-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RG2TDuZwqlO31X7kGl3qej4VCkXg1DorQEJlQJrB/Kt8SWj1Z9wdJvGNdSDsi++1 yFzzu7tCqObbtWMw301wPg== /in/edgar/work/20000907/0000912057-00-040477/0000912057-00-040477.txt : 20000922 0000912057-00-040477.hdr.sgml : 20000922 ACCESSION NUMBER: 0000912057-00-040477 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH SERVICES CORP CENTRAL INDEX KEY: 0001012697 STANDARD INDUSTRIAL CLASSIFICATION: [8071 ] IRS NUMBER: 330702770 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28622 FILM NUMBER: 718556 BUSINESS ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: SUITE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 VON KARMAN AVE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-K 1 a2024859z10-k.txt 10-K 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, 2000 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 (I.R.S. Employer jurisdiction Identification of incorporation or No.) organization) 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 August 15, 2000 (based on the closing price on the NASDAQ Small Cap Market on that date) was $18,716,263. The number of shares outstanding of the Registrant's common stock as of August 15, 2000 was 2,993,543. 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. 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. CENTERS IN OPERATION The Company provides diagnostic imaging, treatment and related management services in 30 states throughout the United States. The Company's services are provided through a network of 77 mobile magnetic resonance imaging ("MRI") facilities ("Mobile Facilities"), 42 fixed-site MRI facilities ("Fixed Facilities"), 26 multi-modality imaging centers ("Centers"), four mobile lithotripsy facilities, one Leksell Stereotactic Gamma Unit ("Gamma Knife") treatment center, one positron emission therapy ("PET") fixed-site facility 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, nuclear medicine, bone densitometry, nuclear cardiology, and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services, marketing, radiology management services, and billing and collection services. DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY During approximately the last 30 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 MRI systems, CT scanners, digital ultrasound systems, computer-based nuclear gamma cameras, conventional x-ray and radiography/fluoroscopy 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: Magnetic resonance is a technique that utilizes low energy radiowaves to manipulate protons (usually hydrogen) in the body. MRI systems place patients in a magnetic field. Once in the magnetic field, the protons in a patient's body will tend to align with the magnetic field. Radio frequency ("RF") waves, produced by a radio antenna coil, which surrounds the body part to be imaged, are "pulsed" against the magnetic field. The RF energy is then turned off, and the protons are observed for different types of behavior, movement or "relaxation." Different tissues have different relaxation times, depending on the amount of hydrogen or water in each proton. The data on each proton's behavior is collected digitally by the system's computer and then reconstructed into cross-sectional images in three-dimensional planes of orientation. The resulting image reproduces soft tissue anatomy (as found in the brain, spinal cord and interior ligaments of body joints such as the knee) with superior clarity, not available by any other currently existing imaging modality. A typical MRI examination takes from 20 to 45 minutes. MRI systems are typically priced in the range of $0.9 million to $2 million each, depending upon the system configuration, magnet design and field strength. There are no known hazards to the general population from magnetic and RF fields of the intensity to which a patient is exposed in a clinical MRI system. Equipment literature nonetheless recommends that, until further information is available, pregnant women should be scanned only under limited circumstances. Furthermore, MRI magnets may disrupt the operation of cardiac pacemakers and may react with ferrous clips utilized in various surgical procedures, so that individuals with such devices may be excluded from examination with MRI systems, and access to the area 2 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 $0.8 million each, depending upon the specific performance characteristics of the systems. Based on the fact that CT systems have been commercially marketed for approximately 30 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. PET: PET scanning involves the administration of a radiopharmaceutical agent with a positron-emitting isotope and the measurement for the distribution of that isotope to create images for diagnostic purposes. PET scans provide the capability to determine how metabolic activity impacts other aspects of physiology in the disease process by correlating the reading from the PET study with other studies such as CT or MRI. PET technology has been found highly effective and appropriate in certain clinical circumstances for the detection and assessment of tumors throughout the body, the evaluation of certain cardiac conditions and the assessment of epilepsy seizure sites. The information provided by PET technology often obviates the need to perform further highly invasive and/or diagnostic surgical procedures. Interest in PET scanning has increased recently due to several factors including: expansion of available hardware options through the introduction of dual head gamma camera coincidence detection; increased payor coverage and reimbursement; the availability of the isotopes without an in-house cyclotron; and a growing recognition by clinicians that PET is a powerful diagnostic tool that can be used to evaluate and guide management of a patient's disease. PET systems are priced in the range of $1.0 million to $1.4 million each. Distribution networks have been established across the United States to ensure consistent availability of and access to the isotopes. The development of these networks has made mobile PET a business development opportunity. ULTRASOUND: Ultrasound systems emit, detect and process high frequency sound waves to generate images of soft tissues and internal body organs. The sound waves used in ultrasound do not involve ionizing radiation and are not known to cause any harmful effects to the patient. NUCLEAR MEDICINE: Nuclear medicine gamma cameras, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals injected or inhaled into the body, are used to provide information about organ function as opposed to anatomical structure. 3 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. BONE DENSITOMETRY: Bone densitometry, using an advanced technology called DEXA (dual-energy X-ray absorptiometry), safely, accurately and painlessly measures bone density and the mineral content of bone for the diagnosis of osteoporosis and other bone diseases. Bone densitometry uses an extremely low level of radiation and gives a quantifiable measurement of the patient's bone mass. When detected in its earlier stages, osteoporosis and other bone diseases can be treated with new drug therapies that have been shown to effectively slow or reverse the bone-loss process. GAMMA KNIFE: The Gamma Knife is a 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 continue to be developed, including treatment of patients for chronic pain and motion disorders such as Parkinson's disease, epilepsy and trigeminal neuralgia. The current selling price of a Gamma Knife system is approximately $3 million. 4 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; and (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 a 100% interest in three Centers and two Fixed Facilities in Phoenix, Arizona. The Company utilized the bank financing described below (see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this report) to fund the purchase price of these acquisitions. In fiscal 2000, the Company completed two acquisitions as follows: two Fixed Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90% interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The Company utilized its bank financing to fund the purchase price of these acquisitions. In fiscal 2000, the Company opened the following: its second radiology co-source outpatient Fixed Facility in Granada Hills, California; its third radiology co-source outpatient Center in Henderson, Nevada; and an Open MRI Fixed Facility in Pleasanton, California. These were financed through both capital leases with General Electric Company ("GE") and internally generated funds. In the first quarter of fiscal 2001, the Company opened its fourth radiology co-source Fixed Facility in Marina del Rey, California which was financed with a capital lease from GE and a PET Fixed Facility in Louisville, Kentucky, which was financed with outside financing. 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 healthcare 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 5 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: 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; except under regulations issued by the FDA pursuant to the Mammography Quality Standards Act of 1992, all mammography facilities are required to be accredited by an approved non-profit organization or state agency. Pursuant to the accreditation process each facility providing mammography services must comply with certain standards including annual inspection. Compliance with these standards is required to obtain payment for Medicare services and to avoid various sanctions, including monetary penalties, or suspension of certification. Although all of the Company's facilities which provide mammography services are currently accredited by the Mammography Accreditation Program of the American College of Radiology and the Company anticipates continuing to meet the requirements for accreditation, the withdrawal of such accreditation could result in the revocation of certification. Congress has extended Medicare benefits to include coverage of screening mammography subject to the prescribed quality standards described above. The regulations apply to diagnostic mammography and image quality examination as well as screening mammography. 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. 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 6 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 was a loosely defined Medicare provider category that was not specifically authorized to provide imaging services. Accordingly, certain carriers permitted IPLs to provide imaging services and others did not. In the past, the Company preferred, to the extent possible, to operate imaging centers for Medicare purposes as IPLs. The Company believed 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 has converted most of its imaging centers from IPLs 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 health care operations or services and/or the acquisition of major medical equipment including MRI and Gamma Knife systems. CON regulations may limit or preclude the Company from providing diagnostic imaging services or systems in certain states. The Company believes that it will not be required to obtain CONs in most of the states in which it intends to operate, and in those states where a CON is required, the Company believes it has complied or will comply with such requirements. Nevertheless, a significant increase in the number of states regulating the Company's business within the CON or state licensure framework could adversely affect the Company's business, financial condition and results of operations. Conversely, repeal of existing CON regulations in jurisdictions where the Company has obtained or operates under a CON could also adversely affect the Company's business, financial condition and results of operations as barriers to entry are reduced or removed. This is an area of continuing legislative activity, and there can be no assurance that the Company will not be subject to CON and licensing statutes in other states in which it operates or may operate in the future. 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. 7 On April, 7, 2000, HCFA published its final rules concerning a new prospective payment system ("OPPS") for most outpatient services in Medicare-participating hospitals. Effective August 1, 2000, Medicare will pay hospitals for outpatient services based on ambulatory payment classification ("APC") groups rather than on a hospital's costs. Each APC has been assigned a payment weight by HCFA. Under the new OPPS, the payment due a hospital for performing an outpatient service will be an amount based on the APC weight, a dollar based conversion factor, a geographic adjustment factor to account for area labor cost differences and any other adjustments applicable to the hospital or case. Because the new OPPS may initially have a severe adverse economic effect on hospitals, Congress enacted additional legislation in the Balanced Budget Refinement Act of 1999 ("BBA") to ease such effect for a specific period of time (through 2003). Under the BBA, hospitals may receive additional payments for new technologies, transitional pass-through for innovative medical devices, drugs and biologics, outlier adjustments and transitional corridors. Congressional and regulatory actions reflect industry-wide cost containment pressures which the Company believes will affect all health care providers for the foreseeable future. A recent initiative by HCFA to impose a 24% reduction in diagnostic imaging reimbursement over a four year period beginning January 1999 was indefinitely postponed due to flaws in HCFA's imaging center cost study. HCFA has indicated that it will continue to evaluate diagnostic imaging reimbursement; although, in January 2000, HCFA increased reimbursement for diagnostic imaging services by approximately 3% to 4% depending on the type of diagnostic imaging services provided. 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 8 reimbursement in response to reductions in government reimbursement, which could have an adverse impact on the Company's business, financial condition and results of operations. 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. 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. As a result of the implementation of the new OPPS, the Company believes that its hospital customers may seek reductions in contractual rates per procedure to the extent the hospital believes it will pay more to the Company than it will receive from Medicare and other third party payors. The reduction of contractual rates for a single customer or loss of a single customer to a competitor prepared to reduce contractual rates would not have a material adverse impact on the Company's contract services revenues; however, the reduction in contractual rates for several customers or loss of several contracts could have a material impact on the Company's business, financial condition and results of operations. On the other hand, the Company believes that the impact of the new OPPS on hospital payments for diagnostic imaging services -- especially for MRI and CT services -- may cause hospitals to consider restructuring their diagnostic outpatient imaging services as freestanding centers which are unaffected by the new OPPS. This may provide the Company with additional opportunities for its radiology co-source product which involves the joint ownership and management of single and multi-modality imaging centers with hospitals. Given the infancy and complexity of the new OPPS it is difficult to determine whether hospitals will be receiving less from Medicare (after they take advantage of the additional payments that may be available under the BBA) and to what extent they will attempt to renegotiate existing contractual arrangements. 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 believes its patient services revenues received from Medicare will not be materially impacted because it primarily operates freestanding imaging centers, which will be unaffected by the new OPPS. See "Reimbursement of Health Care Costs". 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". 9 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 nonrenewal 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. See "Reimbursement of Health Care Costs". DIAGNOSTIC IMAGING AND OTHER EQUIPMENT The Company estimates that it has invested approximately $89 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 179 diagnostic imaging and treatment systems, of which 122 are conventional MRI systems, 28 are Open MRI systems, 21 are CT systems, four are lithotripters, two are radiation oncology systems, one is a PET system and one is a Gamma Knife. The Company owns 149 of its imaging and treatment systems and has operating leases for the remaining 30 systems. Of the Company's 122 conventional MRI systems, 61% have a magnet strength of 1.5 Tesla and 32% have a magnet strength of 1.0 Tesla. Currently, the industry standard magnet strength for fixed and mobile MRI 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. The Company's master lease agreement with GE Medical Systems ("GEMS") includes a variable lease arrangement for 8 of the Company's 30 leased imaging 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 $29,000 per month to lease each system. Under the variable rate election, the Company may choose to pay a monthly rental fee averaging $18,000 per system, plus 40% of the operating profits generated by such system, or to store idle systems at a fixed location for a monthly payment to GEMS of $1,500 per system, representing approximately half of the monthly maintenance costs for an idle system. The Company's variable lease arrangement with GEMS covers most of the Company's older systems, which the Company either has upgraded or expects to replace within the next 18 to 24 months. As of August 1, 2000, the Company had elected the variable lease option with respect to one of the eight systems in the variable rate pool. 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 10 to those types of diagnostic imaging systems which appear most appropriate for the specific diagnostic or treatment center to be established. EMPLOYEES As of August 1, 2000, the Company had approximately 1,100 full-time, 70 part-time and 340 per diem employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes its employee relations to be satisfactory. COMPANY HISTORY The Company was incorporated in Delaware in February 1996. The Company's predecessors, InSight Health Corp. (formerly American Health Services Corp. ("AHS")) ("IHC"), and Maxum Health Corp. ("MHC"), became wholly owned subsidiaries of the Company on June 26, 1996, pursuant to an Agreement and Plan of Merger among the Company, IHC and MHC (the "Merger"). 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; and (b) GE (i) surrendered its rights under the amended equipment service agreement to receive supplemental service fee payments equal to 14% of pretax income in exchange for (A) the issuance of 7,000 shares of newly issued convertible preferred stock, Series C of the Company, par value $0.001 per share ("Series C Preferred Stock") initially convertible, at the option of GE, in the aggregate into 835,821 shares of common stock, for which the Company recorded a non-recurring expense of approximately $6.3 million, and (B) warrants ("GE Warrants") to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share and (ii) exchanged all of its 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. 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 regulations; 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 11 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, 2000:
APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ---------------- ----------- --------- 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 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 (2) 1,500 Atlanta, Georgia InSight Diagnostic Imaging Center - N. 18th Place 1,800 Phoenix, Arizona Open MRI of Indianapolis 1,900 Indianapolis, Indiana Lockport MRI 2,200 N. Tonawanda, New York Lockport MRI 2,400 Lockport, New York Open MRI of Southern Regional 2,400 Clarksville, Indiana Redwood City MRI 2,900 Redwood City, California InSight 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 Open MRI of Pleasanton 4,400 Pleasanton, California InSight 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 InSight 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 7,300 Lewiston, Maine St. John's Regional Imaging Center 7,700 Oxnard, California Wilkes-Barre Imaging Center 8,200 Wilkes Barre, Pennsylvania Ocean Medical Imaging Center 8,700 Tom's River, New Jersey InSight Diagnostic Imaging Center - E. Thomas Road 10,600 Phoenix, Arizona Broad Street Imaging Center 12,700 Columbus, Ohio Parkway Imaging Center 17,500 Henderson, Nevada Maxum Diagnostic Center - Forest Lane 18,500 Dallas, Texas InSight Mountain Diagnostics 19,100 Las Vegas, Nevada
(1) The Company owns the building and holds the related land under a long-term lease. (2) In connection with the closure of the Open MRI Fixed Facility in Atlanta, Georgia, the Company has a lease expiring in 2002, which it intends to sub-lease or terminate. 12 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. 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 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 alleged that, among other things, in March 1994, MHC 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 alleged 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 were providing services to IHC. The plaintiff's complaint included claims of unfair competition, breach of contract, collusion, business disparagement and tortious interference with contractual relations. The complaint requested a judgment for actual and exemplary damages in unspecified amounts, attorney's fees, pre-judgment and post judgment interest, costs and disbursements. On January 26, 2000, the parties entered into a settlement agreement pursuant to which IHC paid the plaintiff an immaterial monetary settlement for all of the plaintiff's claims and the plaintiff and defendants mutually released each other from any other claims. As part of the settlement agreement, InfoTech, Alchemy and Messrs. Railey and Gardner assigned to IHC all rights to all source codes for software developed by them. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 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.
QUARTER ENDED LOW HIGH - ------------- --- ---- September 30, 1999 5 6 15/16 December 31, 1999 4 5/8 6 1/2 March 31, 2000 5 11/16 11 1/2 June 30, 2000 5 3/4 8 3/8 September 30, 1998 6 12 December 31, 1998 4 1/2 9 March 31, 1999 5 8 June 30, 1999 4 15/16 9
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 August 15, 2000, the Company's records indicate that there were in excess of 1,900 beneficial holders of common stock and approximately 440 stockholders of record. The following securities were sold by the Company during the period covered by this report on Form 10-K which, pursuant to the exemption provided under Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"), were not registered under the Securities Act: On June 21, 2000, the Company issued to SHP Capital Markets Inc., pursuant to the cashless exercise of 35,000 warrants, 7,252 shares of the Company's common stock. 14 ITEM 6. SELECTED FINANCIAL DATA 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, 2000, 1999, 1998 and 1997, the six months ended June 30, 1996 and 1995 (unaudited), and for the year ended December 31, 1995 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, 2000, 1999 and 1998, 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) SIX MONTHS ENDED YEARS ENDED JUNE 30, --------------------- YEAR ENDED -------------------------------------------- JUNE 30, JUNE 30, DECEMBER 31, 2000 1999 1998 1997 1996 (1) 1995(1)(8) 1995(1) ---------- ---------- --------- --------- --------- ---------- --------------- STATEMENT OF OPERATIONS DATA: Revenues $ 188,574 $ 161,992 $ 119,018 $ 92,273 $ 26,460 $ 24,434 $ 50,609 Operating income (loss) (2) (3) 27,016 17,422 7,770 5,774 (2,949) (331) (1,193) Interest expense, net 18,696 14,500 6,827 4,066 1,144 648 1,626 Net income (loss) (4) (5) (6) 7,189 6,112 512 1,281 (979) (979) (4,319) Income (loss) per common and converted preferred share (7): Basic $ 0.78 $ 0.67 $ 0.06 $ 0.25 $ (0.70) $ (0.73) $ (3.21) ======== ======== ======== ======= ======== ======== ======== Diluted $ 0.76 $ 0.65 $ 0.06 $ 0.24 $ (0.70) $ (0.73) $ (3.21) ======== ======== ======== ======= ======== ======== ======== JUNE 30, ------------------------------------------------------- DECEMBER 31, BALANCE SHEET DATA: 2000 1999 1998 1997 1996 1995 (1) ---------- ---------- --------- --------- --------- ------------- Working capital (deficit) $ 20,814 $ 24,651 $ 36,109 $ (6,162) $ (1,441) $ (2,228) Property and equipment, net 148,469 90,671 75,146 34,060 29,349 12,386 Intangible assets 93,930 80,327 74,831 32,579 16,216 4,047 Total assets 328,872 238,304 231,592 97,271 69,313 28,306 Total long-term liabilities 221,307 161,266 155,642 59,205 39,839 19,723 Stockholders' equity (deficit) 51,487 44,106 37,858 6,685 5,404 (4,005)
(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 an extraordinary gain on debt extinguishment of $3.2 million in 1996. (6) Includes an income tax benefit of $3.5 million in 1999. (7) 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, 1995. (8) Unaudited. (9) No cash dividends have been paid on the Company's common stock for the periods indicated above. 15 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 the following factors: availability of financing; limitations and delays in reimbursement by third party payors; contract renewals and financial stability of customers; technology changes; governmental regulations; conditions within the health care environment; Year 2000 issues; adverse utilization trends for certain diagnostic imaging procedures; aggressive competition; general economic factors; successful integration of acquisitions; and the risk 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. 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; and (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 a single or multi-modality facility on a hospital campus. The Company believes that long-term viability is contingent upon its ability to successfully execute its business strategy. 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 aggregate purchase price for these two acquisitions was approximately $16.9 million, subject to certain earn-out provisions relating to the Buffalo, New York acquisition. In fiscal 2000, the Company completed two acquisitions as follows: two Fixed Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90% interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The aggregate purchase price for these two acquisitions was approximately $24.5 million. In fiscal 2000, the Company opened the following: its second radiology co-source outpatient Fixed Facility in Granada Hills, California; its third radiology co-source outpatient Center in Henderson, Nevada; and an Open MRI Fixed Facility in Pleasanton, California. These were financed through both capital leases with GE and internally generated funds. In fiscal 2000, the Company closed an Open MRI Fixed Facility in Atlanta, Georgia. In the first quarter of fiscal 2001, the Company opened its fourth radiology co-source Fixed Facility in Marina del Rey, California, which was financed with a capital lease from GE and a PET Fixed Facility in Louisville, Kentucky, which was financed with outside financing. 16 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. The Company continues to pursue acquisition opportunities. The Company believes that the expansion of its business through acquisitions is a key factor in improving profitability. Generally, acquisition opportunities are aimed at increasing revenues and operating income, and maximizing utilization of existing capacity. Incremental operating income 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 1996, the Company has completed twelve acquisitions. 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. In addition, the Company's acquisition facility has expired, and until alternate financing sources can be arranged, the Company will have to utilize its own internally generated funds to complete future acquisitions, as discussed below. The Company has outstanding $100 million of 9 5/8% senior subordinated notes (Notes). The Notes mature in June 2008, with interest payable semi-annually and 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 indebtedness, as defined in the indenture, of the Company, including borrowings under the bank financing described below. The terms of the Notes contain certain restrictions on the Company's ability to take certain actions without first obtaining consent of the noteholders. The Company also has the following credit facilities with Bank of America, N.A.: (i) a $50 million term loan which matures in June 2004, (ii) a $25 million working capital facility which expires in June 2003, and (iii) a $75 million acquisition facility which matures in June 2004, the availability of which expired on June 12, 2000 (Bank Financing). Borrowings under the Bank Financing bear interest at LIBOR plus 1.75%. The Company is required to pay an annual unused facility fee of 0.375%, payable quarterly, on unborrowed amounts under the working capital facility. The Company paid approximately $0.3 million during the year ended June 30, 2000 for unused facility fees on unborrowed amounts under the working capital and acquisition facilities. At June 30, 2000, there was approximately $35.0 million and $54.1 million in borrowings under the term loan and the acquisition facilities, respectively; however, there were no borrowings under the working capital facility. The Company did not completely utilize the acquisition facility prior to its expiration and until alternate financing sources can be arranged, the Company will have to utilize its own internally generated funds to complete future acquisitions. As of June 30, 2000, the Company had cash on hand of approximately $27.1 million, which it may utilize to consummate such acquisitions. As of August 15, 2000, the Company had borrowing availability of approximately $25 million under the working capital facility. Net cash provided by operating activities was approximately $40.5 million for the year ended June 30, 2000. Cash provided by operating activities resulted primarily from net income before depreciation and amortization (approximately $40.8 million) and an increase in accounts payable and other accrued expenses (approximately $6.1 million). The increase in accounts payable and other accrued expenses is due primarily to approximately $5.5 million in equipment costs for the delivery of three Mobile Facilities in June 2000. The increase was offset by an increase in trade accounts receivables (approximately $4.6 million) and an increase in other current assets (approximately $1.8 million). The increase in trade accounts receivables is due primarily to the Company's acquisition and development activities. Net cash used in investing activities was approximately $49.0 million for the year ended June 30, 2000. Cash used in investing activities resulted primarily from the (i) Company purchasing or upgrading diagnostic imaging equipment at its existing facilities (approximately $23.1 million), (ii) the acquisitions described above (approximately $23.9 million), and (iii) purchasing or upgrading diagnostic imaging equipment at the facilities acquired in fiscal 2000 and 1999 described above (approximately $1.4 million). 17 Net cash provided by financing activities was approximately $21.4 million for the year ended June 30, 2000, resulting primarily from net borrowings under the working capital and acquisition facilities (approximately $34.8 million), offset by principal payments of debt and capital lease obligations (approximately $15.0 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 Centers, Fixed and Mobile Facilities, at an aggregate cost of approximately $12.4 million, 10 MRI systems for delivery through December 31, 2000. The Company expects to use either internally generated funds or leases from GE to finance the purchase of such equipment. In addition, the Company previously committed to purchase or lease from GE 24 Open MRI systems. As of June 30, 2000, the Company had not taken delivery of two such MRI systems, which are included in the commitments discussed above. 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. Effective December 1, 1999, the Company purchased 38 pieces of diagnostic imaging equipment from GE by converting operating leases to capital leases. The capital leases bear interest at 9% per annum, have 48 to 72 month terms and contain a $1.00 buyout at the end of each lease. The total purchase price was approximately $45 million. For the seven months ended June 30, 2000, equipment lease expense was reduced by approximately $7.0 million, and depreciation and interest combined was increased by approximately the same amount. The Company believes, on an annualized basis, equipment lease expense will be reduced by approximately $12 million, and depreciation and interest will be increased by approximately the same amount. The Company also purchased four pieces of diagnostic imaging equipment which were also financed through capital leases with GE. The total purchase price was approximately $7.0 million. 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, as discussed above. The Company's acquisition strategy may require sources of capital in addition to that currently available to the Company. The Company expects, subject to market conditions, to obtain additional acquisition financing in the third quarter of fiscal 2001. 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, 2000 AND 1999 REVENUES: Revenues increased approximately 16.4% from approximately $162.0 million for the year ended June 30, 1999, to approximately $188.6 million for the year ended June 30, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $15.2 million) and an increase in contract services and patient services revenues (approximately $12.7 million) at existing facilities, offset by a decrease in other revenues (approximately $1.3 million), primarily due to a one-time settlement payment in connection with an earn-out from the sale of the Company's lithotripsy partnerships which was recorded in fiscal 1999 (approximately $0.4 million). Contract services revenues increased approximately 17.1% from approximately $85.5 million for the year ended June 30, 1999, to approximately $100.1 million for the year ended June 30, 2000. This increase was due primarily to the acquisitions discussed above (approximately $4.0 million) and an increase in the Company's existing business (approximately $10.6 million). The increase in existing business was due to (i) the addition of six Mobile Facilities and (ii) higher utilization (approximately 14%) at the Company's existing mobile customer base, 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, 2000. 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 18 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. As a result of the implementation of the new OPPS for outpatient services, the Company's contract services revenues could be adversely affected. See "Reimbursement of Health Care Costs" and "Customers and Fees". Patient services revenues increased approximately 17.9% from approximately $73.6 million for the year ended June 30, 1999, to approximately $86.8 million for the year ended June 30, 2000. This increase was due primarily to the acquisitions and opened Fixed Facilities discussed above (approximately $11.1 million) and an increase in revenues at existing facilities (approximately $2.3 million), offset by reduced revenues from the closure of the Open MRI Fixed Facility discussed above (approximately $0.2 million). The increase at existing facilities was due to higher utilization (approximately 9%), partially offset by a decline in reimbursement from third party payors (approximately 3%). 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, 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 15.3% from approximately $131.3 million for the year ended June 30, 1999, to approximately $151.4 million for the year ended June 30, 2000. This increase was due primarily to additional costs related to the acquisitions and opened Fixed Facilities discussed above (approximately $14.5 million) and at existing facilities (approximately $5.9 million), offset by reduced expenses for the closed Open MRI Fixed Facility discussed above (approximately $0.3 million). Costs of operations, as a percentage of total revenues, decreased to approximately 80.3% for the year ended June 30, 2000 from approximately 81.1% for the year ended June 30, 1999. The percentage decrease is primarily due to reduced costs in equipment leases and depreciation, equipment maintenance and occupancy, offset by higher salary and benefit costs. The Company is continuing its effort to improve operating efficiencies through cost reduction initiatives. The cost reduction initiatives are focused primarily on costs for diagnostic imaging equipment, including lease, depreciation and maintenance, occupancy, marketing and salary and benefits. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 3.8% from approximately $10.5 million for the year ended June 30, 1999, to approximately $10.9 million for the year ended June 30, 2000. This increase was due primarily to additional information systems costs, offset by a decrease in travel, legal and consulting costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 6.5% for the year ended June 30, 1999, to approximately 5.8% for the year ended June 30, 2000. INTEREST EXPENSE, NET: Interest expense, net increased approximately 29.0% from approximately $14.5 million for the year ended June 30, 1999, to approximately $18.7 million for the year ended June 30, 2000. This increase was due primarily to additional debt related to (i) the acquisitions discussed above, (ii) the buy-out of operating leases discussed above, (iii) higher interest rates on the Company's floating rate debt and (iv) the Company 19 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 increased from a benefit of approximately $3.2 million for the year ended June 30, 1999, to approximately $1.1 million for the year ended June 30, 2000. The increase 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 in 1999. The effective tax rate increased to approximately 14% in 2000 from approximately 11% in 1999 primarily as a result of the effects of benefits from the Company's net operating loss carryforwards. At the beginning of each fiscal year, the Company estimates its effective tax rate for the fiscal year. In addition, the Company periodically reviews the effective tax rate in light of certain factors, including actual operating income, acquisitions completed and new business development and the effects of benefits from the Company's net operating loss carryforwards. This review may result in an increase or decrease in the effective tax rate during the fiscal year. INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.76 for the year ended June 30, 2000, compared to net income per common and converted preferred share of $0.65 for the year ended June 30, 1999. Excluding the one-time provision for reorganization and other costs and the benefit for income taxes, net income per common and converted preferred share on a diluted basis for the year ended June 30, 1999 would have been $0.63. The increase in net income per common and converted preferred share is the result of (i) increased income from company operations and (ii) an increase in earnings from unconsolidated partnerships, as a result of new diagnostic imaging equipment installed in 1999, offset by (i) increased interest expense and (ii) an increase in provision for income taxes. 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 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%). 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 facilities 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). COSTS OF OPERATIONS: Costs of operations increased approximately 35.5% from approximately $96.9 million for the year ended June 30, 1998, to approximately $131.3 million for the year ended June 30, 1999. This increase was due primarily to an increase in costs due to the acquisitions and opened facilities discussed above (approximately $25.4 million) and an increase in costs at existing facilities (approximately $10.1 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 81.4% for the year ended June 30, 1998, to approximately 81.1% for the year ended June 30, 1999. The percentage decrease was 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 was offset by higher salaries and benefits and marketing costs. 20 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the Recapitalization 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 19.3% from approximately $8.8 million for the year ended June 30, 1998, to approximately $10.5 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 7.4% for the year ended June 30, 1998, to approximately 6.5% 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 was 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 was 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. 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. 21 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 occurred, computer programs, computers and embedded microprocessors controlling equipment with date-sensitive systems might have recognized Year 2000 as 1900 or not at all. This inability to recognize or properly treat Year 2000 might have resulted in computer system failures or miscalculations of critical financial and operational information as well as failures of equipment controlling date-sensitive microprocessors. In addition, miscalculations or failures could have been 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. The Company's primary focus was 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 developed a Year 2000 Plan to address all of its Year 2000 Issues. The Company gave its Executive Vice President and Chief Information Officer specific responsibility for managing its Year 2000 Plan and a Year 2000 Committee was established to assist in developing and implementing the Year 2000 Plan. As of August 15, 2000, the Company had not experienced and does not expect to experience any material disruptions to its operations due to Year 2000 Issues; however, no assurance can be given that the Company has assessed, identified or corrected all Year 2000 Issues that may arise in the coming months. The Company completed, prior to December 31, 1999, assessment, renovation, testing and implementation of all of its internal information technology systems, embedded microprocessors in its other equipment, facilities and corporate and regional offices, and its diagnostic imaging equipment. The Company also completed, prior to December 31, 1999, its assessment of the potential Year 2000 problems with the information systems of its payors, customers, business partners, landlords and vendors. As part of the Company's Year 2000 Plan, it requested readiness statements from any third parties whose non-compliance could materially adversely affect the Company. As of August 15, 2000, the Company had not experienced any Year 2000 Issues with its payors, customers, business partners, landlords, vendors and third parties. PRIOR COST ESTIMATES TO ADDRESS YEAR 2000 ISSUES: The Company originally estimated the cost of assessment, renovation, testing and implementation would range from approximately $500,000 to $800,000, primarily related to capital expenditures for the replacement of diagnostic imaging equipment. As of August 15, 2000, the Company had incurred less than $650,000 in costs relating to consultants, additional personnel, programming, new software and hardware, software upgrades, travel expenses and the replacement of a piece of non-compliant diagnostic imaging equipment at a Center (approximately $470,000), which was scheduled for replacement in fiscal 2001. The Company's costs may increase if additional Year 2000 Issues arise in the future. RISKS TO THE COMPANY: Although the Company has completed the implementation of its Year 2000 Plan and has not encountered any material Year 2000 Issues, there are risks if its efforts did not address all uncertainties or that all uncertainties have been properly identified. A failure by the Company in remedying a Year 2000 Issue, or its failure to be, or the failure of its payors, customers, business partners, landlords, vendors and other third parties to be, Year 2000 compliant, could, in the worst-case scenario, cause a business interruption which may materially adversely affect the Company's business, financial condition and results of operations depending upon the extent and duration of the business interruption. CONTINGENCY PLANS: The Company implemented a contingency plan to address unavoided or unavoidable Year 2000 risks with internal information technology systems and with customers, vendors and other third parties but no assurance can be given that such plan will address all risks that may actually arise. 22 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, 2000, the Company had long-term debt of approximately $89.1 million which has floating rate terms. The Company also had outstanding an interest rate swap, converting $37.5 million of its 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. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements for the Years Ended June 30, 2000, 1999 and 1998
PAGE NUMBER ----------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 25 CONSOLIDATED BALANCE SHEETS 26 CONSOLIDATED STATEMENTS OF INCOME 27 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 28 CONSOLIDATED STATEMENTS OF CASH FLOWS 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30-50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 58 SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 59
24 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended June 30, 2000, 1999, and 1998. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InSight Health Services Corp. and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for the years ended June 30, 2000, 1999, and 1998, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Orange County, California September 1, 2000 25 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND 1999 (Amounts in thousands, except share and per share data)
2000 1999 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 27,133 $ 14,294 Trade accounts receivables, net 40,598 35,987 Other current assets 5,811 3,952 Deferred income taxes 3,350 3,350 ---------- ---------- Total current assets 76,892 57,583 ---------- ---------- PROPERTY AND EQUIPMENT, net 148,469 90,671 INVESTMENTS IN PARTNERSHIPS 1,782 1,415 OTHER ASSETS 7,799 8,308 INTANGIBLE ASSETS, net 93,930 80,327 ---------- ---------- $ 328,872 $ 238,304 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment and other notes $ 18,813 $ 10,580 Current portion of capital lease obligations 10,652 1,863 Accounts payable and other accrued expenses 26,613 20,489 ---------- ---------- Total current liabilities 56,078 32,932 ---------- ---------- LONG-TERM LIABILITIES: Equipment and other notes, less current portion 172,379 153,986 Capital lease obligations, less current portion 46,388 6,201 Other long-term liabilities 2,540 1,079 ---------- ---------- Total long-term liabilities 221,307 161,266 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series B preferred stock, 25,000 shares outstanding at June 30, 2000 and 1999, with a liquidation preference of $25,000 as of June 30, 2000 23,923 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at June 30, 2000 and 1999, with a liquidation preference of $27,953 as of June 30, 2000 13,173 13,173 Common stock, $.001 par value, 25,000,000 shares authorized, 2,979,293 and 2,879,071 shares outstanding at June 30, 2000 and 1999, respectively 3 3 Additional paid-in capital 23,743 23,551 Accumulated deficit (9,355) (16,544) ---------- ---------- Total stockholders' equity 51,487 44,106 ---------- ---------- $ 328,872 $ 238,304 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 26 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Amounts in thousands, except share and per share data)
2000 1999 1998 ------------ ------------ ----------- REVENUES: Contract services $ 100,135 $ 85,491 $ 55,661 Patient services 86,838 73,565 59,669 Other 1,601 2,936 3,688 ---------- ---------- ---------- Total revenues 188,574 161,992 119,018 ---------- ---------- ---------- COSTS OF OPERATIONS: Costs of services 101,323 85,317 62,378 Provision for doubtful accounts 2,907 2,618 1,871 Equipment leases 13,569 18,522 17,023 Depreciation and amortization 33,630 24,886 15,615 ---------- ---------- ---------- Total costs of operations 151,429 131,343 96,887 ---------- ---------- ---------- Gross profit 37,145 30,649 22,131 CORPORATE OPERATING EXPENSES 10,946 10,475 8,759 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION - - 6,309 PROVISION FOR REORGANIZATION AND OTHER COSTS - 3,300 - ---------- ---------- ---------- Income from company operations 26,199 16,874 7,063 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 817 548 707 ---------- ---------- ---------- Operating income 27,016 17,422 7,770 INTEREST EXPENSE, net 18,696 14,500 6,827 ---------- ---------- ---------- Income before income taxes 8,320 2,922 943 PROVISION (BENEFIT) FOR INCOME TAXES 1,131 (3,190) 431 ---------- ---------- ---------- Net income $ 7,189 $ 6,112 $ 512 ========== ========== ========== INCOME PER COMMON AND CONVERTED PREFERRED SHARE: Basic $ 0.78 $ 0.67 $ 0.06 ========== ========== ========== Diluted $ 0.76 $ 0.65 $ 0.06 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED PREFERRED SHARES OUTSTANDING: Basic 9,257,658 9,158,041 7,964,238 ========== ========== ========== Diluted 9,397,908 9,375,531 8,271,298 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 27 INSIGHT HEALTH SERVICES CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Amounts in thousands, except share data)
Preferred Stock ------------------------------------------------------------------------------- Series A Series B Series C --------------------------- ------------------------ ---------------------- Shares Amount Shares Amount Shares Amount ------------- ---------- ---------- ---------- --------- ---------- 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 - - - - (1,007) - 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 Stock options and warrants exercised - - - - - - Net income - - - - - - ------------ --------- --------- --------- -------- --------- BALANCE AT JUNE 30, 2000 - $ - 25,000 $ 23,923 27,953 $ 13,173 ============ ========= ========= ========= ======== ========= Common Stock Additional --------------------------- Paid-In Accumulated Shares Amount Capital Deficit Total ------------- --------- ------------ ----------- ----------- 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 - - - - - 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 Stock options and warrants exercised 100,222 - 192 - 192 Net income - - - 7,189 7,189 ------------ -------- ----------- ---------- ---------- BALANCE AT JUNE 30, 2000 2,979,293 $ 3 $ 23,743 $ (9,355) $ 51,487 ============ ======== =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements 28 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Amounts in thousands)
2000 1999 1998 ---------- ---------- ---------- OPERATING ACTIVITIES: Net income $ 7,189 $ 6,112 $ 512 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 33,630 24,887 15,749 Amortization of deferred gain on debt restructure -- (75) (1,384) Provision for supplemental service fee termination -- -- 6,309 Cash provided by (used in) changes in operating assets and liabilites: Trade accounts receivables (4,611) (8,324) (5,853) Other current assets (1,803) (4,106) (316) Accounts payable and other accrued expenses 6,119 (7,602) 3,199 --------- --------- --------- Net cash provided by operating activities 40,524 10,892 18,216 --------- --------- --------- INVESTING ACTIVITIES: Cash acquired in acquisitions -- 850 4,174 Acquisition of Centers, Fixed and Mobile Facilities (25,346) (28,046) (56,720) Additions to property and equipment (23,170) (18,440) (23,644) Other (554) (1,565) (1,978) --------- --------- --------- Net cash used in investing activities (49,070) (47,201) (78,168) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock -- -- 23,346 Proceeds from stock options and warrants exercised 192 115 315 Proceeds from issuance of common stock -- 21 -- Payment of loan financing costs -- -- (6,483) Principal payments of debt and capital lease obligations (25,468) (17,495) (150,928) Proceeds from issuance of debt 45,200 23,820 231,480 Other 1,461 (598) 78 --------- --------- --------- Net cash provided by financing activities 21,385 5,863 97,808 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 12,839 (30,446) 37,856 Cash, beginning of year 14,294 44,740 6,884 --------- --------- --------- Cash, end of year $ 27,133 $ 14,294 $ 44,740 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 18,086 $ 14,923 $ 7,048 Income taxes paid 452 71 170 Equipment additions under capital leases 55,290 1,507 7,517
The accompanying notes are an integral part of these consolidated financial statements. 29 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. NATURE OF BUSINESS The Company was incorporated in Delaware in February 1996. The Company's predecessors, InSight Health Corp. (formerly American Health Services Corp.) (IHC), and Maxum Health Corp. (MHC), became wholly owned subsidiaries of the Company on June 26, 1996, pursuant to an Agreement and Plan of Merger among the Company, IHC and MHC (the Merger). The Company provides diagnostic imaging, treatment and related management services in 30 states throughout the United States. InSight's services are provided through a network of 77 mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 42 fixed-site MRI facilities (Fixed Facilities), 26 multi-modality imaging centers (Centers), four mobile lithotripsy facilities, one Leksell Stereotactic Gamma Knife treatment center, one positron emission therapy (PET) Fixed Facility, 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, nuclear medicine, bone densitometry, nuclear cardiology, and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services, marketing, radiology management services, 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 12). Significant intercompany balances have been eliminated. c. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 liquid investments with original maturities of three months or less, such as certificates of deposit and commercial paper. 30 f. PROPERTY AND EQUIPMENT Property and equipment are depreciated and amortized on the straight-line method using the following estimated useful lives: Vehicles 3 to 8 years Buildings 7 to 20 years Leasehold improvements Term of lease Computer and office equipment 3 to 5 years Diagnostic and related equipment 5 to 8 years Equipment and vehicles under capital leases Term of lease 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: Goodwill 5 to 20 years Other 3 to 7 years 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 by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. 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. 31 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. 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 1999 and 1998 amounts to conform to the 2000 presentation. 2. TRADE ACCOUNTS RECEIVABLES Trade accounts receivables, net are comprised of the following (amounts in thousands):
June 30, ------------------------------ 2000 1999 ------------ ------------ Trade accounts receivables $ 70,907 $ 60,785 Less: Allowances for doubtful accounts and contractual adjustments 22,291 17,822 Allowances for professional fees 8,018 6,976 ---------- ---------- Trade accounts receivables, net $ 40,598 $ 35,987 ========== ==========
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 receivables. 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, 2000. The Company reserves a contractually agreed upon percentage at several of its Centers and Fixed Facilities, averaging 20 percent of the accounts receivables 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. 32 3. PROPERTY AND EQUIPMENT Property and equipment, net are stated at cost and are comprised of the following (amounts in thousands):
June 30, ------------------------------ 2000 1999 ------------ ----------- Vehicles $ 2,426 $ 2,015 Land, building and leasehold improvements 24,265 18,003 Computer and office equipment 19,192 16,496 Diagnostic and related equipment 107,639 91,743 Equipment and vehicles under capital leases 57,752 6,025 ---------- --------- 211,274 134,282 Less: Accumulated depreciation and amortization 62,805 43,611 ---------- --------- Property and equipment, net $ 148,469 $ 90,671 ========== =========
4. INTANGIBLE ASSETS Intangible assets consist of the following (amounts in thousands):
June 30, ------------------------------ 2000 1999 ------------ ----------- Intangible assets $ 108,014 $ 89,714 Less: Accumulated amortization 14,084 9,387 ---------- --------- $ 93,930 $ 80,327 ========== ========= Net intangible assets: Goodwill $ 92,980 $ 79,163 Other 950 1,164 ---------- --------- $ 93,930 $ 80,327 ========== =========
Amortization of intangible assets was approximately $5.3 million, $4.7 million, and $2.8 million for the years ended June 30, 2000, 1999 and 1998, respectively. 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 aggregate 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 aggregate purchase price for these two acquisitions was approximately $16.9 million, subject to certain earn-out provisions relating to the Buffalo, New York acquisition. In 2000, the Company completed two acquisitions as follows: two Fixed Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90% interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The aggregate purchase price for these two acquisitions was approximately $24.5 million. 33 A summary of the allocation of the purchase price for the Company's acquisitions in 2000 is comprised of the following (amounts in thousands): Total purchase price $ 24,497 Estimated fair market value of net assets acquired 6,263 ---------- Goodwill $ 18,234 ==========
5. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES Accounts payable and other accrued expenses are comprised of the following (amounts in thousands):
June 30, ----------------------- 2000 1999 ----------- ----------- Accounts payable $ 133 $ 3,711 Accrued equipment related costs 8,526 1,748 Accrued payroll and related costs 4,519 6,048 Other accrued expenses 13,435 8,982 --------- --------- $ 26,613 $ 20,489 ========= =========
6. EQUIPMENT AND OTHER NOTES PAYABLE Equipment and other notes payable are comprised of the following (amounts in thousands):
June 30, --------------------------- 2000 1999 ------------ ------------ Unsecured senior subordinated notes payable (Notes), bearing interest at 9.625 percent, interest payable semi-annually, principal due in June 2008 $ 100,000 $ 100,000 Notes payable to bank (Bank Financing), bearing interest at LIBOR plus 1.75 percent (6.78 percent at June 30, 2000), principal and interest payable quarterly, maturing in June 2004. The notes are secured by substantially all of the Company's assets 89,055 61,800 Notes payable to General Electric Company (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 1,587 1,934 Notes payable to banks and third parties bearing interest rates which range from 8.13 percent to 10.13 percent, maturing at various dates through June 2002 The notes are primarily secured by certain buildings and diagnostic equipment 550 832 ---------- ---------- Total equipment and other notes payable 191,192 164,566 Less: Current portion 18,813 10,580 ---------- ---------- Long-term equipment and other notes payable $ 172,379 $ 153,986 ========== ==========
Scheduled maturities of equipment and other notes payable at June 30, 2000, are as follows (amounts in thousands): 2001 $ 18,813 2002 21,253 2003 24,132 2004 26,379 2005 185 Thereafter 100,430 ---------- $ 191,192 ===========
34 As part of the Bank Financing, the Company has a $25 million revolving working capital facility, which expires in June 2003. Additionally, the Company had a $75 million acquisition facility, the availability of which expired on June 12, 2000. The Company is also required to pay an unused facility fee of 0.375% on unborrowed amounts under the working capital facility. There were no borrowings under the working capital facility as of June 30, 2000. 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, 2000, 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, or 2004 at the option of the bank. 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, 2000, 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 (amounts in thousands):
Effective Maximum Notional Interest Fair Market Amount Rate Value ------ ---- ----- $ 37,500 7.47% $ 318
7. LEASE OBLIGATIONS, COMMITMENTS AND CONTINGENCIES 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, 2000 are as follows (amounts in thousands):
Capital Operating ------------ ------------ 2001 $ 15,376 $ 10,966 2002 14,823 8,762 2003 14,533 6,429 2004 12,913 4,041 2005 9,137 3,194 Thereafter 3,913 7,465 ---------- ---------- Total minimum lease payments 70,695 $ 40,857 ========== Less: Amounts representing interest 13,655 ---------- Present value of capital lease obligations 57,040 Less: Current portion 10,652 ---------- Long-term capital lease obligations $ 46,388 ==========
As of June 30, 2000, 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 $21.3 million and $57.0 million, respectively. Rental expense for diagnostic equipment and other equipment for the years ended June 30, 2000, 1999, and 1998 was $13.6 million, $18.5 million, and $17.0 million, respectively. These amounts include contingent rental expense of $0.1 million for the year ended June 30, 1998. No contingent rental expense was paid for the years ended June 30, 2000 and 1999, respectively. 35 The Company occupies facilities under lease agreements expiring through April 2014. Rental expense for these facilities for the years ended June 30, 2000, 1999, and 1998 was $5.1 million, $3.7 million, $2.8 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. Management 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. 8. CAPITAL STOCK PREFERRED STOCK: 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; and (b) GE (i) surrendered its rights under the amended equipment service agreement to receive supplemental service fee payments equal to 14% of pretax income in exchange for (A) the issuance of 7,000 shares of newly issued convertible preferred stock, Series C of the Company, par value $0.001 per share (Series C Preferred Stock) initially convertible, at the option of GE, in the aggregate into 835,821 shares of common stock, for which the Company recorded a non-recurring expense of approximately $6.3 million, and (B) warrants (GE Warrants) to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share and (ii) exchanged all of its 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. 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 34% of the common stock of the Company, on a fully diluted basis. 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. 36 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. 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 or exercised for the year ended June 30, 1999. A summary of the status of the Company's warrants at June 30, 2000, 1999 and 1998 and changes during the years is presented below:
Weighted Average Shares Exercise Price --------------- --------------- Outstanding, June 30, 1997 120,000 $ 5.06 Granted 605,000 9.32 Exercised (62,817) 4.64 --------------- --------------- Outstanding, June 30, 1998 and 1999 662,183 9.00 Granted 15,000 6.00 Exercised (35,000) 5.50 --------------- --------------- Outstanding, June 30, 2000 642,183 $ 9.12 =============== ===============
Of the 642,183 warrants outstanding at June 30, 2000, the characteristics are as follows:
Exercise Price Weighted Average Warrants Total Warrants Remaining Contractual Range Exercise Price Exercisable Outstanding Life ----------------- ---------------------- --------------- ---------------- ------------------------ $4.56 - $6.00 $5.01 93,433 97,183 4.83 years $7.25 - $10.00 $9.85 539,583 545,000 4.81 years -------- ------- 633,016 642,183 ======== =======
STOCK OPTIONS: The Company has five 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 four 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. 37 As of June 30, 2000, the Company has 636,058 shares available for issuance under its plans. A summary of the status of the Company's stock option plans at June 30, 2000, 1999, 1998 and changes during the years is presented below:
Weighted Average Shares Exercise Price --------------- --------------- 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 Granted 190,000 8.15 Exercised (92,970) 2.07 Forfeited (340,368) 8.08 --------------- --------------- Outstanding, June 30, 2000 1,308,740 $ 7.90 =============== ===============
Exercisable at: June 30, 1998 336,805 $ 3.65 June 30, 1999 558,838 $ 6.12 June 30, 2000 751,887 $ 7.61
Of the 1,308,740 options outstanding at June 30, 2000, the characteristics are as follows:
Exercise Price Weighted Average Options Total Options Remaining Contractual Range Exercise Price Exercisable Outstanding Life ----------------- ---------------------- --------------- ---------------- ------------------------- $0.10 - $1.25 $0.59 98,670 98,670 3.98 years $3.75 - $7.00 $5.56 271,083 354,750v 6.93 years $8.37 - $12.57 $9.53 357,446 830,632 6.83 years $15.64 - $16.20 $15.78 24,688 24,688 1.65 years --------------- ---------------- 751,887 1,308,740 =============== ================
38 As permitted under SFAS No. 123, "Accounting for Stock Based Compensation" 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 of net income as if the Company had recognized compensation expense equal to the fair value of options 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 (amounts in thousands, except per share data):
Years Ended June 30, -------------------------------------------------- 2000 1999 1998 --------------- --------------- --------------- Net income (loss): As Reported $ 7,189 $ 6,112 $ 512 Pro Forma 5,469 4,446 (506) Diluted EPS: As Reported 0.76 0.65 0.06 Pro Forma 0.58 0.47 (0.06)
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, 2000, 1999 and 1998, respectively:
Years Ended June 30, --------------------------------------------------- Assumptions 2000 1999 1998 ------------------------------------------------------------------ --------------- --------------- --------------- Risk-free interest rate 6.22% 5.08% 5.93% Volatility 71.23% 64.90% 79.46% Expected dividend yield 0.00% 0.00% 0.00% Estimated contractual life 9.38 years 9.35 years 6.51 years
9. PROVISION FOR REORGANIZATION AND OTHER COSTS In 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 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. 10. INCOME TAXES The provision (benefit) for income taxes for the years ended June 30, 2000, 1999 and 1998 was computed using effective tax rates calculated as follows:
Years Ended June 30, ----------------------------------------------------- 2000 1999 1998 ------------ ------------- ------------ Federal statutory tax rate 34.0 % 34.0 % 34.0 % State income taxes, net of federal benefit 6.0 6.0 1.2 Permanent items, including goodwill, non-deductible merger costs 3.7 12.3 79.4 Change in valuation allowance (30.1) (161.5) (68.9) ------------ ------------- ------------ Net effective tax rate 13.6 % (109.2)% 45.7 % ============ ============= ============
39 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, 2000, 1999, and 1998 consisted of the following (amounts in thousands):
Years Ended June 30, -------------------------------------------------- 2000 1999 1998 --------------- --------------- --------------- Current provision: Federal $ 548 $ 60 $ 1,044 State 283 100 36 --------------- --------------- --------------- 831 160 1,080 --------------- --------------- --------------- Deferred taxes arising from temporary differences: State income taxes (186) (144) (23) Accrued expenses 769 (706) 448 Deferred gain on debt restructure - - (519) Reserves (1,110) (958) 182 Depreciation and amortization 1,004 1,383 (802) Utilization of net operating losses 75 346 - Net operating losses reduced due to prior ownership changes 5,111 - - Change in valuation allowance reducing goodwill 400 1,300 - Change in valuation allowance (5,795) (4,691) - Other 32 120 65 --------------- --------------- --------------- 300 (3,350) (649) --------------- --------------- --------------- Total provision (benefit) $ 1,131 $ (3,190) $ 431 =============== =============== ===============
The components of the Company's net deferred tax asset as of June 30, 2000 and 1999, respectively, which arise due to timing differences between financial and tax reporting and net operating loss (NOL) carryforwards are as follows (amounts in thousands):
June 30, -------------------------------- 2000 1999 --------------- --------------- Reserves $ 3,964 $ 2,854 Accrued expenses (not currently deductible) 1,016 1,785 Depreciation and amortization (3,328) (2,324) Other (545) (699) NOL carryforwards 10,620 15,806 Valuation allowances (7,727) (13,522) --------------- --------------- $ 4,000 $ 3,900 =============== ===============
As of June 30, 2000, the Company had NOL carryforwards of approximately $31.0 million, expiring in 2004 through 2018. The NOLs and related deferred tax components have been reduced to reflect limitations from prior changes in ownership. A valuation allowance is provided against the net deferred tax asset when it is more likely than not that the net 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 $0.4 million and $1.3 million in 2000 and 1999, respectviely, of the change in valuation allowance relates to the Merger and has been recorded as a reduction to goodwill. 11. RETIREMENT SAVINGS PLANS The Company has a 401(k) profit sharing plan (Company Plan), which is available to all eligible employees, pursuant to which the Company may match a percentage of employee contributions to the Company Plan. Company contributions of approximately $0.7 million, $0.6 million, and $0.4 million were made for the years ended June 30, 2000, 1999, and 1998, respectively. 40 12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS The Company has direct ownership in four Partnerships at June 30, 2000, two of which operate Fixed Facilities and two of which operate Centers. The Company owns between 25 percent and 44 percent of these Partnerships, serves as the managing general partner and provides certain management services under agreements expiring in 2010. 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):
June 30, --------------------------------- 2000 1999 ---------------- --------------- Combined Financial Position: Current assets: Cash $ 1,098 $ 685 Trade accounts receivables, less allowances 1,840 1,508 Other 107 95 Property and equipment, net 6,957 2,989 Intangible assets, net 613 583 ---------------- --------------- Total assets 10,615 5,860 Current liabilities (1,455) (917) Due to the Company (1,194) (131) Long-term liabilities (3,877) (1,751) ---------------- --------------- Net assets $ 4,089 $ 3,061 ================ ===============
Set forth below are the combined operating results of the Partnerships and the Company's equity in earnings of the Partnerships (amounts in thousands):
Years Ended June 30, --------------------------------------------------- 2000 1999 1998 ---------------- --------------- --------------- Operating Results: Net revenues $ 7,493 $ 5,673 $ 5,723 Expenses 5,717 4,334 4,058 ---------------- --------------- --------------- Net income $ 1,776 $ 1,339 $ 1,665 ================ =============== =============== Equity in earnings of partnerships $ 817 $ 548 $ 707 ================ =============== ===============
41 The Company has direct ownership in 50 percent of an additional Partnership which operates a Center. Since the Company controls the operations and is primarily responsible for the associated long-term debt, the Partnership has 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 entity which is consolidated (amounts in thousands):
June 30, --------------------------------- 2000 1999 ---------------- --------------- Condensed Combined Balance Sheet Data: Current assets $ 1,490 $ 1,494 Total assets 1,706 1,637 Current liabilities 623 640 Minority interest equity 441 515
Years Ended June 30, --------------------------------------------------- 2000 1999 1998 ---------------- --------------- --------------- Condensed Combined Statement of Income Data: Net revenues $ 5,484 $ 5,551 $ 5,875 Expenses 3,702 3,973 4,147 Provision for center profit distribution 891 789 864 ---------------- --------------- --------------- Net income $ 891 $ 789 $ 864 ================ =============== ===============
13. INCOME PER COMMON AND CONVERTED PREFERRED SHARE 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. A reconciliation of basic and diluted share computations is as follows:
Years Ended June 30, --------------------------------------------------- 2000 1999 1998 --------------- --------------- --------------- Average common stock outstanding 2,935,002 2,835,385 2,751,212 Effect of preferred stock 6,322,656 6,322,656 5,213,026 --------------- --------------- --------------- Denominator for basic EPS 9,257,658 9,158,041 7,964,238 Dilutive effect of stock options and warrants 140,250 217,490 307,060 --------------- --------------- --------------- 9,397,908 9,375,531 8,271,298 =============== =============== ===============
14. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION The Company's payment obligations under the senior subordinated Notes (Note 6) 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 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2000
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents $ - $ 25,497 $ 1,636 $ - $ 27,133 Trade accounts receivables, net - 36,071 4,527 - 40,598 Other current assets - 9,093 68 - 9,161 Intercompany accounts receivables 252,571 10,390 - (262,961) - --------- ---------- ------------ ------------ ----------- Total current assets 252,571 81,051 6,231 (262,961) 76,892 Property and equipment, net - 141,242 7,227 - 148,469 Investments in partnerships - 1,782 - - 1,782 Investments in consolidated subsidiaries (12,029) 2,674 - 9,355 - Other assets - 7,799 - - 7,799 Intangible assets, net - 93,466 464 - 93,930 --------- ---------- ------------ ------------ ----------- $ 240,542 $ 328,014 $ 13,922 $ (253,606) $ 328,872 ========= ========== ============ ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes $ 18,393 $ 10,929 $ 143 $ - $ 29,465 Accounts payable and other accrued expenses - 26,108 505 - 26,613 Intercompany accounts payable - 252,571 10,390 (262,961) - --------- ---------- ------------ ------------ ----------- Total current liabilities 18,393 289,608 11,038 (262,961) 56,078 Equipment, capital leases and other notes, less current portion 170,662 47,709 396 - 218,767 Other long-term liabilities - 2,726 (186) - 2,540 Stockholders' equity (deficit) 51,487 (12,029) 2,674 9,355 51,487 --------- ---------- ------------ ------------ ----------- $ 240,542 $ 328,014 $ 13,922 $ (253,606) $ 328,872 ========= ========== ============ ============ ===========
43 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1999
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- --------------- ----------------- --------------- -------------- (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 - 7,188 114 - 7,302 Intercompany accounts receivables 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 current portions 151,855 8,315 17 - 160,187 Other long-term liabilities - 929 150 - 1,079 Stockholders' equity (deficit) 44,106 (19,234) 2,691 16,543 44,106 ---------- --------- ------------ ---------- ---------- $ 205,906 $ 237,652 $ 14,370 $ (219,624) $ 238,304 ========== ========= ============ ========== ==========
44 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 2000
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- ------------- ---------------- -------------- --------------- (Amounts in thousands) Revenues $ - $ 168,884 $ 19,690 $ - $ 188,574 Costs of operations - 134,784 16,645 - 151,429 ---------- ---------- -------------- ------------- ----------- Gross profit - 34,100 3,045 - 37,145 Corporate operating expenses - 10,946 - - 10,946 ---------- ---------- -------------- ------------- ----------- Income from company operations - 23,154 3,045 - 26,199 Equity in earnings of unconsolidated partnerships - 817 - - 817 ---------- ---------- -------------- ------------- ----------- Operating income - 23,971 3,045 - 27,016 Interest expense, net - 17,730 966 - 18,696 ---------- ---------- -------------- ------------- ----------- Income before income taxes - 6,241 2,079 - 8,320 Provision for income taxes - 1,131 - - 1,131 ---------- ---------- -------------- ------------- ------------ Income before equity in income of consolidated subsidiaries - 5,110 2,079 - 7,189 Equity in income of consolidated subsidiaries 7,189 2,079 - (9,268) - ---------- ---------- -------------- ------------- ----------- Net income $ 7,189 $ 7,189 $ 2,079 $ (9,268) $ 7,189 ========== ========== ============= ============ ===========
45 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1999
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- ------------- ----------------- -------------- --------------- (Amounts in thousands) Revenues $ - $ 143,205 $ 18,787 $ - $ 161,992 Costs of operations - 115,230 16,113 - 131,343 -------- ---------- ---------- --------- ----------- Gross profit - 27,975 2,674 - 30,649 Provision for reorganization and other costs - 3,300 - - 3,300 Corporate operating expenses - 10,475 - - 10,475 -------- ---------- ---------- --------- ----------- 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 ======== ========== ========== ========= ============
46 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- ------------- ----------------- -------------- --------------- (Amounts in thousands) Revenues $ - $104,707 $ 14,311 $ - $119,018 Costs of operations - 84,195 12,692 - 96,887 ---------- --------- ---------- ---------- ---------- Gross profit - 20,512 1,619 - 22,131 Provision for supplemental service fee termination - 6,309 - - 6,309 Corporate operating expenses - 8,759 - - 8,759 ---------- --------- ---------- ---------- ---------- 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 ========= ========= ========== ========== ==========
47 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2000
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- -------------- ----------------- -------------- ------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 7,189 $ 7,189 $ 2,079 $ (9,268) $ 7,189 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization - 31,343 2,287 - 33,630 Equity in income of consolidated subsidiaries (7,189) (2,079) - 9,268 - Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables - (3,907) (704) - (4,611) Intercompany receivables, net (27,447) 30,180 (2,733) - - Other current assets - (1,849) 46 - (1,803) Accounts payable and other accrued expenses - 5,975 144 - 6,119 ----------- ---------- ---------- --------- --------- Net cash provided by (used in) operating activities (27,447) 66,852 1,119 - 40,524 ----------- ---------- ---------- --------- --------- INVESTING ACTIVITIES: Acquisitions of Centers, Fixed and Mobile Facilities - (25,346) - - (25,346) Additions to property and equipment - (22,635) (535) - (23,170) Other - (554) - - (554) ----------- ---------- ---------- --------- --------- Net cash used in investing activities - (48,535) (535) - (49,070) ----------- ---------- ---------- --------- --------- FINANCING ACTIVITIES: Proceeds from stock options and warrants exercised 192 - - - 192 Principal payments of debt and capital lease obligations (17,945) (7,326) (197) - (25,468) Proceeds from issuance of debt 45,200 - - - 45,200 Other - 1,797 (336) - 1,461 ----------- ---------- ---------- --------- --------- Net cash provided by (used in) financing activities 27,447 (5,529) (533) - 21,385 ----------- ---------- ---------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS - 12,788 51 - 12,839 CASH AND CASH EQUIVALENTS: Cash, beginning of year - 12,709 1,585 - 14,294 ----------- ---------- ---------- --------- --------- Cash, end of year $ - $ 25,497 $ 1,636 $ - $ 27,133 =========== ========== ========== ========= =========
48 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
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- -------------- ----------------- -------------- ------------- (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 6,112 $ 6,112 $ 1,627 $ (7,739) $ 6,112 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization - 21,977 2,910 - 24,887 Amortization of deferred gain on debt restructure - (75) - - (75) Equity in income of consolidated subsidiaries (6,112) (1,627) - 7,739 - Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables - (7,255) (1,069) - (8,324) Intercompany receivables, net (11,936) 6,230 5,706 - - Other current assets - (4,291) 185 - (4,106) Accounts payable and other accrued expenses - (7,294) (308) - (7,602) --------- ----------- ------------ ----------- --------- Net cash provided by (used in) operating activities (11,936) 13,777 9,051 - 10,892 --------- ----------- ------------ ----------- --------- INVESTING ACTIVITIES: Cash acquired in acquisitions - 850 - - 850 Acquisitions of Centers, Fixed and Mobile Facilities - (28,046) - - (28,046) Additions to property and equipment - (11,112) (7,328) - (18,440) Other - (706) (859) - (1,565) --------- ----------- ------------ ----------- --------- Net cash used in investing activities - (39,014) (8,187) - (47,201) --------- ----------- ------------ ----------- --------- FINANCING ACTIVITIES: Proceeds from stock options and warrants exercised 115 - - - 115 Proceeds from issuance of common stock 21 - - - 21 Principal payments of debt and capital lease obligations (11,200) (6,124) (171) - (17,495) Proceeds from issuance of debt 23,000 820 - - 23,820 Other - - (598) - (598) --------- ----------- ------------ ----------- --------- Net cash provided by (used in) financing activities 11,936 (5,304) (769) - 5,863 --------- ----------- ------------ ----------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (30,541) 95 - (30,446) CASH AND CASH EQUIVALENTS: Cash, beginning of year - 43,250 1,490 - 44,740 --------- ----------- ------------ ----------- --------- Cash, end of year $ - $ 12,709 $ 1,585 $ - $ 14,294 ========= ========== ============ =========== ==========
49 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
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- -------------- ------------------ -------------- ------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 512 $ 512 $ 1,234 $ (1,746) $ 512 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization - 14,686 1,063 - 15,749 Amortization of deferred gain on debt restructure - (1,384) - - (1,384) Provision for supplemental service fee termination - 6,309 - - 6,309 Equity in income of consolidated subsidiaries (512) (1,234) - 1,746 - Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables - (5,726) (127) - (5,853) Intercompany receivables, net (173,661) 171,307 2,354 - - Other current assets - (289) (27) - (316) Accounts payable and other accrued expenses - 3,458 (259) - 3,199 --------- --------- --------- -------- -------- Net cash provided by (used in) operating activities (173,661) 187,639 4,238 - 18,216 --------- --------- --------- -------- -------- INVESTING ACTIVITIES: Cash acquired in acquisitions - 4,174 - - 4,174 Acquisitions of Centers, Fixed and Mobile Facilities - (56,720) - - (56,720) Additions to property and equipment - (20,848) (2,796) - (23,644) Other - (1,817) (161) - (1,978) --------- --------- --------- -------- -------- Net cash used in investing activities - (75,211) (2,957) - (78,168) --------- --------- --------- -------- -------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock 23,346 - - - 23,346 Proceeds from stock options and warrants exercised 315 - - - 315 Payment of loan financing costs - (6,483) - - (6,483) Principal payments of debt and capital lease obligations (70,900) (79,198) (830) - (150,928) Proceeds from issuance of debt 220,900 10,580 - - 231,480 Other - 78 - - 78 --------- --------- --------- -------- -------- Net cash provided by (used in) financing activities 173,661 (75,023) (830) - 97,808 --------- --------- --------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS - 37,405 451 - 37,856 CASH AND CASH EQUIVALENTS: Cash, beginning of year - 5,845 1,039 - 6,884 --------- --------- --------- -------- -------- Cash, end of year $ - $ 43,250 $ 1,490 $ - $ 44,740 ========= ========= ========= ======== ========
50 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 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. *2.7 Asset Purchase Agreement dated May 2, 2000, by and among InSight Health Corp., Roy Assael, Wilkes-Barre Imaging and US Diagnostic Inc., previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 14, 2000. *2.8 Amendment to Asset Purchase Agreement dated May 31, 2000, by and among InSight Health Corp., Roy Assael, Wilkes-Barre Imaging and US Diagnostic Inc., previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 14, 2000. *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.
52 *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 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. *10.5 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. *10.6 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. *10.7 AHS 1989 Stock Incentive Plan, previously filed and incorporated herein by reference from AHS's Annual Report on Form 10-K, filed April 15, 1991.
53 *10.8 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. 9 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. *10.10 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. *10.11 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. *10.12 InSight's 1997 Management Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *10.13 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. *10.14 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. 15 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. *10.16 Form of Executive Employment Agreement between InSight and various officers of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10. 17 Nonqualified Stock Option Agreement dated August 17, 1994, between MHC and Leonard H. Habas, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six months ended June 30, 1996. *10.18 Nonqualified Stock Option Agreement dated August 17, 1994, between MHC and Ronald G. Pantello, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six months ended June 30, 1996. *10.19 Warrant Certificate No. 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.
54 *10.20 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. *10.21 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. *10.22 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. *10.23 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. *10.24 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. *10.25 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated July 7, 1999, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1999. *10.26 Warrant Certificate No. E-I dated July 7, 1999 in the name of Frank E. Egger, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1999. *10.27 Separation Agreement between InSight and E. Larry Atkins dated as of July 19, 1999, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1999. *10.28 InSight's 1999 Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-8 (Registration No. 333-318218), filed March 6, 2000. 10.29 Form of Stock Option Agreement between InSight and employees of InSight relative to InSight's 1999 Stock Option Plan, filed herewith. 10.30 Executive Employment Agreement between InSight and Steven T. Plochocki dated as of November 17, 1999, filed herewith. 10.31 Fifth Amendment to Credit Agreement dated as of December 15, 1999, among the Company, the Subsidiary Guarantors (as defined therein), Bank of America, N.A., as Agent, and the Lenders (as defined therein), filed herewith.
55 10.32 Sixth Amendment to Credit Agreement and Waiver dated as of May 31, 2000, among the Company, the Subsidiary Guarantors (as defined therein), Bank of America, N.A., as Agent, and the Lenders (as defined therein), filed herewith. 99 Charter of the Audit Committee of the Board of Directors of InSight, filed herewith. 21 Subsidiaries of InSight, filed herewith. 23 Consent of Independent Public Accountants, filed herewith.
* Previously filed. ITEM 14(b). REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K with the SEC on June 14, 2000, under Item 2 thereof, reporting the Company's acquisition of substantially all of the assets of Wilkes-Barre Imaging, a New York general partnership. 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. 56 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/ Steven T. Plochocki --------------------------------------- Steven T. Plochocki, President and Chief Executive Officer Date: September 7, 2000 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.
Signature Title Date /s/ Steven T. Plochocki Director, President and September 7, 2000 - ----------------------- Chief Executive Officer Steven T. Plochocki (Principal Executive Officer) /s/ Thomas V. Croal Executive Vice President September 7, 2000 - ------------------- and Chief Financial Officer Thomas V. Croal (Principal Accounting Officer) /s/ Grant R. Chamberlain Director September 7, 2000 - ------------------------ Grant R. Chamberlain /s/ W. Robert Dahl Director September 7, 2000 - ------------------ W. Robert Dahl Director - ------------------ Frank E. Egger /s/Leonard H. Habas Director September 7, 2000 - ------------------- Leonard H. Habas Director - -------------------- Jerome C. Marcus /s/ Ronald G. Pantello Director September 7, 2000 - ---------------------- Ronald G. Pantello /s/ Glenn A. Youngkin Director September 7, 2000 - ---------------------- Glenn A. Youngkin
57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To InSight Health Services Corp.: We have audited in accordance with auditing standards generally accepted in the United States 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 1, 2000. Our audit was made for the purpose of forming an opinion on the basic consolidated 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. /s/ ARTHUR ANDERSEN LLP Orange County, California September 1, 2000 58 SCHEDULE IX INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (amounts in thousands)
Balance at Charges to Balance at Beginning of Cost and End of Year Expenses Other (A) Year --------------- --------------- --------------- --------------- 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 ======== ======== ========= ======== June 30, 2000: Allowance for doubtful accounts $ 3,751 $ 2,907 $ (1,736) $ 4,922 Allowance for contractual adjustments 14,071 57,715 (54,417) 17,369 -------- -------- --------- -------- Total $ 17,822 $ 60,622 $ (56,153) $ 22,291 ======== ======== ========= ========
(A) Write-offs of uncollectible accounts. 59 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. *2.7 Asset Purchase Agreement dated May 2, 2000, by and among InSight Health Corp., Roy Assael, Wilkes-Barre Imaging and US Diagnostic Inc., previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 14, 2000. *2.8 Amendment to Asset Purchase Agreement dated May 31, 2000, by and among InSight Health Corp., Roy Assael, Wilkes-Barre Imaging and US Diagnostic Inc., previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 14, 2000. *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.
60 *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 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. *10.5 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. *10.6 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. *10.7 AHS 1989 Stock Incentive Plan, previously filed and incorporated herein by reference from AHS's Annual Report on Form 10-K, filed April 15, 1991.
61 *10.8 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. 9 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. *10.10 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. *10.11 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. *10.12 InSight's 1997 Management Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *10.13 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. *10.14 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. 15 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. *10.16 Form of Executive Employment Agreement between InSight and various officers of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10. 17 Nonqualified Stock Option Agreement dated August 17, 1994, between MHC and Leonard H. Habas, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six months ended June 30, 1996. *10.18 Nonqualified Stock Option Agreement dated August 17, 1994, between MHC and Ronald G. Pantello, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six months ended June 30, 1996. *10.19 Warrant Certificate No. 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.
62 *10.20 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. *10.21 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. *10.22 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. *10.23 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. *10.24 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. *10.25 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated July 7, 1999, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1999. *10.26 Warrant Certificate No. E-I dated July 7, 1999 in the name of Frank E. Egger, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1999. *10.27 Separation Agreement between InSight and E. Larry Atkins dated as of July 19, 1999, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1999. *10.28 InSight's 1999 Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-8 (Registration No. 333-318218), filed March 6, 2000. 10.29 Form of Stock Option Agreement between InSight and employees of InSight relative to InSight's 1999 Stock Option Plan, filed herewith. 10.30 Executive Employment Agreement between InSight and Steven T. Plochocki dated as of November 17, 1999, filed herewith. 10.31 Fifth Amendment to Credit Agreement dated as of December 15, 1999, among the Company, the Subsidiary Guarantors (as defined therein), Bank of America, N.A., as Agent, and the Lenders (as defined therein), filed herewith.
63 10.32 Sixth Amendment to Credit Agreement and Waiver dated as of May 31, 2000, among the Company, the Subsidiary Guarantors (as defined therein), Bank of America, N.A., as Agent, and the Lenders (as defined therein), filed herewith. 99 Charter of the Audit Committee of the Board of Directors of InSight, filed herewith. 21 Subsidiaries of InSight, filed herewith. 23 Consent of Independent Public Accountants, filed herewith.
* Previously filed. 64 EX-10.29 2 a2024859zex-10_29.txt EXHIBIT 29 EXHIBIT 10.29 INSIGHT HEALTH SERVICES CORP. 1999 STOCK OPTION PLAN STOCK OPTION AGREEMENT AGREEMENT is dated as of ____________, 2000 ("Grant Date") between INSIGHT HEALTH SERVICES CORP., a Delaware corporation ("Company"), and ________________________ ("Optionee"). The stockholders and the Board of Directors of the Company ("Board") have adopted the 1999 Stock Option Plan ("Plan") of the Company for the purpose of advancing the interests of the Company by providing certain individuals with an opportunity to develop a proprietary interest in the Company, which will thereby create strong performance incentives for such individuals to maximize the growth and success of the Company and its subsidiaries and will encourage such individuals to remain in the employ of the Company or any of its subsidiaries. The Optionee is a full time employee of the Company or its subsidiaries, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the grant by the Company of a stock option to the Optionee. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement and the Plan, a copy of which is attached hereto, the Company hereby grants to the Optionee, as of the Grant Date, a stock option ("Option") to purchase up to ________________________ shares ("Option Shares") of the common stock, par value $0.001 per share, of the Company ("Common Stock") from time to time during the Option Period (as defined below) at the price of $_____ per share ("Option Price"). 2. OPTION PERIOD. The Option shall be exercisable only during the Option Period. Subject to Section 4, upon the termination of the Optionee's employment, the Option shall terminate three (3) months after the date of such termination of employment. In addition, upon the Expiration Date (as defined below), the Option shall cease to be exercisable and have no further force or effect whatsoever. 3. VESTING AND EARLY TERMINATION. The Option shall vest and become exercisable at the rate of ________ each year on the anniversary date of the Grant Date and until fully vested, so long as continuously during such time period the Optionee remains an employee of the Company or any of its subsidiaries. If the Optionee's employment terminates prior to the fourth anniversary date of the Grant Date, then the vested Option Shares shall be fixed at such time and should the calculation result in a fractional share, it shall be rounded down to the nearest whole number of shares. 4. DEATH OR DISABILITY OF AN OPTIONEE. If the Optionee's employment with the Company is terminated as a result of the Optionee's death or "permanent or total disability" (within the meaning of Section 22(e) of the Internal Revenue Code of 1986, as amended) then the executors or administrators of the Optionee's estate or the Optionee's heirs or legatees (as the case may be) shall 1999 STOCK OPTION AGREEMENT -- OTH PAGE 1 have the right to exercise the Option only with respect to Option Shares theretofor vested, unless earlier terminated in accordance with its terms. In the event of such termination, the period for exercising the Option shall be a period of twelve (12) months commencing with the date of such termination of employment, provided that in no event shall the Option be exercisable at any time after the Expiration Date. 5. TIMING AND METHOD OF EXERCISE. In order to exercise the Option with respect to all or any part of the Option Shares for which the Option is at the time exercisable, the Optionee (or in the case of exercise after the Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must comply with the provisions of Section 9 of the Plan. A form of exercise notice is attached hereto as Exhibit A. 6. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, devisees, legal representatives and permitted assigns of the Optionee and the successors and assigns of the Company. 7. LIABILITY OF THE COMPANY. The inability of the Company, despite its best efforts, to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of any Common Stock pursuant to the Option shall relieve the Company of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. 8. CONSTRUCTION. This Agreement and the Option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. 9. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Delaware. 10. WARRANTIES AND OBLIGATIONS OF THE OPTIONEE. (a) The Optionee represents, warrants and agrees that the Optionee will acquire and hold the Option Shares for the Optionee's own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with federal and state securities laws, and that the Optionee will not, at any time or times, directly or indirectly, offer, sell, distribute, pledge or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any Option Shares (or solicit an offer to buy, take in pledge or otherwise acquire or receive, all or any portion thereof), except pursuant to either (i) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended ("1933 Act"), which Registration Statement has become effective and is current with respect to the shares being offered or sold, or (ii) a specific exemption from the registration requirements of the 1933 Act, the availability of which exemption shall be the subject matter of an opinion of counsel reasonably acceptable to the Company that no registration under the 1933 Act is required with respect to such offer, sale, distribution, pledge, grant or other disposition or transfer. (b) The Optionee acknowledges that the Optionee understands that (i) the Option has been granted and the shares to be sold to the Optionee upon exercise of the Option will be sold to 1999 STOCK OPTION AGREEMENT -- OTH PAGE 2 the Optionee pursuant to an exemption from the registration requirements in the 1933 Act until such time as the Company shall file a Registration Statement under the 1933 Act which has become effective and is current with respect to the shares being offered or sold and in this connection the Company is relying in part on the representations set forth in this Agreement; (ii) such shares must be held indefinitely unless they are registered or an exemption from registration becomes available under the 1933 Act and the securities laws of any state; (iii) the Company is under no obligation to register such shares or to comply with any exemption from such registration, including those portions of Rule 144 under the 1933 Act to be complied with by the Company; (iv) if Rule 144 is available for sales of such shares, and there is no assurance that the Optionee will ever be able to sell under Rule 144, such sales in reliance upon Rule 144 may be made only after the shares have been held for the requisite holding period and then only in limited amounts in accordance with the conditions of that Rule, all of which must be met; and (v) the Optionee must, therefore, continue to bear the economic risks of the investment in such shares for an indefinite period of time after the exercise of the Option. (c) The Optionee acknowledges that the Optionee has had the opportunity to ask questions of, and receive answers from, the officers and representatives of the Company concerning all material information concerning the Company and the terms and conditions of the transactions in which the Optionee is acquiring the Option and may subsequently acquire Option Shares. The Optionee further acknowledges that the Optionee understands that the Company may use the proceeds from the exercise of the Option for general corporate purposes. (d) Immediately prior to the exercise of all or any portion of the Option, the Optionee shall deliver to the Company a signed statement, in a form satisfactory to the Company, confirming that each of the representations, warranties, acknowledgments and agreements contained in this Section is true as to the Optionee as of the date of such exercise. (e) The Optionee understands that all certificates representing shares transferred pursuant to this Agreement, unless made pursuant to an appropriate Registration Statement under the 1933 Act, will bear the following restrictive legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred or hypothecated without prior registration under said Act or an exemption therefrom established to the satisfaction of the issuer." (f) If the legal counsel of the Company, at the request of the Company, advises it that registration under the 1933 Act of the shares deliverable upon the exercise of the Option is required prior to delivery thereof, or that listing of such shares on any exchange is required prior to delivery thereof, the Company shall not be required to issue or deliver such shares unless and until such legal counsel shall advise that such registration and/or listing has been completed and is then effective, or is not required. 11. SEVERABILITY. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 1999 STOCK OPTION AGREEMENT -- OTH PAGE 3 12. DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. For purposes of interpreting this Agreement, the following definitions shall also apply: (a) "Exercise Date" means the date on which the Company receives written notice of the exercise of the Option together with payment of the Option Price for the purchased Option Shares. (b) "Exercise Price" means the Option Price multiplied by the number of purchased Option Shares. (c) "Expiration Date" means, unless earlier terminated pursuant to the terms of this Agreement or the Plan, the day immediately preceding the tenth anniversary of the Grant Date. (d) "Option Period" means the period commencing on the Grant Date and, unless earlier terminated in accordance with Section 3 or 4, ending on the close of business on the Expiration Date. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate on its behalf and the Optionee has also executed this Agreement in duplicate, all as of the date first above written. INSIGHT HEALTH SERVICES CORP. By: --------------------------------- Leonard H. Habas Chairman, Compensation Committee OPTIONEE ------------------------------------ MMY:meg|SOA-OTH 1999 STOCK OPTION AGREEMENT -- OTH PAGE 4 EX-10.30 3 a2024859zex-10_30.txt EXHIBIT 10.30 EXHIBIT 10.30 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT dated as of November 17, 1999 between INSIGHT HEALTH SERVICES CORP., a Delaware corporation ("Company"), and STEVEN T. PLOCHOCKI ("Executive"). Company wishes to employ Executive, and Executive wishes to accept such employment, in each case subject to the terms and conditions hereof. Accordingly, Company and Executive hereby agree as follows: I. TERM The term of this Agreement and of Executive's employment hereunder shall commence on November 22, 1999 ("Effective Date") and shall continue for a period of three (3) years from the Effective Date unless terminated in accordance with Article IV below. II. EMPLOYMENT SECTION 2.01 EMPLOYMENT BY COMPANY. Company, for itself and its subsidiaries and affiliates, employs Executive for the term of this Agreement to render full time services as Company's President and CEO and in such other capacities as the Board of Directors of Company ("Board") may assign and, in connection therewith, to perform such duties as are reasonably consistent with Executive's initial appointment as Company's President and CEO and as the Board shall reasonably direct. Executive agrees to perform such duties as are reasonably consistent with the duties normally pertaining to the office to which Executive has been elected or appointed, subject always to the direction of the Board. Subject to Section 5.01 hereof, Executive's expenditure of reasonable amounts of time for personal business, charitable or professional activities will not be deemed a breach of Executive's undertaking to provide full time services hereunder, provided that such activities do not interfere materially with Executive's rendering of such services. SECTION 2.02 ACCEPTANCE OF EMPLOYMENT BY EXECUTIVE. Executive accepts such employment and shall render the services required by this Agreement to be rendered by Executive. Executive shall also serve on request during all or any part of the term of this Agreement as an officer of Company and of any of its subsidiaries or affiliates without any compensation therefor other than as specified in this Agreement. SECTION 2.03 PLACE OF EMPLOYMENT. Executive's principal place of employment shall be at 4400 MacArthur Boulevard, Suite 800, Newport Beach, CA 92660. In the event that the principal place of employment of Executive is relocated to a site that is more than 50 miles from Executive's principal residence, subject to Section 4.06(a) hereof, Company may require Executive to relocate Executive's principal residence to within 50 miles of such site. Notwithstanding the foregoing, Executive acknowledges that the duties to be performed by Executive hereunder are such that Executive may be required to travel extensively, principally within the United States, in connection with Company's Business (as defined below). III. COMPENSATION SECTION 3.01 SALARY, BONUSES, LIFE INSURANCE. As compensation for the services to be rendered pursuant to this Agreement, Company shall pay Executive, and Executive shall EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 1 accept, a salary of $250,000 per annum ("Annual Salary"), payable in accordance with the payroll policies of Company for senior executives as from time to time in effect, less such amounts as may be required to be withheld by applicable federal, state and local law and regulations. In addition to the Annual Salary, Executive shall be eligible to receive and Company shall pay (i) for the fiscal year ending June 30, 2000, (a) a nondiscretionary bonus of $75,000; and (b) an additional $50,000 bonus payable at the discretion of the Compensation Committee of the Board ("Compensation Committee") based upon goals mutually agreed upon by Executive and the Board within 30 days of the Effective Date; and (ii) for the fiscal year ending June 30, 2001, (a) a discretionary bonus of up to 75% of the Annual Salary if Company achieves the goals set forth in a business plan mutually agreed upon by Executive and the Board; and (b) a discretionary bonus of up to an additional 25% of the Annual Salary upon the achievement of other goals mutually agreed upon by Executive and the Board. Such bonuses are payable only after Company's annual report on Form 10-K is filed with the Securities and Exchange Commission ("SEC") each year. Company shall purchase and maintain in full force and effect at all times during the term of this Agreement a policy of term insurance on the life of Executive payable to such beneficiary or beneficiaries as Executive may designate in an amount equal to three (3) times the amount of the Annual Salary; provided Executive shall comply with the issuing insurance company's requirements for issuance of the policy. SECTION 3.02 PERFORMANCE REVIEW. Within the 90 days of Executive's employment commencement date, and annually on the anniversary date of Executive's employment commencement date during the term of this Agreement, Executive's performance shall be reviewed and evaluated by the Compensation Committee. SECTION 3.03 PARTICIPATION IN EMPLOYEE BENEFIT PLANS. Executive shall be entitled during the term of this Agreement, if and to the extent eligible, to participate in any life insurance, medical, health and accident and disability plan or program, pension plan or similar benefit plan of Company, which may be available to senior executives of Company generally, on the same terms as such other executives. SECTION 3.04 EXPENSES. Subject to such policies as may from time to time be established by Company for senior executives of Company generally, Company shall pay or reimburse Executive for all reasonable business expenses actually incurred or paid by Executive during the term of this Agreement in the performance by Executive of services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as Company may reasonably require. SECTION 3.05 AUTOMOBILE ALLOWANCE. Company shall pay Executive $750 per month and all reasonable expenses of operating an automobile subject to such policies as may from time to time be established and amended by Company. SECTION 3.06 VACATION. Executive shall be entitled to four (4) weeks of paid vacation each year during the term of this Agreement, which Executive may accumulate up to eight (8) weeks, to be taken at a time or times which do not unreasonably interfere with Executive's duties hereunder. SECTION 3.07 STOCK OPTIONS. As an inducement essential to Executive entering into this Agreement, the Compensation Committee will recommend and the Board will grant to EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 2 Executive, pursuant to the 1999 Stock Option Plan, (i) on the Effective Date, an option to purchase 125,000 shares of Company common stock at the option exercise price of $8.37 per share in accordance with the terms of a Stock Option Agreement in the form attached hereto as Exhibit A, and (ii) on November 22, 2000 an option to purchase an additional 50,000 shares of Company common stock at the option exercise price which is the greater of $8.37 per share or the Fair Market Value (as defined in the 1999 Stock Option Plan) of Company common stock in accordance with the terms of a Stock Option Agreement in the form attached hereto as Exhibit B. IV. TERMINATION SECTION 4.01 TERMINATION UPON DEATH. If Executive dies during the term of this Agreement, this Agreement shall terminate as of the date of Executive's death. SECTION 4.02 TERMINATION UPON DISABILITY. Executive's employment may be terminated by Company due to Executive's permanent and total disability (within the meaning of section 22(e)(3) of the Internal Revenue Code of 1986, as amended) ("Disability"), so that Executive is unable substantially to perform Executive's services required by this Agreement to be rendered by Executive for (i) a period of three (3) consecutive months or (ii) for shorter periods aggregating three (3) months during any twelve (12) month period. Company may, at any time after the last day of the three (3) consecutive months of Disability or the day on which the shorter periods of Disability equal an aggregate of three (3) months, by 30 days' written notice to Executive, terminate this Agreement and Executive's employment hereunder. Any such determination of Disability shall be made by a physician chosen by a majority of the members of the Board in its sole and unfettered discretion. Nothing in this Section 4.02 shall be deemed to extend the term of this Agreement or of Executive's employment hereunder, beyond the term specified in Article I hereof. SECTION 4.03 TERMINATION FOR CAUSE. If the Board decides that Cause (as defined below) exists, it may remove Executive for Cause and terminate this Agreement and the term of Executive's employment hereunder on the date specified in written notice to Executive. If terminated for Cause, Executive shall have no right to receive any monetary compensation or benefit hereunder with respect to any period after the date specified in such notice. Such notice may also terminate Executive's right to enter Company's premises. For purposes of this Agreement, the term "Cause" means any of the following: (a) Executive has been convicted or pled guilty or no contest to any crime or offense (other than any crime or offense relating to the operation of a motor vehicle) which is likely to have a material adverse impact on the business operations or financial or other condition of Company, or any felony offense for any crime of moral turpitude; (b) Executive has committed fraud or embezzlement; (c) Executive has intentionally breached any of Executive's obligations under this Agreement which is likely to have a material adverse impact on the business operations or financial or other condition of Company and Executive has failed to cure the breach within 30 business days following receipt of written notice of such breach from Company; (d) Company, after reasonable investigation, finds that Executive has intentionally violated material written policies and procedures of Company, including but not necessarily limited to, policies and procedures pertaining to harassment and discrimination; EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 3 (e) Executive has failed to obey a specific written direction from the Board (unless such specific written instruction represents an illegal act), provided that (i) such failure continues for a period of 30 business days after receipt of such specific written direction, and (ii) such specific written direction includes a statement that the failure to comply therewith will be a basis for termination hereunder. SECTION 4.04 TERMINATION IN DISCRETION OF COMPANY. If the Board determines in the reasonable exercise of its discretion that, for reasons other than Cause, severance of Executive from Company is in the best interests of Company, Company may, at any time thereafter by 30 days' written notice to Executive, terminate this Agreement and the term of Executive's employment hereunder, and Executive thereafter shall have only such rights to receive monetary compensation or benefits hereunder in respect of any period after the effective date of termination as are provided in Section 4.07 hereof. Such notice may also terminate Executive's right to enter Company's premises. SECTION 4.05 VOLUNTARY TERMINATION DUE TO CHANGE OF CONTROL. If there is a Change of Control (as defined below) of Company, Executive shall have the right, to terminate Executive's employment with Company, whereupon Executive shall become entitled to receive compensation as provided in Section 4.07 hereof. Such right may be exercised at any time prior to the expiration of 180 days following the Change of Control by giving Company (or its successor) at least 30 days' written notice before the effective date of termination. For purposes of this Agreement, "Change of Control" means if Company or its stockholders enter into an agreement or agreements, in one or a series of related transactions, to dispose of, whether by sale, exchange, merger, consolidation, reorganization, recapitalization, dissolution or liquidation (a) not less than 80% of the assets of Company or (b) a portion of the outstanding capital stock such that after the transaction or transactions one person or "group" (as defined by the SEC) [other than General Electric Company ("GE") and the entities to whom shares of Company's Convertible Preferred Stock, Series B were initially issued ("Carlyle") and successors and permitted assigns of GE and Carlyle individually and collectively] owns, of record or beneficially, 50% or more of the outstanding capital stock of Company, or the right (by whatever means) or the voting power to elect 50% or more of the directors of Company. SECTION 4.06 VOLUNTARY TERMINATION FOR GOOD REASON. Executive shall have the right, effective upon 60 days' written notice to Company, to terminate Executive's employment for Good Reason (as defined below), whereupon Executive shall become entitled to receive compensation as provided in Section 4.07 hereof. For purposes of this Agreement, "Good Reason" means any of the following: (a) the movement by Company, without Executive's consent, of Executive's principal place of employment to a site that is more than 50 miles from Executive's principal residence; (b) a reduction by Company, without Executive's consent, in Executive's Annual Salary, duties and responsibilities, and title, as they may exist from time to time; (c) a failure by Company to comply with any material provisions of this Agreement which has not been cured within 30 days after notice of such noncompliance has been given by Executive to Company, or if such failure is not capable of being cured in such EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 4 time, for which a cure shall not have been diligently initiated by Company within the 30 day period. SECTION 4.07 COMPENSATION ON TERMINATION. (a) If the term of Executive's employment hereunder is terminated pursuant to Section 4.01 hereof, Company shall pay to the executors or administrators of Executive's estate or Executive's heirs or legatees (as the case may be) all compensation accrued and unpaid up to the date of Executive's death. (b) If the term of Executive's employment hereunder is terminated pursuant to Sections 4.02, 4.04, 4.05 or 4.06 hereof, Company shall (i) pay to Executive all compensation accrued and unpaid up to the effective date of termination; (ii) pay to Executive additional compensation in an amount equal to twenty four (24) months of compensation at the Annual Salary rate then in effect, payable within fifteen (15) days of the effective date of termination; and (iii) maintain, at Company's expense, in full force and effect, for Executive's continued benefit until the earlier of (x) twenty four (24) months after the effective date of termination or (y) Executive's commencement of full time employment with a new employer, all life insurance, medical, health and accident, and disability plans or programs, in which Executive was entitled to participate immediately prior to the effective date of termination; provided, that Executive's continued participation is permissible under the general terms and provisions of such plans or programs. In the event that Executive's participation in any such plan or program is prohibited, Company shall arrange to provide Executive with benefits substantially similar to those which Executive was entitled to receive under such plans or programs. Any amounts paid by Company to Executive under (i) and (ii) above may be reduced, in the case of termination pursuant to Section 4.02, by the amount which Executive is entitled to receive under the terms of Company's long-term disability insurance policy for senior executives as and if in effect at the effective date of termination. Any payments made pursuant to this Section 4.07 shall be reduced by such amounts as are required by law to be withheld or deducted. (c) The compensation rights provided for Executive in this Section shall be Executive's sole and exclusive remedies with respect to Sections 4.01, 4.02, 4.04, 4.05 or 4.06 hereof, and Executive shall not be entitled to any other compensation, damages or relief in connection therewith. V. CERTAIN COVENANTS OF EXECUTIVE SECTION 5.01 COVENANTS AGAINST UNFAIR COMPETITION. (a) ACKNOWLEDGMENTS. Executive acknowledges that, as of the date hereof (i) the principal business of Company and its affiliates is the provision of diagnostic imaging, treatment and related management services through a network of mobile magnetic resonance imaging ("MRI") facilities, fixed-site MRI facilities and multi-modality centers, at times, together with other healthcare providers, utilizing the related equipment and computer programs and "software" and various corporate investment structures ("Company Business"); (ii) Company Business is primarily national in scope; (iii) the industry is highly competitive; and (iv) Executive's duties hereunder will cause Executive to have access to and be entrusted with various trade secrets not readily available to the public or competitors, consisting of business accounts, lists of customers and other business contacts, information concerning Company's relationships with actual or potential clients or customers and the needs or requirements of such clients or customers, budgets, business and financial plans, employee lists, financial EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 5 information, artwork, designs, graphics, marketing plans and techniques, business strategy and development, know-how or other matters connected with Company Business, computer software programs and specifications (some of which may be developed in part by Executive under this Agreement), which items are owned exclusively by Company and used in the operation of Company Business ("Trade Secrets"). Notwithstanding the foregoing, the parties agree that the term "Trade Secrets" shall not include information which (i) is or becomes generally available to the public, without violation of any obligation of confidentiality by Executive, (ii) is or becomes available from a third party on a non-confidential basis, provided that such third party is not bound by a confidentiality agreement concerning the Trade Secrets and (iii) is or has been independently acquired or developed by Executive without violating the provisions of this Section. Executive further acknowledges that the Trade Secrets will be disclosed to Executive or obtained by Executive and received in confidence and trust for the sole purpose of using the same for the sole benefit of Company Business. Executive also acknowledges that such Trade Secrets are valuable to Company, of a unique and special nature, and important to Company in competing in the marketplace. During and after the term of this Agreement (otherwise than in the performance of this Agreement), without Company's prior written consent, Executive shall not divulge or use all or any of the Trade Secrets to or for any person or entity except (i) for the benefit of Company and as necessary to perform Executive's services under this Agreement; and (ii) when required by law, and then only after consultation with Company or unless such information is in the public domain. In the event that Executive, becomes or is legally compelled (whether by deposition, interrogatories, request for documents, subpoena, civil investigative demand or similar process) to disclose any Trade Secrets, Executive shall provide Company with prompt, prior written notice of such requirement so that Company may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section. (b) BREACH. Executive understands and agrees that Executive's employment with Company may be terminated if Executive breaches this Agreement or in any way divulges such Trade Secrets. Executive further understands and agrees that Company may be irreparably harmed by any violation or threatened violation of this Agreement and, therefore, Company may be entitled to injunctive relief to enforce its provisions. (c) NON-COMPETE. During the period of Executive's employment, Executive will not directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any activity or business which Company shall determine in good faith to be in competition in any substantial way with Company Business within any metropolitan area in the United States or elsewhere in which Company is then engaged in Company Business. The parties acknowledge that in California and some states post-employment non-compete clauses may be generally unenforceable, but that other states and jurisdictions permit such agreements. Executive hereby agrees that Executive will not directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any activity or business which Company shall determine in good faith to be in competition in any substantial way with Company Business as conducted at the effective date of termination of Executive's employment by Company for a period of twenty four (24) months after the termination of Executive's employment and that this Section will be enforceable to the greatest extent of the law; provided however, that if Executive's employment EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 6 is terminated pursuant to Sections 4.04 or 4.06 hereof, this subsection (c) will have no force or effect. (d) NO SOLICITATION OF EMPLOYEES. During Executive's employment and for a period of twenty four (24) months after the termination of Executive's employment, Executive will not, either directly or indirectly, either alone or in concert with others, solicit or entice or participate in the solicitation or attempt to solicit or in any manner encourage employees of Company to leave Company or work for anyone that is in competition in any substantial way with Company Business (which in the case of the period following Executive's termination, shall mean Company Business as conducted as of the effective date of termination of Executive's employment with Company); provided however, that if Executive's employment is terminated pursuant to Sections 4.04 or 4.06 hereof, this subsection (d) will have no force or effect; provided further, that the public listing, advertising or posting of an available position shall not constitute solicitation or an attempt to solicit hereunder and this subsection (d) shall not preclude Executive from hiring an individual pursuant thereto. (e) NO SOLICITATION OF CUSTOMERS. Executive will not during the course of Executive's employment, or for twenty four (24) months thereafter, either directly or indirectly call on, solicit, or take away, or attempt to call on, solicit or take away any of Company's customers on behalf of any business that is in competition in any substantial way with Company. Executive promises and agrees not to engage in any unfair competition with Company. During Executive's employment, Executive agrees not to plan or otherwise take any preliminary steps, either alone or in concert with others, to set up or engage in any business enterprise that would be in competition with Company Business. In the event of the termination of Executive's employment and for a period of twenty four (24) months thereafter, Executive will not accept any employment or engage in any activities which Company shall determine in good faith to be competitive with Company, if the fulfillment of the duties of the competitive employment or activities would inherently require Executive to reveal Trade Secrets to which Executive has access or learned during Executive's employment on behalf of any business that is in competition in any substantial way with Company. Notwithstanding the foregoing, if Executive's employment is terminated pursuant to Sections 4.04 or 4.06 hereof, this subsection (e) will have no force or effect. (f) RETURN OF COMPANY PROPERTY. In the event of the termination of Executive's employment, Executive will deliver to Company all devices, records, sketches, reports, proposals, files, customer lists, mailing or contact lists, correspondence, computer tapes, discs and design and other document and data storage and retrieval materials (and all copies, compilations and summaries thereof), equipment, documents, duplicates, notes, drawings, specifications, research, tape or other electronic recordings, programs, data and other materials or property of any nature belonging to Company or relating to Company Business, and Executive will not take with Executive or allow a third party to take, any of the foregoing or any reproduction of any of the foregoing. Company property includes personal property, made or compiled by Executive, in whole or in part and alone or with others, or in any way coming into Executive's possession concerning Company Business or other affairs of Company or any of its affiliates. (g) DISCLOSURE AND ASSIGNMENT OF RIGHTS. (i) Executive shall promptly disclose and assign to Company and its affiliates or its nominee(s), to the maximum extent permitted by Section 2870 of the California Labor Code, as it may be hereafter amended from time to time, all right, title and interest of Executive in and to any and all ideas, inventions, discoveries, secret processes and methods and improvements, together with any and all patents that may be issued EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 7 thereon in the United States and in all foreign countries, which Executive may invent, develop or improve, or cause to be invented, developed or improved, during the term of this Agreement or which are (1) conceived and developed during normal working hours, and (2) related to the scope of Company Business. As used in this Agreement, the term "invent" includes "make", "discover", "develop", "manufacture" or "produce", or any of them; "invention" includes the phrase "any new or useful original art, machine, methods of manufacture, process, composition of matter, design, or configuration of any kind"; "improvement" includes "discovery" or "production"; and "patent" includes "Letters Patent" and "all the extensions, renewals, modifications, improvements and reissues of such patents". (ii) Executive shall disclose immediately to duly authorized representatives of Company any ideas, inventions, discoveries, secret processes and methods and improvements covered by the provisions of paragraph (i) above, and execute all documents reasonably required in connection with the application for an issuance of Letters Patent in the United States and in any foreign country and the assignment thereof to Company and its affiliates or its nominee(s). SECTION 5.02 RIGHTS AND REMEDIES UPON BREACH. If Executive breaches, or threatens to breach, in any material respect any of the provisions of Section 5.01 hereof ("Restrictive Covenants"), Company shall, in addition to all its other rights hereunder and under applicable law and in equity, have the right to seek specific enforcement of the Restrictive Covenants by any court having jurisdiction, including, without limitation, the granting of a preliminary injunction which may be granted without the posting of a bond or other security, it being acknowledged that any such breach or threatened breach may cause irreparable injury to Company and that money damages may not provide an adequate remedy to Company. SECTION 5.03 SEVERABILITY OF COVENANTS. If any court of competent jurisdiction determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court of competent jurisdiction construes any of the Restrictive Covenants, or any part thereof, to be unenforceable because of the duration or geographic scope of such provision or otherwise, such provision shall be deemed amended to the minimum extent required to make it enforceable and, in its reduced form, such provision shall then be enforceable and enforced. VI. MISCELLANEOUS SECTION 6.01 NOTICES. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed or telecopied, or sent by certified, registered or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed, telexed or telecopied, or if mailed, two (2) days after the date of mailing, as follows: (i) If to Company, addressed to it at: InSight Health Services Corp. 4400 MacArthur Boulevard, Suite 800 Newport Beach, CA 92660 Attention: General Counsel (ii) If to Executive, addressed to Executive at such address as Executive shall have filed with Company for such purpose, or at such other address as Executive may from time to time specify by giving notice to Company. EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 8 SECTION 6.02 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. SECTION 6.03 WAIVERS AND AMENDMENTS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, amended, modified, superseded, canceled, renewed or extended, only by a written instrument signed by Executive and the Chairman of the Compensation Committee. No waiver of any provision of this Agreement shall be deemed to be a waiver of any other provision, whether or not similar. No such waiver shall constitute a continuing waiver. No delay on the part of either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either party of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. SECTION 6.04 ASSIGNMENT. This Agreement is personal to Executive, and Executive's rights and obligations hereunder may not be assigned by Executive. Company may assign this Agreement and its rights, together with its obligations, hereunder (i) in connection with any sale, transfer or other disposition of all or substantially all of its assets or business(s), whether by merger, consolidation or otherwise; or (ii) to any wholly owned subsidiary of Company, provided that Company shall remain liable for all of its obligations under this Agreement. SECTION 6.05 COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. SECTION 6.06 HEADINGS. The article and section headings in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. SECTION 6.07 NUMBER. Unless the context of this Agreement otherwise requires, words using the singular or plural number will also include the plural or singular number. SECTION 6.08 GOVERNING LAW. This Agreement shall be governed and interpreted in accordance with the laws of the State of California, without giving effect to the provisions thereof relating to conflicts of law. SECTION 6.09 (a) RESOLUTION OF DISPUTES. Executive and Company mutually agree and understand that as an inducement for Company to enter into this Agreement, Executive and Company agree and consent to the resolution by arbitration of all claims or controversies, past, present or future, whether arising out of the employment relationship (or its termination) or relating to this Agreement that Company may have against Executive or that Executive may have against Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The only claims that are arbitrable are those that, in the absence of this arbitration provision, would have been justiciable under applicable state or federal law. The claims covered by this arbitration provision, include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination, retaliation or harassment (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except claims under an employee benefit or pension plan that either (i) specifies that its claims procedure shall culminate in an arbitration procedure different from this one, or (ii) is underwritten by a EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 9 commercial insurer which decides the claims); and claims for violation of any federal, state, or other governmental law, statute, regulation or ordinance, except claims excluded in Section (b) below. Except as otherwise provided in this arbitration provision, both Company and Executive agree that neither of them shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination) in any way related to any claim covered by this arbitration provision. (b) CLAIMS EXCLUDED FROM ARBITRATION. Claims Executive may have for workers' compensation or unemployment compensation benefits are not covered by this arbitration provision. Also not covered are claims by Company for injunctive and/or other equitable relief, including but not limited to those for unfair competition and/or the use and/or unauthorized disclosure of Trade Secrets or confidential information, as to which Executive understands and agrees that Company may seek and obtain relief from a court of competent jurisdiction. (c) ARBITRATION PROCEDURES. Executive and Company understand and agree that the arbitration will take place in Orange County, California, in accordance with the California Employment Dispute Resolution Rules of the American Arbitration Association then in effect in the State of California, and judgment upon such award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The decision of the arbitrator(s) shall be bound by generally accepted legal principles, including, but not limited to, all rules of law and legal principles concerning potential liability, burdens of proof, and measure of damages found in all applicable California statutes and administrative rules and codes, and all California case law. SECTION 6.10 EXPENSES. Should either party institute arbitration to enforce this Agreement or any provision hereof, or for damages by reason of any alleged breach of this Agreement or any provisions hereof, Executive shall be entitled to receive from Company Executive's reasonable travel and living expenses, incurred by Executive in connection with preparation for and participation in the arbitration proceeding if Executive is the prevailing party or such portion thereof as the arbitrator(s) may award in the event of a split decision. SECTION 6.11 EFFECTIVE DATE. This Agreement shall be effective upon execution of this Agreement by all parties who are signatories hereto. IN WITNESS WHEREOF, the parties have executed this Executive Employment Agreement as of the date first above written. INSIGHT HEALTH SERVICES CORP. By: /s/ L. H. Habas --------------------------------------- Leonard H. Habas, Chairman, Compensation Committee EXECUTIVE /s/ Steven T. Plochocki ------------------------------------------ EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 10 Steven T. Plochocki EXECUTIVE EMPLOYMENT AGREEMENT -- STP PAGE 11 EX-10.31 4 a2024859zex-10_31.txt EXHIBIT 10.31 EXHIBIT 10.31 FIFTH AMENDMENT TO CREDIT AGREEMENT THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT"), dated as of December 15, 1999, is by and among INSIGHT HEALTH SERVICES CORP. (the "BORROWER"), the subsidiaries of the Borrower identified on the signature pages hereto (the "GUARANTORS"), the several lenders identified on the signature pages hereto (each a "LENDER" and, collectively, the "LENDERS") and BANK OF AMERICA, N.A., formerly NationsBank, N.A., as agent for the Lenders (in such capacity, the "AGENT"). Capitalized terms used herein which are not defined herein and which are defined in the Credit Agreement shall have the same meanings as therein defined. W I T N E S S E T H WHEREAS, the Borrower, the Guarantors, the Lenders and the Agent entered into that certain Credit Agreement dated as of October 14, 1997, as amended by that First Amendment to Credit Agreement dated as of November 17, 1997, as amended by that Second Amendment to Credit Agreement dated as of December 19, 1997, as amended by that Third Amendment to Credit Agreement dated as of March 23, 1998 and as amended by that Fourth Amendment and Restatement of Credit Agreement dated as of June 12, 1998 (as so amended, the "EXISTING CREDIT AGREEMENT"); WHEREAS, the Borrower and the Guarantors have requested that certain provisions of the Existing Credit Agreement be amended; and WHEREAS, the parties have agreed to amend the Existing Credit Agreement as set forth herein. NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: PART 1 DEFINITIONS SUBPART 1.1 CERTAIN DEFINITIONS. Unless otherwise defined herein or the context otherwise requires, the following terms used in this Amendment, including its preamble and recitals, have the following meanings: "AMENDED CREDIT AGREEMENT" means the Existing Credit Agreement as amended hereby. "AMENDMENT NO. 5 EFFECTIVE DATE" is defined in SUBPART 3.1. SUBPART 1.2 OTHER DEFINITIONS. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Amended Credit Agreement. -1- PART 2 AMENDMENTS TO EXISTING CREDIT AGREEMENT Effective on (and subject to the occurrence of) the Amendment No. 5 Effective Date, the Existing Credit Agreement is hereby amended in accordance with this PART 2. Except as so amended, the Existing Credit Agreement and all other Credit Documents shall continue in full force and effect. SUBPART 2.1 AMENDMENTS TO SECTION 1.1. The following new definition is hereby added to Section 1.1 of the Existing Credit Agreement in the appropriate alphabetical order to read as follows: "GE FINANCED MACHINERY" means the magnetic resonance and other diagnostic imaging equipment financed by GE as Capital Leases, which equipment is more fully described on SCHEDULE 8.1(c)(iv) hereto. SUBPART 2.2 AMENDMENTS TO SECTION 8.1(c). Section 8.1(c) of the Existing Credit Agreement is amended in its entirety to read as follows: 8.1 INDEBTEDNESS. The Credit Parties will not permit any Consolidated Party to contract, create, incur, assume or permit to exist any Indebtedness, except: ************ (c)(i) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by the Borrower or any of its Subsidiaries which is not a Joint Venture other than Open MRI or Central Coast to finance the purchase of fixed assets PROVIDED that (A) the total of all such Indebtedness for all such Persons taken together shall not exceed an aggregate principal amount of $10,000,000 (excluding any such Indebtedness of the Borrower or any of its Subsidiaries other than Open MRI or Central Coast referred to in subsection (b) above) at any one time outstanding; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (ii) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by Open MRI to finance the purchase of fixed assets PROVIDED that (A) the total outstanding principal of all such Indebtedness (including any such Indebtedness of Open MRI referred to in subsection (b) above), taken together with the aggregate original equipment cost of all Property leased by Open MRI under Operating Leases, shall not exceed at any time an aggregate -2- principal amount of $20,000,000; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (iii) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by Central Coast to finance the purchase of fixed assets PROVIDED that (A) the total outstanding principal of all such Indebtedness shall not exceed at any time an aggregate principal amount of $6,000,000 (including any such Indebtedness of Central Coast referred to in subsection (b) above); (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (iv) obligations of the Credit Parties (other than Open MRI) arising under Capital Leases with respect to the GE Financed Machinery; PROVIDED that (A) the total outstanding principal of all such Indebtedness shall not exceed at any time an aggregate principal amount of $57,300,000; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; SUBPART 2.3 AMENDMENTS TO SECTION 8.14. Section 8.14 of the Existing Credit Agreement is hereby amended in its entirety to read as follows: 8.14 CAPITAL EXPENDITURES. The Credit Parties will not permit Consolidated Capital Expenditures to exceed $35,000,000 per fiscal year; PROVIDED, HOWEVER, notwithstanding any provision of this Credit Agreement to the contrary, any Consolidated Capital Expenditures attributable to Indebtedness incurred by the Credit Parties in accordance with Section 8.1(c)(iv) shall be excluded from the limitations set forth in this Section 8.14. SUBPART 2.4 AMENDMENTS TO SECTION 8.16(a). Section 8.16(a) of the Existing Credit Agreement is hereby amended in its entirety to read as follows: 8.16 OPERATING LEASE OBLIGATIONS. (a) The Credit Parties will not permit the aggregate obligations of the Consolidated Parties other than Open MRI which are not Joint Ventures for the payment of rental under Operating Leases (other than in respect of Operating Leases existing as of the Closing Date and described in SCHEDULE 8.16 (and renewals, refinancings and extensions thereof)) for any fiscal year to exceed at any time an aggregate amount of $2,500,000. - 3 - SUBPART 2.5 NEW SCHEDULE 8.1(c)(iv). A new SCHEDULE 8.1(c)(iv) in the form of SCHEDULE 8.1(c)(iv) attached hereto is hereby added to the Existing Credit Agreement. PART 3 CONDITIONS TO EFFECTIVENESS SUBPART 3.1 AMENDMENT NO. 5 EFFECTIVE DATE. This Amendment shall be and become effective as of the date hereof (the "AMENDMENT NO. 5 EFFECTIVE DATE") when all of the conditions set forth in this PART 3 shall have been satisfied, and thereafter this Amendment shall be known, and may be referred to, as "AMENDMENT NO. 5." SUBPART 3.2 EXECUTION OF COUNTERPARTS OF AMENDMENT. The Agent shall have received counterparts (or other evidence of execution, including telephonic message, satisfactory to the Agent) of this Amendment, which collectively shall have been duly executed on behalf of each of the Borrower, the Guarantors and the Required Lenders. SUBPART 3.3 AMENDMENT FEE. The Agent shall have received for the account of each Lender approving this Amendment an amendment fee equal to 0.10% of each such Lender's Commitment. SUBPART 3.4 SUBORDINATED NOTE INDENTURE. If the transactions contemplated in the Amended Credit Agreement are prohibited by the Subordinated Note Indenture (as in effect immediately prior to the Amendment No. 5 Effective Date), the Subordinated Note Indenture shall have been amended in a manner satisfactory to the Agent so as to permit such transactions. The Agent shall have received executed copies of any such amendments and consents to the Subordinated Note Indenture. SUBPART 3.5 OTHER ITEMS. The Agent shall have received such other documents, agreements or information which may be reasonably requested by the Agent. - 4 - PART 4 MISCELLANEOUS SUBPART 4.1 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to the Agent and the Lenders that, after giving effect to this Amendment, (a) no Default or Event of Default exists under the Credit Agreement or any of the other Credit Documents and (b) the representations and warranties set forth in Section 6 of the Existing Credit Agreement are, subject to the limitations set forth therein, true and correct in all material respects as of the date hereof (except for those which expressly relate to an earlier date). SUBPART 4.2 REAFFIRMATION OF CREDIT PARTY OBLIGATIONS. Each Credit Party hereby ratifies the Credit Agreement acknowledges and reaffirms (i) that it is bound by all terms of the Credit Agreement and (ii) that it is responsible for the observance and full performance of the Credit Party Obligations. SUBPART 4.3 CROSS-REFERENCES. References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this Amendment. SUBPART 4.4 INSTRUMENT PURSUANT TO EXISTING CREDIT AGREEMENT. This Amendment is a Credit Document executed pursuant to the Existing Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Existing Credit Agreement. SUBPART 4.5 REFERENCES IN OTHER CREDIT DOCUMENTS. At such time as this Amendment No. 5 shall become effective pursuant to the terms of SUBPART 3.1, all references in the Credit Documents to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment No. 5. SUBPART 4.6 COUNTERPARTS. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SUBPART 4.7 GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. SUBPART 4.8 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns. [The remainder of this page has been left blank intentionally] - 5 - IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly executed on the date first above written. BORROWER: INSIGHT HEALTH SERVICES CORP. - -------- By: /s/ Thomas V. Croal ----------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer GUARANTORS: INSIGHT HEALTH CORP. - ---------- RADIOLOGY SERVICES CORP. OPEN MRI, INC. MAXUM HEALTH CORP. RADIOSURGERY CENTERS, INC. MTS ENTERPRISES, INC. QUEST FINANCIAL SERVICES, INC. MAXUM HEALTH SERVICES CORP. DIAGNOSTIC SOLUTIONS CORP. MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. MAXUM HEALTH SERVICES OF ARLINGTON, INC. MAXUM HEALTH SERVICES OF DALLAS, INC. NDDC, INC. SIGNAL MEDICAL SERVICES, INC. MISSISSIPPI MOBILE TECHNOLOGY, INC. By: /s/ Thomas V. Croal ----------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer [Signatures Continue] LENDERS: BANK OF AMERICA, N.A. formerly NationsBank, N.A., individually in its capacity as a Lender and in its capacity as Agent By: /s/ Scott Singhoff ---------------------------------------- Name: Scott Singhoff Title: Managing Director THE BANK OF NOVA SCOTIA By: /s/ R.P. Reynolds ---------------------------------------- Name: R.P. Reynolds Title: Director BANKBOSTON, N.A. By: /s/ Walter J. Marullo ---------------------------------------- Name: Walter J. Marullo Title: Vice President PARIBAS By: /s/ Eric Voravong ---------------------------------------- Name: Eric Voravong Title: Vice President By: /s/ Sean T. Conlon ---------------------------------------- Name: Sean T. Conlon Title: Managing Director COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEINBANK B.A., "RABOBANK NEDERLAND" By: ---------------------------------------- Name: Title: [Signatures Continue] FIFTH AMENDMENT INSIGHT HEALTH SERVICES CORP. BHF BANK AKTIENGESELLSCHAFT By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title: DRESDNER BANK AG. NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: /s/ A. P. Nesi ---------------------------------------- Name: Andrew P. Nesi Title: First Vice President By: /s/ C. M. O'Shea ---------------------------------------- Name: Charles M. O'Shea Title: Vice President IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION By: /s/ R. Vadalma ---------------------------------------- Name: Ray Vadalma Title: Senior Managing Director UNION BANK OF CALIFORNIA, N.A. By: ---------------------------------------- Name: Title: BANK POLSKA KASA OPIEKA, S.A. By: /s/ Barry W. Henry ---------------------------------------- Name: Barry W. Henry Title: Vice President Senior Lending Officer FIFTH AMENDMENT INSIGHT HEALTH SERVICES CORP. EX-10.32 5 a2024859zex-10_32.txt EXHIBIT 10.32 EXHIBIT 10.32 SIXTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER THIS SIXTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this "AMENDMENT"), dated as of May 31, 2000, is by and among INSIGHT HEALTH SERVICES CORP. (the "BORROWER"), the subsidiaries of the Borrower identified on the signature pages hereto (the "GUARANTORS"), the several lenders identified on the signature pages hereto (each a "LENDER" and, collectively, the "LENDERS") and BANK OF AMERICA, N.A., formerly NationsBank N.A., as agent for the Lenders (in such capacity, the "AGENT"). W I T N E S S E T H WHEREAS, the Borrower, the Guarantors, the Lenders and the Agent entered into that certain Credit Agreement dated as of October 14, 1997, as amended by that First Amendment to Credit Agreement dated as of November 17, 1997, as amended by that Second Amendment to Credit Agreement dated as of December 19, 1997, as amended by that Third Amendment to Credit Agreement dated as of March 23, 1998, as amended by that Fourth Amendment and Restatement of Credit Agreement dated as of June 12, 1998 and as amended by that Fifth Amendment to Credit Agreement dated as of December 15, 1999 (as so amended, the "EXISTING CREDIT AGREEMENT"); WHEREAS, the Borrower and the Guarantors have requested that certain provisions of the Existing Credit Agreement be amended; and WHEREAS, the parties have agreed to amend the Existing Credit Agreement as set forth herein. NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: PART 1 DEFINITIONS SUBPART 1.1 CERTAIN DEFINITIONS. Unless otherwise defined herein or the context otherwise requires, the following terms used in this Amendment, including its preamble and recitals, have the following meanings: "AMENDED CREDIT AGREEMENT" means the Existing Credit Agreement as amended hereby. "AMENDMENT NO. 6 EFFECTIVE DATE" is defined in Subpart 4.1. "WILKES-BARRE" means that certain outpatient medical diagnostic imaging center located at 150 Mundy Street, Wilkes-Barre, Pennsylvania. - 1 - SUBPART 1.2 OTHER DEFINITIONS. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Amended Credit Agreement. PART 2 AMENDMENTS TO EXISTING CREDIT AGREEMENT Effective on (and subject to the occurrence of) the Amendment No. 6 Effective Date, the Existing Credit Agreement is hereby amended in accordance with this PART 2. Except as so amended, the Existing Credit Agreement and all other Credit Documents shall continue in full force and effect. SUBPART 2.1 AMENDMENTS TO SECTION 1.1. A. The following definitions set forth in Section 1.1 of the Existing Credit Agreement are hereby amended in their entireties to read as follows: "APPLICATION PERIOD", (i) in respect of any Asset Disposition by any Consolidated Party, shall have the meaning assigned to such term in Section 8.5 and (ii) in respect of any Asset Disposition by any Unrestricted Joint Venture which is a Restricted Subsidiary (as defined in the Subordinated Note Indenture), means 359 days following the consummation of such Asset Disposition. "ASSET DISPOSITION" means (i) the disposition of any or all of the assets (including without limitation the Capital Stock of a Subsidiary) of any Consolidated Party, whether by sale, lease, transfer or otherwise, other than (a) the sale of inventory in the ordinary course of business for fair consideration, (b) the sale or disposition of machinery and equipment no longer used or useful in the conduct of such Person's business and (c) any Equity Issuance and (ii) any Asset Sale (as defined in the Subordinated Note Indenture). "CENTRAL COAST" means St. John's Regional Medical Center, LLC, a California limited liability company. "EXCLUDED ASSET DISPOSITION" means (i) any Asset Disposition by any Consolidated Party to any Credit Party if (a) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such Asset Disposition and (b) after giving effect such Asset Disposition, no Default or Event of Default exists and (ii) any transaction constituting a Permitted Investment. - 2 - "NET CASH PROCEEDS" means, with respect to any Person, the aggregate cash proceeds received by such Person in respect of any Asset Disposition, Equity Issuance or Debt Issuance, net of (a) direct costs (including, without limitation, legal, accounting and investment banking fees, and sales commissions), (b) taxes paid or payable as a result thereof and (c) amounts required to be paid to any Person (other than any Consolidated Party or Unrestricted Joint Venture) owning a beneficial interest in any assets that are subject to an Asset Disposition; it being understood that "Net Cash Proceeds" shall include, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received by such Person in any Asset Disposition, Equity Issuance or Debt Issuance. "PERMITTED INVESTMENTS" means Investments which are either (i) cash or Cash Equivalents; (ii) accounts receivable created, acquired or made by any Consolidated Party in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) Investments consisting of Capital Stock, obligations, securities or other property received by any Consolidated Party in settlement of accounts receivable (created in the ordinary course of business) from bankrupt obligors; (iv) Investments existing as of the Closing Date and set forth in SCHEDULE 1.1B; (v) Guaranty Obligations permitted by Section 8.1; (vi) transactions permitted by Section 8.9; (vii) advances or loans to directors, officers, employees, agents, customers or suppliers made in the ordinary course of business for reasonable business and which do not exceed $1,000,000 in the aggregate at any one time outstanding for all of the Consolidated Parties; (viii) Investments in any Credit Party; (ix) Permitted Acquisitions; (x) Investments in Joint Ventures not to exceed $25,000,000 and (xi) the purchase of Eligible Assets with the proceeds of any Asset Disposition as contemplated by Section 8.5. "RESTRICTED JOINT VENTURE" means any Joint Venture in existence on the Closing Date and identified on SCHEDULE 1.1A. "SUBSIDIARY" means, as to any Person at any time, (a) any corporation more than 50% of whose Capital Stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at such time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at such time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity of which such Person directly or indirectly through Subsidiaries owns at such time more than 50% of the Capital Stock; PROVIDED, HOWEVER, that the term "Subsidiary" (i) shall not include any Unrestricted Joint Venture and (ii) shall include Wilkes-Barre Imaging, LLC. - 3 - "UNRESTRICTED JOINT VENTURE" means any Joint Venture which is not a Restricted Joint Venture; PROVIDED, HOWEVER, the term "Unrestricted Joint Venture" shall not include Wilkes-Barre Imaging, LLC. B. Clause (xiii) appearing in the definition of "Permitted Liens" appearing in Section 1.1 of the Existing Credit Agreement is hereby amended in its entirety to read as follows: (xiii) Liens on any Property owned by any Subsidiary of the Borrower which is a Restricted Joint Venture; SUBPART 2.2 AMENDMENTS TO SECTION 1.3 Section 1.3 of the Existing Credit Agreement is amended in its entirety to read as follows: 1.3 ACCOUNTING TERMS. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement (i) shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 (or, prior to the delivery of the first financial statements pursuant to Section 7.1, consistent with the financial statements as at June 30, 1997) but, in any event, after elimination for minority interests; PROVIDED, HOWEVER, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Agent or the Required Lenders shall so object in writing within 60 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Borrower to the Lenders as to which no such objection shall have been made, and (ii) shall exclude income statement items (whether positive or negative) attributable to ownership interests held by any Consolidated Party in any Unrestricted Joint Venture. Notwithstanding the above, the parties hereto acknowledge and agree that, for purposes of all calculations made under the financial covenants set forth in Section 7.11 (including without limitation for purposes of the definitions of "Applicable Percentage" and "Pro Forma Basis" set forth in Section 1.1), (i)(A) income statement items (whether positive or negative) attributable to the Property disposed of in any Asset Disposition as contemplated by Section 8.5 or to any Operating Leases of - 4 - GE Financed Machinery which were converted into Capital Leases, as applicable, shall be excluded to the extent relating to any period occurring prior to the date of such transaction, (B) Indebtedness which is retired in connection with any such Asset Disposition shall be excluded and deemed to have been retired as of the first day of the applicable period and (C) for purposes of calculating interest expense, Indebtedness attributable to Capital Leases which were formerly Operating Leases of GE Financed Machinery shall be deemed to have been incurred on the first day of the applicable period and if such Indebtedness has a floating or formula rate, such Indebtedness shall have an implied rate of interest for the applicable period determined by utilizing the rate which is or would be in effect with respect to such Indebtedness as at the relevant date of determination, and (ii) income statement items (whether positive or negative) attributable to any Property acquired in any Investment transaction (including without limitation any Permitted Acquisition) contemplated by Section 8.6 shall be included to the extent relating to any period applicable in such calculations occurring after the date of such transaction (and, notwithstanding the foregoing, during the first four fiscal quarters following the date of such transaction, shall be included on an annualized basis). SUBPART 2.3 AMENDMENTS TO SECTION 6.13. The first sentence of Section 6.13 of the Existing Credit Agreement is hereby amended in its entirety to read as follows: Set forth on SCHEDULE 6.13 is a complete and accurate list of all Subsidiaries of each Consolidated Party and all Unrestricted Joint Ventures of each Consolidated Party. SUBPART 2.4 AMENDMENTS TO SECTIONS 7.12, 7.13, 8.7, 8.8, 8.12 AND 8.15. The clause "which is not a Joint Venture" as it appears in Sections 7.12, 7.13, 8.7, 8.8, 8.12 and 8.15 of the Existing Credit Agreement is amended in its entirety in each such Section to read "which is not a Restricted Joint Venture". SUBPART 2.5 AMENDMENTS TO SECTION 7.14. The clause "Joint Ventures" as it appears in Section 7.14 of the Existing Credit Agreement is amended in its entirety each time it appears in such Section to read "Restricted Joint Ventures". SUBPART 2.6 AMENDMENTS TO SECTION 8.1(c). Section 8.1(c) of the Existing Credit Agreement is amended in its entirety to read as follows: 8.1 INDEBTEDNESS. The Credit Parties will not permit any Consolidated Party to contract, create, incur, assume or permit to exist any Indebtedness, except: ************ - 5 - (c)(i) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by any Consolidated Party which is not a Restricted Joint Venture other than Open MRI or Central Coast to finance the purchase of fixed assets PROVIDED that (A) the total of all such Indebtedness for all such Persons taken together shall not exceed an aggregate principal amount of $10,000,000 (excluding any such Indebtedness of any Consolidated Party other than Open MRI or Central Coast referred to in subsection (b) above) at any one time outstanding; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (ii) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by Open MRI to finance the purchase of fixed assets PROVIDED that (A) the total outstanding principal of all such Indebtedness (including any such Indebtedness of Open MRI referred to in subsection (b) above), taken together with the aggregate original equipment cost of all Property leased by Open MRI under Operating Leases, shall not exceed at any time an aggregate principal amount of $20,000,000; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (iii) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by Central Coast to finance the purchase of fixed assets PROVIDED that (A) the total outstanding principal of all such Indebtedness shall not exceed at any time an aggregate principal amount of $6,000,000 (including any such Indebtedness of Central Coast referred to in subsection (b) above); (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (iv) obligations of the Credit Parties (other than Open MRI) arising under Capital Leases with respect to the GE Financed Machinery; PROVIDED that (A) the total outstanding principal of all such Indebtedness shall not exceed at any time an aggregate principal amount of $57,300,000; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; SUBPART 2.7 AMENDMENTS TO SECTIONS 8.16(a) AND 8.18. The clause "which are not Joint Ventures" as it appears in Sections 8.16(a) and 8.18 of the Existing Credit Agreement is amended in its entirety in each such Section to read "which are not Restricted Joint Ventures". PART 3 CERTAIN WAIVERS REGARDING ACQUISITION OF WILKES-BARRE Solely with respect to the Acquisition of Wilkes-Barre by InSight Health Corp., the Required Lenders agree as follows: (a) The requirement that the maximum amount of proceeds of Acquisition Loans used to finance the Acquisition of Wilkes-Barre not exceed $15,000,000, as set forth in clause (vii) of the definition of "Permitted Acquisition" appearing in Section 1.1 of the Amended Credit Agreement, is hereby waived. (b) Notwithstanding anything to the contrary contained in the Amended Credit Agreement (including, without limitation, Sections 8.5 and 8.12), in connection with and as partial consideration for the Acquisition of Wilkes-Barre, Wilkes-Barre Imaging, LLC shall be permitted to issue or transfer shares of its Capital Stock to Roy Assael in an amount not to exceed 10% of the total outstanding Capital Stock of Wilkes-Barre Imaging, LLC (the "Minority Interest"). Furthermore, (i) any requirement that the Credit Parties prepay the Loans pursuant to Section 3.3(b)(v) in connection with the issuance of such Capital Stock to Roy Assael is hereby waived and (ii) notwithstanding anything to the contrary contained in Section 7.12, Section 7.13 or any of the Collateral Documents, any requirement that the Minority Interest be pledged as Collateral to secure the Credit Party Obligations is waived for so long as such Minority Interest is not held by a Credit Party. PART 4 CONDITIONS TO EFFECTIVENESS SUBPART 4.1 AMENDMENT NO. 6 EFFECTIVE DATE. This Amendment shall be and become effective as of the date hereof (the "AMENDMENT NO. 6 EFFECTIVE DATE") when all of the conditions set forth in this PART 4 shall have been satisfied, and thereafter this Amendment shall be known, and may be referred to, as "AMENDMENT NO. 6." SUBPART 4.2 EXECUTION OF COUNTERPARTS OF AMENDMENT. The Agent shall have received counterparts (or other evidence of execution, including telephonic message, satisfactory to the Agent) of this Amendment, which collectively shall have been duly executed on behalf of each of the Borrower, the Guarantors and the Required Lenders. SUBPART 4.3 AMENDMENT FEE. The Agent shall have received for the account of each Lender approving this Amendment an amendment fee equal to 0.125% of each such Lender's Commitment. SUBPART 4.4 OTHER ITEMS. The Agent shall have received such other documents, agreements or information which may be reasonably requested by the Agent. -7- PART 5 MISCELLANEOUS SUBPART 5.1 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to the Agent and the Lenders that (a) after giving effect to this Amendment, (i) no Default or Event of Default exists under the Credit Agreement or any of the other Credit Documents and (ii) the representations and warranties set forth in Section 6 of the Amended Credit Agreement are, subject to the limitations set forth therein, true and correct in all material respects as of the date hereof (except for those which expressly relate to an earlier date) and (b) the transactions contemplated in this Amendment are not prohibited by the Subordinated Note Indenture (as in effect immediately prior to the Amendment No. 6 Effective Date. SUBPART 5.2 REAFFIRMATION OF CREDIT PARTY OBLIGATIONS. Each Credit Party hereby ratifies the Credit Agreement and acknowledges and reaffirms (i) that it is bound by all terms of the Credit Agreement and (ii) that it is responsible for the observance and full performance of the Credit Party Obligations. SUBPART 5.3 CROSS-REFERENCES. References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this Amendment. SUBPART 5.4 INSTRUMENT PURSUANT TO EXISTING CREDIT AGREEMENT. This Amendment is a Credit Document executed pursuant to the Existing Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Existing Credit Agreement. SUBPART 5.5 REFERENCES IN OTHER CREDIT DOCUMENTS. At such time as this Amendment No. 6 shall become effective pursuant to the terms of SUBPART 4.1, all references in the Existing Credit Documents to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment No. 6. SUBPART 5.6 COUNTERPARTS. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SUBPART 5.7 GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. SUBPART 5.8 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. [The remainder of this page has been left blank intentionally] -8- IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly executed on the date first above written. BORROWER: INSIGHT HEALTH SERVICES CORP. By: /s/ Thomas V. Croal ------------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer GUARANTORS: INSIGHT HEALTH CORP. RADIOLOGY SERVICES CORP. OPEN MRI, INC. MAXUM HEALTH CORP. RADIOSURGERY CENTERS, INC. QUEST FINANCIAL SERVICES, INC. MAXUM HEALTH SERVICES CORP. DIAGNOSTIC SOLUTIONS CORP. MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. MAXUM HEALTH SERVICES OF ARLINGTON, INC. MAXUM HEALTH SERVICES OF DALLAS, INC. NDDC, INC. SIGNAL MEDICAL SERVICES, INC. MISSISSIPPI MOBILE TECHNOLOGY, INC. By: /s/ Thomas V. Croal ------------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer [Signatures Continue] SIXTH AMENDMENT INSIGHT HEALTH SERVICES CORP. LENDERS: BANK OF AMERICA, N.A. formerly NationsBank, N.A., individually in its capacity as a Lender and in its capacity as Agent By: /s/ Scott Singhoff ---------------------------------------- Name: Scott Singhoff Title: Managing Director THE BANK OF NOVA SCOTIA By: /s/ R.P. Reynolds ---------------------------------------- Name: R.P. Reynolds Title: Director FLEET NATIONAL BANK By: /s/ Walter J. Marullo ---------------------------------------- Name: Walter J. Marullo Title: Vice President PARIBAS By: /s/ Sean T. Conlon ---------------------------------------- Name: Sean T. Conlon Title: Managing Director By: /s/ Eric Voravong ---------------------------------------- Name: Eric Voravong Title: Vice President COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEINBANK B.A., "RABOBANK NEDERLAND" By: ---------------------------------------- Name: Title: [Signatures Continue] SIXTH AMENDMENT INSIGHT HEALTH SERVICES CORP. BHF (USA) CAPITAL CORPORATION By: /s/ Dan Dobrjanskyj ---------------------------------------- Name: Dan Dobrjanskyj Title: Assistant Vice President By: /s/ Richard Cameron ---------------------------------------- Name: Richard Cameron Title: Vice President DRESDNER BANK AG. NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: /s/ A. Nesi ---------------------------------------- Name: A. Nesi Title: First Vice President By: /s/ D. A. Ritzier ---------------------------------------- Name: Debra A. Ritzier Title: Assistant Vice President IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION By: /s/ R. Vadalma ---------------------------------------- Name: Ray Vadalma Title: Senior Managing Director UNION BANK OF CALIFORNIA, N.A. By: /s/ Ronald A. Launsbach ---------------------------------------- Name: Ronald A. Launsbach Title: Vice President BANK POLSKA KASA OPIEKA, S.A. By: /s/ Barry W. Henry ---------------------------------------- Name: Barry W. Henry Title: Vice President Senior Lending Officer SIXTH AMENDMENT INSIGHT HEALTH SERVICES CORP. EX-21 6 a2024859zex-21.txt EXHIBIT 21 EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT 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 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 EX-23 7 a2024859zex-23.txt EXHIBIT 23 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 1, 2000, with respect to the consolidated financial statements of InSight Health Services Corp. included in the Form 10-K for the year ended June 30, 2000. /s/ ARTHUR ANDERSON LLP Orange County, California September 6, 2000 EX-99 8 a2024859zex-99.txt EXHIBIT 99 EXHIBIT 99 INSIGHT HEALTH SERVICES CORP. AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER I. PURPOSE, OBJECTIVES AND DUTIES The primary purpose of the Audit Committee is to assist the Board of Directors ("Board") in fulfilling its oversight responsibilities by reviewing: the financial reports and other financial information provided by InSight Health Services Corp. ("Company") to any governmental body or the public; the Company's systems of internal controls regarding finance and accounting that management and the Board have established; and the Company's auditing, accounting and financial reporting processes generally. Consistent with this purpose, the Audit Committee shall encourage continuous improvement of, and foster adherence to the Company's policies, procedures and practices at all levels. The Audit Committee's primary objectives are to: - Serve as an independent and objective party to monitor the Company's financial reporting processes and internal controls systems. - Review the work of the Company's independent accountants. - Provide independent, direct, and open communications among the Company's independent accountants, financial and senior management, and the Board. - Oversee with management the reliability and integrity of the Company's accounting policies and financial reporting and disclosure practices. The Audit Committee's primary duties shall specifically be to: - Discuss and review with the Company's independent accountants their ultimate accountability to the Board and the Audit Committee. - Share with the Board the ultimate authority and responsibility to select, evaluate and, where appropriate, replace the Company's independent accountants. - Ensure that the Company's independent accountants submit on a periodic basis to the Audit Committee a formal written statement delineating all relationships between the independent accountants and the Company. - Engage actively in a dialogue with the Company's independent accountants with respect to any disclosed relationship or services that may impact the objectivity of the independent accountants and recommend that the Board take appropriate action in response to the independent accountants' report to satisfy itself of the independent accountants' independence. II. COMPOSITION 1. Composition of Audit Committee. (a) The Audit Committee shall consist of at least three directors, all of whom have no relationship to the Company that may interfere with the exercise of their independence from management and the Company ("Independent"). (b) Each member of the Audit Committee shall be financially literate, as such qualification is interpreted by the Board in its business judgment, or must become financially literate within a reasonable period of time after his or her appointment to the Audit Committee. (c) At least one member of the Audit Committee must have accounting or related financial management expertise, as the Board interprets such qualification in its business judgment. 2. Independence Requirement of Audit Committee Members. Notwithstanding the definition of Independent provided in Section II.1.(a) above, the following persons are not considered Independent: (a) a director who is employed by the Company or any of its affiliates for the current year or any of the past three years; (b) a director who accepted compensation from the Company or any of its affiliates in excess of $60,000 during the previous fiscal year, other than compensation for Board service, benefits under a tax-qualified retirement plan, or non-discretionary compensation; (c) a director who is a member of the immediate family of an individual who has, or has been in any of the past three years, employed by the Company or any of its affiliates as an executive officer; (d) a director who is a partner in or a controlling shareholder or an executive officer of any for-profit business organization to which the Company made or from which the Company received, payments (other than those arising solely from investments in the Company's or the business organization's securities) that exceed 5% of the Company's or the business organization's consolidated gross revenues for that year, or $200,000, whichever is more, in any of the past three years; (e) a director who is employed as an executive officer of another entity where any of the Company's executives serve on that entity's compensation committee. 2 Notwithstanding the above, one director who is not Independent and is not a current employee or an immediate family member of such employee, may be appointed to the Audit Committee, if the Board, under exceptional and limited circumstances, determines that membership on the Audit Committee by that individual is required in the best interest of the Company and its stockholders and the Board discloses, in the next annual proxy statement subsequent to such determination, the nature of the relationship and the reasons for that determination. 3. Election of Audit Committee Members. The members of the Audit Committee shall be elected by the Board at the Board meeting following the annual meeting of stockholders or until their successors shall be duly elected and qualified. Unless a Chairperson is elected by the full Board, the members of the Audit Committee shall designate a Chairperson by majority vote of the full Audit Committee membership. III. MEETINGS The Audit Committee shall meet in person or by telephone at least four times annually, or more frequently as circumstances dictate, including the meetings described below, and shall report to the Board following each meeting of the Audit Committee at the next regularly scheduled meeting of the Board or sooner. As part of its primary function, to foster independent, direct, and open communications, the Audit Committee shall meet at least annually with management and the Company's independent accountants in separate executive sessions to discuss any matters that the Audit Committee or each of these groups believe should be discussed privately. In addition, the Chairperson of the Audit Committee shall meet in person or by telephone with the Company's independent accountants and the Company's chief financial officer quarterly to review the Company's financial statements consistent with Section IV.4, 5 and 6 below. IV. RESPONSIBILITIES To fulfill its primary responsibilities the Audit Committee shall: DOCUMENTS/REPORTS REVIEW 1. Review and update this Charter periodically, and at least annually, as conditions dictate. 2. Review the Company's annual financial statements and related notes thereto and any reports or other financial information submitted to any governmental body or the public, including any certification, report, analysis, opinion or review rendered by the Company's independent accountants. 3. Review the regular internal quarterly reports to management. 4. Review filings made with the Securities and Exchange Commission ("SEC") and other published documents containing the Company's financial statements and 3 consider whether the information contained in such documents is consistent with the information contained in the Company's financial statements. 5. Include in the Company's proxy statements relating to annual meetings of stockholders at which directors are to be elected (or special meetings or written consents in lieu of such meetings) a report of the Audit Committee that complies with the SEC's regulations for such reports. 6. Review (or cause the Chairperson of the Audit Committee to review) with the Company's independent accountants and the Company's chief financial officer each quarterly report on Form 10-Q and all financial statements and related notes thereto (or any successor report thereto under the rules and regulations of the SEC) prior to its filing with the SEC or prior to the public release of the Company's earnings. INDEPENDENT ACCOUNTANTS 7. Recommend to the Board the selection, evaluation and, where appropriate, replacement of the Company's independent accountants, consider the independence and effectiveness of the independent accountants and approve the fees and other compensation to be paid to the independent accountants and the range and cost of audit and non-audit services performed by the independent accountants. On an annual basis, the Audit Committee shall review and discuss with the independent accountants all significant relationships the independent accountants have with the Company in order to determine such independent accountants' independence. 8. Periodically consult with the Company's independent accountants out of the presence of management about internal controls and the fullness and accuracy of the Company's financial statements. FINANCIAL REPORTING PROCESSES 9. In consultation with the Company's independent accountants, review the integrity of the Company's financial reporting processes, both internal and external; confer with the independent accountants concerning the scope of their examinations of the books and records of the Company and its subsidiaries; review and approve the independent accountant's annual engagement letter; review and approve the Company's annual audit plans and budgets; direct the special attention of the independent accountants to specific matters or areas deemed by the Audit Committee to be of special significance; and authorize the independent accountants to perform such supplemental reviews or audits as the Audit Committee may deem necessary. 10. Consider the Company's independent accountants' judgments about the quality and appropriateness of the Company's accounting principles as applied in its financial reporting. 11. Consider and approve, if appropriate, major changes to the Company's auditing and accounting principles and practice as suggested by the Company's independent accountants or management. 4 PROCESS IMPROVEMENT 12. Establish regular and separate systems of reporting to the Audit Committee by each of management and the Company's independent accountants regarding any significant judgments made in management's preparation of the financial statements and the view of each as to the appropriateness of such judgments. 13. Following completion of the Company's annual audit, review separately with each of management and the Company's independent accountants any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information and the nature and extent of any significant changes in accounting principles or the application thereto. 14. Review any significant disagreement among management and the Company's independent accountants in connection with the preparation of the financial statements. 15. Review with the Company's independent accountants and management the extent to which changes or improvement in financial or accounting practices, as approved by the Audit Committee, have been implemented. (This review should be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Committee.) 16. Inquire of management and the Company's independent accountants about significant risks or exposures and assess the steps that management has taken to minimize such risks to the Company. GENERAL 17. Perform any other activities consistent with this Charter, the Company's Amended and Restated Bylaws and governing law, as the Audit Committee or the Board deems necessary or appropriate. V. CONSISTENCY WITH CERTIFICATE OF INCORPORATION/AMENDED AND RESTATED BYLAWS To the extent that any provision or section of this Charter may be inconsistent with any article, provision or section of the Certificate of Incorporation or Amended and Restated Bylaws of the Company, the Certificate of Incorporation or Amended and Restated Bylaws, as appropriate, shall fully control. 5 EX-27 9 a2024859zex-27.txt EXH. 27
5 1,000 YEAR JUN-30-2000 JUL-01-1999 JUN-30-2000 27,133 0 40,598 0 0 76,892 211,274 (62,805) 328,872 56,078 221,307 0 37,096 3 14,388 328,872 186,973 188,574 0 148,522 10,946 2,907 18,696 8,320 1,131 7,189 0 0 0 7,189 0.78 0.76
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