech Software Corporation (InfoTech) filed a complaint
against IHC, Shawn P. Railey, Jason P. Gardner and Alchemy Software
Corporation (Alchemy) in the District Court of Dallas County, Texas. The
plaintiff alleges that, among other things, in March 1994, Maxum Health Corp.
(MHC), an affiliate of IHC, entered into an agreement with InfoTech to design
and implement a custom information system for MHC and that MHC received only
a license to use the software and did not have the right to sublicense or
otherwise provide third parties access to InfoTech's software or to modify
it. InfoTech further alleges that defendants Railey and Gardner, former
employees of InfoTech, resigned from InfoTech and formed Alchemy, conspired
to and did steal the IHC project from InfoTech, and are now providing
services to IHC. The plaintiff's complaint includes claims of unfair
competition, breach of contract, collusion, business disparagement and
tortious interference with contractual relations. The complaint requests a
judgment for actual and exemplary damages in unspecified amounts, attorney's
fees, pre-judgment and post judgment interest, costs and disbursements. The
defendants have filed an answer to the complaint and discovery has commenced
and is continuing. The Company believes the plaintiff's claims are without
merit and intends to vigorously defend the lawsuit.
36
<PAGE>
10. CAPITAL STOCK
WARRANTS: The Company does not have a formal warrant plan. The Board authorizes
the issuance of warrants at its discretion. The Board has generally granted
warrants in connection with financing transactions. The number of warrants
issued and related terms are determined by the Board. All warrants have been
issued with an exercise price of at least fair market value of its common stock
on the issuance date. There were no warrants granted for the year ended June 30,
1999. A summary of the status of the Company's warrants at June 30, 1999, 1998
and 1997 and changes during the years ended June 30, 1999, 1998 and 1997 is
presented below:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
--------------- ---------------
<S> <C> <C>
Outstanding, June 30, 1996 20,000 $ 2.50
Granted 100,000 5.57
------- ------
Outstanding, June 30, 1997 120,000 5.06
Granted 605,000 9.32
Exercised (62,817) 4.64
------- ------
Outstanding, June 30, 1998 662,183 $ 9.00
------- ------
Outstanding, June 30, 1999 662,183 $ 9.00
------- ------
------- ------
</TABLE>
Of the 662,183 warrants outstanding at June 30, 1999, the characteristics are as
follows:
<TABLE>
<CAPTION>
Exercise Price Weighted Average Warrants Total Warrants Remaining Contractual
Range Exercise Price Exercisable Outstanding Life
----------------- ---------------------- --------------- ---------------- ------------------------
<S> <C> <C> <C> <C>
$4.56 - $5.64 $5.03 89,683 117,183 4.53 years
$7.25 - $10.00 $9.85 524,584 545,000 6.96 years
---------- ----------
614,267 662,183
---------- ----------
---------- ----------
</TABLE>
STOCK OPTIONS: The Company has four stock option plans, which provide for the
granting of incentive and nonstatutory stock options to key employees and
non-employee directors. Incentive stock options must have an exercise price of
at least the fair market value of its common stock on the grant date. Options
become vested cumulatively over various periods up to seven years from the grant
date, are exercisable in whole or in installments, and expire five or ten years
from the grant date. In addition, two wholly owned subsidiaries of the Company
have three stock option plans, which provided for the granting of incentive or
nonstatutory stock options to key employees and non-employee directors. No
shares are available for future grants under these plans.
As of June 30, 1999, the Company has 268,433 shares available for issuance under
its plans. A summary of the status of the Company's stock option plans at June
30, 1999, 1998 and 1997 and changes during the years is presented below:
37
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
--------------- ---------------
<S> <C> <C>
Outstanding, June 30, 1996 369,918 $ 3.15
Granted 233,000 6.19
Exercised (4,485) 2.50
Expired (25,000) 13.85
--------- ------
Outstanding, June 30, 1997 573,433 3.98
Granted 975,000 8.59
Exercised (47,555) 0.48
Forfeited (17,500) 4.67
--------- ------
Outstanding, June 30, 1998 1,483,378 7.15
Granted 265,000 8.46
Exercised (59,800) 1.92
Forfeited (136,500) 7.28
--------- ------
Outstanding, June 30, 1999 1,552,078 $ 7.56
--------- ------
--------- ------
Exercisable at:
June 30, 1997 296,416 $ 2.12
June 30, 1998 336,805 $ 3.65
June 30, 1999 558,838 $ 6.12
</TABLE>
Of the 1,552,078 options outstanding at June 30, 1999, the characteristics are
as follows:
<TABLE>
<CAPTION>
Exercise Price Weighted Average Options Total Options Remaining Contractual
Range Exercise Price Exercisable Outstanding Life
----------------- ---------------------- --------------- ---------------- -------------------------
<S> <C> <C> <C> <C>
$0.10 - $1.25 $0.57 137,540 137,540 5.04 years
$2.50 - $7.00 $5.26 235,708 476,350 6.92 years
$8.37 - $12.57 $9.59 160,902 913,500 9.25 years
$15.64 - $16.20 $15.78 24,688 24,688 2.70 years
--------------- ----------------
558,838 1,552,078
--------------- ----------------
--------------- ----------------
</TABLE>
As permitted under SFAS No. 123, "Accounting for Stock Based Compensation
(SFAS No. 123)", the Company accounts for the options and warrants issued in
accordance with APB Opinion No. 25, and no compensation cost has been
recognized in the financial statements. SFAS No. 123 requires that the
Company presents pro forma disclosures as if the Company recognized
compensation expense equal to the fair value of options and warrants granted,
as determined at the date of grant. The Company's net income and earnings per
share would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss): As Reported $ 6,112,000 $ 512,000 $ 1,281,000
Pro Forma 4,446,000 (506,000) 966,000
Diluted EPS: As Reported 0.65 0.06 0.24
Pro Forma 0.47 (0.06) 0.18
</TABLE>
The fair value of each option grant and warrant issued is estimated on the
date of grant using the Black-Scholes pricing model with the following
assumptions used for the grants and issuances in the fiscal years ended June
30, 1999, 1998 and 1997, respectively:
38
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------
Assumptions 1999 1998 1997
------------------------------------------------------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
Risk-free interest rate 5.08% 5.93% 6.75%
Volatility 64.90% 79.46% 70.00%
Expected dividend yield 0.00% 0.00% 0.00%
Estimated contractual life 9.35 years 6.51 years 10 years
</TABLE>
11. INCOME TAXES
The provision (benefit)for income taxes for the years ended June 30, 1999, 1998
and 1997 was computed using effective tax rates calculated as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal benefit 6.0 1.2 1.2
Permanent items, including goodwill,
non-deductible merger costs 12.3 79.4 41.8
Change in valuation allowance (161.5) (68.9) (52.0)
------------ ------------- ------------
Net effective tax rate (109.2)% 45.7% 25.0%
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The provision (benefit) 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 (benefit) for
income taxes for the years ended June 30, 1999, 1998 and 1997 consisted of the
following (amounts in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current provision:
Federal $ 60 $ 1,044 $ 1,268
State 100 36 47
-------- ----- -----
160 1,080 1,315
-------- ----- -----
Deferred taxes arising from temporary differences:
State income taxes (144) (23) (31)
Accrued expenses 706 448 (629)
Deferred gain on debt restructure - (519) (368)
Reserves 958 182 31
Depreciation and amortization (1,383) (802) (216)
Utilization of net operating losses (346) - -
Change in valuation allowance (3,350) - -
Other 209 65 325
-------- ----- -----
(3,350) (649) (888)
-------- ----- -----
Total provision (benefit) $ (3,190) $ 431 $ 427
-------- ----- -----
-------- ----- -----
</TABLE>
39
<PAGE>
The components of the Company's deferred tax asset as of June 30, 1999 and 1998,
respectively, which arise due to timing differences between financial and tax
reporting and net operating loss (NOL) carryforwards are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Reserves $ 2,854 $ 1,896
Accrued expenses
(not currently deductible) 1,785 1,052
Depreciation and amortization (2,324) (941)
Other 101 54
NOL carryforwards 15,806 16,152
Valuation allowances (13,522) (18,213)
------- -------
$ 4,700 $ --
------- -------
------- -------
</TABLE>
As of June 30, 1999, the Company had NOL carryforwards of approximately $46.5
million, expiring in 2004 through 2011. 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 against a component of the
deferred tax asset, as, in management's best estimate, it is not likely to be
realized in the near term. Approximately $1.3 million of the change in
valuation allowance relates to the merger of the Company, IHC and MHC and has
been recorded as a reduction to goodwill.
12. RETIREMENT SAVINGS PLANS
The Company has a 401(k) profit sharing plan (Company Plan), which is available
to all eligible employees, pursuant to which the Company matches a percentage of
employee contributions to the Company Plan. Company contributions of
approximately $0.6 million, $0.4 million and $0.3 million were made for the
years ended June 30, 1999, 1998 and 1997, respectively.
13. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The Company has direct ownership in two Partnerships at June 30, 1999, both of
which operate Centers. The Company owns between 35 percent and 50 percent of
these Partnerships, serves as the managing general partner and provides certain
management services under agreements expiring in 2007. These Partnerships are
accounted for under the equity method since the Company does not exercise
significant control over the operations of these Partnerships or does not have
primary responsibility for the Partnerships' long-term debt. Set forth below is
certain financial data of these Partnerships (amounts in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Combined Financial Position:
Current assets:
Cash $ 685 $ 1,035
Trade accounts receivables, less allowances 1,508 1,539
Other 95 37
Property and equipment, net 2,989 667
Intangible assets, net 583 638
------- -------
Total assets 5,860 3,916
Current liabilities (917) (510)
Due to the Company (131) (142)
Long-term liabilities (1,751) (35)
------- -------
Net assets $ 3,061 $ 3,229
------- -------
------- -------
</TABLE>
40
<PAGE>
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>
Years Ended June 30,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating Results:
Net revenues $ 5,673 $ 5,723 $ 5,143
Expenses 4,334 4,058 3,793
------- ------- -------
Net income $ 1,339 $ 1,665 $ 1,350
------- ------- -------
------- ------- -------
Equity in earnings of Partnerships $ 548 $ 707 $ 566
------- ------- -------
------- ------- -------
</TABLE>
The Company has direct ownership in two additional Partnerships, one of which
operates a Center. The Company transferred ownership of one Center in 1998 to
its hospital partner and is in process of dissolving the Partnership. The
Company owns 50 percent of the Partnerships. Since the Company controls the
operations and is primarily responsible for the associated long-term debt,
the Centers have been included in the Company's consolidated financial
statements. Set forth below is the summarized combined financial data of the
Company's 50 percent controlled entities which are consolidated (amounts in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Condensed Combined Balance Sheet Data:
Current assets $ 1,494 $ 1,825
Total assets 1,637 1,896
Current liabilities 640 644
Minority interest equity 515 642
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Condensed Combined Statement of Income Data:
Net revenues $ 5,551 $ 5,875 $ 6,316
Expenses 3,973 4,147 4,642
Provision for center profit distribution 789 864 837
------- ------- -------
Net income $ 789 $ 864 $ 837
------- ------- -------
------- ------- -------
</TABLE>
14. INCOME PER COMMON AND CONVERTED PREFERRED SHARE
The Company has adopted SFAS No. 128, which replaces primary EPS and fully
diluted EPS with basic EPS and diluted EPS. The number of shares used in
computing EPS is equal to the weighted average number of common and converted
preferred shares outstanding during the respective period. Since the preferred
stock has no stated dividend rate and participates in any dividends paid with
respect to the common stock, the as-if-converted amounts are included in the
computation of basic EPS. There were no adjustments to net income (the
numerator) for purposes of computing EPS.
41
<PAGE>
A reconciliation of basic and diluted share computations is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Average common stock outstanding 2,835,385 2,751,212 2,712,771
Effect of preferred stock 6,322,656 5,213,026 2,501,760
---------- ---------- ----------
Denominator for basic EPS 9,158,041 7,964,238 5,214,531
Dilutive effect of stock options and warrants 217,490 307,060 225,784
---------- ---------- ----------
9,375,531 8,271,298 5,440,315
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
15. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the senior subordinated Notes (Note 8)
are guaranteed by certain of the Company's wholly owned subsidiaries (the
Guarantor Subsidiaries). Such guarantees are full, unconditional and joint and
several. Separate financial statements of the Guarantor Subsidiaries are not
presented because the Company's management has determined that they would not be
material to investors. The following supplemental financial information sets
forth, on an unconsolidated basis, balance sheets, statements of income, and
statements 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.
42
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTO
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ --------------------------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 12,709 $ 1,585 $ -- $ 14,294
Trade accounts receivables, net -- 32,164 3,823 -- 35,987
Other current assets -- 3,838 114 -- 3,952
Deferred income taxes -- 3,350 -- -- 3,350
Intercompany accounts receivable 225,140 11,027 -- (236,167) --
----------- ----------- ----------- ----------- -----------
Total current assets 225,140 63,088 5,522 (236,167) 57,583
Property and equipment, net -- 82,544 8,127 -- 90,671
Investments in partnerships -- 1,415 -- -- 1,415
Investments in consolidated subsidiaries (19,234) 2,691 -- 16,543 --
Other assets -- 8,308 -- -- 8,308
Intangible assets, net -- 79,606 721 -- 80,327
----------- ----------- ----------- ----------- -----------
$ 205,906 $ 237,652 $ 14,370 $ (219,624) $ 238,304
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital leases $ 9,945 $ 2,374 $ 124 $ -- $ 12,443
and other notes
Accounts payable and other accrued expenses -- 20,128 361 -- 20,489
Intercompany accounts payable -- 225,140 11,027 (236,167) --
----------- ----------- ----------- ----------- -----------
Total current liabilities 9,945 247,642 11,512 (236,167) 32,932
Equipment, capital leases and other notes, less 151,855 8,315 17 -- 160,187
current portion
Other long-term liabilities -- 929 -- -- 929
Minority interest -- -- 150 -- 150
Stockholders' equity (deficit) 44,106 (19,234) 2,691 16,543 44,106
----------- ----------- ----------- ----------- -----------
$ 205,906 $ 237,652 $ 14,370 $ (219,624) $ 238,304
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
43
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 43,250 $ 1,490 $ -- $ 44,740
Trade accounts receivables, net -- 22,909 2,754 -- 25,663
Other current assets -- 2,751 299 -- 3,050
Intercompany accounts receivable 211,995 4,903 -- (216,898) --
--------- --------- --------- --------- ---------
Total current assets 211,995 73,813 4,543 (216,898) 73,453
Property and equipment, net -- 71,695 3,451 -- 75,146
Investments in partnerships -- 1,523 -- -- 1,523
Investments in consolidated subsidiaries (24,137) 1,482 -- 22,655 --
Other assets -- 6,639 -- -- 6,639
Intangible assets, net -- 74,711 120 -- 74,831
--------- --------- --------- --------- ---------
$ 187,858 $ 229,863 $ 8,114 $(194,243) $ 231,592
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment, capital $ 7,500 $ 2,497 $ 143 $ -- $ 10,140
leases and other notes
Accounts payable and other accrued expenses -- 26,535 669 -- 27,204
Intercompany accounts payable -- 211,995 4,903 (216,898) --
--------- --------- --------- --------- ---------
Total current liabilities 7,500 241,027 5,715 (216,898) 37,344
Equipment, capital leases and other notes, 142,500 11,989 169 -- 154,658
less current portion
Other long-term liabilities -- 984 -- -- 984
Minority interest -- -- 748 -- 748
Stockholders' equity (deficit) 37,858 (24,137) 1,482 22,655 37,858
--------- --------- --------- --------- ---------
$ 187,858 $ 229,863 $ 8,114 $(194,243) $ 231,592
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
44
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
----------- ------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ -- $ 143,205 $ 18,787 $ -- $ 161,992
Costs of operations -- 114,812 16,113 -- 130,925
--------- --------- --------- --------- ---------
Gross profit -- 28,393 2,674 -- 31,067
Provision for reorganization and other costs -- 3,300 -- -- 3,300
Corporate operating expenses -- 10,893 -- -- 10,893
--------- --------- --------- --------- ---------
Income from company operations -- 14,200 2,674 -- 16,874
Equity in earnings of unconsolidated partnerships -- 548 -- -- 548
--------- --------- --------- --------- ---------
Operating income -- 14,748 2,674 -- 17,422
Interest expense, net -- 13,453 1,047 -- 14,500
--------- --------- --------- --------- ---------
Income before income taxes -- 1,295 1,627 -- 2,922
Provision (benefit) for income taxes -- (3,190) -- -- (3,190)
--------- --------- --------- --------- ---------
Income before equity in income of
consolidated subsidiaries -- 4,485 1,627 -- 6,112
Equity in income of consolidated subsidiaries 6,112 1,627 -- (7,739) --
--------- --------- --------- --------- ---------
Net income $ 6,112 $ 6,112 $ 1,627 $ (7,739) $ 6,112
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
45
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
----------- ------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Revenues $ -- $ 104,707 $ 14,311 $ -- $ 119,018
Costs of operations -- 84,021 12,692 -- 96,713
--------- --------- --------- --------- ---------
Gross profit -- 20,686 1,619 -- 22,305
Provision for supplemental service
fee termination -- 6,309 -- -- 6,309
Corporate operating expenses -- 8,933 -- -- 8,933
--------- --------- --------- --------- ---------
Income from company operations -- 5,444 1,619 -- 7,063
Equity in earnings of unconsolidated partnerships -- 707 -- -- 707
--------- --------- --------- --------- ---------
Operating income -- 6,151 1,619 -- 7,770
Interest expense, net -- 6,442 385 -- 6,827
--------- --------- --------- --------- ---------
Income (loss) before income taxes -- (291) 1,234 -- 943
Provision for income taxes -- 431 -- -- 431
--------- --------- --------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries -- (722) 1,234 -- 512
Equity in income of consolidated subsidiaries 512 1,234 -- (1,746) --
--------- --------- --------- --------- ---------
Net income $ 512 $ 512 $ 1,234 $ (1,746) $ 512
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
46
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ -------------- ------------------ --------------- ----------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 78,294 $ 13,979 $ -- $ 92,273
Costs of operations -- 67,505 12,129 -- 79,634
-------- -------- -------- -------- --------
Gross profit -- 10,789 1,850 -- 12,639
Corporate operating expenses -- 7,431 -- -- 7,431
-------- -------- -------- -------- --------
Income from company operations -- 3,358 1,850 -- 5,208
Equity in earnings of unconsolidated
partnerships -- 566 -- -- 566
-------- -------- -------- -------- --------
Operating income -- 3,924 1,850 -- 5,774
Interest expense, net -- 3,946 120 -- 4,066
-------- -------- -------- -------- --------
Income (loss) before income taxes -- (22) 1,730 -- 1,708
Provision for income taxes -- 427 -- -- 427
-------- -------- -------- -------- --------
Income (loss) before equity in income of
consolidated subsidiaries -- (449) 1,730 -- 1,281
Equity in income of consolidated subsidiaries 1,281 1,730 -- (3,011) --
-------- -------- -------- -------- --------
Net income $ 1,281 $ 1,281 $ 1,730 $ (3,011) $ 1,281
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
47
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
----------- -------------- ------------------
<S> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ 6,112 $ 6,112 $ 1,627
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization -- 21,977 2,910
Amortization of deferred gain on debt restructure -- (75) --
Equity in income of consolidated subsidiaries (6,112) (1,627) --
Cash provided by (used in) changes in operating assets and liabilities: --
Trade accounts receivables -- (7,255) (1,069)
Intercompany receivables, net (11,936) 6,230 5,706
Other current assets -- (4,291) 185
Accounts payable and other accrued expenses -- (7,294) (308)
-------- -------- --------
Net cash provided by (used in) operating activities (11,936) 13,777 9,051
-------- -------- --------
INVESTING ACTIVITIES:
Cash acquired in acquisitions -- 850 --
Acquisitions of Centers and Mobile Facilities -- (28,046) --
Additions to property and equipment -- (11,112) (7,328)
Other -- (706) (859)
-------- -------- --------
Net cash used in investing activities -- (39,014) (8,187)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and warrants exercised 115 -- --
Proceeds for issuance of common stock 21 -- --
Principal payments of debt and capital lease obligations (11,200) (6,124) (171)
Proceeds from issuance of debt 23,000 820 --
Other -- -- (598)
-------- -------- --------
Net cash provided by (used in) financing activities 11,936 (5,304) (769)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (30,541) 95
CASH AND CASH EQUIVALENTS:
Cash, beginning of year -- 43,250 1,490
-------- -------- --------
Cash, end of year $ -- $ 12,709 $ 1,585
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
ELIMINATION CONSOLIDATED
--------------- ---------------
<S> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ (7,739) $ 6,112
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization -- 24,887
Amortization of deferred gain on debt restructure -- (75)
Equity in income of consolidated subsidiaries 7,739 --
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables -- (8,324)
Intercompany receivables, net -- --
Other current assets -- (4,106)
Accounts payable and other accrued expenses -- (7,602)
-------- --------
Net cash provided by (used in) operating activities -- 10,892
-------- --------
INVESTING ACTIVITIES:
Cash acquired in acquisitions -- 850
Acquisitions of Centers and Mobile Facilities -- (28,046)
Additions to property and equipment -- (18,440)
Other -- (1,565)
-------- --------
Net cash used in investing activities -- (47,201)
-------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and warrants exercised -- 115
Proceeds from issuance of common stock -- 21
Principal payments of debt and capital lease obligations -- (17,495)
Proceeds from issuance of debt -- 23,820
Other -- (598)
-------- --------
Net cash provided by (used in) financing activities -- 5,863
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (30,446)
CASH AND CASH EQUIVALENTS:
Cash, beginning of year -- 44,740
-------- --------
Cash, end of year $ -- $ 14,294
-------- --------
-------- --------
</TABLE>
48
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
----------- -------------- ------------------
<S> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ 512 $ 512 $ 1,234
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization -- 14,686 1,063
Amortization of deferred gain on debt restructure -- (1,384) --
Provision for supplemental service fee termination -- 6,309 --
Equity in income of consolidated subsidiaries (512) (1,234) --
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables -- (5,726) (127)
Intercompany receivables, net (173,661) 171,307 2,354
Other current assets -- (289) (27)
Accounts payable and other accrued expenses -- 3,458 (259)
--------- --------- ---------
Net cash provided by (used in) operating activities (173,661) 187,639 4,238
--------- --------- ---------
INVESTING ACTIVITIES:
Cash acquired in acquisitions -- 4,174 --
Acquisitions of Centers and Mobile Facilities -- (56,720) --
Additions to property and equipment -- (20,848) (2,796)
Other -- (1,817) (161)
--------- --------- ---------
Net cash used in investing activities -- (75,211) (2,957)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 23,346 -- --
Proceeds from stock options and warrants exercised 315 -- --
Payment of loan financing costs -- (6,483) --
Principal payments of debt and capital lease obligations (70,900) (79,198) (830)
Proceeds from issuance of debt 220,900 10,580 --
Other -- 78 --
--------- --------- ---------
Net cash provided by (used in) financing activities 173,661 (75,023) (830)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS -- 37,405 451
CASH AND CASH EQUIVALENTS:
Cash, beginning of year -- 5,845 1,039
--------- --------- ---------
Cash, end of year $ -- $ 43,250 $ 1,490
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
ELIMINATION CONSOLIDATED
-------------- ---------------
<S> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ (1,746) $ 512
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization -- 15,749
Amortization of deferred gain on debt restructure -- (1,384)
Provision for supplemental service fee termination -- 6,309
Equity in income of consolidated subsidiaries 1,746 --
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables -- (5,853)
Intercompany receivables, net -- --
Other current assets -- (316)
Accounts payable and other accrued expenses -- 3,199
--------- ---------
Net cash provided by (used in) operating activities -- 18,216
--------- ---------
INVESTING ACTIVITIES:
Cash acquired in acquisitions -- 4,174
Acquisitions of Centers and Mobile Facilities -- (56,720)
Additions to property and equipment -- (23,644)
Other -- (1,978)
--------- ---------
Net cash used in investing activities -- (78,168)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 23,346
Proceeds from stock options and warrants exercised -- 315
Payment of loan financing costs -- (6,483)
Principal payments of debt and capital lease obligations -- (150,928)
Proceeds from issuance of debt -- 231,480
Other -- 78
--------- ---------
Net cash provided by (used in) financing activities -- 97,808
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS -- 37,856
CASH AND CASH EQUIVALENTS:
Cash, beginning of year -- 6,884
--------- ---------
Cash, end of year $ -- $ 44,740
--------- ---------
--------- ---------
</TABLE>
49
<PAGE>
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES
------------- ------------- ----------------
<S> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ 1,281 $ 1,281 $ 1,730
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization -- 9,511 229
Amortization of deferred gain on debt restructure -- (1,047) --
Equity in income of consolidated subsidiaries (1,281) (1,730) --
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables -- (1,304) (214)
Intercompany receivables, net -- 890 (890)
Other current assets -- 141 19
Accounts payable and other accrued expenses -- (1,117) (21)
-------- -------- --------
Net cash provided by operating activities -- 6,625 853
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions of Centers and Mobile Facilities -- (18,566) --
Additions to property and equipment -- (6,459) (409)
Other -- (4,943) --
-------- -------- --------
Net cash used in investing activities -- (29,968) (409)
-------- -------- --------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease obligations -- (10,913) (85)
Proceeds from issuance of debt -- 33,728 --
Other -- 819 (345)
-------- -------- --------
Net cash provided by (used in) financing activities -- 23,634 (430)
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS -- 291 14
CASH AND CASH EQUIVALENTS:
Cash, beginning of year -- 5,554 1,025
-------- -------- --------
Cash, end of year $ -- $ 5,845 $ 1,039
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
ELIMINATION CONSOLIDATED
-------------- ---------------
<S> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ (3,011) $ 1,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Total depreciation and amortization -- 9,740
Amortization of deferred gain on debt restructure -- (1,047)
Equity in income of consolidated subsidiaries 3,011 --
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables -- (1,518)
Intercompany receivables, net -- --
Other current assets -- 160
Accounts payable and other accrued expenses -- (1,138)
-------- --------
Net cash provided by operating activities -- 7,478
-------- --------
INVESTING ACTIVITIES:
Acquisitions of Centers and Mobile Facilities -- (18,566)
Additions to property and equipment -- (6,868)
Other -- (4,943)
-------- --------
Net cash used in investing activities -- (30,377)
-------- --------
FINANCING ACTIVITIES:
Principal payments of debt and capital lease obligations -- (10,998)
Proceeds from issuance of debt -- 33,728
Other -- 474
-------- --------
Net cash provided by (used in) financing activities -- 23,204
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS -- 305
CASH AND CASH EQUIVALENTS:
Cash, beginning of year -- 6,579
-------- --------
Cash, end of year $ -- $ 6,884
-------- --------
-------- --------
</TABLE>
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the SEC in connection with
the Company's next Annual Meeting of Stockholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the SEC in connection with
the Company's next Annual Meeting of Stockholders, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the SEC in connection with
the Company's next Annual Meeting of Stockholders, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's
definitive proxy statement, which will be filed with the SEC in connection with
the Company's next Annual Meeting of Stockholders, and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14 (a) (1). FINANCIAL STATEMENTS
Included in Part II of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 14 (a) (2). FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
Schedule IX - Valuation and Qualifying Accounts
All other schedules have been omitted because they are either not required or
not applicable, or the information is presented in the consolidated financial
statements or notes thereto.
51
<PAGE>
ITEM 14 (a) (3). EXHIBITS
EXHIBIT NUMBER DESCRIPTION AND REFERENCES
*2.1 Asset Purchase and Liabilities Assumption Agreement dated
as of January 3, 1997, by and among InSight Health Corp.,
Mobile Imaging Consortium, Limited Partnership and Mobile
Imaging Consortium-New Hampshire, previously filed and
incorporated herein by reference from the Company's Current
Report on Form 8-K, filed June 16, 1997.
*2.2 Amendment No. 1 to Asset Purchase and Liabilities Assumption
Agreement dated as of May 30, 1997, by and among InSight
Health Corp., Mobile Imaging Consortium, Limited Partnership
and Mobile Imaging Consortium-New Hampshire, previously
filed and incorporated herein by reference from the
Company's Current Report on Form 8-K, filed June 16, 1997.
*2.3 Asset Purchase and Liabilities Assumption Agreement dated as
of June 20, 1997, by and between InSight Health Corp. and
Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient
Center), previously filed and incorporated herein by
reference from the Company's Current Report on Form 8-K,
filed July 14, 1997.
*2.4 Agreement and Plan of Merger dated as of April 15, 1998, by
and among InSight, SMSI Acquisition Company, Signal Medical
Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas
W. Crucitti and Todd Stowell, previously filed and
incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, filed May 13, 1998.
*2.5 First Amendment to Agreement and Plan of Merger dated as of
May 15, 1998, by and among InSight, SMSI Acquisition
Company, Signal Medical Services, Inc., SMSI Holdings, Inc.,
Brian P. Stone, Thomas W. Crucitti and Todd Stowell,
previously filed and incorporated herein by reference from
the Company's Current Report on Form 8-K, filed June 2,
1998.
*2.6 Second Amendment to Agreement and Plan of Merger dated as of
May 18, 1998 by and among InSight, SMSI Acquisition Company,
Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P.
Stone, Thomas W. Crucitti and Todd Stowell, previously filed
and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
*3.1 Certificate of Incorporation of InSight, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-02935), filed April 29, 1996.
*3.2 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series B, of InSight,
previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14,
1997.
*3.3 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series C, of InSight,
previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14,
1997.
*3.4 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series D, of InSight,
previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14,
1997.
*3.5 Amended and Restated Bylaws of InSight, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*4.1 Indenture dated as of June 1, 1998, by and among the
Company, the Subsidiary Guarantors (as defined therein) and
State Street Bank and Trust Company, N.A. as Trustee
(includes forms of the Outstanding Notes and Exchange Notes
(as defined therein)), previously filed
52
<PAGE>
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-60573), filed August 4, 1998.
*4.2 Purchase Agreement, dated as of June 9, 1998, by and among
the Company, the Subsidiary Guarantors (as defined therein)
and the Initial Purchasers (as defined therein), previously
filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
*10.1 Credit Agreement dated as of October 14, 1997, as amended
November 17, 1997, December 19, 1997, March 23, 1998 and
amended and restated as of June 12, 1998, among the Company,
the Subsidiary Guarantors (as defined therein), Bank of
America, N.A. (formerly NationsBank, N.A.) as Agent and the
Lenders (as defined therein), previously filed and
incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-60573), filed August 4, 1998.
*10.2 Master 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.
*10.3 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.
*10.4 InSight's 1996 Employee Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No. 333-
02935), filed April 29, 1996.
*10.7 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.
*10.8 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.
*10.9 AHS 1989 Stock Incentive Plan, previously filed and
incorporated herein by reference from AHS's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, filed
April 15, 1991.
*10.10 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.
*10.11 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.
*10.12 InSight's 1998 Employee Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No. 333-
60573), filed August 4, 1998.
*10.13 Form of Stock Option Agreement between InSight and former
officers of Signal Medical Services, Inc. relative to
InSight's 1998 Employee Stock Option Plan, previously filed
and incorporated by reference from the Company's Annual
Report on Form 10-K, filed September 28, 1998.
*10.14 InSight's 1997 Management Stock Option Plan, previously
filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
53
<PAGE>
*10.15 Form of Stock Option Agreement between InSight and certain
senior officers of InSight relative to InSight's 1997
Management Stock Option Plan, previously filed and
incorporated by reference from the Company's Annual Report
on Form 10-K, filed September 28, 1998.
*10.16 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.
*10.17 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.
*10.18 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.
*10.19 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.
*10.20 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.
*10.21 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.
*10.22 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.
*10.23 Form of Stock Option Agreement between InSight and non
-employee directors of InSight relative to InSight's 1996
Directors' Stock Option Plan, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*10.24 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.
*10.25 Executive Employment Agreement between InSight and Brian P.
Stone dated as of May 18, 1998, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed September 28, 1998.
*10.26 Form of Warrant Certificate relative to the grants of
warrants to InSight's non-employee directors, previously
filed and incorporated herein by reference from the
Company's Annual Report on Form 10-K, filed September 28,
1998.
*10.27 Form of Warrant Certificate relative to the grants of
warrants to Carlyle and GE in lieu of director stock
options, previously filed and incorporated herein by
reference from the Company's Annual Report on Form 10-K,
filed September 28, 1998.
10.28 Letter Agreement for Consulting Services between InSight
and Frank E. Egger dated July 7, 1999, filed herewith.
10.29 Warrant Certificate No. E-1 dated July 7, 1999 in the name
of Frank E. Egger, filed herewith.
54
<PAGE>
10.30 Separation Agreement between InSight and E. Larry Atkins
dated as of July 19, 1999, filed herewith.
21 Subsidiaries of InSight, filed herewith.
23 Consent of Independent Public Accountants, filed herewith.
27 Financial Data Schedule, filed herewith.
- - *Previously filed.
ITEM 14 (b). REPORTS ON FORM 8-K. The Company did not file any Current Report on
Form 8-K with the SEC for the quarter ended June 30, 1999.
ITEM 14 (c). The Exhibits described above in Item 14(a)(3) are attached hereto
or incorporated by reference herein, as noted.
ITEM 14 (d). Not applicable.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INSIGHT HEALTH SERVICES CORP.
By /s/ Frank E. Egger
------------------------------------
Frank E. Egger, Acting President and
Chief Executive Officer
Date: September 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Director, Acting President and September 28, 1999
/s/ Frank E. Egger Chief Executive Officer
- ----------------------------------- (Principal Executive Officer)
Frank E. Egger
Executive Vice President, September 28, 1999
/s/ Thomas V. Croal and Chief Financial Officer
- ----------------------------------- (Principal Accounting Officer)
Thomas V. Croal
Director September 28, 1999
/s/ Michael E. Aspinwall
- -----------------------------------
Michael E. Aspinwall
Director
- -----------------------------------
Grant R. Chamberlain
Director September 28, 1999
/s/ David W. Dupree
- -----------------------------------
David W. Dupree
Director
- -----------------------------------
Leonard H. Habas
Director September 28, 1999
/s/ Ronald G. Pantello
- -----------------------------------
Ronald G. Pantello
Director
- -----------------------------------
Glenn A. Youngkin
</TABLE>
56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InSight Health Services Corp.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of INSIGHT HEALTH SERVICES CORP. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated September 24, 1999. 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 the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
September 24, 1999
57
<PAGE>
SCHEDULE IX
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charges to Balance at
Beginning of Cost and End of
Year Expenses Other (A) Year
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
June 30, 1997:
Allowance for doubtful accounts $ 2,274 $ 1,483 $ (1,435) $ 2,322
Allowance for contractual adjustments 5,417 17,483 (17,852) 5,048
-------- -------- -------- --------
Total $ 7,691 $ 18,966 $(19,287) $ 7,370
-------- -------- -------- --------
-------- -------- -------- --------
June 30, 1998:
Allowance for doubtful accounts $ 2,322 $ 1,871 $ (711) $ 3,482
Allowance for contractual adjustments 5,048 29,447 (26,578) 7,917
-------- -------- -------- --------
Total $ 7,370 $ 31,318 $(27,289) $ 11,399
-------- -------- -------- --------
-------- -------- -------- --------
June 30, 1999:
Allowance for doubtful accounts $ 3,482 $ 2,618 $ (2,349) $ 3,751
Allowance for contractual adjustments 7,917 41,293 (35,139) 14,071
-------- -------- -------- --------
Total $ 11,399 $ 43,911 $(37,488) $ 17,822
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(A) Write offs of uncollectible accounts.
58
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION AND REFERENCES
*2.1 Asset Purchase and Liabilities Assumption Agreement dated
as of January 3, 1997, by and among InSight Health Corp.,
Mobile Imaging Consortium, Limited Partnership and Mobile
Imaging Consortium-New Hampshire, previously filed and
incorporated herein by reference from the Company's Current
Report on Form 8-K, filed June 16, 1997.
*2.2 Amendment No. 1 to Asset Purchase and Liabilities Assumption
Agreement dated as of May 30, 1997, by and among InSight
Health Corp., Mobile Imaging Consortium, Limited Partnership
and Mobile Imaging Consortium-New Hampshire, previously
filed and incorporated herein by reference from the
Company's Current Report on Form 8-K, filed June 16, 1997.
*2.3 Asset Purchase and Liabilities Assumption Agreement dated as
of June 20, 1997, by and between InSight Health Corp. and
Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient
Center), previously filed and incorporated herein by
reference from the Company's Current Report on Form 8-K,
filed July 14, 1997.
*2.4 Agreement and Plan of Merger dated as of April 15, 1998, by
and among InSight, SMSI Acquisition Company, Signal Medical
Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas
W. Crucitti and Todd Stowell, previously filed and
incorporated herein by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, filed May 13, 1998.
*2.5 First Amendment to Agreement and Plan of Merger dated as of
May 15, 1998, by and among InSight, SMSI Acquisition
Company, Signal Medical Services, Inc., SMSI Holdings, Inc.,
Brian P. Stone, Thomas W. Crucitti and Todd Stowell,
previously filed and incorporated herein by reference from
the Company's Current Report on Form 8-K, filed June 2,
1998.
*2.6 Second Amendment to Agreement and Plan of Merger dated as of
May 18, 1998 by and among InSight, SMSI Acquisition Company,
Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P.
Stone, Thomas W. Crucitti and Todd Stowell, previously filed
and incorporated herein by reference from the Company's
Current Report on Form 8-K, filed June 2, 1998.
*3.1 Certificate of Incorporation of InSight, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-02935), filed April 29, 1996.
*3.2 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series B, of InSight,
previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14,
1997.
*3.3 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series C, of InSight,
previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14,
1997.
*3.4 Certificate of Designation, Preferences and Rights of
Convertible Preferred Stock, Series D, of InSight,
previously filed and incorporated herein by reference from
the Company's Annual Report on Form 10-K, filed October 14,
1997.
*3.5 Amended and Restated Bylaws of InSight, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*4.1 Indenture dated as of June 1, 1998, by and among the
Company, the Subsidiary Guarantors (as defined therein) and
State Street Bank and Trust Company, N.A. as Trustee
(includes forms of the Outstanding Notes and Exchange Notes
(as defined therein)), previously filed
59
<PAGE>
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-60573), filed August 4, 1998.
*4.2 Purchase Agreement, dated as of June 9, 1998, by and among
the Company, the Subsidiary Guarantors (as defined therein)
and the Initial Purchasers (as defined therein), previously
filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
*10.1 Credit Agreement dated as of October 14, 1997, as amended
November 17, 1997, December 19, 1997, March 23, 1998 and
amended and restated as of June 12, 1998, among the Company,
the Subsidiary Guarantors (as defined therein), Bank of
America, N.A. (formerly NationsBank, N.A.) as Agent and the
Lenders (as defined therein), previously filed and
incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-60573), filed August 4, 1998.
*10.2 Master 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.
*10.3 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.
*10.4 InSight's 1996 Employee Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No. 333-
02935), filed April 29, 1996.
*10.7 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.
*10.8 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.
*10.9 AHS 1989 Stock Incentive Plan, previously filed and
incorporated herein by reference from AHS's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, filed
April 15, 1991.
*10.10 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.
*10.11 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.
*10.12 InSight's 1998 Employee Stock Option Plan, previously filed
and incorporated herein by reference from the Company's
Registration Statement on Form S-4 (Registration No. 333-
60573), filed August 4, 1998.
*10.13 Form of Stock Option Agreement between InSight and former
officers of Signal Medical Services, Inc. relative to
InSight's 1998 Employee Stock Option Plan, previously filed
and incorporated by reference from the Company's Annual
Report on Form 10-K, filed September 28, 1998.
*10.14 InSight's 1997 Management Stock Option Plan, previously
filed and incorporated herein by reference from the
Company's Registration Statement on Form S-4 (Registration
No. 333-60573), filed August 4, 1998.
60
<PAGE>
*10.15 Form of Stock Option Agreement between InSight and certain
senior officers of InSight relative to InSight's 1997
Management Stock Option Plan, previously filed and
incorporated by reference from the Company's Annual Report
on Form 10-K, filed September 28, 1998.
*10.16 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.
*10.17 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.
*10.18 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.
*10.19 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.
*10.20 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.
*10.21 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.
*10.22 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.
*10.23 Form of Stock Option Agreement between InSight and non
-employee directors of InSight relative to InSight's 1996
Directors' Stock Option Plan, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed October 14, 1997.
*10.24 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.
*10.25 Executive Employment Agreement between InSight and Brian P.
Stone dated as of May 18, 1998, previously filed and
incorporated herein by reference from the Company's Annual
Report on Form 10-K, filed September 28, 1998.
*10.26 Form of Warrant Certificate relative to the grants of
warrants to InSight's non-employee directors, previously
filed and incorporated herein by reference from the
Company's Annual Report on Form 10-K, filed September 28,
1998.
*10.27 Form of Warrant Certificate relative to the grants of
warrants to Carlyle and GE in lieu of director stock
options, previously filed and incorporated herein by
reference from the Company's Annual Report on Form 10-K,
filed September 28, 1998.
10.28 Letter Agreement for Consulting Services between InSight
and Frank E. Egger dated July 7, 1999, filed herewith.
10.29 Warrant Certificate No. E-1 dated July 7, 1999 in the name
of Frank E. Egger, filed herewith.
61
<PAGE>
10.30 Separation Agreement between InSight and E. Larry Atkins
dated as of July 19, 1999, filed herewith.
21 Subsidiaries of InSight, filed herewith.
23 Consent of Independent Public Accountants, filed herewith.
27 Financial Data Schedule, filed herewith.
- - *Previously filed.
62
<PAGE>
July 7, 1999
Mr. Frank E. Egger
10301 S. W. 13th Street
Pembroke Pines, Florida 33025
RE: CONSULTING AGREEMENT
Dear Frank:
This letter is to confirm our agreement that you will be retained by InSight
on the following terms:
(1) Effective July 12, 1999, you will act as interim President and CEO of
InSight until a replacement is identified and hired.
(2) The initial term of this arrangement is four (4) months. We have agreed
that either of us may cancel this arrangement upon sixty (60) days'
written notice.
(3) You will provide InSight with a minimum of 40 hours per week of services.
InSight will provide you telephone, facsimile and copy services, office
space, secretarial support and office supplies.
(4) InSight will compensate you at the rate of $15,000.00 monthly, payable at
the beginning of each calendar month in advance effective as of July 8,
1999. InSight will also reimburse you for all reasonable out-of-pocket
expenses. Expenses shall be submitted monthly and InSight will pay for
expenses according to its established policy.
(5) You are an independent contractor with respect to InSight and not an
employee of InSight. InSight will not provide you with any fringe
benefits, including life insurance,
<PAGE>
FRANK E. EGGER
July 7, 1999
Page 2
medical, health, accident or disability plan or program, paid vacation or
any other employee benefit.
(6) You have agreed that by reason of your position with InSight, you have
access to InSight's confidential information and materials and trade
secrets with regard to InSight's business affairs and you have agreed that
you have held, and will hold, all such information strictly confidential
and that you will not disclose or use such information for any reason
without the prior written consent of InSight.
(7) We have agreed that your March 28, 1996 Consulting Agreement will remain
in full force and effect.
(8) We have agreed that you will also be granted today a warrant for 15,000
shares of InSight common stock which will vest over a period of four
months and will remain exercisable for ten years.
If the above accurately sets forth our arrangement, please execute the enclosed
copy of this Agreement and return the same to me.
Very truly yours,
/s/ Leonard H. Habas
LEONARD H. HABAS, Chairman
Compensation Committee
AGREED TO:
/s/ Frank E. Egger
- -----------------------------------------
Frank E. Egger
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
OFFERED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
No. E - 1
Certificate for 15,000 Warrants
EXERCISABLE COMMENCING ON THE DATES SPECIFIED
HEREIN AND ENDING
5:00 P.M., NEWPORT BEACH, CALIFORNIA TIME, ON THE EXPIRATION DATE
INSIGHT HEALTH SERVICES CORP.
WARRANT CERTIFICATE
THIS CERTIFIES that Frank E. Egger is the registered holder (the
"Warrantholder") of the number of warrants (the "Warrants") set forth above,
each of which represents the right to purchase one fully paid and non-assessable
share of common stock, par value $.001 per share (the "Common Shares"), of
InSight Health Services Corp., a Delaware corporation (the "Company"), at the
exercise price of $6.00 per share (the "Exercise Price"), at any time prior to
the Expiration Date hereinafter referred to, by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon duly
executed, at the Company's principal executive office, 4400 MacArthur Boulevard,
Suite 800, Newport Beach, California 92660 (the "Office"), and by paying in full
the Exercise Price, plus transfer taxes, if any, in United States currency by
certified check, bank cashier's check or money order payable to the order of the
Company.
SECTION 1. DURATION AND EXERCISE OF WARRANTS.
(a) The Warrants represented by this Warrant Certificate shall
vest cumulatively and be exercisable at the rate of 3,750 Warrants each month
commencing on July 7, 1999 until fully vested so long as continuously during
such time period the Warrantholder remains a director of the Company. The
Warrants shall expire at 5:00 p.m. Newport Beach, California time, on the
earlier of (i) 90 days after the Warrantholder ceases to be a director of the
Company (other than by death or permanent or total disability within the meaning
of the Internal Revenue Code of 1986, as amended, ("Internal Revenue Code")),
(ii) twelve months after the Warrantholder's death or permanent or total
disability within the meaning of the Internal Revenue Code or (iii) on July 7,
2009 (the "Expiration Date"); provided however, that if the Warrantholder ceases
to be a director of the Company, other than by death or permanent or total
disability within the meaning of the Internal Revenue Code, the Warrantholder
shall have the right until the Expiration Date to purchase from the Company the
Common Shares issuable upon exercise of the Warrants which shall have vested
prior to such termination.
-1-
<PAGE>
(b) Subject to the provisions of this Warrant Certificate,
after the date of this Warrant Certificate and prior to the close of business
on the Expiration Date, the Warrantholder shall have the right to purchase
from the Company the number of Common Shares specified above at the Exercise
Price. In order to exercise such right, the Warrantholder shall surrender
the Warrant Certificate(s) evidencing such Warrants to the Company at the
Office with the form of Election to Purchase set forth hereon duly completed
and signed, and shall tender payment in full to the Company for the Company's
account of the Exercise Price, together with such taxes as are specified in
Section 4 hereof, for each Common Share with respect to which such Warrants
are being exercised. Such Exercise Price and taxes shall be paid in full by
certified check, bank cashier's check or money order, payable in United
States currency to the order of the Company. In addition, if the Common
Shares deliverable upon exercise have not been registered pursuant to the
Securities Act, the Warrantholder shall deliver a duly executed certificate
substantially in the form of Exhibit A hereto.
(c) The Warrants evidenced by this Warrant Certificate shall
be exercisable only in multiples of one (l) Warrant. If less than all of the
Warrants evidenced by this Warrant Certificate are exercised at any time
prior to the close of business on the Expiration Date, a new Warrant
Certificate(s) shall be issued to the Warrantholder, or his duly authorized
assigns, by the Company for the remaining number of Warrants evidenced by the
Warrant Certificate so surrendered.
SECTION 2. ISSUANCE OF SHARE CERTIFICATES. Upon surrender of this
Warrant Certificate and payment of the Exercise Price, and, if the Common
Shares deliverable on exercise have not been registered under the Securities
Act, upon delivery of a certificate in the form of Exhibit A hereto, the
Company shall issue certificates representing Common Shares ("Share
Certificates") for the number of full Common Shares to which the holder of
such Warrants is entitled, registered in accordance with the instructions set
forth in the Election to Purchase. If such Common Shares have not been
registered under the Securities Act, the Share Certificates shall bear a
legend substantially similar to the legend on this Warrant Certificate.
SECTION 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF COMMON SHARES
PURCHASABLE PER NUMBER OF WARRANTS. The Exercise Price and the number of
Common Shares purchasable upon the exercise of each Warrant are subject to
adjustment from time to time upon the occurrence of the events specified in
this Section 3:
(a) If the Company at any time after the date of this
Warrant Certificate (i) declares a dividend or makes a distribution on the
outstanding Common Shares payable in Common Shares, (ii) subdivides or
reclassifies the outstanding Common Shares into a greater number of shares or
(iii) combines or reclassifies the outstanding Common Shares into a smaller
number of Common Shares, the Exercise Price in effect immediately after the
record date for such dividend or distribution or at the effective date of
such subdivision, combination or reclassification, shall be adjusted to equal
the quotient obtained by multiplying the Exercise Price in effect immediately
prior to such date by a fraction, the numerator of which shall be the number
of Common Shares outstanding immediately prior to such dividend,
distribution, subdivision, combination or reclassification, and the
denominator of which shall be the number of Common Shares outstanding
immediately after such dividend, distribution, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any
event listed above shall occur.
-2-
<PAGE>
(b) If at any time, as a result of an adjustment made pursuant
to subsection (a), the holder of any Warrant thereafter exercised shall become
entitled to receive any additional Common Shares (the "New Shares"), thereafter
the number of such New Shares so receivable upon exercise of any Warrant shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Shares
contained in paragraph (a), and the provisions of this Warrant Certificate with
respect to the Common Shares shall apply on like terms to any such New Shares.
(c) All calculations of the Exercise Price under this
Section 3 shall be made to the nearest one hundredth of a cent. No
adjustment in the Exercise Price in accordance with the provisions of
subsection (a) hereof need be made if such adjustment, together with other
adjustments carried forward pursuant to this subsection (c), would amount to
a change in such Exercise Price of less than 1%; PROVIDED, HOWEVER, that the
amount by which any adjustment is not made by reason of this subsection (c)
shall be carried forward and taken into account at the time of any subsequent
adjustment in the Exercise Price.
(d) Unless the Company shall have exercised its election as
provided in subsection (e), upon each adjustment of the Exercise Price as a
result of the calculations made in subsection (a), each Warrant outstanding
immediately prior to the making of such adjustment shall thereafter evidence
the right to purchase, at the adjusted Exercise Price that number of Common
Shares obtained by (i) multiplying (A) the number of Common Shares
purchasable upon exercise of a Warrant immediately prior to such adjustment
of the Exercise Price by (B) the Exercise Price in effect immediately prior
to such adjustment of the Exercise Price and (ii) dividing the product so
obtained by the Exercise Price in effect immediately after such adjustment of
the Exercise Price.
(e) The Company may elect, on or after the date of any
adjustment of the Exercise Price, to adjust the number of Warrants in
substitution for an adjustment in the number of Common Shares purchasable
upon the exercise of a Warrant as provided in subsection (d).
(f) In case of any reorganization of the Company, or in case
of the consolidation or merger of the Company with or into any other legal
entity or of the sale of the properties and assets of the Company as, or
substantially as, an entirety to any other legal entity (collectively,
"Reorganization"), all vested Warrants shall be exercisable, and any unvested
Warrants shall become immediately exercisable, after such Reorganization,
upon the terms and conditions specified in this Warrant Certificate, for the
stock or other securities or property (including cash) to which a holder of
the number of Common Shares purchasable (at the time of such Reorganization)
upon exercise of such Warrant would have been entitled upon such
Reorganization if such Warrant had been exercised in full immediately prior
to such Reorganization; and in any such case, if necessary, the provisions
set forth in this Section 3 with respect to the rights and interests
thereafter of the holders of the Warrants shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any such stock or
other securities or property thereafter deliverable upon exercise of the
Warrants. The Company shall not effect any such Reorganization unless prior
to or simultaneously with the consummation thereof the successor (if other
than the Company) resulting from such Reorganization or the legal entity
purchasing such assets shall assume, by written instrument executed and
delivered to the holder of each Warrant, the obligation to deliver to the
holder of each Warrant such stock, securities or assets as, in accordance
with the foregoing provisions, such holders may be entitled to purchase, and
the other obligations under this Warrant Certificate.
-3-
<PAGE>
SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes that may be imposed by the United States of America or any state
or territory thereof ("Taxes") attributable to the initial issuance of Common
Shares upon the exercise of Warrants prior to the close of business on the
Expiration Date; PROVIDED, HOWEVER, that the Company shall not be required to
pay any Taxes which may be payable in respect of any transfer involved in the
issuance of any Warrant Certificates or any Share Certificates in a name
other than that of the Warrantholder of record surrendered upon the exercise
of a Warrant, and the Company shall not be required to issue or deliver such
Share Certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such Taxes or
shall have established to the satisfaction of the Company that such Taxes
have been paid.
SECTION 5. REGISTRATION.
(a) This Warrant Certificate shall be registered in the name
of the record holder to whom it is distributed, and the Company shall
maintain a list showing the name, address and number of Warrants held by each
of the Warrantholders of record.
(b) The Company may deem and treat the Warrantholder of
record as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing thereon made by anyone) for the
purpose of any exercise thereof and any distribution to the holder thereof
and for all other purposes, and the Company shall not be affected by any
notice to the contrary.
SECTION 6. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of this Warrant
Certificate upon the records to be maintained by it for that purpose, upon
surrender of this Warrant Certificate accompanied (if so required by the
Company) by (i) a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder(s)
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney, and (ii) an opinion of counsel, reasonably satisfactory
to the Company, that such transfer is exempt from registration under the
Securities Act. Upon any such registration or transfer, a new Warrant
Certificate shall be issued to the transferee, and the surrendered Warrant
Certificate shall be canceled by the Company.
(b) This Warrant Certificate may be exchanged at the option
of the holder, when surrendered to the Company at the Office, for another
Warrant Certificate or other Warrant Certificates of like tenor and
representing in the aggregate a like number of Warrants. Warrant
Certificates surrendered for exchange, transfer or exercise shall be canceled
by the Company.
SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case this
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the
Company shall issue and deliver, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for any Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence satisfactory to the Company of
such loss, theft or destruction of such Warrant Certificate and an indemnity
or bond, if requested, also satisfactory to the Company. Applicants for such
substitute Warrant Certificate shall also comply with such other reasonable
charges as the Company may prescribe.
-4-
<PAGE>
SECTION 8. NOTICES.
(a) Any notice or demand authorized by this Warrant
Certificate to be given or made by the Warrantholder to or on the Company
shall be in writing and shall be sufficiently given or made if personally
delivered or sent by mail or by telegram or telex confirmed by letter
addressed (until another address is given in writing by the Company) to the
Office.
(b) Any notice pursuant to this Warrant Certificate to be
given by the Company to the Warrantholder shall be in writing and shall be
sufficiently given if personally delivered or sent by mail or telegram or
telex confirmed by letter, addressed (until another address is filed in
writing by the Warrantholder with the Company) to the address specified in
the Warrant register maintained by the Company.
SECTION 9. RIGHTS OF WARRANTHOLDERS; VOTING. Nothing contained in
this Warrant Certificate shall be construed as conferring upon the
Warrantholder any of the rights of a stockholder of the Company, including
without limitation the right to vote, to receive dividends and other
distributions, to receive any notice of, or to attend, meetings of
stockholders or any other proceedings of the Company.
SECTION 10. SUPPLEMENTS AND AMENDMENTS. The Company may from time
to time supplement or amend this Warrant Certificate without the consent or
concurrence of the Warrantholder in order to cure any ambiguity, manifest
error or other mistake in this Warrant Certificate, or to make provision in
regard to any matters or questions arising hereunder which the Company may
deem necessary or desirable and which shall not adversely affect, alter or
change the interests of the Warrantholder.
SECTION 11. WARRANT AGENT. The Company may, by written notice to
the Warrantholder, appoint an agent for the purpose of issuing Common Shares
on the exercise of the Warrants, exchanging Warrants, replacing Warrants or
any of the foregoing, and thereafter any such issuance, exchange or
replacement shall be made at such office by such agent.
SECTION 12. SUCCESSORS. All the representations, warranties,
covenants and provisions of this Warrant Certificate by or for the benefit of
the Company or the Warrantholder shall bind and inure to the benefit of their
respective successors and assigns hereunder.
SECTION 13. GOVERNING LAW. This Warrant Certificate shall be deemed
to be a contract made under the laws of the State of Delaware and for all
purposes shall be governed in accordance with the laws of said State,
regardless of the laws that might be applied under applicable principles of
conflicts of laws.
SECTION 14. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this
Warrant Certificate shall be construed to give to any person or entity other
than the Company and the Warrantholder any legal or equitable right, remedy
or claim under this Warrant Certificate, and this Warrant Certificate shall
be for the sole and exclusive benefit of the Company and the Warrantholder.
SECTION 15. INTERPRETATION. The headings contained in this Warrant
Certificate are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Warrant Certificate.
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SECTION 16. INVALIDITY OF PROVISIONS. If any provision of this
Warrant Certificate is or becomes invalid, illegal or unenforceable in any
respect, such provision shall be amended to the extent necessary to cause it
to express the intent of the parties and be valid, legal and enforceable.
The amendment of such provision shall not affect the validity, legality or
enforceability of any other provision hereof.
SECTION 17. REGISTRATION RIGHTS.
(a) If at any time or from time to time the Company proposes
to file a registration statement on any appropriate form (a "Registration
Statement") (other than in connection with an exchange offer or a
registration statement on Form S-4 or S-8 or otherwise unsuitable
registration statements) under the Securities Act with respect to any Common
Shares, whether or not for sale for its own account, on a form and in a
manner which would permit registration of Common Shares received upon
exercise of the Warrants ("Warrant Shares") for sale to the public under the
Securities Act, the Company shall
(i) promptly give to the Warrantholder written notice
thereof (which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such securities under the applicable blue sky
or other state securities law); and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Warrant Shares specified in a written
request or requests, made within 20 days after receipt of such written notice
from the Company, by the Warrantholder.
(b) If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the Company shall
so advise the Warrantholder as a part of the written notice given pursuant to
Section 17(a)(i). In such event the right of the Warrantholder to
registration pursuant to this Section 17 shall be conditioned upon the
Warrantholder's participation, as a selling security holder, in such
underwriting and the inclusion of the Warrant Shares in the underwriting to
the extent provided herein. The Warrantholder shall (together with the
Company and the other holders of Common Shares distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriters selected for such underwriting by the Company.
The Warrantholder shall not be required to make any representations or
warranties to the Company or the underwriters other than those relating to
the Warrantholder, the Warrant Shares and the intended method of distribution
and information about the Warrantholder provided by the Warrantholder for use
in the Registration Statement.
(c) Notwithstanding any other provision of this Section 17:
(i) subject to subsection (iii) below, if the
registration is an underwritten primary registration on behalf of the Company
and the managing underwriters of such offering determine in good faith that
the aggregate amount of Common Shares which the Warrantholder and the Company
propose to include in such Registration Statement exceeds the maximum amount
of Common Shares that could practicably be included therein, the Company will
include in such registration, first, the Common Shares which the Company
proposes to sell, and second, the Warrant Shares and the Common Shares of any
holders of other piggyback registration rights, if any, which can practicably
be included therein, pro
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rata among all such holders, taken together, on the basis of the relative
amount of Common Shares owned by the Warrantholder and such other holders who
have requested that Common Shares owned by them be included;
(ii) subject to subsection (iii) below, if the
registration is an underwritten secondary registration on behalf of any of
the other security holders of the Company and the managing underwriters
determine in good faith that the aggregate amount of Common Shares which the
Warrantholder and such security holders propose to include in such
registration exceeds the maximum amount of Common Shares that could
practicably be included therein, the Company will include in such
registration, first, the Common Shares to be sold for the account of any
other holders entitled to demand registration and, second, the Warrant Shares
and other Common Shares to be sold for the account of other holders electing
to include (but not being entitled to demand inclusion of) Common Shares in
such registration, pro rata among all such holders, taken together, on the
basis of the relative amount of Common Shares owned by the Warrantholder and
such other holders who have requested that Common Shares owned by them be
included; and
(iii) in the event of a conflict between the rights of
the Warrantholder set forth in this Section 17 and the registration rights of
General Electric Company, the rights hereunder shall be subordinate to such
other rights and the Company's obligations shall be limited to those that can
be performed without violating the terms of such other registration rights.
(d) The Company may withdraw any Registration Statement at
any time before it becomes effective, or postpone the offering of Common
Shares, without obligation or liability to the Warrantholder.
(e) With respect to a Registration Statement in which any of
the Warrant Shares are included, the Warrantholder agrees, if requested by
the managing underwriters in an underwritten offering, not to effect any
public sale or distribution of Common Shares, including a sale pursuant to
Rule 144 under the Securities Act (except as part of such registration),
during the 180-day period beginning on the effective date of such
Registration Statement; PROVIDED, HOWEVER, that such agreement shall be
applicable only to the first three such Registration Statements which cover
Common Shares (or other securities) to be sold on the Company's behalf to the
public in an underwritten offering.
(f) All Registration Expenses (as defined below) incurred in
connection with any registration, qualification or compliance pursuant to
this Section 17 shall be borne by the Company. All Selling Expenses (as
defined below) incurred in connection with any registrations hereunder shall
be borne by the holders of the Common Shares so registered pro rata on the
basis of the number of shares so registered. For purposes of this Section
17, (i) "REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with this Section 17, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single
special counsel for the Warrantholder and all other holders of Common Shares
to be registered, blue sky fees and expenses, and the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of the Company's regular employees which shall be paid in any
event by the Company) and (ii) "SELLING EXPENSES" shall mean all underwriting
discounts and selling commissions applicable to the sale.
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(g) In the case of each registration, qualification or
compliance effected by the Company pursuant to this Section 17, the Company
will keep the Warrantholder advised in writing as to the qualification and
compliance and as to the completion thereof. At its expense the Company will:
(i) Keep such registration, qualification or
compliance effective for a period of 120 days or until the Warrantholder has
completed the distribution described in the Registration Statement relating
thereto, whichever first occurs;
(ii) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration Statement
effective for the requisite period;
(iii) Furnish such number of prospectuses and other
documents incident thereto as the Warrantholder from time to time may
reasonably request;
(iv) Use its reasonable efforts to register or qualify
such Warrant Shares under the securities or blue sky laws of such
jurisdictions as the Warrantholder reasonably requests and do any and all
other acts and things which may be reasonably necessary or advisable to
enable the Warrantholder to consummate the disposition in such jurisdictions
of the Warrant Shares owned by the Warrantholder (PROVIDED that the Company
will not be required to (A) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 17, (B) subject itself to taxation in any such jurisdiction, (C)
consent to general service of process in any such jurisdiction, or (D)
qualify such Warrant Shares in a given jurisdiction where, in the sole
discretion of the Company, expressions of investment interest are not
sufficient in such jurisdiction to reasonably justify the expense of
qualification in that jurisdiction or where such qualification would require
the Company to register as a broker or dealer in such jurisdiction);
(v) Notify the Warrantholder at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event known to the Company as a result of which
the prospectus included in such Registration Statement contains an untrue
statement of a material fact or omits any material fact necessary to make the
statements therein not misleading, and in such event, at the request of the
Warrantholder, the Company will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such Warrant
Shares, such prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein not misleading;
(vi) Cause all such Warrant Shares to be listed on
each securities exchange on which similar securities issued by the Company
are then listed and qualify such Warrant Shares for trading on each system on
which similar securities issued by the Company are from time to time
qualified;
(vii) Provide a transfer agent and registrar for all
such Warrant Shares not later than the effective date of such Registration
Statement and thereafter maintain such a transfer agent and registrar;
(viii) Permit the Warrantholder, if in the Company's
sole and exclusive judgment, such holder might be deemed to be an underwriter
or a controlling person of the Company, to
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participate in the preparation of such Registration Statement and to require
the insertion therein of material, furnished to the Company in writing, which
in the reasonable judgment of such holder and his counsel should be included;
and
(ix) In the event of the issuance of any stop order
suspending the effectiveness of a Registration Statement, or of any order
suspending or preventing the use of any related prospectus or suspending the
qualification of any common stock included in such Registration Statement for
sale in any jurisdiction, the Company will use its reasonable efforts
promptly to obtain the withdrawal of such order.
(h) The Warrantholder agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described
in Sections 17(g)(v) or (ix), such holder will forthwith discontinue
disposition of Warrant Shares pursuant to a registration hereunder until
receipt of the copies of an appropriate supplement or amendment to the
prospectus under Section 17(g)(ii) or until the withdrawal of such order
under Section 17(g)(ix).
(i) No person may participate in any underwritten
registration hereunder unless such person (i) agrees to sell such person's
Common Shares on the basis provided in any underwriting arrangements approved
by the persons entitled to approve such arrangements, (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements and (iii) furnishes to the Company such information regarding
such person and the distribution proposed by such person as the Company may
request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 17.
(j) The Company agrees to indemnify, to the extent permitted
by law, the Warrantholder, its officers, directors and trustees and each
person who controls (within the meaning of the Securities Act) such holder
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any
Registration Statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are caused by
or contained in any information furnished in writing to the Company by such
holder expressly for use therein or by such holder's failure to deliver a
copy of the Registration Statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company will indemnify such underwriters, their officers and
directors and each person who controls (within the meaning of the Securities
Act) such underwriters at least to the same extent as provided above with
respect to the indemnification of the Warrantholder.
(k) In connection with any Registration Statement in which
Warrantholder is participating, such Warrantholder will furnish to the
Company in writing such information as the Company reasonably requests for
use in connection with any such Registration Statement or prospectus and, to
the extent permitted by law, will indemnify the Company, its directors and
officers and each person who controls (within the meaning of the Securities
Act) the Company against any losses, claims, damages, liabilities and
expenses resulting from any untrue or alleged untrue statement of material
fact contained in the Registration Statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein
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<PAGE>
or necessary to make the statements therein not misleading, but only to the
extent that such untrue statement or omission is contained in any information
so furnished in writing by such Holder; PROVIDED that the obligation to
indemnify will be limited to the net amount of proceeds received by such
holder from the sale of Warrant Shares pursuant to such Registration
Statement. In connection with an underwritten offering, such holder will
indemnify such underwriters, their officers and directors and each person who
controls (within the meaning of the Securities Act) such underwriters at
least to the same extent as provided above with respect to the
indemnification of the Company.
(l) Any person entitled to indemnification hereunder will
(i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification and (ii) unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified
and indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party will not be subject to any liability for any
settlement made by the indemnified party without its consent (but such
consent will not be unreasonably withheld). An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
(m) The indemnification provided for under this Section 17
will remain in full force and effect regardless of any investigation made by
or on behalf of the indemnified party or any officer, director or controlling
person of such indemnified party and will survive the transfer of securities.
The Company also agrees to make such provisions, as are reasonably requested
by any indemnified party, for contribution to such party in the event the
Company's indemnification is unavailable for any reason. The Warrantholder
also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event such holder's
indemnification is unavailable for any reason.
(n) The provisions of this Section 17 shall apply until such
time as all Warrant Shares that have not been resold to the public may be
resold pursuant to Rule 144 under the Securities Act within a three month
period.
SECTION 18. CERTAIN REPRESENTATIONS.
The Warrantholder, by his acceptance of this Warrant
Certificate, as evidenced by delivery of the Warrant Certificate to the
Warrantholder, has made the following representations to the Company and
agreed as follows:
The Warrantholder is a director of the Company and understands
that, in connection with complying with California law, the Company
(i) may issue Warrants to no more than thirty-five (35) purchasers in
connection with an offering of such Warrants, excluding executive
officers and directors of the Company and certain other persons as
provided under California law, (ii) the Warrantholder is not included
in the foregoing thirty-five (35) purchaser number, and (iii) the
Company, in compliance with California
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law, is granting the Warrants pursuant to this Warrant Certificate in
part in reliance on Warrantholder's representations made herein.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed.
INSIGHT HEALTH SERVICES CORP.
Attest:
/s/Marilyn U. MacNiven-Young By: /s/Leonard H. Habas
- ------------------------------------ -------------------------------
Marilyn U. MacNiven-Young Leonard H. Habas
Secretary Chairman, Compensation Committee
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CONFIDENTIAL CONFIDENTIAL
SEPARATION AGREEMENT
This Separation Agreement ("Agreement") is made as of July 19, 1999
and is entered into by and between InSight Health Services Corp., a Delaware
corporation ("Company") and E. Larry Atkins ("Atkins").
RECITALS
A. Until July 12, 1999, Atkins was President and CEO of the Company.
B. Atkins and the Company are parties to an Employment Agreement
dated February 23, 1996 ("Employment Agreement").
C. Atkins and the Company (or its subsidiaries) are also parties
to Stock Option Agreements dated January 18, 1995, October 2, 1996, July 18,
1997, and November 7, 1997 (collectively, "Stock Option Agreements").
D. The Company and Atkins have agreed that Atkins will voluntarily
resign from his employment with the Company and that the Company will make
certain payments and grant certain other benefits to Atkins upon the terms
and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth in this Agreement, the parties agree as follows:
1. RESIGNATION. Atkins hereby voluntarily resigns as President
and CEO of the Company, effective as of July 12, 1999, and from his
employment with the Company, effective as of July 31, 1999. Without limiting
the foregoing, Atkins also hereby resigns, effective as of July 12, 1999, as
a director of the Company, from any other Board committees and management
committees of the Company and as an officer of its subsidiaries and
affiliates. Concurrently with the execution of this Agreement, Atkins will
provide the Company with an original letter of resignation in the form
attached hereto as Exhibit "A." Atkins agrees to assist the Company in
effectuating a smooth transition of his responsibilities.
2. SEPARATION PAYMENTS AND BENEFITS.
(a) SALARY. The Company agrees to continue to pay to Atkins
an amount equal to his regular annual base salary ($292,000), less applicable
deductions and withholdings required by law, for the months of August 1999
through and including July 2001, ("Separation Payment Period") on the
Company's regular payroll dates. In the event that there is a Change of
Control (as defined in the Employment Agreement) of the Company other than a
transaction in which the current Series B and Series C Preferred Stockholders
acquire a majority of the outstanding Company Common Stock owned by the
public, Atkins shall be
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CONFIDENTIAL CONFIDENTIAL
paid on the effective date thereof in a lump sum the remaining monthly
payments due hereunder.
(b) EMPLOYEE BENEFIT PLANS. The Company agrees to
maintain, at the Company's expense, in full force and effect, for Atkins'
(and his dependants) continued benefit until the earlier of (i) twenty-four
(24) months following termination of employment or (ii) Atkins' eligibility
to participate in another life insurance, medical, health and accident and
disability plan or program, all life insurance, medical, health and accident,
and disability plans or programs, in which Atkins was entitled to participate
immediately prior to the date of termination of employment; provided that
Atkins' participation in any such plan or program is permitted under the
general terms and provisions of such plans or programs.
(c) REFERENCE. The Company agrees to provide Atkins with a
reference letter in the form attached hereto as Exhibit "B."
(d) OFFICE SPACE. The Company agrees to provide Atkins with
reasonable office space, telephone, voicemail and e-mail services through
August 31, 1999 for the purpose of facilitating a smooth transition of his
responsibilities.
(e) MAINTENANCE OF BUSINESS RELATIONSHIPS. During the
Separation Payment Period, Atkins agrees, upon the reasonable request of the
Company, to use his best efforts to assist the Company in maintaining its
business relationships with the customers, vendors and partners of the
Company existing on the date of this Agreement. Atkins will be reimbursed
for all reasonable out-of-pocket expenses incurred in connection with this
assistance. If Atkins breaches in any material respect his obligations under
this Paragraph 2(e), the separation payments and employee benefits to which
he would otherwise be entitled under Paragraph 2 (a) and (b) for the months
of August 2000 through and including July 2001, (or any shorter period,
commencing with the date of breach) shall no longer be paid by the Company.
3. STOCK OPTIONS. As of the date hereof, Atkins holds unvested
options covering an aggregate of 200,000 shares of Company Common Stock
pursuant to the Stock Option Agreements. In addition, Atkins holds vested
options covering an aggregate of 117,500 shares of Company Common Stock.
Pursuant to amendments to the Stock Option Agreements, Atkins and the Company
agree that (i) the unvested stock options will continue to vest for twelve
(12) months following termination of employment in accordance with the
vesting schedule set forth in the Stock Option Agreements and as described
on Exhibit "C" attached hereto, as if Atkins' employment had not been
terminated and (ii) the vested stock options and the unvested stock options
which will vest in accordance with (i) above, will be exercisable until
their expiration in accordance with the terms of the Stock Option Agreements
as if Atkins' employment had not been terminated. Atkins agrees that he will
provide at least three (3) business days prior written notice to the Company
of his intention to sell any or all shares of Company Common Stock which he
owns.
4. WAIVER OF ATKINS' RIGHTS UNDER EMPLOYMENT AGREEMENT. Except
for the continuing obligations of Atkins under Article V of the Employment
Agreement, the parties agree that said Employment Agreement is terminated in
its entirety, and both parties
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CONFIDENTIAL CONFIDENTIAL
expressly waive any notice periods for termination of the Employment
Agreement. Atkins agrees that he is not entitled to receive, and will not
claim, any damages, profits, compensation, bonuses, benefits, vacation, stock
options or rights other than those which are expressly set forth in this
Agreement. Atkins acknowledges that the consideration he is receiving under
this Agreement is in lieu of, and he hereby waives any other rights he may
have had under, the Employment Agreement, the Stock Option Agreements, and/or
any other agreements, express or implied, he may have had with the Company.
Except as otherwise provided herein, this Agreement supersedes all rights
and/or benefits Atkins may have or claim arising out of the Employment
Agreement, the Stock Option Agreements and other agreements he may have had
with the Company. Atkins acknowledges that this Agreement provides him with
consideration in addition to anything of value to which he is already
entitled.
5. NON-DISPARAGEMENT. Atkins represents and agrees that he has no
disagreement with the Company on any matter relating to his employment, the
termination of his employment or the Company's operations, policies, or
practices. In addition, Atkins covenants not to make any negative, harassing
or disparaging statements concerning the Company or any of its officers,
directors, employees, attorneys, stockholders, vendors, representatives,
agents or affiliates, either orally or in writing. The Company covenants not
to make any negative, harassing or disparaging statements concerning Atkins,
either orally or in writing.
6. RETURN OF COMPANY PROPERTY; EXPENSES.
(a) On or before July 31, 1999, Atkins will return all
Company property and equipment in his possession or under his control,
including, but not limited to, cell phones, computers, keys, credit cards,
manuals, notebooks, financial statements, reports and other property of the
Company; however, the Company agrees that the Toshiba laptop computer and
Hewlett Packard printer which are currently in Atkins' possession may be
retained by Atkins.
(b) On or before August 31, 1999, Atkins must submit to the
Company all outstanding business expenses for reconciliation and payment.
The Company will pay only for business expenses incurred through July 31,
1999, according to its established policy.
7. RELEASE BY ATKINS. Excepting only the obligations undertaken
by the Company in accordance with this Agreement, and in exchange for the
consideration provided to Atkins under this Agreement, Atkins hereby
releases, acquits, relieves, and forever discharges the Company and its
successors, heirs, assigns, employees, officers, directors, investors,
stockholders, agents, representatives, attorneys, benefit plans, parent
corporations, subsidiaries, divisions or affiliated corporations or
organizations, whether previously or hereinafter affiliated in any manner
(collectively, "Released Parties"), from any and all claims, rights, actions,
complaints, demands, causes of action, wage claims, obligations, promises,
contracts, agreements, controversies, suits, debts, expenses, damages,
attorneys' fees, costs, and liabilities of any nature whatsoever, matured or
unmatured, fixed or contingent, which Atkins ever had, now has, or may claim
to have from the beginning of time to the moment he signs
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CONFIDENTIAL CONFIDENTIAL
this Agreement against the Released Parties (whether directly or indirectly),
or any of them, by reason of any act, event or omission concerning any
matter, cause or thing, including, without limiting the generality of the
foregoing, any claims related to or arising out of: (a) Atkins' employment
with the Company or the termination of that employment; (b) any common law
torts, including, without limitation, infliction of emotional distress; (c)
any federal, state or governmental constitution, statute, regulation or
ordinance, including, without limitation, Title VII of the Civil Rights Act
of 1964, the California Fair Employment and Housing Act, and the Age
Discrimination in Employment Act; (d) any agreement, express or implied,
between Atkins and any of the Released Parties, including the Employment
Agreement and the Stock Option Agreements; (e) any impairment of his ability
to compete in the open labor market; or (f) any permanent or temporary
disability or loss of future earnings as a result of injury or disability
arising from or associated with his employment or termination of his
employment relationship with the Company; provided, however, that this
Paragraph is not intended to release claims for indemnification in connection
with his business activities as an officer and director of the Company during
the term of his employment with the Company, which are covered under the
Indemnification Agreement between the Company and Atkins dated September 19,
1996, a copy of which is attached hereto as Exhibit "D".
8. TRADE SECRETS AND PROPRIETARY INFORMATION. Atkins acknowledges
and agrees that: (a) by reason of his position with the Company, he has been
given access to procedures, plans, designs and expertise unique to the
Company, as well as the Company's expansion and marketing plans and other
confidential materials and information; and (b) the foregoing constitute
trade secrets and/or confidential information respecting the Company's
business affairs. Atkins acknowledges and agrees to comply with his
continuing obligations under Article V of the Employment Agreement. Atkins
also agrees, covenants and represents that he has held, and will hold, all
such information strictly confidential and that he will not disclose or use
such information for any reason without the prior written consent of the
Company. Atkins agrees to immediately return all documents and writings of
any kind, including both originals and copies within his custody, possession
or control, which contain any information which in any way relates or refers
to the Company.
9. ASSISTANCE/COOPERATION WITH LITIGATION. In connection with the
Company's participation in current or future litigation relating to events
which occurred during Atkins's employment or about which Atkins has
information, Atkins agrees to cooperate fully and devote all time which may
be reasonably required in the preparation, prosecution or defense of the
Company's case, including, but not limited to, the execution of truthful
declarations or providing information and/or documents requested by the
Company. In addition, Atkins shall be entitled to receive from the Company
reasonable travel and out-of-pocket expenses incurred by Atkins in connection
with his preparation for and/or participation in such litigation. Atkins
further agrees not to voluntarily assist any party and/or attorney in any
claim, dispute, charge, or litigation adverse to the Company. Nothing in
this Paragraph shall prohibit Atkins from testifying truthfully pursuant to a
subpoena or lawful court order.
10. LEGAL REPRESENTATION. Atkins is hereby advised to consult with
an attorney prior to executing this Agreement. The parties acknowledge that
they have had the opportunity to
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CONFIDENTIAL CONFIDENTIAL
receive the advice of independent legal counsel prior to the execution of
this Agreement and the opportunity to receive an explanation from legal
counsel of the legal nature and effect of the Agreement, and each party has
fully exercised that opportunity to the extent desired and understands the
terms and provisions of this Agreement and its nature and effect. Each party
further represents that it also is entering into this Agreement freely and
voluntarily, and not relying on the representations of any other party or of
the counsel of any other party. Each party expressly agrees that this
Agreement shall not be construed or interpreted for or against the party
drafting the Agreement.
11. NO ADMISSION. Nothing contained in this Agreement or the fact
that the parties have signed this Agreement shall be considered an admission
of any liability whatsoever.
12. CONFIDENTIALITY. Atkins agrees that this Agreement, including
the separation payments referred to in Paragraph 2 above, shall be and remain
confidential, and the parties promise and covenant not to disclose,
publicize, or cause to be disclosed or publicized in any manner, directly or
indirectly, any of the terms and conditions of this Agreement except: (a) to
his accountants, financial advisors, attorneys, and immediately family
members, provided such persons also agree to this pledge of confidentiality;
(b) state and federal taxing authorities; and (c) as legally required by
applicable law.
13. INJUNCTIVE RELIEF. Atkins agrees that it would be difficult to
measure the damage to the Company from any breach by Atkins of the covenants
set forth in Paragraphs 8 and 12 above, and in Article V of the Employment
Agreement, that injury to the Company from any such breach would be
impossible to calculate, and that money damages would therefore be an
inadequate remedy for any such breach. Accordingly, Atkins agrees that if
Atkins breaches any term of this Agreement, the Company shall be entitled, in
addition to and without limitation of all other remedies it may have, to
obtain injunctive or other relief to restrain any such breach without showing
or proving any such actual damage to the Company.
14. FEES AND COSTS. Atkins and the Company agree that in the event
of litigation relating to this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees and costs.
15. SUCCESSORS AND ASSIGNS. This Agreement, and all the terms and
provisions hereof, shall be binding upon and shall inure to the benefit of
the parties and their respective heirs, legal representatives, successors and
assigns.
16. WAIVER. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar. No waiver shall constitute a continuing waiver. No
waiver shall be binding unless executed in writing by the party charged with
the waiver.
17. SEVERABILITY. In the event any provision of this Agreement
shall finally be determined to be unlawful, such provision shall be deemed to
be severed from this Agreement and every other provision of this Agreement
shall remain in full force and effect. If, moreover, any one or more of the
provisions contained in this Agreement shall for any reason
5
<PAGE>
CONFIDENTIAL CONFIDENTIAL
be held to be excessively broad, it shall be construed, by limiting and
reducing it, so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
18. MISCELLANEOUS. Atkins and the Company agree that:
(a) Atkins has until 5:00 p.m. on August 10, 1999, or
twenty-one (21) days from receipt of this Agreement, whichever is later, to
consider it. The Company hereby advises Atkins to consult with an attorney
before signing this Agreement;
(b) for a period of seven (7) days following the signing of
this Agreement, Atkins may revoke the Agreement. This Agreement does not
become effective or enforceable until the revocation period has expired;
(c) this Agreement constitutes the entire agreement and
supersedes all prior written or oral and all contemporaneous oral agreements,
understandings and negotiations between the parties with respect to the
subject matter of this Agreement;
(d) this Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which shall constitute one and
the same instrument;
(e) this Agreement may not be amended except by an agreement
in writing signed by the parties to this Agreement of their respective
successors in interest and expressly stating that it is an amendment of this
Agreement; and
(f) this Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
California.
The parties have executed this Agreement as of the date written above.
COMPANY
INSIGHT HEALTH SERVICES CORP., a
Delaware corporation
Dated: July 19, 1999 By: /s/ Frank E. Egger
------------------------------------
Frank E. Egger
Chairman of the Board
6
<PAGE>
CONFIDENTIAL CONFIDENTIAL
I, E. Larry Atkins, have read and understand the foregoing Agreement, have
been provided the opportunity to consult with an attorney or other persons of
my choice before signing it, and I acknowledge that I am signing this
Agreement freely and voluntarily.
Dated: July 20, 1999 By: /s/ E. Larry Atkins
-------- ----------------------
E. Larry Atkins
7
<PAGE>
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
InSight Health Corp. Delaware
Mississippi Mobile Technology, Inc. Mississippi
Radiosurgery Centers, Inc. Delaware
Maxum Health Corp. Delaware
Quest Financial Services, Inc. Delaware
Maxum Health Services Corp. Delaware
DiagnosTemps, Inc. Delaware
Diagnostic Solutions Corp. Delaware
Maxum Health Services of North Texas, Inc. Texas
Maxum Health Services of Arlington, Inc. Texas
Maxum Health Services of Dallas, Inc. Texas
MTS Enterprises, Inc. Texas
NDDC, Inc. Texas
Open MRI, Inc. Delaware
Radiology Services Corp. Delaware
Signal Medical Services, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the previously filed Registration Statement (Form S-8, No.
333-16123) of our report dated September 24, 1999, with respect to the
consolidated financial statements of InSight Health Services Corp. included
in the Form 10-K for the year ended June 30, 1999.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
September 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 14,294
<SECURITIES> 0
<RECEIVABLES> 60,785
<ALLOWANCES> (24,798)
<INVENTORY> 0
<CURRENT-ASSETS> 57,583
<PP&E> 134,282
<DEPRECIATION> (43,611)
<TOTAL-ASSETS> 238,304
<CURRENT-LIABILITIES> 32,932
<BONDS> 161,116
0
37,096
<COMMON> 3
<OTHER-SE> 7,007
<TOTAL-LIABILITY-AND-EQUITY> 238,304
<SALES> 0
<TOTAL-REVENUES> 161,992
<CGS> 0
<TOTAL-COSTS> 128,307
<OTHER-EXPENSES> 14,193
<LOSS-PROVISION> 2,618
<INTEREST-EXPENSE> 14,500
<INCOME-PRETAX> 2,922
<INCOME-TAX> (3,190)
<INCOME-CONTINUING> 6,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,112
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.65
</TABLE>
