-----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, Vu+ZtVW0mFkOxCggmBuUMtE5DdCBb+WmYYUNOqrq9jJFs/4794kYCBH79jwhIVcq jDtyv7XTOxmQnV7kDkm5GA== 0000950123-02-002828.txt : 20020415 0000950123-02-002828.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-002828 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20020325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILKES-BARRE IMAGING LLC CENTRAL INDEX KEY: 0001169166 IRS NUMBER: 522238781 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-13 FILM NUMBER: 02583392 MAIL ADDRESS: STREET 1: 4400 MACAUTHUR BOULEVARD STREET 2: SUITE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTIC SOLUTIONS CORP CENTRAL INDEX KEY: 0001164056 IRS NUMBER: 752565249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-02 FILM NUMBER: 02583394 MAIL ADDRESS: STREET 1: 4400 MACAUTHUR BOULEVARD STREET 2: SUITE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NDDC INC CENTRAL INDEX KEY: 0001164057 IRS NUMBER: 752407830 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-03 FILM NUMBER: 02583395 MAIL ADDRESS: STREET 1: 4400 MACAUTHUR BOULEVARD STREET 2: SUITE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXUM HEALTH SERVICES OF DALLAS INC CENTRAL INDEX KEY: 0001164059 IRS NUMBER: 752615132 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-04 FILM NUMBER: 02583396 MAIL ADDRESS: STREET 1: 4400 MACAUTHUR BOULEVARD STREET 2: SUITE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH SERVICES HOLDINGS CORP CENTRAL INDEX KEY: 0001145238 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-12 FILM NUMBER: 02583404 BUSINESS ADDRESS: STREET 1: ONE FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6177531100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH SERVICES CORP CENTRAL INDEX KEY: 0001012697 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 330702770 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984 FILM NUMBER: 02583391 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH CORP CENTRAL INDEX KEY: 0001164086 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-01 FILM NUMBER: 02583393 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 MACARTHUR BLVD STREET 2: SUITE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXUM HEALTH SERVICES CORP CENTRAL INDEX KEY: 0001164051 IRS NUMBER: 752135957 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-05 FILM NUMBER: 02583397 BUSINESS ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXUM HEALTH SERVICES OF NORTH TEXAS INC CENTRAL INDEX KEY: 0001164048 IRS NUMBER: 752435797 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-06 FILM NUMBER: 02583398 BUSINESS ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MRI ASSOCIATES LP CENTRAL INDEX KEY: 0000885280 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-07 FILM NUMBER: 02583399 BUSINESS ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STREET 2: STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIO SURGERY CENTERS INC CENTRAL INDEX KEY: 0001164050 IRS NUMBER: 330522445 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-08 FILM NUMBER: 02583400 BUSINESS ADDRESS: STREET 1: 4400 MAXARTHUR BLVD STE 800 CITY: NEW BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STE CITY: NEW PORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXUM HEALTH CORP/CA CENTRAL INDEX KEY: 0001164052 IRS NUMBER: 752287276 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-09 FILM NUMBER: 02583401 BUSINESS ADDRESS: STREET 1: 4400 MAXARTHUR BLVD STE 800 CITY: NEW BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STE CITY: NEW PORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPEN MRL INC CENTRAL INDEX KEY: 0001164053 IRS NUMBER: 943251529 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-10 FILM NUMBER: 02583402 BUSINESS ADDRESS: STREET 1: 4400 MAXARTHUR BLVD STE 800 CITY: NEW BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STE CITY: NEW PORT BEACH STATE: CA ZIP: 92660 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNAL MEDICAL SERVICES CENTRAL INDEX KEY: 0001164049 IRS NUMBER: 330802413 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-75984-11 FILM NUMBER: 02583403 BUSINESS ADDRESS: STREET 1: 4400 MAXARTHUR BLVD STE 800 CITY: NEW BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4400 MACARTHUR BLVD STE CITY: NEW PORT BEACH STATE: CA ZIP: 92660 S-4/A 1 y55701a1s-4a.txt AMENDMENT #1 TO FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 2002 REGISTRATION NO. 333-75984 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- INSIGHT HEALTH SERVICES CORP.* (Exact name of registrant as specified in its charter) DELAWARE 621510 33-0702770 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
--------------------- *SEE TABLE OF ADDITIONAL REGISTRANTS --------------------- 4400 MACARTHUR BOULEVARD, SUITE 800 NEWPORT BEACH, CA 92660 (949) 476-0733 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- MARILYN U. MACNIVEN-YOUNG, ESQ. EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL 4400 MACARTHUR BOULEVARD NEWPORT BEACH, CA 92660 (949) 476-0733 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: STEPHEN C. KOVAL, ESQ. KAYE SCHOLER LLP 425 PARK AVENUE NEW YORK, NEW YORK 10022 (212) 836-8000 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The exchange will occur as soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement under the earlier effective registration statement for the same offering. [ ] THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF ADDITIONAL REGISTRANTS
I.R.S. EMPLOYER STATE OR OTHER JURISDICTION OF IDENTIFICATION EXACT NAME OF ADDITIONAL REGISTRANTS* INCORPORATION NUMBER - ------------------------------------- ------------------------------ --------------- InSight Health Services Holdings Corp.................. Delaware 04-3570028 InSight Health Corp.................................... Delaware 52-1278857 Signal Medical Services, Inc........................... Delaware 33-0802413 Open MRI, Inc.......................................... Delaware 94-3251529 Maxum Health Corp...................................... Delaware 75-2287276 Radiosurgery Centers, Inc.............................. Delaware 33-0522445 Maxum Health Services Corp............................. Delaware 75-2135957 MRI Associates, L.P.................................... Indiana 35-1881106 Maxum Health Services of North Texas, Inc.............. Texas 75-2435797 Maxum Health Services of Dallas, Inc................... Texas 75-2615132 NDDC, Inc.............................................. Texas 75-2407830 Diagnostic Solutions Corp.............................. Delaware 75-2565249 Wilkes-Barre Imaging, L.L.C. .......................... Pennsylvania 52-2238781
- --------------- * The address of each additional registrant is c/o InSight Health Services Corp., 4400 MacArthur Boulevard, Newport Beach, CA 92660, telephone (949) 476-0733. The primary standard industrial classification number for InSight Health Services Holdings Corp. is 6719. The primary standard industrial classification number for each of the other additional registrants is 621510. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 25, 2002 INSIGHT HEALTH SERVICES CORP. OFFER TO EXCHANGE $225,000,000 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011 We are offering to exchange all of our $225,000,000 9 7/8% senior subordinated notes, which we refer to as the outstanding notes, for $225,000,000 in registered 9 7/8% Series B senior subordinated notes, which we refer to as the exchange notes. The outstanding notes and the exchange notes are collectively referred to as the notes. The outstanding notes were issued on October 30, 2001. The exchange notes represent the same indebtedness as the outstanding notes. The terms of the exchange notes are identical to the terms of the outstanding notes except that the exchange notes are registered under the Securities Act of 1933 and therefore are freely transferable, subject to certain conditions. You should consider the following: - PARTICIPATING IN THE EXCHANGE OFFER INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 13 OF THIS PROSPECTUS. - Our offer to exchange the outstanding notes for exchange notes will expire at 5:00 p.m. New York City time on , 2002 unless we extend the time of expiration. You may withdraw your tender of outstanding notes at any time before the expiration of this exchange offer. - No public market currently exists for the notes. We do not intend to list the exchange notes on any securities exchange or seek approval for quotation through any automated trading system and, therefore, no active public market is anticipated. - We have been advised by counsel that the exchange of outstanding notes for exchange notes will not be a taxable event for U.S. federal income tax purposes. - The exchange offer is subject to customary conditions, including that it does not violate applicable law or any applicable interpretation of the staff of the SEC. - We will not receive any proceeds from the exchange offer. - Each broker-dealer that receives exchange notes pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. If the holder of the notes is a broker-dealer that will receive exchange notes for its own account in exchange for outstanding notes that were acquired as a result of market-making activities or other trading activities, it will be required to acknowledge that it will deliver this prospectus, as it may be amended or supplemented, in connection with any resale of the exchange notes. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is , 2002 WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR REPRESENT ANYTHING TO YOU OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 13 The Acquisition and Related Financing Transactions.......... 26 Exchange Offer.............................................. 27 Use of Proceeds............................................. 34 Capitalization.............................................. 35 Ratio of Earnings to Fixed Charges.......................... 35 Unaudited Pro Forma Condensed Consolidated Financial Statements................................................ 36 Selected Historical Financial and Operating Data............ 41 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 43 The Diagnostic Imaging Industry............................. 56 Business.................................................... 59 Management.................................................. 75 Security Ownership of Certain Beneficial Owners and Management................................................ 84 Certain Relationships and Related Transactions.............. 87 Description of New Senior Credit Facilities................. 88 Description of Notes........................................ 90 Certain Federal Income Tax Considerations................... 125 Plan of Distribution........................................ 129 Legal Matters............................................... 129 Experts..................................................... 130 Available Information....................................... 130 Index to Consolidated Financial Statements.................. F-1
i MARKET, RANKING AND OTHER DATA The data included in this prospectus regarding markets and ranking, including the size of certain markets and our position and the position of our competitors within these markets, are based on independent industry publications, reports of government agencies or other published industry sources and our estimates based on our management's knowledge and experience in the markets in which we operate. Our estimates have been based on information obtained from our customers, suppliers, trade and business organizations and other contacts in the markets in which we operate. We believe these estimates to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. As a result, you should be aware that market, ranking and other similar data included in this prospectus, and estimates and beliefs based on that data, may not be reliable. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes "forward-looking statements." Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industry and economies in which we operate and other information that is not historical information and, in particular, appear under the heading "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "The Diagnostic Imaging Industry" and "Business." When used in this prospectus, the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus, including the factors described in the section entitled "Risk Factors," and the following: - limitations and delays in reimbursement by third-party payors; - contract renewals and financial stability of customers; - conditions within the healthcare environment; - adverse utilization trends for certain diagnostic imaging procedures; - our ability to successfully integrate acquisitions; - competition in our markets; - the potential for rapid and significant changes in technology and their effect on our operations; - operating, legal, governmental and regulatory risks; and - economic, political and competitive forces affecting our business. If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. ii PROSPECTUS SUMMARY In this prospectus, the words "InSight," "our company," "we," "us" or "our" refer to the combined business of InSight Health Services Corp. and all of its subsidiaries, "the issuer" refers to InSight Health Services Corp., exclusive of its subsidiaries, "InSight Holdings" refers to InSight Health Services Holdings Corp., the parent company of InSight and "EBITDA" refers to operating income plus depreciation and amortization. This summary highlights the information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. For a more complete understanding of this offering, we encourage you to read this entire prospectus and documents to which we refer you. You should read the following summary together with the more detailed information and consolidated financial statements and the notes to those statements included elsewhere in this prospectus. We report our financial results on a fiscal year rather than a calendar year basis. When we refer to a particular fiscal year in this prospectus, we mean the twelve months ended June 30 of that year. When we refer to contract services, we are generally referring to our mobile business. When we refer to patient services, we are generally referring to our fixed-site business. When we refer to our results of operations for the six months ended December 31, 2001, these results have been derived by combining the results of InSight Holdings for the six months ended December 31, 2001 and the results of InSight from July 1, 2001 to October 17, 2001 when the acquisition was consummated. The results of InSight for the period prior to the acquisition do not reflect any purchase accounting adjustments and thus are not directly comparable to the results of InSight Holdings for the period after the acquisition. We nonetheless believe that a discussion of the combined operating results is more meaningful than splitting up the results between pre- and post-acquisition periods because operating revenues and expenses were not affected by the acquisition and splitting up the results would make period- to-period comparisons very different. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." GENERAL On October 30, 2001, we issued an aggregate principal amount of $225 million of 9 7/8% senior subordinated notes due 2011 in an offering exempt from registration under the Securities Act. We refer to the notes issued in October 2001 as the "outstanding notes." The term "exchange notes" refers to the 9 7/8% Series B senior subordinated notes due 2011 newly offered under this prospectus. In connection with the private offering of the outstanding notes, we entered into a registration rights agreement. Under the registration rights agreement, we are obligated, among other things, to deliver to you this prospectus and complete the exchange offer. This exchange offer allows you to exchange your outstanding notes for newly registered exchange notes with substantially similar terms. If the exchange offer is not completed as contemplated in the registration rights agreement, we will be required to pay liquidated damages to holders of the outstanding notes, and to holders of the exchange notes under limited circumstances. You should read the registration rights agreement in its entirety for more information. Refer to the section in this prospectus entitled "Available Information" for information on how to obtain a copy of the registration rights agreement. OUR COMPANY We are a leading nationwide provider of outsourced diagnostic imaging services, serving a diverse portfolio of customers, including healthcare providers, such as hospitals and physicians, and payors, such as managed care organizations and insurance companies. As the largest integrated network of mobile facilities and fixed-site imaging centers in the United States, we believe we are unique in our ability to offer healthcare providers a broad range of comprehensive imaging solutions, from mobile magnetic resonance imaging, or MRI, services to MRI-only and multi-modality fixed-site centers, many of which we jointly own with hospitals, physician groups or other healthcare providers. 1 We deliver our services through regional networks of diagnostic imaging facilities, comprised of: - 95 mobile, including 84 MRI and seven positron emission tomography, or PET, facilities. The revenues generated primarily from our mobile facilities, which we refer to as our contract services revenues, represent approximately 48% of our total revenues; and - 69 fixed-site centers operating 73 MRI systems. Approximately 38% of these are multi-modality centers, which typically include MRI and one or more of computed tomography, or CT, x-ray, mammography, ultrasound, nuclear medicine and bone densitometry services. The revenues generated primarily from our fixed-site centers, which we refer to as our patient services revenues, represent approximately 52% of our total revenues. Healthcare providers contract with us for our outsourced imaging services because they may lack: - the financial resources to make the significant capital investments associated with the purchase of an imaging system; - the patient volume to utilize their own imaging system in a cost-effective manner; - the management and marketing expertise or the billing and collections capabilities to operate an imaging facility or center efficiently and profitably; or - the ability to add capacity independently to meet local demand. In addition, hospitals may use our outsourced imaging services to take advantage of recent federal healthcare regulatory changes that favor the outsourcing of radiology services to facilities managed by and jointly owned with a third party. We have contracts with approximately 240 hospitals and have over 850 contracts with managed care organizations across 28 states. In the six months ended December 31, 2001, we completed over 371,000 procedures, and MRI services accounted for approximately 77% of our total revenues. For the year ended June 30, 2001, we had revenues of $211.5 million and EBITDA of $81.0 million. For the six months ended December 31, 2001, we had revenues of $106.8 million and EBITDA of $40.7 million. DIAGNOSTIC IMAGING INDUSTRY OVERVIEW Diagnostic imaging involves the use of non-invasive techniques to generate representations of internal anatomy on film or video. Based on government and industry sources, in calendar year 2000, the diagnostic imaging industry generated revenues in excess of $70 billion in the United States, or approximately 6% of total healthcare spending. MRI and CT services constituted approximately $10 billion or approximately 13% of the diagnostic imaging industry in 2000. MRI services have experienced substantial scan volume growth, which increased at a compounded annual growth rate, or CAGR, of 10.7% from 9.8 million in 1996 to 13.3 million in 1999 and is projected to grow at a CAGR of approximately 10.4% to 26.6 million in 2006. We believe that growth in the diagnostic imaging industry as a whole, and MRI in particular, is attributable to: - strong demand for healthcare services due to an aging population; - wider physician and payor acceptance of MRI as a cost-effective, non-invasive diagnostic tool, with superior image quality; - expanding applications for MRI technology; - a currently relatively stable reimbursement environment with respect to non-governmental payors; and - the increased role of preventive medicine. 2 COMPETITIVE STRENGTHS We believe we are well-positioned to capitalize on the favorable trends in the diagnostic imaging industry. We attribute our leading market position to the following strengths: COMPREHENSIVE OUTSOURCED IMAGING SOLUTIONS. Unlike most of our competitors, we operate integrated, regional networks comprised of both mobile facilities and fixed-site imaging centers. Through these networks, we believe we have a unique ability to offer healthcare providers a broad range of outsourcing solutions to meet their diverse and developing imaging needs, whether through mobile MRI, MRI-only or multi-modality fixed-site centers or joint venture facilities. In addition to providing these customers with imaging equipment and technical expertise, we can tailor solutions, based on customers' needs, to include day-to-day management, marketing support, billing and collection assistance, as well as site design and development. STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. We have developed a substantial presence in our targeted markets by forming regional networks of imaging facilities that emphasize quality of care, produce cost-effective diagnostic information and provide superior service to our customers. Clustering our facilities in regional networks enables us to: - offer a broad range of imaging services; - provide access to convenient locations and greater scheduling flexibility; - maximize our equipment utilization; - leverage our marketing efforts; and - benefit from economies of scale in purchasing, negotiating payor contracts and reducing overhead through the centralization of certain administrative functions. WELL ESTABLISHED RELATIONSHIPS WITH HOSPITAL AND MANAGED CARE CUSTOMERS. Our hospital and managed care customers accounted for approximately 50% and 33%, respectively, of total revenues for the fiscal year ended June 30, 2001. Our 60-member sales force focuses its marketing efforts on maintaining and expanding our relationships with hospital and managed care customers. Hospitals. We have approximately 240 exclusive contracts with hospitals, including 200 for mobile facility services and 40 for fixed-site services. - Our mobile facilities typically operate under contracts with average terms of three to five years with an overall renewal rate of approximately 85% since July 2000. Our mobile facilities operate under a wholesale model in which we provide a specified schedule of services and bill the hospital directly, typically on a fee-per-scan basis. Our mobile facilities are rotated among multiple hospitals in a manner intended to optimize equipment utilization. - Our contracts with hospitals for fixed-site services generally have terms of five to 15 years. We primarily operate our fixed-site centers under a retail model in which we bill our payor customers and patients directly on a fee-for-service basis. As one of the largest networks of hospital outsourced radiology services, we believe we are a preferred joint venture partner for hospitals and are uniquely positioned to convert mobile customers into long-term fixed-site center relationships as these customers' scan volumes increase and it becomes more economical for them to establish a fixed-site center. These conversions also decrease the risk associated with mobile contract renewal. To date, we have completed 19 mobile to fixed-site conversions. Managed Care Organizations. Through our regional networks, we offer managed care organizations "one-stop shopping," which includes centralized scheduling, single invoices, multiple locations and quality assurance. Since the fiscal year ended June 30, 1997, we have more than doubled the number of our managed care contracts, and we currently have over 850 contracts at our fixed-site centers. Due to our extensive relationships with managed care payors, we are able to provide services for a large base of referring physicians and as a result, increase scan volumes at our centers. 3 TECHNOLOGICALLY ADVANCED MRI SYSTEMS. We operate our mobile facilities and fixed-site centers with state-of-the-art equipment that allows us to perform the variety, quality and volume of scans required by our customers. Of our 130 conventional MRI systems, 72% have a magnet field strength of 1.5 Tesla, which is the industry's highest commercial standard, and 96% have a magnet field strength of 1.0 Tesla or greater. We maintain our imaging systems with software enhancements and upgrades to increase capacity and to perform new applications, such as stroke and cardiac evaluation and cancer detection. The average age of our MRI equipment is 3.1 years with an estimated useful life of 10 years. EXPERIENCED MANAGEMENT TEAM. We have a highly experienced senior management team with an average of 17 years of experience in the healthcare services industry. Management has demonstrated its ability to generate significant growth through a combination of same-store growth, developing new mobile customers and routes, establishing fixed-site centers and successfully integrating 12 acquisitions since the fiscal year ended June 30, 1996. From the fiscal year ended June 30, 1997 to the fiscal year ended June 30, 2001, revenues increased from $92.3 million to $211.5 million, reflecting a 23.0% CAGR, while EBITDA increased from $15.5 million to $81.0 million, a 51.1% CAGR. BUSINESS STRATEGY Our objective is to be the leading provider of outsourced diagnostic imaging services in our target markets by further developing and expanding our regional networks. We plan to realize our objective by: MAXIMIZING UTILIZATION OF OUR EXISTING FACILITIES. We intend to expand in our regional markets by leveraging our existing facility network and customer relationships, while reducing costs through economies of scale and ongoing cost reduction measures. To this end, we intend to: - broaden our physician referral base and generate new sources of revenues through selective marketing activities, such as educating physicians on new applications for diagnostic imaging equipment, providing technology training for physicians and their staffs, and other customer service programs; - focus our marketing efforts on attracting additional managed care customers; - add new modalities such as CT, ultrasound and bone densitometry to increase scan volume and economies of scale by leveraging our existing fixed-site infrastructure; - expand MRI applications to increase scan volume; - continue to focus on our unique ability to convert developing mobile operations into fixed-site centers; and - maximize cost efficiencies through increased purchasing power and the continual reduction of overhead expenses. DEVELOPING DE NOVO OPPORTUNITIES. We will continue to pursue growth opportunities within our existing regional networks by opening new fixed-site centers and adding new mobile routes where attractive returns on investment can be achieved and sustained. We will also selectively implement additional mobile PET systems and routes. Mobile PET presents an attractive growth opportunity due to increased physician acceptance of PET as a diagnostic tool and recently expanded Medicare coverage of PET procedures. In addition, we will continue to pursue partnerships with hospitals because we believe that they have the potential to provide us with a steady source of scan volume. We believe this will be an area for additional growth for us because we expect that hospitals may respond to recent federal healthcare regulatory changes by outsourcing radiology services to facilities that are managed by and jointly owned with third parties. PURSUING STRATEGIC ACQUISITIONS. Acquisitions have been an integral part of our strategy. We expect to selectively acquire imaging centers to augment our penetration in existing regional markets and increase economies of scale. We may also enter new markets where we believe we can establish a strong regional network. Diagnostic imaging remains a highly fragmented industry as multi-facility chains account for less 4 than half of the total imaging centers. We believe we are well positioned to capitalize on the ongoing consolidation of the imaging industry. Our management team is experienced at successfully identifying, negotiating, completing and integrating acquisitions. Since the fiscal year ended June 30, 1996, we have completed 12 acquisitions comprising over 45 imaging facilities. THE EQUITY SPONSORS The acquisition and refinancing of InSight referred to below was sponsored by J.W. Childs Associates, L.P., The Halifax Group, L.L.C. and certain of their affiliates. J.W. Childs Associates, a Boston-based private investment firm, manages $1.5 billion of institutional private equity through J.W. Childs Equity Partners, L.P. and J.W. Childs Equity Partners II, L.P. J.W. Childs Associates' investment strategy is to invest, in partnership with management, in middle-market growth companies. J.W. Childs Associates' principal executive offices are located at 111 Huntington Avenue, Suite 2900, Boston, Massachusetts 02199. J.W. Childs Associates, J.W. Childs Equity Partners and J.W. Childs Equity Partners II are Delaware limited partnerships. The Halifax Group, L.L.C., a private equity firm with $200 million under management through Halifax Capital Partners, L.P., operates from offices in Washington, D.C., Fort Worth, Texas, Los Angeles, California, and Raleigh, North Carolina. Halifax was launched in January 1999 to capitalize on opportunities for equity investments in small and mid-cap companies. Halifax looks to partner with management teams to make investments that demonstrate sustainable long-term growth potential and compelling long-term value propositions. The Halifax Group's principal executive offices are located at 1133 Connecticut Avenue, N.W., Suite 700, Washington, D.C. 20036, and 201 Main Street, Suite 2420, Fort Worth, Texas 76102. The Halifax Group is a Delaware limited liability company and Halifax Capital Partners is a Delaware limited partnership. We refer to these entities and their affiliates as the equity sponsors. THE ACQUISITION AND RELATED FINANCING TRANSACTIONS On October 17, 2001, InSight was acquired by and became a wholly-owned subsidiary of InSight Holdings. Concurrently with the closing of the acquisition, J.W. Childs Equity Partners II, Halifax Capital Partners and certain of their affiliates made an equity contribution to InSight Holdings of approximately $98.1 million. J.W. Childs Equity Partners II and an affiliate own approximately 80% of the outstanding common stock of InSight Holdings and Halifax Capital Partners and an affiliate own approximately 20% of the outstanding common stock of InSight Holdings. In addition, concurrently with the closing of the acquisition, certain members of our senior management rolled over a portion of their InSight stock options into stock options of InSight Holdings. Also in connection with the acquisition, we incurred $200 million of indebtedness under a senior subordinated bridge financing, entered into a credit agreement providing up to a maximum of $275 million of new senior credit facilities, and repurchased by tender offer all of our 9 5/8% senior subordinated notes due 2008 in an aggregate principal amount of $100 million. The new senior credit facilities consist of: - a $50 million six-year revolving credit facility; - a $150 million seven-year term loan B (all of which was drawn in connection with the acquisition); and - a $75 million seven-year delayed-draw term loan facility (which is only available for draw for two years following the closing of the acquisition). 5 The funds from the equity contribution, the senior subordinated bridge financing and the new senior credit facilities, along with a portion of our cash, were used to: - pay the merger consideration, the warrant consideration and the option consideration pursuant to the merger agreement; - complete a tender offer to purchase our existing 9 5/8% senior subordinated notes due in 2008 in the aggregate principal amount of $100 million and the related consent solicitation; - refinance most of our other indebtedness; and - pay related fees and expenses. We will use availability under our new senior credit facilities to fund our future working capital requirements, capital expenditures, acquisitions and for other general corporate purposes. We refer to these events as the acquisition and related financing transactions. For additional information, see "The Acquisition and Related Financing Transactions," "Capitalization" and "Description of New Senior Credit Facilities." Following the closing of the acquisition on October 17, 2001, our common stock ceased to be publicly traded, and we terminated the registration of our common stock under the Exchange Act effective January 15, 2002. InSight is a Delaware corporation. Our principal executive offices are located at 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660 and our telephone number is (949) 476-0733. SUMMARY OF THE EXCHANGE OFFER The Initial Offering of Outstanding Notes............. We refinanced the senior subordinated bridge financing by issuing the outstanding notes on October 30, 2001 to Banc of America Securities LLC and First Union Securities, Inc. We collectively refer to those parties in this prospectus as the "initial purchasers." The initial purchasers subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and to non-U.S. Persons within the meaning of Regulation S under the Securities Act. Registration Rights Agreement..................... Simultaneously with the issuance of the outstanding notes, we entered into a registration rights agreement for the exchange offer. In the registration rights agreement, we agreed, among other things, to file a registration statement with the SEC within 120 days of the issue date of the outstanding notes and to use our reasonable best efforts to complete the exchange offer within 210 days of the issue date of the outstanding notes. The exchange offer is intended to satisfy our obligations under the registration rights agreement. After the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your outstanding notes. The Exchange Offer............ We are offering to exchange the exchange notes, which have been registered under the Securities Act, for your outstanding notes. In order to be exchanged, an outstanding note must be properly tendered and accepted. All outstanding notes that are validly tendered and not validly withdrawn will be exchanged. 6 We will issue exchange notes promptly after the expiration of the exchange offer. Resales....................... We believe that the exchange notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act provided that: - the exchange notes are being acquired in the ordinary course of your business; - you are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the exchange notes issued to you in the exchange offer; and - you are not an affiliate of ours. If any of these conditions are not satisfied and you transfer any exchange notes issued to you in the exchange offer without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from registration of your exchange notes from these requirements, you may incur liability under the Securities Act. We will not assume, nor will we indemnify you against, any such liability. Each broker-dealer that is issued exchange notes in the exchange offer for its own account in exchange for outstanding notes that were acquired by that broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes. A broker-dealer may use this prospectus for an offer to resell, resale or other transfer of the exchange notes issued to it in the exchange offer. Record Date................... We mailed this prospectus and the related exchange offer documents to registered holders of outstanding notes on , 2002. Expiration Date............... The exchange offer will expire at 5:00 p.m., New York City time, , 2002, unless we decide to extend the expiration date. Conditions to the Exchange Offer......................... The exchange offer is subject to customary conditions, including that it does not violate applicable law or any applicable interpretation of the staff of the SEC. Procedures for Tendering Outstanding Shares............ If you wish to tender your outstanding notes for exchange in this exchange offer, you must transmit to the exchange agent on or before the expiration date either: - an original or a facsimile of a properly completed and duly executed letter of transmittal, which accompanies this prospectus, together with your outstanding notes and any other documentation required by the letter of transmittal, at the 7 address provided on the cover page of the letter of transmittal; or - if the notes you own are held of record by The Depositary Trust Company, or DTC, in book-entry form and you are making delivery by book-entry transfer, a computer-generated message transmitted by means of the Automated Tender Offer Program System of DTC, or ATOP, in which you acknowledge and agree to be bound by the terms of the letter of transmittal and which, when received by the exchange agent, forms a part of a confirmation of book-entry transfer. As part of the book-entry transfer, DTC will facilitate the exchange of your notes and update your account to reflect the issuance of the exchange notes to you. ATOP allows you to electronically transmit your acceptance of the exchange offer to DTC instead of physically completing and delivering a letter of transmittal to the notes exchange agent. In addition, you must deliver to the exchange agent on or before the expiration date: - if you are effecting delivery by book-entry transfer, a timely confirmation of book-entry transfer of your outstanding notes into the account of the notes exchange agent at DTC; or - if necessary, the documents required for compliance with the guaranteed delivery procedures. Special Procedures for Beneficial Owners............. If you are the beneficial owner of book-entry interests and your name does not appear on a security position listing of DTC as the holder of the book-entry interests or if you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender the book-entry interest or outstanding notes in the exchange offer, you should contact the person in whose name your book-entry interests or outstanding notes are registered promptly and instruct that person to tender on your behalf. Withdrawal Rights............. You may withdraw the tender of your outstanding notes at any time prior to 5:00 p.m., New York City time on , 2002. Federal Income Tax Considerations................ Based on the advice of counsel, the exchange of outstanding notes will not be a taxable event for U.S. federal income tax purposes. Use of Proceeds............... We will not receive any proceeds from the issuance of exchange notes pursuant to the exchange offer. We will pay all of our expenses incident to the exchange offer. Exchange Agent................ State Street Bank and Trust Company, N.A. is serving as the exchange agent in connection with the exchange offer. 8 SUMMARY OF TERMS OF THE EXCHANGE NOTES The form and terms of the exchange notes are the same as the form and terms of the outstanding notes, except that the exchange notes will be registered under the Securities Act. As a result, the exchange notes will not bear legends restricting their transfer and will not contain the registration rights and liquidated damage provisions contained in the outstanding notes. The exchange notes represent the same debt as the outstanding notes. Both the outstanding notes and the exchange notes are governed by the same indenture. Unless otherwise required by the context, we use the term "notes" in this prospectus to collectively refer to the outstanding notes and the exchange notes. Issuer........................ InSight Health Services Corp., a Delaware corporation. Securities.................... $225.0 million in principal amount of 9 7/8% Series B Senior Subordinated Notes due 2011. Maturity...................... November 1, 2011. Interest...................... Annual rate: 9 7/8%. Payment frequency: every six months on May 1 and November 1. First payment: May 1, 2002. Ranking....................... The notes are senior subordinated debt. Accordingly, they will rank: - behind all of the issuer's and the guarantors' existing and future senior debt; - equally with all of the issuer's existing and future senior subordinated, unsecured debt that does not expressly provide that it is subordinated to the notes; - ahead of any of the issuer's future debt that expressly provides that it is subordinated to the notes; and - structurally behind the liabilities of any of the issuer's subsidiaries that do not guarantee the notes. At December 31, 2001, the notes were subordinated to approximately $149.6 million of senior debt of the issuer and the guarantees were subordinated to approximately $153.3 million of senior debt of the guarantors, $149.6 million of which represented guarantees of the issuer's senior debt. Guarantees.................... The notes will be unconditionally guaranteed on a senior subordinated basis by InSight Holdings, our parent company, and each of our existing and future domestic wholly-owned subsidiaries. If we cannot make payments on the notes when they are due, the guarantors must make them instead. Optional Redemption........... On or after November 1, 2006, we may redeem some or all of the notes at any time at the redemption prices described in the section "Description of Notes -- Optional Redemption." Prior to November 1, 2004, we may redeem up to 35% of the notes with the proceeds of qualified sales of our equity at the price listed in the section "Description of Notes -- Optional Redemption." 9 Mandatory Offer to Repurchase.................... If we sell certain assets or if we or InSight Holdings experience specific kinds of changes of control, we must offer to repurchase the notes at the prices listed in the section "Description of Notes--Repurchase at the Option of Holders." Basic Covenants of the Indenture..................... The indenture under which the outstanding notes were issued will govern the exchange notes. This indenture contains certain covenants which will, among other things, restrict our ability and the ability of our restricted subsidiaries to: - borrow money; - pay dividends on or redeem or repurchase our stock; - make investments; - create liens; - use assets as security in other transactions; - sell certain assets or merge with or into other companies; - enter into certain transactions with affiliates; - sell stock in our subsidiaries; and - restrict dividends, distributions or other payments from our subsidiaries. For more details, see the section "Description of Notes -- Certain Covenants." YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION OF CERTAIN RISKS OF PARTICIPATING IN THE EXCHANGE OFFER. 10 SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The following table contains summary historical financial information derived from our audited consolidated financial statements for the five fiscal years ended June 30, 1997, 1998, 1999, 2000 and 2001 and our unaudited consolidated financial statements for the six months ended December 31, 2000 and 2001. The table also contains summary unaudited pro forma financial information derived from the financial information set forth under "Unaudited Pro Forma Condensed Consolidated Financial Statements." This summary financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Financial and Operating Data" and our consolidated financial statements and related notes contained elsewhere in this prospectus. The data under the "Pro Forma Data" caption adjusts the historical information to give effect to (1) the acquisition and related financing transactions and (2) the issuance of the outstanding notes and extinguishment of the senior subordinated bridge financing. The pro forma income statement related data for the fiscal year ended June 30, 2001 and six months ended December 31, 2001 are presented as if these transactions had occurred on July 1, 2000. The pro forma information is presented for illustration purposes only and does not purport to represent what our results of operations would have been had these transactions actually been completed for the periods indicated and is not necessarily indicative of our future results of operations.
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, --------------------------------------------------- ------------------- 1997 1998 1999 2000 2001 2001(3) 2000 ------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenues................................... $92,273 $119,018 $161,992 $188,574 $211,503 $106,789 $104,014 Costs of operations........................ 79,634 96,887 131,343 151,429 161,872 78,890 80,891 ------- -------- -------- -------- -------- -------- -------- Gross profit............................... 12,639 22,131 30,649 37,145 49,631 27,899 23,123 Corporate operating expenses............... 7,431 8,759 10,475 10,946 10,783 5,313 5,277 Provision for reorganization and other costs.................................... -- -- 3,300 -- -- -- -- Provision for supplemental service fee termination.............................. -- 6,309 -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- Income from company operations............. 5,208 7,063 16,874 26,199 38,848 22,586 17,846 Equity in earnings of unconsolidated partnerships............................. 566 707 548 817 971 492 425 Acquisition related compensation charge.... -- -- -- -- -- (15,616) -- ------- -------- -------- -------- -------- -------- -------- Operating income........................... 5,774 7,770 17,422 27,016 39,819 7,462 18,271 Interest expense, net...................... 4,066 6,827 14,500 18,696 23,394 14,011 11,907 ------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes.......... 1,708 943 2,922 8,320 16,425 (6,549) 6,364 Provision (benefit) for income taxes....... 427 431 (3,190) 1,131 2,624 (2,100) 636 ------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item.... 1,281 512 6,112 7,189 13,801 (4,499) 5,728 Extraordinary item-loss on debt extinguishment........................... -- -- -- -- -- (7,378) -- ------- -------- -------- -------- -------- -------- -------- Net income (loss).......................... $ 1,281 $ 512 $ 6,112 $ 7,189 $ 13,801 $(11,827) $ 5,728 ======= ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA: Cash and cash equivalents.................. $ 6,884 $ 44,740 $ 14,294 $ 27,133 $ 23,254 $ 22,891 $ 15,147 Working capital (deficit).................. (6,162) 36,109 24,651 20,814 16,791 43,902 14,037 Total assets............................... 97,271 231,592 238,304 328,872 321,056 490,563 327,106 Total debt (including current maturities).............................. 73,195 164,798 172,630 248,232 228,253 379,743 243,062 Stockholders' equity....................... 6,685 37,858 44,106 51,487 65,471 80,519 57,304
11
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, --------------------------------------------------- ------------------- 1997 1998 1999 2000 2001 2001(3) 2000 ------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA: EBITDA(2).................................. $15,514 $ 29,694 $ 45,608 $ 60,646 $ 80,953 $ 40,724 $ 39,207 EBITDA margin.............................. 16.8% 24.9% 28.2% 32.2% 38.3% 38.14% 37.69% Depreciation and amortization.............. 9,740 15,615 24,886 33,630 41,134 17,646 20,936 Capital expenditures....................... 6,868 23,644 18,440 23,170 22,911 32,288 18,642 Ratio of earnings to fixed charges......... 1.1x 1.0x 1.1x 1.3x 1.6x -- 1.4x Fixed charge coverage deficiency........... -- -- -- -- -- $ (6,590) -- Number of mobile facilities................ 40 67 86 82 88 93 87 Number of fixed-site centers............... 39 52 59 68 69 70 69 PRO FORMA DATA (UNAUDITED): Interest expense, net...................... $ 36,678 $ 18,506 Ratio of EBITDA to interest expense, net(1)................................... 2.2x 2.2x Ratio of net debt to EBITDA(1)(2).......... 4.4x
- --------------- (1) EBITDA is defined as operating income plus depreciation and amortization. This measurement has been included because management believes that certain investors will find it to be a useful tool for measuring our ability to meet debt service, capital expenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. EBITDA excludes the provision for supplemental service fee termination in 1998, the provision for reorganization and other costs in 1999, and the acquisition related compensation charge in 2001. (2) Net debt is total debt, including current maturities, less cash and cash equivalents. (3)The results of operations for the six months ended December 31, 2001 have been derived by combining the results of operations of InSight Holdings for the six months ended December 31, 2001 with the results of operations of InSight from July 1, 2001 to October 17, 2001. 12 RISK FACTORS You should read and carefully consider the following factors and other information in this prospectus before deciding to participate in the exchange offer. RISKS RELATING TO THE EXCHANGE OFFER BECAUSE THERE IS NO PUBLIC MARKET FOR THE NOTES, YOU MAY NOT BE ABLE TO RESELL YOUR NOTES. The exchange notes will be registered under the Securities Act, but will constitute a new issue of securities with no established trading market, and there can be no assurance as to: - the liquidity of any trading market that may develop; - the ability of holders to sell their exchange notes; or - the price at which the holders would be able to sell their exchange notes. If a trading market were to develop, the exchange notes might trade at higher or lower prices than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the market for similar notes and our financial performance. We understand that the initial purchasers presently intend to make a market in the notes. However, the initial purchasers may stop their market-making activities at any time. Any market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act, and may be limited during the exchange offer or the pendency of an applicable shelf registration statement. In addition, the liquidity of the trading market in these notes, and the market price quoted for these notes, may be adversely affected by changes in the overall market for high-yield securities and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, you cannot be sure that an active trading market will develop for these notes. In addition, any holder of outstanding notes who tenders in the exchange offer for the purpose of participating in a distribution of the exchange notes may be deemed to have received restricted securities, and if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. For a description of these requirements, see "Exchange Offer." YOUR NOTES WILL NOT BE ACCEPTED FOR EXCHANGE IF YOU FAIL TO FOLLOW THE EXCHANGE OFFER PROCEDURES AND, AS A RESULT, YOUR NOTES WILL CONTINUE TO BE SUBJECT TO EXISTING TRANSFER RESTRICTIONS AND YOU MAY NOT BE ABLE TO SELL YOUR NOTES. We will not accept your notes for exchange if you do not follow the exchange offer procedures. We will issue exchange notes as part of this exchange offer only after a timely receipt of your outstanding notes, a properly completed and duly executed letter of transmittal and all other required documents. Therefore, if you want to tender your notes, please allow sufficient time to ensure timely delivery. If we do not receive your notes, letter of transmittal and other required documents by the expiration date of the exchange offer, we will not accept your notes for exchange. We are under no duty to give notification of defects or irregularities with respect to the tenders of outstanding notes for exchange. If there are defects or irregularities with respect to your tender of notes, we will not accept your notes for exchange. IF YOU DO NOT EXCHANGE YOUR NOTES, YOUR NOTES WILL CONTINUE TO BE SUBJECT TO THE EXISTING TRANSFER RESTRICTIONS AND YOU MAY NOT BE ABLE TO SELL YOUR NOTES. We did not register the outstanding notes, nor do we intend to do so following the exchange offer. Outstanding notes that are not tendered will therefore continue to be subject to the existing transfer restrictions and may be transferred only in limited circumstances under the securities laws. If you do not exchange your notes, you will lose your right to have such notes registered under the federal securities 13 laws. As a result, if you hold outstanding notes after the exchange offer, you may not be able to sell your outstanding notes. RISKS RELATING TO THE NOTES OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT THE ISSUER FROM FULFILLING ITS OBLIGATIONS UNDER THESE NOTES. At December 31, 2001, we had total indebtedness of approximately $379.7 million. In addition, the following table sets forth our ratio of earnings to fixed charges, assuming we had completed the acquisition and the related financing transactions and applied the net proceeds as intended at July 1, 2001:
PRO FORMA SIX MONTHS ENDED DECEMBER 31, 2001 ------------------ (UNAUDITED) Ratio of earnings to fixed charges.......................... 1.2x
Our substantial indebtedness could have important consequences to you. For example, it could: - make it more difficult for the issuer to satisfy its obligations with respect to these notes; - increase our vulnerability to general adverse economic and industry conditions; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; - place us at a competitive disadvantage compared to our competitors that have less debt; and - limit, among other things, our ability to borrow additional funds. In addition, we may be able to incur substantial additional indebtedness in the future. The terms of the indenture governing the notes and the new senior credit facilities allow us to issue and incur additional debt upon satisfaction of certain conditions. If new debt is added to current debt levels, the related risks described above could intensify. YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS JUNIOR TO THE ISSUER'S EXISTING SENIOR INDEBTEDNESS AND POSSIBLY ALL OF ITS FUTURE BORROWINGS. FURTHER, THE GUARANTEES OF THESE NOTES ARE JUNIOR TO ALL OF THE GUARANTORS' EXISTING SENIOR INDEBTEDNESS AND POSSIBLY TO ALL THEIR FUTURE BORROWINGS. These notes and the guarantees rank behind all of the issuer's and the guarantors' existing senior indebtedness and all of the issuer's and the guarantors' future senior indebtedness. At December 31, 2001, the notes were subordinated to approximately $149.6 million of senior debt of the issuer and the guarantees were subordinated to approximately $153.3 million of senior debt of the guarantors, $149.6 million of which represented guarantees of the issuer's senior debt. In addition, our new senior credit facilities permit additional borrowings up to approximately $125.0 million, subject to compliance with the covenants and conditions to borrowing under the new senior credit facilities, and all of these borrowings would be senior to the notes and the guarantees. We will be permitted to borrow substantial additional indebtedness, including senior debt, in the future. As a result of this subordination, upon any distribution to the issuer's creditors or the creditors of the guarantors in a bankruptcy, liquidation or reorganization or similar proceeding relating to the issuer or the guarantors or the issuer's or the guarantors' property, the holders of senior debt of the issuer and the guarantors will be entitled to be paid in full in cash before any payment may be made with respect to these notes or the guarantees. 14 In addition, all payments on the notes and the guarantees will be blocked in the event of a payment default on senior debt and may be blocked for up to 179 consecutive days in the event of certain non-payment defaults on designated senior debt. In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to the issuer or the guarantors, holders of the notes will participate with trade creditors and all other holders of subordinated indebtedness of the issuer and the guarantors in the assets remaining after the issuer and the guarantors have paid all of the senior debt. However, because the indenture relating to the notes requires that amounts otherwise payable to holders of the notes in a bankruptcy or similar proceeding be paid to holders of senior debt instead, holders of the notes may receive less, ratably, than holders of trade payables in any such proceeding. In any of these cases, the issuer and the guarantors may not have sufficient funds to pay all of their creditors and holders of notes may receive less, ratably, than the holders of senior debt. SINCE THE NOTES ARE UNSECURED, YOUR RIGHT TO ENFORCE REMEDIES IS LIMITED BY THE RIGHTS OF HOLDERS OF SECURED DEBT. In addition to being contractually subordinated to all existing and future senior indebtedness, the issuer's obligations under the notes will be unsecured while obligations under the new senior credit facilities are secured by substantially all of its assets and those of its parent and its subsidiaries. If the issuer becomes insolvent or is liquidated, or if payment under the new senior credit facilities is accelerated, the lenders under the new senior credit facilities are entitled to exercise the remedies available to a secured lender under applicable law. These lenders have a claim on all assets securing the new senior credit facilities before the holders of unsecured debt, including the notes. See "Description of New Senior Credit Facilities." YOU SHOULD NOT RELY ON OUR PARENT COMPANY'S GUARANTEE IN EVALUATING AN INVESTMENT IN THE NOTES. InSight Holdings, our parent company, was formed as a holding company in connection with the acquisition. Its sole source of operating income and cash flow is derived from us and its only material asset is our capital stock. As a result, our parent company's guarantee provides little, if any, additional credit support for the notes. Furthermore, the indenture will not impose any restrictions on the business or operations of our parent company or on, among other things, the amount of indebtedness that our parent company may incur. NOT ALL OF OUR SUBSIDIARIES GUARANTEE OUR OBLIGATIONS UNDER THE NOTES, AND THE ASSETS OF THE NON-GUARANTOR SUBSIDIARIES MAY NOT BE AVAILABLE TO MAKE PAYMENTS ON THE NOTES. Our subsidiaries that are not wholly-owned by us will not be guarantors of the notes. Our present and future wholly-owned domestic subsidiaries will guarantee the notes. Payments on the notes are only required to be made by us, our parent company and the subsidiary guarantors. As a result, no payments are required to be made from assets of subsidiaries that do not guarantee the notes, unless those assets are transferred by dividend or otherwise to us or a subsidiary guarantor. In addition, the historical consolidated financial statements included in this prospectus are represented on a consolidated basis, including all of our domestic subsidiaries. The aggregate revenues, EBITDA and total assets for the fiscal year ended June 30, 2001 of our subsidiaries which are not guarantors were $45.1 million, $16.8 million and $43.6 million, respectively, or 21.3%, 20.7% and 13.6%, respectively, of our total revenues, EBITDA and total assets for the fiscal year ended June 30, 2001. The aggregate revenues, EBITDA and total assets for the six months ended December 31, 2001 of our subsidiaries which are not guarantors were $22.8 million, $7.8 million and $44.8 million, respectively, or 21.3%, 19.2% and 9.1%, respectively, of our total revenues, EBITDA and total assets for the six months ended December 31, 2001. We expect that as a result of our strategy of entering into partnerships and joint ventures with hospitals, an increasing portion of our revenues, EBITDA and total assets will be attributable to the operations of subsidiaries that are not guarantors. In the event of a bankruptcy, liquidation or reorganization of any of the non-guarantor subsidiaries, holders of their liabilities, including their trade creditors, will generally be entitled to payment of their 15 claims from the assets of those subsidiaries before any assets are made available for distribution to us. As a result, the notes are effectively subordinated to the indebtedness of the non-guarantor subsidiaries. As of December 31, 2001, the total liabilities of our non-guarantor subsidiaries, excluding intercompany liabilities, were $5.0 million. WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to make payments on and to refinance our indebtedness, including these notes and amounts borrowed under the new senior credit facilities, and to fund planned capital expenditures and expansion efforts and any strategic acquisitions we may make in the future, if any, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, together with available cash and available borrowings under the new senior credit facilities, will be adequate to meet future liquidity needs for at least the next twelve months. However, we cannot assure you that our business will generate sufficient cash flow from operations in the future, that our currently anticipated growth in revenues and cash flow will be realized on schedule or that future borrowings will be available to us under the new senior credit facilities in an amount sufficient to enable the issuer to repay indebtedness, including these notes, or to fund other liquidity needs. We may need to refinance all or a portion of our indebtedness, including these notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the new senior credit facilities and these notes, on commercially reasonable terms or at all. THE INDENTURE RELATED TO THE NOTES AND THE NEW SENIOR CREDIT FACILITIES CONTAIN VARIOUS COVENANTS WHICH LIMIT OUR MANAGEMENT'S DISCRETION IN THE OPERATION OF OUR BUSINESS. The indenture under which the outstanding notes were issued will govern the exchange notes. The new senior credit facilities, and the indenture related to the notes contain various provisions which limit our management's discretion by restricting our, our subsidiaries' and our parent's ability to: - borrow money; - pay dividends on stock or purchase stock; - make investments and other restricted payments; - use assets as security in other transactions; - sell certain assets or merge with or into other companies; - enter into certain transactions with affiliates; - sell stock in certain of our subsidiaries; and - restrict dividends or other payments to the issuer. In addition, the new senior credit facilities require us to meet certain financial ratios. Covenants in our new senior credit facilities also require us to use a portion of the proceeds we receive in specified debt or equity issuances to repay outstanding borrowings under our new senior credit facilities. Any failure to comply with the restrictions of the new senior credit facilities, the indenture related to the notes or any other subsequent financing agreements may result in an event of default. An event of default may allow the creditors, if the agreements so provide, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, the syndicate of lenders may be able to terminate any commitments they had made to supply us with further funds. 16 WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE. Upon the occurrence of certain specific kinds of change of control events, we will be required to offer to repurchase all notes. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of notes or that restrictions in the new senior credit facilities will not allow such repurchases. In addition, certain important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a "change of control" under the indenture related to the notes. Our ability to repurchase these notes upon certain specific kinds of change of control events may be limited by the terms of our senior indebtedness and the subordination provisions of the indenture. For example, the new senior credit facilities prohibit us from repurchasing these notes after certain specific kinds of change of control events until we first repay debt under the new senior credit facilities in full or obtain a waiver from the syndicate of lenders under the new senior credit facilities. If we fail to repurchase these notes in that circumstance, we will go into default under the indenture related to these notes and the new senior credit facilities. Any future debt which we incur may also contain restrictions on repayment which come into effect upon certain specific kinds of change of control events. If a change of control occurs, we cannot assure you that we will have sufficient funds to repay other debt obligations which will be required to be repaid, in addition to these notes. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control" and "Description of New Senior Credit Facilities." FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS. If a bankruptcy case or lawsuit is initiated by unpaid creditors of any guarantor, the debt represented by the guarantees entered into by the guarantors may be reviewed under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws. Under these laws, a guarantee could be voided, or claims in respect of the guarantee could be subordinated to certain obligations of a guarantor if, among other things, the guarantor, at the time it entered into the guarantee: - received less than reasonably equivalent value or fair consideration for entering into the guarantee; and - either: - was insolvent or rendered insolvent by reason of entering into a guarantee; or - was engaged in a business or transaction for which the guarantor's remaining assets constituted unreasonably small capital; or - intended to incur, or believed that it would incur, debts or contingent liabilities beyond its ability to pay them as they become due. In addition, any payment by a guarantor could be voided and required to be returned to the guarantor or to a fund for the benefit of the guarantor's creditors under those circumstances. If a guarantee of a subsidiary were voided as a fraudulent conveyance or held unenforceable for any other reason, holders of the notes would be solely creditors of our company and creditors of our parent company and our other subsidiaries that have validly guaranteed the notes. These notes then would be effectively subordinated to all obligations of the subsidiary whose guarantee was voided. The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if: - the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets; or 17 - the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or - it could not pay its debts or contingent liabilities as they become due. If the claims of the holders of the notes against any subsidiary were subordinated in favor of other creditors of the subsidiary, the other creditors would be entitled to be paid in full before any payment could be made on the notes. If one or more of the guarantees is voided or subordinated, we cannot assure you that after providing for all prior claims, there would be sufficient assets remaining to satisfy the claims of the holders of the notes. Based upon financial and other information, we believe that the guarantees are being incurred for proper purposes and in good faith and that we, our parent company and our subsidiaries that are guarantors, on a consolidated basis, are solvent and will continue to be solvent after this offering is completed, will have sufficient capital for carrying on our business after the issuance of the exchange notes and will be able to pay our debts as they mature. We cannot assure you, however, as to the standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. RISKS RELATING TO OUR COMPANY AND OUR INDUSTRY CHANGES IN THE RATES OR METHODS OF THIRD-PARTY REIMBURSEMENTS FOR DIAGNOSTIC IMAGING AND THERAPEUTIC SERVICES COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES OR CREATE DOWNWARD PRICING PRESSURE, WHICH WOULD RESULT IN A DECLINE IN OUR REVENUES AND HARM OUR FINANCIAL POSITION. We derive approximately 52% of our revenues from direct billings to patients and third-party payors such as Medicare, Medicaid, managed care and private health insurance companies. Changes in the rates or methods of reimbursement for the services we provide could have a significant negative impact on those revenues. Moreover, our healthcare provider customers on whom we depend for approximately 48% of our revenues generally rely on reimbursement from third-party payors. In the past, initiatives have been proposed which, if implemented, would have the effect of substantially decreasing reimbursement rates for diagnostic imaging services provided at non-hospital facilities. Most recently, effective January 1, 2002, the Medicare Program adopted final regulations reducing Medicare payment across-the-board for all services provided under the Medicare Physician Fee Schedule (including MRI and other services we provide in non-hospital settings) by approximately 5.4%. In addition these regulations reduce Medicare payment for the technical component of virtually all services reimbursed under the Medicare Physician Fee Schedule (including those we provide in non-hospital settings) by approximately 2% to 3%. Thus, in the aggregate, Medicare payment for diagnostic imaging services covered by Medicare will be reduced by approximately 7% to 9%. Similar initiatives enacted in the future may have an adverse impact on our financial condition and our operations. In addition, effective August 2000, the Medicare program implemented a new prospective payment system for hospital outpatient services which establishes rates for hospital-based diagnostic imaging services that are unrelated to hospital costs. In the case of MRI services, these rates are lower than the amounts generally paid to non-hospital facilities. While Congress enacted additional legislation in 2000 intended to ease the effect of the new hospital outpatient prospective payment system (OPPS), the transitional provisions will phase out at the end of 2003. Moreover, rates have been modified significantly, effective January 1, 2002, to differentiate between contrast-enhanced and unenhanced procedures. Any change in the rates of or conditions for reimbursement could substantially reduce the number of procedures for which we or our customers can obtain reimbursement or the amounts reimbursed to us or our customers for services provided by us. If third-party payors reduce the amount of their payments to our customers, our customers may seek to reduce their payments to us or seek an alternate supplier of diagnostic imaging services. Because unfavorable reimbursement policies have constricted and may continue to constrict the profit margins of the hospitals and clinics we bill directly, we have lowered and may continue to need to lower our fees to retain existing customers and attract new ones. These reductions 18 could have a significant adverse effect on our revenues and financial results by decreasing demand for our services or creating downward pricing pressure. OUR REVENUES MAY FLUCTUATE OR BE UNPREDICTABLE AND THIS MAY HARM OUR FINANCIAL RESULTS. The amount and timing of revenues that we may derive from our business will fluctuate based on: - variations in the rate at which customers renew their contracts; - the extent to which our mobile customers convert into a fixed-site operation and choose not to continue using our services; - changes in the number of days of service we can offer with respect to a given diagnostic imaging or therapeutic system due to equipment malfunctions or seasonal factors; and - the mix of wholesale and retail billing for our services. We may not be able to reduce our expenses, including our debt service obligations, quickly enough to respond to these declines in revenues, which would make our business difficult to operate and would harm our financial results. A FAILURE TO MEET OUR CAPITAL EXPENDITURE REQUIREMENTS CAN ADVERSELY AFFECT OUR BUSINESS. We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expenses of de novo centers, or new operations, and the acquisition of additional businesses and new imaging equipment. We incur capital expenditures to, among other things: - upgrade our imaging systems and software; - purchase systems upon termination of operating leases; and - purchase new systems. To the extent we are unable to generate sufficient cash from our operations or funds are no longer available under our senior credit facilities, we may be unable to meet our capital expenditure requirements and therefore unable to achieve our estimates of EBITDA growth. Furthermore, we cannot assure you that we will be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all. WE MAY EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES AND THIS COMPETITION COULD ADVERSELY AFFECT OUR REVENUES AND OUR BUSINESS. The market for diagnostic imaging services and systems is competitive. We compete principally on the basis of our reputation for our productive and cost-effective superior services. We compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies, that own and operate imaging equipment. Our major competitors include Alliance Imaging, Inc., Shared Medical Services, Medical Resources, Inc., Radiologix, Inc., U.S. Diagnostic Inc. and Syncor International Corporation. Some of our direct competitors which provide diagnostic imaging services may now or in the future have access to greater financial resources than we do and may have access to newer, more advanced equipment. In addition, some customers have in the past elected to provide imaging services to their patients directly rather than renewing their contracts with us. Finally, we face competition from providers of competing technologies such as PET and ultrasound and may face competition from providers of new technologies in the future. If we are unable to successfully compete, our customer base would decline and our business, financial condition and results of operations would be harmed. Certain hospitals, particularly the larger hospitals, may directly acquire and operate imaging and treatment equipment on-site as part of their overall inpatient servicing capability, subject only to their 19 decision to acquire a high-cost diagnostic imaging system, assume the associated financial risk, employ the necessary technologists and satisfy applicable licensure and certificate of need requirements, if any. Historically, smaller hospitals have often been reluctant to purchase imaging and treatment equipment. This reluctance, however, has in the past encouraged the entry of start-up ventures and more established business operations into the diagnostic and treatment services business. As a result, there have been periods in the recent past when there has been significant excess capacity in the diagnostic imaging business in the United States, which can negatively affect utilization and reimbursement. In addition, in the past some non-radiologist physician practices have refrained from establishing their own diagnostic imaging facilities because of the federal physician self-referral legislation. Final regulations issued in January 2001 clarify certain of the exceptions to the physician self-referral legislation, which may create opportunities for and encourage some physician practices to establish their own diagnostic imaging facilities which may compete with us. MANAGED CARE ORGANIZATIONS MAY PREVENT HEALTHCARE PROVIDERS FROM USING OUR SERVICES, CAUSING US TO LOSE CURRENT AND PROSPECTIVE CUSTOMERS. Healthcare providers participating as providers under managed care plans may be required to refer diagnostic imaging tests to specific imaging service providers depending on the plan in which each covered patient is enrolled. These requirements currently inhibit healthcare providers from using our diagnostic imaging services in some cases. The proliferation of managed care may prevent an increasing number of healthcare providers from using our services in the future, which would cause our revenues to decline. OUR FIXED-SITE CENTERS DEPEND ON PHYSICIAN REFERRALS AND CONTRACTUAL ARRANGEMENTS WITH INSURANCE CARRIERS FOR THEIR BUSINESS. Our fixed-site centers are principally dependent on our ability to attract referrals from physicians and other healthcare providers representing a variety of specialties. Our eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's health plan. We currently have in excess of 850 contracts with managed care organizations for diagnostic imaging services provided at our fixed-site centers, primarily on a discounted fee-for-service basis. A significant decline in referrals would have a material adverse effect on our business, financial condition and results of operations. WE MAY BE UNABLE TO RENEW OR MAINTAIN OUR CUSTOMER CONTRACTS WHICH WOULD HARM OUR BUSINESS AND FINANCIAL RESULTS. Upon expiration of our customer contracts, we are subject to the risk that customers will cease using our imaging services and purchase or lease their own imaging systems or use our competitors' imaging systems. 29% of our MRI contracts will expire in the fiscal year ending June 30, 2002 and an additional 16% will expire in the fiscal year ending June 30, 2003. If these contracts are not renewed or are renewed at lower prices, we could experience a significant negative impact on our business. Our mobile contract renewal rate for the fiscal year ended June 30, 2001 was approximately 85%. It is not always possible to immediately obtain replacement customers, and historically many replacement customers have been smaller facilities which have a lower number of scans than lost customers. Although the non-renewal of a single customer contract would not have a material impact on our contract services revenues, non-renewal of several contracts could have a material impact on contract services revenues. WE MAY BE SUBJECT TO PROFESSIONAL LIABILITY RISKS WHICH COULD BE COSTLY AND NEGATIVELY IMPACT OUR BUSINESS AND FINANCIAL RESULTS. We have not experienced any material losses due to claims for malpractice. However, claims for malpractice have been asserted against us in the past and any future claims, if successful, could entail significant defense costs and could result in substantial damage awards to the claimants, which may exceed the limits of any applicable insurance coverage. While we maintain professional liability insurance, there 20 can be no assurance that any claim against us will not exceed the amount of our insurance. Successful malpractice claims asserted against us, to the extent not covered by our liability insurance, could have a material adverse effect on our business, financial condition and results of operations. In addition to being exposed to claims for malpractice, there are other professional liability risks to which we are exposed through our operation of diagnostic imaging systems. Equipment literature 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 metal implants utilized in various surgical procedures. Additionally, some MRI examinations require injection of a paramagnetic contrast material and certain CT examinations require the injection of an iodine-based contrast material, allowing for better visualization of the anatomy. Although it is unusual, some patients may develop a significant adverse reaction to these contrast materials; however, chances of fatalities as a result of such reaction are remote. Patients are screened to safeguard against potential risks, but screening may nevertheless fail to identify the hazard. To protect against possible professional liability either from malpractice claims or the other risks described above, we maintain professional liability insurance. However, if we are unable to maintain insurance in the future at an acceptable cost or at all or if our insurance does not fully cover us, and a successful claim was made against us, we could incur substantial losses. Any successful malpractice or other professional liability claim made against us not fully covered by insurance could be costly to defend against, result in a substantial damage award against us and divert the attention of our management from our operations, which could have a material adverse effect on our business, financial condition and results of operations. TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR SERVICES AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT. Technological change in the MRI industry has been gradual since the last technological advancements were made in 1994. Although we believe that substantially all of our MRI and other diagnostic imaging systems are upgradeable to maintain their state-of-the-art character, the development of new technologies or refinements of existing ones might make our existing systems technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, our systems. MRI and other diagnostic imaging systems are currently manufactured by numerous companies. Competition among manufacturers for a greater share of the MRI and other diagnostic imaging systems market may result in technological advances in the speed and imaging capacity of these new systems. Consequently, the obsolescence of our systems may be accelerated. Although we are aware of no imminent substantial technological changes, should such changes occur, we cannot assure you that we would be able to acquire the new or improved systems. The development of new scanning technology or new diagnostic applications for existing technology may require us to adapt our existing technology or acquire new or technologically improved systems in order to successfully compete. In the future, however, we may not have the financial resources to do so, particularly given our indebtedness. In addition, advancing technology may enable hospitals, physicians or other diagnostic service providers to perform tests without the assistance of diagnostic service providers such as ourselves. OUR FAILURE TO EFFECTIVELY MAKE OR INTEGRATE ACQUISITIONS AND ESTABLISH CO-SOURCING ARRANGEMENTS THROUGH PARTNERSHIPS WITH HOSPITALS AND OTHER HEALTHCARE PROVIDERS COULD IMPAIR OUR BUSINESS. As part of our business strategy, we have pursued and intend to continue to pursue strategic acquisitions and establish co-sourcing arrangements through partnerships and joint ventures with hospitals and other healthcare providers. We are continuously evaluating acquisition opportunities and consolidation possibilities, and, at any given time, may be in various stages of due diligence or preliminary discussions with respect to a number of potential transactions. From time to time we may enter into non-binding letters of intent, but we are not currently subject to any definitive agreement with respect to any 21 transaction or otherwise so far advanced in any discussions as to make a transaction material to our operations reasonably certain. Nevertheless, one of these potential transactions, a definitive agreement for which is currently under negotiation, if we were to complete our business and legal due diligence and enter into a definitive agreement, would, if consummated, be material to our operations and to our financial condition. We cannot assure you that we will succeed in identifying suitable acquisition or co-sourcing candidates or in consummating any such acquisitions or co-sourcing arrangements. Our acquisition and co-sourcing strategies require substantial capital which may exceed the funds available to us from internally generated funds and under the new senior credit facilities. We cannot assure you that we will be able to raise any necessary additional funds through bank financing or through the issuance of equity or debt securities on terms acceptable to us, if at all. Additionally, acquisitions involve the integration of acquired operations with our operations. Integration involves a number of risks, including: - demands on management related to the increase in our size after an acquisition; - the diversion of our management's attention from the management of daily operations to the integration of operations; - integration of information systems; - difficulties in the assimilation and retention of employees; - potential adverse effects on operating results; and - challenges in retaining customers and referral sources. Although we believe we have successfully integrated acquisitions in the past, we cannot assure you that we will be able to successfully integrate the operations of any future acquisitions. If we do not successfully integrate acquisitions, we may not realize anticipated operating advantages, economies of scale and cost savings. Also, we may not be able to maintain the levels of operating efficiency acquired companies will have achieved or might achieve separately. Successful integration of each of their operations will depend upon our ability to manage those operations and to eliminate redundant and excess costs. LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGERS, TECHNOLOGISTS AND SALESPERSONS COULD LIMIT OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS. We depend upon our management team to a substantial extent. During the fiscal year ended June 30, 2001, we added approximately 80 employees. As we grow, we will increasingly require field managers and salespersons with experience in our industry and skilled technologists to operate our diagnostic equipment. It is impossible to predict the availability of qualified field managers, salespersons and technologists or the compensation levels that will be required to hire them. In particular, there is a very high demand for qualified technologists who are necessary to operate our systems. We may not be able to hire and retain a sufficient number of technologists, and we may be required to pay bonuses and higher salaries to our technologists, which would increase our expenses. The loss of the services of any member of our senior management or our inability to hire qualified field managers, salespersons and skilled technologists at economically reasonable compensation levels could adversely affect our ability to operate and grow our business. OUR PET SERVICE AND SOME OF OUR OTHER IMAGING SERVICES REQUIRE THE USE OF RADIOACTIVE MATERIALS, WHICH COULD SUBJECT US TO REGULATION, RELATED COSTS AND DELAYS AND POTENTIAL LIABILITIES FOR INJURIES OR VIOLATIONS OF ENVIRONMENTAL, HEALTH AND SAFETY LAWS. Our PET service and some of our other imaging and therapeutic services require radioactive materials. While this radioactive material has a short half-life, meaning it quickly breaks down into inert, or non-radioactive substances, storage, use and disposal of these materials present the risk of accidental environmental contamination and physical injury. We are subject to federal, state and local regulations 22 governing storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for storing, handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials. In the event of an accident, we would be held liable for any resulting damages, and any liability could exceed the limits of or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. We could incur significant costs and the diversion of our management's attention in order to comply with current or future environmental, health and safety laws and regulations. WE MAY BE UNABLE TO EFFECTIVELY MAINTAIN OUR IMAGING AND THERAPEUTIC SYSTEMS OR GENERATE REVENUES WHEN OUR SYSTEMS ARE NOT FULLY OPERATIONAL. Timely, effective service is essential to maintaining our reputation and high utilization rates on our imaging systems. Repairs to one of our systems can take up to two weeks and result in a loss of revenues. Our warranties and maintenance contracts do not compensate us for loss of revenues when our systems are not fully operational. The principal components of our operating costs include depreciation, salaries paid to technologists and drivers, annual system maintenance costs, insurance and transportation costs. Because the majority of these expenses are fixed, a reduction in the number of scans performed due to out-of-service equipment will result in lower revenues and margins. Repairs of our equipment are performed for us by the equipment manufacturers. These manufacturers may not be able to perform repairs or supply needed parts in a timely manner. Thus, if we experience more system malfunctions than anticipated or if we are unable to promptly obtain the service necessary to keep our systems functioning effectively, our revenues could decline and our ability to provide services would be harmed. THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS COULD CONFLICT WITH THOSE OF THE HOLDERS OF THE NOTES OFFERED HEREBY. We are a wholly-owned subsidiary of InSight Holdings which is a corporation controlled by J.W. Childs Equity Partners II and Halifax Capital Partners. As a result, J.W. Childs Equity Partners II and Halifax Capital Partners, through InSight Holdings, have the ability to elect all of the members of our board of directors, appoint new management and approve any action requiring the approval of our stockholders. The board of directors has the authority to make decisions affecting our capital structure, including the issuance of additional indebtedness and the declaration of dividends. In addition, transactions may be pursued that could enhance the equity sponsors' equity investment while involving risks to your interests. There can be no assurance that the interests of the equity sponsors will not conflict with your interests. RISKS RELATING TO GOVERNMENT REGULATION OF OUR BUSINESS COMPLYING WITH FEDERAL AND STATE REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL PENALTIES. We are directly or indirectly through our customers subject to extensive regulation by both the federal government and the states in which we conduct our business, including: - the federal False Claims Act; - the federal Medicare and Medicaid Anti-kickback Law, and state anti-kickback prohibitions; - federal and state billing and claims submission laws and regulations; - the federal Health Insurance Portability and Accountability Act of 1996; - the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law; - state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians; and 23 - federal and state laws governing the diagnostic imaging and therapeutic equipment we use in our business concerning patient safety, equipment operating specifications and radiation exposure levels. If our operations are found to be in violation of any of the laws and regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines and the curtailment of our operations. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results. The risks of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business. For a more detailed discussion of the various state and federal regulations to which we are subject, see "Business -- Government Regulation." FUTURE FEDERAL LEGISLATION COULD LIMIT THE PRICES WE CAN CHARGE FOR OUR SERVICES, WHICH WOULD REDUCE OUR REVENUES AND HARM OUR OPERATING RESULTS. In addition to extensive existing government healthcare regulation, there are numerous initiatives affecting the coverage of and payment for healthcare services, including proposals that would significantly limit reimbursement under the Medicare and Medicaid programs. Most recently, for example, the Medicare Program issued its Physician Fee Schedule for calendar year 2002, which reduces Medicare payment for MRI services by approximately 7% to 9%. In addition, also effective January 1, 2002, the Medicare Program announced new rates under the hospital outpatient prospective payment system that reduces Medicare payment for unenhanced MRI procedures and increases Medicare payment for certain contrast-enhanced procedures. Limitations on reimbursement amounts and other cost containment pressures have in the past resulted in a decrease in the revenues we receive for each scan we perform. It is not clear at this time what additional proposals, if any, will be made or adopted or, if adopted, what effect these proposals would have on our business. THE APPLICATION OR REPEAL OF STATE CERTIFICATE OF NEED REGULATIONS COULD HARM OUR BUSINESS AND FINANCIAL RESULTS. Some states require a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items including diagnostic imaging systems or provisions of diagnostic imaging services by us or our customers. Twelve of the 28 states in which we operate mobile and fixed-site centers have some form of certificate of need regulation and more states may adopt similar licensure frameworks in the future. In many cases, a limited number of these certificates are available in a given state. If we are unable to obtain the applicable certificate or approval or additional certificates or approvals necessary to expand our operations, these regulations may limit or preclude our operations in the relevant jurisdictions. Conversely, states in which we have obtained a certificate of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations. The repeal of certificate of need regulations in states in which we have obtained a certificate of need or a certificate of need exemption would lower barriers to entry for competition in those states and could adversely affect our business. RECENTLY PROMULGATED FEDERAL REGULATIONS AND GUIDELINES MAY PREVENT OUR CUSTOMERS FROM QUALIFYING OUR SERVICES FOR PROVIDER-BASED STATUS, AND MAY IMPOSE PHYSICIAN SUPERVISION GUIDELINES WITH WHICH WE MAY HAVE DIFFICULTY COMPLYING. Recent regulations may affect the ability of a Medicare provider, such as a hospital, to include a service or facility as provider-based, as opposed to treating the service as if it were offered offsite from the hospital, for purposes of Medicare reimbursement. The application of these regulations to mobile facilities is uncertain. While the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) offers some relief for facilities recognized as provider-based on October 1, 2000, under these new 24 regulations some of our customers may have difficulty qualifying our services for provider-based status. If a hospital customer cannot obtain provider-based status for our services, then the hospital might decide not to contract with us, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the Medicare program has recently implemented regulations and guidelines establishing the level of physician supervision required for various diagnostic services. It is unclear how these medical supervision requirements will be implemented, especially with regard to mobile facilities. Strict implementation of these guidelines may render it impracticable for some of our hospital customers to continue to contract with us or to otherwise provide diagnostic imaging services through an outside supplier, and this would have a material adverse effect on our business, financial condition and results of operations. IF WE FAIL TO COMPLY WITH VARIOUS LICENSURE, CERTIFICATION AND ACCREDITATION STANDARDS, WE MAY BE SUBJECT TO LOSS OF LICENSURE, CERTIFICATION OR ACCREDITATION, WHICH WOULD ADVERSELY AFFECT OUR OPERATIONS. All of the states in which we operate require that the imaging technologists that operate our CT and PET systems be licensed or certified. Certain states in which we operate require that our centers be licensed or specifically exempt from licensure, and that the imaging technologists that operate our MRI and ultrasound systems be licensed or certified. Also, each of our fixed-site centers must continue to meet various requirements in order to receive payments from the Medicare program. All of our mammography units are required to be accredited under the Mammography Quality Standards Act of 1992 (MQSA). In addition, a number of our facilities are currently accredited by the Joint Commission on Accreditation of Healthcare Organizations, an independent, non-profit organization that accredits various types of healthcare providers such as hospitals, nursing homes and providers of diagnostic imaging services. In the healthcare industry, various types of organizations are accredited to meet certain Medicare certification requirements, expedite third-party payment, and fulfill state licensure requirements. Some managed care providers prefer to contract with accredited organizations. Any lapse in our licenses, certifications or accreditations, or those of our technologists or physicians, or the failure of any of our fixed-site centers to satisfy the necessary requirements under Medicare or MQSA, could have a material adverse effect on our business, financial condition and results of operations. 25 THE ACQUISITION AND RELATED FINANCING TRANSACTIONS On October 17, 2001, a corporation organized by the equity sponsors and wholly-owned by InSight Health Services Holdings Corp., merged with and into InSight. InSight was the surviving corporation and became a wholly-owned subsidiary of InSight Holdings. J.W. Childs Equity Partners II and an affiliate own approximately 80% of the outstanding common stock of InSight Holdings and Halifax Capital Partners and an affiliate own approximately 20% of the outstanding common stock of InSight Holdings. In addition, certain members of our senior management rolled over a portion of their InSight stock options into stock options of InSight Holdings at the consummation of the acquisition. Upon consummation of the acquisition, each of our stockholders became entitled to receive $18.00 in cash for each share of our common stock that they owned prior to the acquisition. Holders of options and warrants, which prior to the acquisition were exercisable for our common stock, received the difference between $18.00 and the exercise price for each share of common stock the holder could have acquired pursuant to the terms of the options or warrants, and the options and warrants were terminated. Our stockholders, option holders and warrant holders immediately prior to the acquisition became entitled to receive aggregate cash consideration of approximately $187.7 million as a result of the acquisition. Concurrently with the acquisition, we repurchased by tender offer all of our 9 5/8% senior subordinated notes due 2008 in an aggregate principal amount of $100 million. Additionally, upon consummation of the acquisition, we repaid our then outstanding senior credit facilities and certain other indebtedness and paid fees and expenses relating to the acquisition and related financing transactions. These transactions were financed through: - borrowings of $150 million under the $275 million new senior credit facilities; - a $200 million senior subordinated bridge financing; and - the investment by the equity sponsors of $98.1 million; management options and common stock rollover with a total net value of approximately $1.9 million. 26 EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The issuer, the guarantors and the initial purchasers entered into a registration rights agreement in connection with the issuance of the outstanding notes. The registration rights agreement provides that we will take the following actions, at our expense, for the benefit of the holders of the outstanding notes: - within 120 days after the date on which the outstanding notes were issued, file the exchange offer registration statement, of which this prospectus is a part, relating to the exchange offer; - cause the exchange offer registration statement to be declared effective under the Securities Act within 180 days after the date on which the outstanding notes were issued; and - keep the exchange offer open for at least 30 business days, or longer if required by applicable law, after the date notice of the exchange offer is mailed to the holders of the outstanding notes. For each of the outstanding notes surrendered in the exchange offer, the holder who surrendered the note will receive an exchange note having a principal amount equal to that of the surrendered note. Interest on each exchange note will accrue from the later of (1) the last interest payment date on which interest was paid on the outstanding note surrendered or (2) if no interest has been paid on the outstanding note, from the date on which the outstanding notes were issued. If the note is surrendered for exchange on a date after the record date for the payment of interest to occur on or after the date of exchange, interest on the exchange note will accrue from that interest payment date. We will be required to file a shelf registration statement covering resales of the outstanding notes if: - because of any change in law or in currently prevailing interpretations of the staff of the SEC, we are not permitted to effect an exchange offer, - in some circumstances, the holders of outstanding notes so request, or - in the case of any holder that participates in the exchange offer, the holder does not receive exchange notes on the date of the exchange that may be sold without restriction under state and federal securities laws. Following the consummation of the exchange offer, holders of the outstanding notes who were eligible to participate in the exchange offer, but who did not tender their outstanding notes, will not have any further registration rights and the outstanding notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the outstanding notes could be adversely affected. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all outstanding notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding notes accepted in the exchange offer. Any holder may tender some or all of its outstanding notes pursuant to the exchange offer. However, outstanding notes may be tendered only in integral multiples of $1,000. The form and terms of the exchange notes are the same as the form and terms of the outstanding notes except that: (1) the exchange notes bear a Series B designation and a different CUSIP Number from the outstanding notes; (2) the exchange notes have been registered under the Securities Act and hence will not bear legends restricting their transfer; and 27 (3) the holders of the exchange notes will not be entitled to certain rights under the registration rights agreement, including the provisions providing for an increase in the interest rate on the outstanding notes in certain circumstances relating to the timing of the exchange offer, all of which rights will terminate when the exchange offer is terminated. The exchange notes will evidence the same indebtedness as the outstanding notes and will be entitled to the benefits of the indenture. As of the date of this prospectus, $225,000,000 aggregate principal amount of the outstanding notes were outstanding. We have fixed the close of business on , 2002 as the record date for the exchange offer for purposes of determining the persons to whom this prospectus and the letter of transmittal will be mailed initially. Holders of outstanding notes do not have any appraisal or dissenters' rights under the Delaware General Corporation Law. We intend to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC thereunder. We will be deemed to have accepted validly tendered outstanding notes when, as and if we have given oral or written notice thereof to the exchange agent. The exchange agent will act as agent for the tendering holders for the purpose of receiving the exchange notes from us. If any tendered outstanding notes are not accepted for exchange because of an invalid tender, the occurrence of specified other events set forth in this prospectus or otherwise, the certificates for any unaccepted outstanding notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the expiration date of the exchange offer. Holders who tender outstanding notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of outstanding notes pursuant to the exchange offer. We will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the exchange offer. See "-- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "expiration date" will mean 5:00 p.m., New York City time, on , 2002, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" will mean the latest date and time to which the exchange offer is extended. In order to extend the exchange offer, we will notify the exchange agent of any extension by oral or written notice and will mail to the registered holders an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right, in our sole discretion, (1) to delay accepting any outstanding notes, to extend the exchange offer or to terminate the exchange offer if any of the conditions set forth below under "-- Conditions" have not been satisfied, by giving oral or written notice of any delay, extension or termination to the exchange agent or (2) to amend the terms of the exchange offer in any manner. Any delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. INTEREST ON THE EXCHANGE NOTES The exchange notes will bear interest from their date of issuance. Holders of outstanding notes that are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the date of issuance of the exchange notes. Such interest will be paid with the first interest payment on the exchange notes on May 1, 2002. Interest on the outstanding notes accepted for exchange will cease to accrue upon issuance of the exchange notes. 28 Interest on the exchange notes is payable semi-annually on each May 1 and November 1, commencing on May 1, 2002. PROCEDURES FOR TENDERING Only a holder of outstanding notes may tender outstanding notes in the exchange offer. To tender in the exchange offer, a holder must complete, sign and date the letter of transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the letter of transmittal or transmit an agent's message in connection with a book-entry transfer, and mail or otherwise deliver the letter of transmittal or the facsimile, together with the outstanding notes and any other required documents, to the exchange agent prior to 5:00 p.m., New York City time, on the expiration date. To be tendered effectively, the outstanding notes, letter of transmittal or an agent's message and other required documents must be completed and received by the exchange agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date. Delivery of the outstanding notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of the book-entry transfer must be received by the exchange agent prior to the expiration date. The term "agent's message" means a message, transmitted by a book-entry transfer facility to, and received by, the exchange agent forming a part of a confirmation of a book-entry, which states that the book-entry transfer facility has received an express acknowledgment from the participant in the book-entry transfer facility tendering the outstanding notes that the participant has received and agree: (1) to participate in ATOP; (2) to be bound by the terms of the letter of transmittal; and (3) that we may enforce the agreement against the participant. To participate in the exchange offer, each holder will be required to make the following representations to us: - Any exchange notes to be received by the holder will be acquired in the ordinary course of its business. - At the time of the commencement of the exchange offer, the holder has no arrangement or understanding with any person to participate in the distribution, within the meaning of Securities Act, of the exchange notes in violation of the Securities Act. - The holder is not our affiliate as defined in Rule 405 promulgated under the Securities Act. - If the holder is not a broker-dealer, it is not engaged in, and does not intend to engage in, the distribution of exchange notes. - If the holder is a broker-dealer that will receive exchange notes for its own account in exchange for outstanding notes that were acquired as a result of market-making or other trading activities, the holder will deliver a prospectus in connection with any resale of the exchange notes. We refer to these broker-dealers as participating broker-dealers. - The holder is not acting on behalf of any person or entity that could not truthfully make these representations. The tender by a holder and our acceptance thereof will constitute agreement between the holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal or agent's message. THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL OR AGENT'S MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO US. HOLDERS MAY REQUEST THEIR 29 RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THEM. Any beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct the registered holder to tender on the beneficial owner's behalf. See "Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner" included with the letter of transmittal. Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member of the Medallion System unless the outstanding notes tendered pursuant to the letter of transmittal are tendered (1) by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the letter of transmittal or (2) for the account of a member firm of the Medallion System. If signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, the guarantee must be by a member firm of the Medallion System. If the letter of transmittal is signed by a person other than the registered holder of any outstanding notes listed in this prospectus, the outstanding notes must be endorsed or accompanied by a properly completed bond power, signed by the registered holder as the registered holder's name appears on the outstanding notes with the signature thereon guaranteed by a member firm of the Medallion System. If the letter of transmittal or any outstanding notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, the person signing should so indicate when signing, and evidence satisfactory to us of its authority to so act must be submitted with the letter of transmittal. We understand that the exchange agent will make a request promptly after the date of this prospectus to establish accounts with respect to the outstanding notes at DTC for the purpose of facilitating the exchange offer, and subject to the establishment thereof, any financial institution that is a participant in DTC's system may make book-entry delivery of outstanding notes by causing DTC to transfer the outstanding notes into the exchange agent's account with respect to the outstanding notes in accordance with DTC's procedures for the transfer. Although delivery of the outstanding notes may be effected through book-entry transfer into the exchange agent's account at DTC, unless an agent's message is received by the exchange agent in compliance with ATOP, an appropriate letter of transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the exchange agent at its address set forth below on or prior to the expiration date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under the procedures. Delivery of documents to DTC does not constitute delivery to the exchange agent. All questions as to the validity, form, eligibility, including time of receipt, acceptance of tendered outstanding notes and withdrawal of tendered outstanding notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right to reject any and all outstanding notes not properly tendered or any outstanding notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right in our sole discretion to waive any defects, irregularities or conditions of tender as to particular outstanding notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of outstanding notes must be cured within the time we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of outstanding notes, neither we, the exchange agent nor any other person will incur any liability for failure to give the notification. Tenders of outstanding notes will not be deemed to have been made until the defects or irregularities have been cured or waived. Any outstanding notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. 30 GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their outstanding notes and (1) whose outstanding notes are not immediately available, (2) who cannot deliver their outstanding notes, the letter of transmittal or any other required documents to the exchange agent or (3) who cannot complete the procedures for book-entry transfer, on or prior to the expiration date, may effect a tender if: (A) the tender is made through a member firm of the Medallion System; (B) prior to the expiration date, the exchange agent receives from a member firm of the Medallion System a properly completed and duly executed Notice of Guaranteed Delivery by facsimile transmission, mail or hand delivery setting forth the name and address of the holder, the certificate number(s) of the outstanding notes and the principal amount of outstanding notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal or facsimile thereof together with the certificate(s) representing the outstanding notes or a confirmation of book-entry transfer of the outstanding notes into the exchange agent's account at DTC, and any other documents required by the letter of transmittal will be deposited by the member firm of the Medallion System with the exchange agent; and (C) the properly completed and executed letter of transmittal or facsimile thereof, as well as the certificate(s) representing all tendered outstanding notes in proper form for transfer or a confirmation of book-entry transfer of the outstanding notes into the exchange agent's account at DTC, and all other documents required by the letter of transmittal are received by the exchange agent within five New York Stock Exchange trading days after the expiration date. Upon request to the exchange agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their outstanding notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, tenders of outstanding notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of outstanding notes in the exchange offer, a telegram, telex, letter or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth in this prospectus prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer. Any notice of withdrawal must: (1) specify the name of the person having deposited the outstanding notes to be withdrawn; (2) identify the outstanding notes to be withdrawn, including the certificate number(s) and principal amount of the outstanding notes, or, in the case of outstanding notes transferred by book-entry transfer, the name and number of the account at DTC to be credited; (3) be signed by the holder in the same manner as the original signature on the letter of transmittal by which the outstanding notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to have the trustee with respect to the outstanding notes register the transfer of the outstanding notes into the name of the person withdrawing the tender; and (4) specify the name in which any outstanding notes are to be registered, if different from that of the person depositing the outstanding notes to be withdrawn. All questions as to the validity, form and eligibility, including time of receipt, of the notices will be determined by us. Our determination will be final and binding on all parties. Any outstanding notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer and no exchange notes will be issued with respect thereto unless the outstanding notes so withdrawn are validly retendered. Any outstanding notes which have been tendered but which are not accepted for exchange will 31 be returned to the holder thereof without cost to the holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn outstanding notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the expiration date. CONDITIONS Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or exchange notes for, any outstanding notes, and may terminate or amend the exchange offer as provided in this prospectus before the acceptance of the outstanding notes, if: (1) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer which, in our sole judgment, might materially impair our ability to proceed with the exchange offer or any material adverse development has occurred in any existing action or proceeding with respect to us or any of our subsidiaries; or (2) any law, statute, rule, regulation or interpretation by the staff of the SEC is proposed, adopted or enacted, which, in our sole judgment, might materially impair our ability to proceed with the exchange offer or materially impair the contemplated benefits of the exchange offer to us; or (3) any governmental approval has not been obtained, which approval we will, in our sole discretion, deem necessary for the consummation of the exchange offer as contemplated by this prospectus. If we determine in our sole discretion that any of the conditions are not satisfied, we may (1) refuse to accept any outstanding notes and return all tendered outstanding notes to the tendering holders, (2) extend the exchange offer and retain all outstanding notes tendered prior to the expiration of the exchange offer, subject, however, to the rights of holders to withdraw the outstanding notes (See "-- Withdrawal of Tenders") or (3) waive the unsatisfied conditions with respect to the exchange offer and accept all properly tendered outstanding notes which have not been withdrawn. EXCHANGE AGENT State Street Bank and Trust Company, N.A. has been appointed as exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for Notice of Guaranteed Delivery should be directed to the exchange agent addressed as follows: By Hand, Overnight Delivery or Registered/Certified Mail: c/o State Street Bank and Trust Company 2 Avenue de Lafayette Boston, MA 02111 Attention: Ralph Jones By Facsimile: (617) 662-1452 Confirm by Telephone: (617) 662-1548 DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. FEES AND EXPENSES We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telecopy, telephone or in person by our and our affiliates' officers and regular employees. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We will, however, 32 pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses incurred in connection with these services. We will pay the cash expenses to be incurred in connection with the exchange offer. Such expenses include fees and expenses of the exchange agent and trustee, accounting and legal fees and printing costs, among others. ACCOUNTING TREATMENT We will record the exchange notes at the same carrying value as the outstanding notes, which is face value, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes as a result of the exchange offer. The expenses of the exchange offer will be deferred and charged to expense over the term of the exchange notes. CONSEQUENCES OF FAILURE TO EXCHANGE The outstanding notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities. Accordingly, the outstanding notes may be resold only: (1) to us upon redemption thereof or otherwise; (2) so long as the outstanding notes are eligible for resale pursuant to Rule 144A, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant to another exemption from the registration requirements of the Securities Act, which other exemption is based upon an opinion of counsel reasonably acceptable to us; (3) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act; or (4) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. RESALE OF THE EXCHANGE NOTES With respect to resales of exchange notes, based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties, we believe that a holder or other person who receives exchange notes, whether or not the person is the holder, other than a person that is our affiliate within the meaning of Rule 405 under the Securities Act, in exchange for outstanding notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of the exchange notes, will be allowed to resell the exchange notes to the public without further registration under the Securities Act and without delivering to the purchasers of the exchange notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any holder acquires exchange notes in the exchange offer for the purpose of distributing or participating in a distribution of the exchange notes, the holder cannot rely on the position of the staff of the SEC expressed in the no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Further, each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where the outstanding notes were acquired by the broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. 33 USE OF PROCEEDS This exchange offer is intended to satisfy some of our obligations under the registration rights agreement. We will not receive any cash proceeds from the issuance of the exchange notes. In consideration for issuing the exchange notes, we will receive outstanding notes in like principal amount, the form and terms of which are substantially identical to the form and terms of the exchange notes, except as otherwise described in this prospectus. We used the proceeds from the issuance of the outstanding notes to retire in full the $200 million of indebtedness under a senior subordinated bridge financing and for general corporate purposes. The senior subordinated bridge financing was used, together with the related financing transactions, to fund a portion of the cash required to consummate the acquisition, repay certain indebtedness outstanding prior to the acquisition and pay related fees and expenses. 34 CAPITALIZATION The following table sets forth our cash and cash equivalents and capitalization derived from our unaudited consolidated financial statements as of December 31, 2001. This table should be read in conjunction with "Use of Proceeds," "Selected Historical Financial and Operating Data," our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus.
AS OF DECEMBER 31, 2001 -------------- (UNAUDITED) (IN THOUSANDS) Cash and cash equivalents................................... $ 22,891 ======== Long-term debt (including current maturities): New senior credit facilities(1)........................... $149,625 Capital leases............................................ 5,118 -------- Total senior debt...................................... 154,743 9 7/8% senior subordinated notes due 2011................. 225,000 -------- Total long-term debt................................... 379,743 Total stockholders' equity.................................. 80,519 -------- Total capitalization................................... $460,262 ========
- --------------- (1) The new senior credit facilities consist of a $50.0 million revolving credit facility, a $150.0 million term loan B and a $75.0 million delayed-draw term loan facility. RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the historical consolidated ratio of earnings to fixed charges of our company for the periods indicated.
SIX MONTHS ENDED FISCAL YEAR ENDED --------------------------- -------------------------------- DECEMBER 31, DECEMBER 31, 1997 1998 1999 2000 2001 2001 2000 ---- ---- ---- ---- ---- ------------ ------------ 1.1x 1.0x 1.1x 1.3x 1.6x -- 1.4x Fixed charge coverage deficiency................ -- -- -- -- -- $(6,590) --
For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as (i) pre-tax income from continuing operations before adjustment for income or loss from equity investments, (ii) fixed charges and (iii) distributed income of equity investments. Fixed charges are the sum of (i) interest expense, (ii) amortized premiums, discounts and capitalized expenses related to indebtedness and (iii) an estimate of the interest within rental expense. 35 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated financial statements have been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus and reflect the unaudited pro forma consolidated financial statements of InSight Health Services Corp. The unaudited pro forma condensed consolidated statement of income data give effect to 1) the acquisition and related financing transactions, and the application of the net proceeds and 2) the issuance of the outstanding notes and extinguishment of the senior subordinated bridge financing, as if all such transactions had occurred on July 1, 2000. Assumptions underlying the pro forma adjustments are described in the accompanying notes which should be read in conjunction with these unaudited pro forma condensed consolidated financial statements. The pro forma adjustments reflect the adoption of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Among other things, this requires the elimination of goodwill amortization in the unaudited pro forma condensed consolidated statement of income, however, amortization of other identifiable intangible assets is required. After an acquisition, the total consideration of such acquisition will be allocated to the tangible and intangible assets acquired and liabilities assumed. The actual purchase accounting and other adjustments described in the accompanying notes were made as of the closing date of the acquisition and may differ from the preliminary adjustments reflected in these unaudited pro forma condensed consolidated financial statements. For example, an increase in the allocation to identifiable intangible assets with a corresponding reduction in goodwill will result in an increase in related amortization expense. The unaudited pro forma condensed consolidated financial statements should not be considered indicative of actual results that would have been achieved had the acquisition, related financing transactions and notes offered hereby been consummated for the periods indicated and do not purport to indicate consolidated results of operations as of any future period. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information contained in "Selected Historical Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. 36 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 2001 (IN THOUSANDS)
HISTORICAL(1) ADJUSTMENTS PRO FORMA ------------- ----------- --------- Revenues.................................................. $211,503 $ -- $211,503 Costs of operations....................................... 161,872 (5,530)(2) 156,342 -------- ------- -------- Gross profit............................................ 49,631 5,530 55,161 Corporate operating expenses.............................. 10,783 -- 10,783 -------- ------- -------- Income from company operations.......................... 38,848 5,530 44,378 Equity in earnings of unconsolidated partnerships......... 971 -- 971 -------- ------- -------- Operating income........................................ 39,819 5,530 45,349 Interest expense, net..................................... 23,394 13,284(3) 36,678 -------- ------- -------- Income before income taxes.............................. 16,425 (7,754) 8,671 Provision for income taxes................................ 2,624 844(4) 3,468 -------- ------- -------- Net income.............................................. $ 13,801 $(8,598) $ 5,203 ======== ======= ======== EBITDA.................................................... $ 80,953 -- $ 80,953 Pro forma ratio of earnings to fixed charges.............. 1.1x
37 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) The unaudited pro forma condensed consolidated income statement for the year ended June 30, 2001, reflects the following pro forma adjustments: (1)To reflect the historical results of operations of InSight, as InSight Holdings did not have operations or significant assets (see audited financial statements of InSight Holdings included elsewhere herein.) (2) To record the elimination of goodwill amortization of $5,530 in accordance with SFAS 142. (3) To reflect adjustments to interest expense as follows: Interest on the outstanding notes at 9 7/8%(a).............. $ 22,219 Interest on term loan B facility at LIBOR plus 350 bps (estimated rate of 6.0%).................................. 9,000 Effect of interest rate swap on notional amount of $37,250 of term loan B facility................................... 1,100 Commitment fee on revolving credit facility (0.5% of unused facility) and delayed-draw term loan facility (2.0% of unused facility).......................................... 1,750 Amortization of deferred loan fees on new senior credit facilities ($1,589) and the outstanding notes ($1,352).... 2,941 Elimination of historical interest expense.................. (23,726) -------- $ 13,284 ========
The actual interest on the term loan B facility could vary from that used to compute the above adjustment of interest expense. The effect on pre-tax income of a 0.125% variance in such rate would be approximately $188. (a) Incremental interest expense on the senior subordinated bridge financing is not material to the pro forma presentation due to the limited period outstanding. (4) To record the tax effect on the above entries at estimated effective rates. 38 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 (IN THOUSANDS)
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Revenues.................................................... $43,111 63,678(1) 106,789 Costs of operations......................................... 33,203 45,687(1) 78,890 ------- -------- -------- Gross profit.............................................. 9,908 17,991 27,899 Corporate operating expenses................................ 2,129 3,184(1) 5,313 ------- -------- -------- Income from company operations............................ 7,779 14,807 22,586 Equity in earnings of unconsolidated partnerships........... 110 382(1) 492 ------- -------- -------- Operating income.......................................... 7,889 15,189 23,078 Interest expense, net....................................... 7,690 10,816(2) 18,506 ------- -------- -------- Income before income taxes................................ 199 4,373 4,572 Provision for income taxes.................................. - 1,829(3) 1,829 ------- -------- -------- Income before extraordinary item.......................... $ 199 $ 2,544 2,743 ======= ======== ======== EBITDA...................................................... $15,712 $ 25,012 40,724 Pro forma ratio of earnings to fixed charges................ 1.4x
39 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) The unaudited pro forma condensed consolidated income statement for the six months ended December 31, 2001, reflects the following pro forma adjustments: (1)To add historical results of operations from the period July 1, 2001 to October 17, 2001 of InSight. (2) To reflect interest expense for the period July 1, 2001 to October 17, 2001, as follows: Interest on the outstanding notes at 9 7/8%................. $ 6,481 Interest on term loan B facility at LIBOR plus 350 bps (estimated rate of 6.0%).................................. 2,625 Effect of interest rate swap on notional amount of $37,250 of term loan B facility................................... 343 Commitment fee on revolving credit facility (0.5% of unused facility) and delayed-draw term loan facility (2.0% of unused facility).......................................... 510 Amortization of deferred loan fees on new senior credit facilities ($1,589) and the outstanding notes ($1,352).... 857 ------- $10,816 =======
The actual interest on the term loan B facility could vary from that used to compute the above adjustment of interest expense. The effect on pre-tax income of a 0.125% variance in such rate would be approximately $47. (3) To record the tax effect on the above entries at estimated effective rates. 40 SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth our selected historical financial and other data as of and for each of the five fiscal years ended June 30, 1997, 1998, 1999, 2000 and 2001 and the six months ended December 31, 2000 and 2001. The selected historical financial and other data as of and for the fiscal years ended June 30, 1999, 2000 and 2001 have been derived from our audited consolidated financial statements and the related notes, which are included elsewhere in this prospectus. The selected historical financial and other data as of and for the six months ended December 31, 2000 and 2001 have been derived from our unaudited consolidated financial statements and the related notes, which are included elsewhere in this prospectus. The selected historical financial and other data as of and for the fiscal years ended June 30, 1997 and 1998 have been derived from our audited consolidated financial statements for the fiscal years ended June 30, 1997 and 1998, which are not included in this prospectus. The selected historical financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus.
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, --------------------------------------------------- ------------------- 1997 1998 1999 2000 2001 2001(3) 2000 ------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenues....................... $92,273 $119,018 $161,992 $188,574 $211,503 $106,789 $104,014 Costs of operations............ 79,634 96,887 131,343 151,429 161,872 78,890 80,891 Gross profit................... 12,639 22,131 30,649 37,145 49,631 27,899 23,123 Corporate operating expenses... 7,431 8,759 10,475 10,946 10,783 5,313 5,277 Provision for reorganization and other costs(1)........... -- -- 3,300 -- -- -- -- Provision for supplemental service fee termination...... -- 6,309 -- -- -- -- -- Income from company operations................... 5,208 7,063 16,874 26,199 38,848 22,586 17,846 Equity in earnings of unconsolidated partnerships................. 566 707 548 817 971 492 425 Acquisition related compensation charge.......... -- -- -- -- -- (15,616) -- Operating income............... 5,774 7,770 17,422 27,016 39,819 7,462 18,271 Interest expense, net.......... 4,066 6,827 14,500 18,696 23,394 14,011 11,907 Income (loss) before income taxes........................ 1,708 943 2,922 8,320 16,425 (6,549) 6,364 Provision (benefit) for income taxes........................ 427 431 (3,190) 1,131 2,624 (2,100) 636 Income (loss) before extraordinary item........... 1,281 512 6,112 7,189 13,801 (4,499) 5,728 Extraordinary item -- loss on debt extinguishment.......... -- -- -- -- -- (7,378) -- Net income (loss).............. $ 1,281 $ 512 $ 6,112 $ 7,189 $ 13,801 $(11,827) $ 5,728 ======= ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA: Cash and cash equivalents...... $ 6,884 $ 44,740 $ 14,294 $ 27,133 $ 23,254 $ 22,891 $ 15,147 Working capital (deficit)...... (6,162) 36,109 24,651 20,814 16,791 43,902 14,037 Total assets................... 97,271 231,592 238,304 328,872 321,056 490,563 327,106 Total debt (including current maturities).................. 73,195 164,798 172,630 248,232 228,253 379,743 243,062 Stockholders' equity........... 6,685 37,858 44,106 51,487 65,471 80,519 57,304
41
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, --------------------------------------------------- ------------------- 1997 1998 1999 2000 2001 2001(3) 2000 ------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA: EBITDA(2)...................... $15,514 $ 29,694 $ 45,608 $ 60,646 $ 80,953 $ 40,724 $ 39,207 EBITDA margin.................. 16.8% 24.9% 28.2% 32.2% 38.3% 38.14% 37.69% Depreciation and amortization................. 9,740 15,615 24,886 33,630 41,134 17,646 20,936 Capital expenditures........... 6,868 23,644 18,440 23,170 22,911 32,288 18,642 Net cash provided by operating activities................... 7,478 18,216 10,892 40,524 50,682 26,137 18,993 Net cash used in investing activities................... (30,377) (78,168) (47,201) (49,070) (23,442) (212,955) (18,915) Net cash provided by (used in) financing activities......... 23,204 97,808 5,863 21,385 (31,119) 194,884 (12,064) Ratio of earnings to fixed charges(3)................... 1.1x 1.0x 1.1x 1.3x 1.6x -- 1.4x Fixed charge coverage deficiency................... -- -- -- -- -- $ (6,590) -- Number of mobile facilities.... 40 67 86 82 88 95 87 Number of fixed-site centers... 39 52 59 68 69 70 69 PRO FORMA DATA (UNAUDITED): Interest expense, net.......... $ 36,678 $ 18,506 Ratio of EBITDA to interest expense, net(1).............. 2.2x 2.2x Ratio of net debt to EBITDA(1)(2)................. 4.4x
- --------------- (1) In connection with the recapitalization by The Carlyle Group and General Electric Company (GE) in October 1997, we recorded a one-time non-cash charge of $6,309 for the elimination of a supplemental service fee payment due to GE. In 1999, we recorded a one-time charge of $3,300 related to the realignment of our corporate and regional organization. (2) EBITDA is defined as operating income plus depreciation and amortization. This measurement has been included because management believes that certain investors will find it to be a useful tool for measuring our ability to meet debt service, capital expenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. EBITDA excludes the provision for supplemental service fee termination in 1998, the provision for reorganization and other costs in 1999 and the acquisition related compensation charge in 2001. (3)The results of operations for the six months ended December 31, 2001 have been derived by combining the results of operations of InSight Holdings for the six months ended December 31, 2001 with the results of operations of InSight from July 1, 2001 to October 17, 2001. 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements." OVERVIEW We are a leading nationwide provider of outsourced diagnostic imaging services, serving a diverse portfolio of customers, including healthcare providers, such as hospitals and physicians, and payors, such as managed care organizations and insurance companies, and are the largest integrated provider of fixed and mobile diagnostic imaging services in the United States. We have two reportable segments, the Eastern Division and the Western Division. Our operations are located throughout the United States, with a substantial presence in California, Texas, New England, North Carolina, South Carolina, Florida and the midwest (Indiana and Ohio). While we generated approximately 80% of our revenues from MRI services during the fiscal year ended June 30, 2001, we provide a comprehensive offering of diagnostic imaging and treatment services, including CT, PET, mammography, bone densitometry, diagnostic ultrasound, lithotripsy and x-ray. We have developed and continue to develop strong regional networks of diagnostic imaging services, enabling us to increase overall utilization of our imaging equipment and to benefit from enhanced economies of scale. We provide our services through 69 fixed-site centers, including 26 multi-modality centers and 95 mobile facilities. At our multi-modality imaging centers, we typically offer MRI and one or more of CT, x-ray, mammography, ultrasound, nuclear medicine and bone densitometry services. Our revenues are primarily generated from contract services and patient services. Contract services revenues are primarily earned through mobile facilities. Patient services revenues are primarily earned through fixed-site centers. Contract services revenues are generally earned from services billed to hospitals or other healthcare providers, which include: (1) fee-for-service arrangements in which revenues are based upon a contractual rate per procedure; (2) management fees; and (3) equipment rental in which revenues are generally based upon a fixed monthly rental. Patient services revenues are earned from services billed directly to patients or third-party payors (generally managed care organizations, Medicare, Medicaid, commercial insurance carriers and workers' compensation funds). Contract and patient services revenues represented approximately 49% and 51%, respectively, of our total revenues for the fiscal year ended June 30, 2001. During the fiscal year ended June 30, 2001, compared to the fiscal year ended June 30, 2000, we increased scan volumes at our fixed-site centers by 9%. During the same period, the average fee-per-scan at our fixed-site centers remained relatively constant. The average fee-per-scan at our MRI-only fixed-site centers is higher than at our multi-modality centers, due to the range of procedures, many of which have a lower fee-per-scan than MRI, provided at our multi-modality centers. We maintain a high fixed cost structure, with fixed costs and variable costs representing 80.1% and 19.9% of total operating expenses, respectively, for the fiscal year ended June 30, 2001. Four categories of fixed expenses account for approximately 73.9% of our total operating expenses: (1) salaries and benefits expenses; (2) equipment lease expenses; (3) contractual maintenance expenses; and (4) depreciation and amortization, comprising 34.9%, 5.0%, 25.9% and 8.1%, respectively, of our total operating expenses for the fiscal year ended June 30, 2001. Due to this high degree of operating leverage with respect to our equipment, any increase in existing facility scan volumes disproportionately increases our operating cash flow. Service supplies, consisting mainly of film and contrast media used in our diagnostic imaging services, comprised 5.6% of our total operating expenses for the fiscal year ended June 30, 2001 and were our largest variable operating expense during this period. 43 We believe that the expansion of our business through the addition of new facilities and acquisitions is a key factor in achieving our growth. Generally, acquisition opportunities are aimed at increasing revenues and profits and maximizing utilization of existing capacity and increasing economies of scale. Incremental operating profit resulting from future acquisitions will vary depending on geographic location, whether facilities are mobile or fixed, the range of services provided and our ability to integrate the acquired businesses into our existing infrastructure. Since 1996, we have completed 12 acquisitions. We are continuously evaluating acquisition opportunities and consolidation possibilities, and, at any given time, may be in various stages of due diligence or preliminary discussions with respect to a number of potential transactions. From time to time, we may enter into non-binding letters of intent, but we are not currently subject to any definitive agreement with respect to any transaction material to our operations or otherwise so far advanced in any discussions as to make a transaction material to our operations reasonably certain. Nevertheless, one of these potential transactions, a definitive agreement for which is currently under negotiation, if we were to complete our business and legal due diligence and enter into a definitive agreement, would, if consummated, be material to our operations and to our financial condition. Our results of operations for the six months ended December 31, 2001 have been derived by combining the results of operations of InSight Holdings for the six months ended December 31, 2001 with the results of operations of InSight from July 1, 2001 to October 17, 2001, the date of the acquisition and related financing transactions. Our results of operations for the three months ended December 31, 2001 have been derived by combining the results of operations of InSight Holdings from October 1, 2001 to December 31, 2001 with the results of operations of InSight from October 1, 2001 to October 17, 2001. The results of operations and cash flows of InSight prior to the acquisition and related financing transactions incorporated in the discussion of our operating results for the six and three months ended December 31, 2001 are the historical results and cash flows of InSight. InSight's results do not reflect any purchase accounting adjustments included in the results of InSight Holdings after the acquisition and related financing transactions, and thus are not directly comparable. Because of the effects of purchase accounting applied as a result of the acquisition and related financing transactions and the additional interest expense associated with the debt incurred to finance the acquisition, the results of InSight Holdings after the acquisition are not comparable in all respects to the results of operations prior to the acquisition and related financing transactions. However, management believes a discussion of the operations by combining the results of InSight Holdings and InSight is more meaningful as InSight Holdings' operating revenues and expenses have not been affected by the acquisition and related financing transactions and splitting up the results between pre- and post-acquisition and related financing transactions periods would make comparisons of the operating trends to the prior year very different. ACQUISITIONS AND NEW FACILITIES In the fiscal year ended June 30, 2000, we completed two acquisitions in the Eastern Division: (1) two fixed-site centers in Indianapolis and Clarksville, Indiana, respectively and (2) a 90% interest in a partnership which owns a multi-modality fixed-site center in Wilkes-Barre, Pennsylvania. The aggregate purchase price for these two acquisitions was approximately $24.5 million, which was financed with our acquisition facility under our existing senior credit facilities. In the fiscal year ended June 30, 2000, we opened in the Western Division: (1) a radiology co-source outpatient fixed-site center in Granada Hills, California, (2) a radiology co-source outpatient multi-modality fixed-site center in Henderson, Nevada and (3) an Open MRI fixed-site center in Pleasanton, California. These were financed through both capital leases with General Electric Company and internally generated funds. In the fiscal year ended June 30, 2000, we closed in the Eastern Division an Open MRI fixed-site center in Atlanta, Georgia. In the fiscal year ended June 30, 2001, we opened: (1) in the Western Division a radiology co-source outpatient fixed-site center in Marina del Rey, California, which was financed with a capital lease from General Electric Company and internally generated funds; and (2) in the Eastern Division a PET fixed-site center in Louisville, Kentucky, which was financed with outside financing. 44 In the six months ended December 31, 2001, we opened in the Eastern Division a radiology co-source outpatient fixed-site center in Largo, Florida, which was financed with an operating lease from General Electric Company. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES We operate 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, but we are constantly under external pressure both from our customers and competitors to contain costs and reduce prices. On October 17, 2001 we entered into new senior credit facilities with Bank of America, N.A. and a syndicate of other lenders consisting of (1) a $150.0 million seven year term loan B (the entire amount of which was drawn down in connection with the acquisition), (2) a $75 million seven year delayed-draw term loan facility and (3) a $50.0 million revolving credit facility. Borrowings under the new senior credit facilities bear interest at LIBOR plus 3.5%. We are required to pay an annual unused facility fee of between 0.5% and 2.0%, payable quarterly, on unborrowed amounts under both facilities. For more information, see "Description of New Senior Credit Facilities." We expect to use our delayed-draw facility, which is available through the second anniversary of the acquisition, to fund future acquisitions and capital expenditures. We expect to use the revolving credit facility primarily to fund our future working capital needs. The new senior credit facilities contain various restrictive covenants. They prohibit us from prepaying other indebtedness, including the notes described below, and they require us to maintain specified financial ratios and satisfy financial condition tests. In addition, the new senior credit facilities prohibit us from declaring or paying any dividends and prohibit us from making any payments with respect to the new notes if we fail to perform our obligations under, or fail to meet the conditions of, the new senior credit facilities or if payment creates a default under the new senior credit facilities. For more information, see "Description of New Senior Credit Facilities," "Description of Notes" and "Risk Factors -- Risks Relating to the Notes." In addition to the indebtedness under the new senior credit facilities, we also issued the outstanding notes, consisting of $225 million aggregate principal amount, in a private placement exempt from registration under the Securities Act and used the proceeds thereof to retire $200 million of indebtedness under a senior subordinated bridge financing, which we incurred to finance the acquisition and related refinancing transactions, and for general corporate purposes. The indenture governing the outstanding notes, among other things, (1) restricts our and our restricted subsidiaries' ability, including the ability of the guarantors of the new notes, to incur additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates, (2) places certain restrictions on the ability of certain of our restricted subsidiaries, including the guarantors of the new notes, to pay dividends or make certain payments to us and (3) places restrictions on our restricted subsidiaries' ability, including the ability of the guarantors of the notes, to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. For details regarding the refinancing and the terms of the new indebtedness, see "Description of New Senior Credit Facilities" and "Description of Notes." Net cash provided by operating activities was approximately $26.1 million for the six months ended December 31, 2001. Cash provided by operating activities resulted primarily from net income before depreciation, amortization, the extraordinary loss on debt extinguishment and the acquisition related compensation charge (approximately $28.8 million), an increase in accounts payable and other accrued expenses (approximately $0.4 million) and a decrease in trade accounts receivables, net (approximately $1.7 million), partially offset by an increase in other current assets (approximately $4.7 million). 45 Net cash used in investing activities was approximately $213.0 million for the six months ended December 31, 2001. Cash used in investing activities resulted primarily from the purchase of our common stock, net of cash acquired in the acquisition and related financing transactions (approximately $179.3 million) and our purchasing or upgrading diagnostic imaging equipment at our existing facilities (approximately $32.3 million). Net cash provided by financing activities was approximately $194.9 million for the six months ended December 31, 2001. Cash provided by financing activities resulted primarily from the proceeds from sale of InSight Holdings common stock, net of equity issuance costs (approximately $85.9 million) and borrowings of debt (approximately $575.0 million), partially offset by principal payments of debt and capital lease obligations (approximately $438.6 million), and payments of deferred loan fees (approximately $27.6 million). We have committed to purchase or lease in connection with the development of new fixed-site centers and mobile facilities and replacement or upgrades of diagnostic imaging equipment at fixed-site centers and mobile facilities, at an aggregate cost of approximately $18.5 million, 16 diagnostic imaging systems for delivery through June 2002. We expect to use either internally generated funds or leases from General Electric Company and others to finance the purchase of this equipment. We may purchase, lease or upgrade other diagnostic imaging 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 fixed-site centers and mobile facilities are developed in accordance with our business strategy. Effective December 1, 1999, we purchased 38 pieces of diagnostic imaging equipment from General Electric Company 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. In connection with the acquisition, we refinanced all but approximately $5.5 million of these capital leases through borrowings under the new senior credit facilities. In the future, we intend to finance purchases of diagnostic imaging equipment primarily with internally generated funds, capital leases or our new senior credit facilities rather than entering into operating leases; although we may choose to enter into operating leases for certain diagnostic imaging equipment. In addition, in connection with the implementation of the electronic transaction, security and privacy standards mandated by the Health Insurance Portability and Accountability Act, or HIPAA, we expect to spend approximately $1.5 million to make necessary software upgrades to our radiology information system to make it compliant with the HIPAA transaction standards by late 2002 and with the privacy standards by 2003. We believe that, based on current levels of operations and anticipated growth, our cash from operations, together with other available sources of liquidity, including borrowings available under our new senior credit facilities, will be sufficient through December 31, 2002 to fund anticipated capital expenditures and make required payments of principal and interest on our debt, including payments due on the notes and obligations under our new senior credit facilities. In addition, we continually evaluate potential acquisitions and expect to fund such acquisitions from our available sources of liquidity, as discussed above. Our acquisition strategy may require sources of capital in addition to those currently available to us. No assurance can be given that such necessary additional funds will be available on terms acceptable to us or at all. RESULTS OF OPERATIONS For the six months ended December 31, 2001 and 2000, we focused on the results of operations through the division of our diagnostic imaging business into two geographical regions of the United States: Western and Eastern Divisions. We have divided our operations into two Divisions only for the purposes of the separation of internal management responsibilities and we do not focus on each of these Divisions as a separate business or make financial decisions as if they are separate businesses. Each Division provides diagnostic imaging services and generates both contract services and patient services revenues. In addition, we allocate resources on an overall basis to each Division to maximize returns on investment. Our results of operations for the six months ended December 31, 2001 have been derived by combining the results of 46 operations of InSight Holdings for the six months ended December 31, 2001 with the results of operations of InSight from July 1, 2001 to October 17, 2001, the date of the acquisition and related financing transactions. The results of operations of InSight Holdings for the three months ended December 31, 2001 have been derived by combining the results of operations of InSight Holdings for the three months ended December 31, 2001 with the results of operations of InSight from October 1, 2001 to October 17, 2001. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 Revenues: Revenues increased approximately 2.7% from approximately $104.0 million for the six months ended December 31, 2000, to approximately $106.8 million for the six months ended December 31, 2001. This increase was due primarily to the opened fixed-site centers discussed above (approximately $0.5 million) and an increase in patient services revenues (approximately $3.6 million) at existing facilities, partially offset by a decrease in contract services and other revenues (approximately $1.3 million) at existing facilities. Revenues for the Eastern and Western Division represented approximately 60% and 36%, respectively, of total revenues for the six months ended December 31, 2001. However, the percentages will be affected by future acquisitions and the establishment of fixed-site centers and mobile facilities. Contract services revenues decreased approximately 2.7% from approximately $52.2 million for the six months ended December 31, 2000, to approximately $50.8 million for the six months ended December 31, 2001. This decrease was due to the loss of several high volume contracts which were replaced by contracts which initially have lower volumes. Contract services revenues for the Eastern and Western Division represented approximately 89% and 5%, respectively, of contract services revenues for the six months ended December 31, 2001. However, the percentages will be affected by future acquisitions and the establishment of fixed-site centers and mobile facilities. Contract services revenues, primarily earned by our mobile facilities, represented approximately 48% of total revenues for the six months ended December 31, 2001. 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, we have been able to obtain replacement contracts. While some replacement accounts have initially been smaller than the lost accounts, such replacement accounts revenues have generally increased over the term of the agreement. The non-renewal of a single customer agreement would not have a material impact on our contract services revenues, although non-renewal of several contracts could have a material impact on contract services revenues. As a result of the implementation of the OPPS for outpatient services, effective August 1, 2000 Medicare began paying 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 the Centers for Medicare and Medicaid Services (CMS). 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 appeared to 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 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 payment corridors. In addition, the BIPA included certain provisions requiring CMS to revise the APCs to separate contrast-enhanced diagnostic imaging procedures from those that are not contrast-enhanced. Payment for unenhanced diagnostic procedures was reduced as a result of implementation of these provisions effective January 1, 2002, but the APC rates for certain contrast-enhanced diagnostic procedures were increased. The APC rates which became effective on January 1, 2002, and revised effective April 1, 2002, also reduced Medicare payment for PET services provided to hospital outpatients. As a result of the implementation of the new OPPS, we believe that our hospital customers may seek reductions in contractual rates to the extent the hospital believes it will pay more to us than it will receive 47 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 our contract services revenues; however, the reduction in contractual rates for several customers or loss of several contracts could have a material impact on our business, financial condition and results of operations. On the other hand, we believe 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 us with additional opportunities for our 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 transitional payments that may be available under the BBA) and to what extent they will attempt to renegotiate existing contractual arrangements. Patient services revenues, primarily earned by our fixed-site centers, represented approximately 52% of total revenues for the six months ended December 31, 2001. Patient services revenues increased approximately 8.0% from approximately $51.5 million for the six months ended December 31, 2000, to approximately $55.6 million for the six months ended December 31, 2001. This increase was due primarily to the opened fixed-site centers discussed above (approximately $0.5 million) and an increase in revenues at existing facilities (approximately $3.6 million). The increase at existing facilities was due to higher utilization (approximately 6%), partially offset by nominal changes in reimbursement from third party payors. Patient services revenues for the Eastern and Western Division represented approximately 34% and 65%, respectively, of patient services revenues for the six months ended December 31, 2001. However, the percentages will be affected by future acquisitions and the establishment of fixed-site centers and mobile facilities. We believe our patient services revenues received from Medicare will not be materially impacted by the new OPPS because it primarily operates freestanding fixed-site centers which are unaffected thereby. However, regulations were recently adopted by the Medicare program which, effective January 1, 2002, reduced Medicare payment for diagnostic imaging services, including MRI and other services we provide in non-hospital settings, by approximately 7% to 9%. These regulations are expected to negatively impact patient services revenues in the annual amount of approximately $2 million based on current revenues. Management believes that any future increases in revenues at existing facilities can be achieved primarily by higher utilization and not by increases in procedure prices; however, slower start-ups of new operations, excess capacity of diagnostic imaging equipment, increased competition, and the expansion of managed care may impact utilization and make it difficult for us to achieve revenue increases in the future, absent the execution of provider agreements with managed care companies and other payors, and the execution of our business strategy, particularly acquisitions. Costs of Operations: Costs of operations decreased approximately 2.5% from approximately $80.9 million for the six months ended December 31, 2000, to approximately $78.9 million for the six months ended December 31, 2001. This decrease was due to the elimination of goodwill amortization as a result of the adoption of SFAS 142 discussed below, net of goodwill amortization as a result of the acquisition and related financing transactions (approximately $2.3 million), and reduced costs at existing facilities (approximately $0.1 million), partially offset by costs related to the opened fixed-site centers discussed above (approximately $0.4 million). Costs of operations, as a percentage of total revenues, decreased from approximately 77.8% for the six months ended December 31, 2000, to approximately 73.9% for the six months ended December 31, 2001. The percentage decrease is due to the elimination of goodwill amortization discussed below and reduced costs in equipment leases, equipment maintenance, occupancy, consulting and travel costs, partially offset by higher salary and benefits. We are continuing to improve operating efficiencies through cost reduction initiatives, which are focused primarily on costs for diagnostic imaging equipment, including lease, depreciation and maintenance and occupancy, marketing and salary and benefits. 48 Corporate Operating Expenses: Corporate operating expenses increased approximately 0.6%, from approximately $5.28 million for the six months ended December 31, 2000, to approximately $5.31 million for the six months ended December 31, 2001. This increase was due primarily to increased occupancy and information systems costs, partially offset by reduced travel and consulting costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 5.1% for the six months ended December 31, 2000, to approximately 5.0% for the six months ended December 31, 2001. Acquisition Related Compensation Charge: For the six months ended December 31, 2001, we recorded a charge of approximately $15.6 million related to the exercise of our common stock options and warrants as a result of the acquisition and related financing transactions. Interest Expense, Net: Interest expense, net increased approximately 17.6% from approximately $11.9 million for the six months ended December 31, 2000, to approximately $14.0 million for the six months ended December 31, 2001. This increase was due primarily to additional debt related to the acquisition and related financing transactions. Provision for Income Taxes: Provision for income taxes decreased from approximately $0.6 million for the six months ended December 31, 2000, to a benefit of approximately $2.1 million for the six months ended December 31, 2001. The decrease in provision is due to our recording a benefit of approximately $2.1 million to recognize anticipated utilization of certain net operating loss carrybacks. EBITDA: Earnings before interest, taxes, depreciation, amortization and the acquisition related compensation charge (EBITDA) increased approximately 3.8% from approximately $39.2 million for the six months ended December 31, 2000, to approximately $40.7 million for the six months ended December 31, 2001. This increase was primarily due to higher revenues at existing facilities and lower costs of services as a result of the cost reduction initiatives discussed above. EBITDA for the Western Division increased approximately 27.0% from approximately $12.6 million for the six months ended December 31, 2000 to approximately $16.0 million for the six months ended December 31, 2001. EBITDA for the Eastern Division decreased approximately 7.0% from approximately $32.7 million for the six months ended December 31, 2000 to approximately $30.4 million for the six months ended December 31, 2001. The reduction in EBITDA in the Eastern Division is due primarily to the reduction in contract services revenues and to the start-up costs relating to certain mobile PET facilities. Extraordinary Item: We recorded an extraordinary loss of approximately $7.4 million related to the write-off of associated debt issuance costs, as a result of the acquisition and related financing transactions. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 Revenues: Revenues increased approximately 3.7% from approximately $51.8 million for the three months ended December 31, 2000, to approximately $53.7 million for the three months ended December 31, 2001. This increase was due primarily to an increase in contract services, patient services and other revenues (approximately $1.7 million) at existing facilities, and to revenues generated at the opened fixed-site centers discussed above (approximately $0.3 million). Revenues for the Eastern and Western Division represented approximately 61% and 36%, respectively, of total revenues for the three months ended December 31, 2001. Contract services revenues increased approximately 0.4% from approximately $25.9 million for the three months ended December 31, 2000, to approximately $26.0 million for the three months ended December 31, 2001. This increase was due to higher utilization at our existing mobile customer base offset by the loss of certain high volume contracts which were replaced by contracts which initially have lower volumes. Contract services revenues for the Eastern and Western Division represented approximately 89% and 5%, respectively, of contract services revenues for the three months ended December 31, 2001. Patient services revenues increased approximately 6.6% from approximately $25.8 million for the three months ended December 31, 2000, to approximately $27.5 million for the three months ended December 31, 2001. This increase was due primarily to an increase in revenues at existing facilities (approximately $1.5 million) and the opened fixed-site centers discussed above (approximately $0.3 million). The increase at existing facilities was due to higher utilization (approximately 6%), partially 49 offset by nominal changes in reimbursement from third party payors. Patient services revenues for the Eastern and Western Division represented approximately 33% and 66%, respectively, of patient services revenues for the three months ended December 31, 2001. Costs of Operations: Costs of operations increased approximately 1.2% from approximately $40.3 million for the three months ended December 31, 2000, to approximately $40.8 million for the three months ended December 31, 2001. This increase was due primarily to costs related to the opened fixed-site centers discussed above (approximately $0.2 million) and an increase in costs at existing facilities (approximately $1.3 million), partially offset by the elimination of goodwill amortization as a result of the adoption of SFAS 142 discussed below, net of goodwill amortization as a result of the acquisition and related financing transactions (approximately $1.0 million). Costs of operations, as a percentage of total revenues, decreased from approximately 77.9% for the three months ended December 31, 2000, to approximately 76.0% for the three months ended December 31, 2001. The percentage decrease is due to the elimination of the goodwill amortization discussed below and reduced costs in equipment leases, equipment maintenance and occupancy costs, offset by higher salary and benefits. Corporate Operating Expenses: Corporate operating expenses increased approximately 2.7%, from approximately $2.58 million for the three months ended December 31, 2000, to approximately $2.65 million for the three months ended December 31, 2001. This increase was due primarily to occupancy and information systems costs, partially offset by reduced travel and consulting costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 5.0% for the three months ended December 31, 2000, to approximately 4.9% for the three months ended December 31, 2001. Acquisition Related Compensation Charge: For the three months ended December 31, 2001, we recorded a charge of approximately $15.6 million related to the exercise of our common stock options and warrants as a result of the acquisition and related financing transactions. Interest Expense, Net: Interest expense, net increased approximately 47.5% from approximately $5.9 million for the three months ended December 31, 2000, to approximately $8.7 million for the three months ended December 31, 2001. This increase was due primarily to additional debt related to the acquisition and related financing transactions. Provision for Income Taxes: Provision for income taxes decreased from approximately $0.3 million for the three months ended December 31, 2000, to a benefit of approximately $4.5 million for the three months ended December 31, 2001. The decrease in provision is due to our recording a benefit of approximately $2.1 million to recognize anticipated utilization of certain net operating loss carrybacks. EBITDA: Earnings before interest, taxes, depreciation, amortization and the acquisition related compensation charge (EBITDA) decreased approximately 0.5% from approximately $19.8 million for the three months ended December 31, 2000, to approximately $19.7 million for the three months ended December 31, 2001. This decrease was primarily due to the reduction in contract services revenues in the Eastern Division and higher costs of operations. EBITDA for the Western Division increased approximately 20.3% from approximately $6.4 million for the three months ended December 31, 2000 to approximately $7.7 million for the three months ended December 31, 2001. EBITDA for the Eastern Division decreased approximately 6.9% from approximately $16.0 million for the three months ended December 31, 2000 to approximately $14.9 million for the three months ended December 31, 2001. The reduction in EBITDA in the Eastern Division is due primarily to the reduction in contract services revenues and to the start-up costs relating to certain mobile PET facilities. Extraordinary Item: We recorded an extraordinary loss of approximately $7.4 million related to the write-off of associated debt issuance costs, as a result of the acquisition and related financing transactions. 50 RESULTS OF OPERATIONS FOR YEARS ENDED JUNE 30, 2001 AND 2000 Revenues: Revenues increased approximately 12.1% from approximately $188.6 million for the fiscal year ended June 30, 2000, to approximately $211.5 million for the fiscal year ended June 30, 2001. This increase was due primarily to the acquisitions and opened fixed-site centers discussed above (approximately $10.9 million) and an increase in contract services, patient services and other revenues (approximately $16.4 million) at existing facilities, resulting from sales efforts and incentive initiatives implemented at existing facilities, partially offset by the assignment in the fiscal year ended June 30, 2000 of certain managed care contracts to an outside third party (approximately $4.4 million). Revenues for the Eastern and Western Divisions represented approximately 61% and 35%, respectively, of total revenues for the fiscal year ended June 30, 2001. However, the percentages will be affected by future acquisitions and the establishment of fixed-site centers and mobile facilities. Contract services revenues, primarily earned by our mobile facilities, represented approximately 49% of total revenues for the fiscal year ended June 30, 2001. Contract services revenues increased approximately 3.3% from approximately $100.1 million for the fiscal year ended June 30, 2000, to approximately $103.4 million for the fiscal year ended June 30, 2001. The increase was due to the addition of five mobile facilities and a combination of higher utilization and more fixed monthly fee contracts at our existing mobile customer base (approximately $7.7 million), partially offset by the assignment in the fiscal year ended June 30, 2000 of certain managed care contracts to an outside third party (approximately $4.4 million). Contract services revenues for the Eastern and Western Divisions represented approximately 87% and 6%, respectively, of contract services revenues for the fiscal year ended June 30, 2001. However, the percentages will be affected by future acquisitions and the establishment of fixed-site centers, and mobile facilities. Patient services revenues, primarily earned by our fixed-site centers, represented approximately 51% of total revenues for the fiscal year ended June 30, 2001. Patient services revenues increased approximately 23.8% from approximately $86.8 million for the fiscal year ended June 30, 2000, to approximately $107.5 million for the fiscal year ended June 30, 2001. This increase was due primarily to the acquisitions and opened fixed-site centers discussed above (approximately $10.9 million) and an increase in revenues at existing facilities (approximately $9.8 million). The increase at existing facilities was due to higher utilization (approximately 9%), and a nominal increase in reimbursement from third-party payors. Patient services revenues for the Eastern and Western Divisions represented approximately 37% and 62%, respectively, of patient services revenues for the fiscal year ended June 30, 2001. However, the percentages will be affected by future acquisitions and the establishment of fixed-site centers and mobile facilities. Costs of Operations: Costs of operations increased approximately 6.9% from approximately $151.4 million for the fiscal year ended June 30, 2000, to approximately $161.9 million for the fiscal year ended June 30, 2001. This increase was due primarily to additional costs related to the acquisitions and opened fixed-site centers discussed above (approximately $7.1 million) and at existing facilities (approximately $8.0 million), primarily salary and benefits and depreciation, partially offset by reduced equipment leases, supply costs, consulting and marketing costs, and the elimination of costs resulting from the assignment in the fiscal year ended June 30, 2000 of certain managed care contracts to an outside third party (approximately $4.6 million). The decrease in equipment lease costs and the increase in depreciation is primarily the result of the buy-out of operating leases discussed above and purchases of new diagnostic imaging equipment rather than entering into operating leases. The adoption of SFAS 142 in the fiscal year ending June 30, 2002 discussed below will result in a decrease of annual goodwill amortization of approximately $5.4 million. Costs of operations, as a percentage of total revenues, decreased to approximately 76.5% for the fiscal year ended June 30, 2001 from approximately 80.3% for the fiscal year ended June 30, 2000. The percentage decrease is primarily due to reduced costs in equipment lease, equipment maintenance, occupancy, consulting and communications costs, partially offset by higher depreciation and salary and benefit costs. 51 Corporate Operating Expenses: Corporate operating expenses decreased approximately 0.9% from approximately $10.9 million for the fiscal year ended June 30, 2000, to approximately $10.8 million for the fiscal year ended June 30, 2001. The decrease was due primarily to reduced salary and benefits associated with our acquisition and development activities, consulting and travel costs, partially offset by additional information systems costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 5.8% for the fiscal year ended June 30, 2000, to approximately 5.1% for the fiscal year ended June 30, 2001. Interest Expense, Net: Interest expense, net increased approximately 25.1% from approximately $18.7 million for the fiscal year ended June 30, 2000, to approximately $23.4 million for the fiscal year ended June 30, 2001. This increase was due primarily to additional debt related to (1) the acquisitions discussed above, (2) the buy-out of operating leases discussed above, (3) upgrades to existing diagnostic imaging equipment, and (4) a charge of approximately $0.7 million related to the interest rate swap discussed below, partially offset by reduced interest as a result of principal payments of long-term debt. Provision for Income Taxes: For the fiscal year ended June 30, 2001, the effective tax rate increased to approximately 16% from approximately 14% for the fiscal year ended June 30, 2000, primarily as a result of recognizing in the fiscal year ended June 30, 2000 the benefits from previously unused net operating loss carryforwards. EBITDA: EBITDA increased approximately 33.7% from approximately $60.6 million for the fiscal year ended June 30, 2000, to approximately $81.0 million for the fiscal year ended June 30, 2001. This increase was primarily due to higher revenues at existing facilities as a result of the revenue enhancing efforts described above, lower costs of services as a result of the cost reduction initiatives described above, and decreased equipment lease expense as a result of the buy-out of operating leases discussed above. Income per Common and Converted Preferred Share: On a diluted basis, net income per common and converted preferred share was $1.42 for the fiscal year ended June 30, 2001, compared to net income per common and converted preferred share of $0.76 for the fiscal year ended June 30, 2000. The increase in net income per common and converted preferred share is the result of (1) increased income from company operations and (2) an increase in earnings from unconsolidated partnerships, partially offset by (1) increased interest expense and (2) an increase in provision for income taxes. RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2000 AND 1999 Revenues: Revenues increased approximately 16.4% from approximately $162.0 million for the fiscal year ended June 30, 1999, to approximately $188.6 million for the fiscal year ended June 30, 2000. This increase was due primarily to the acquisitions and opened fixed-site centers discussed above (approximately $15.2 million) and an increase in contract services and patient services revenues (approximately $12.7 million) at existing facilities, partially 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 our lithotripsy partnerships, which was recorded in the fiscal year ended June 30, 1999 (approximately $0.4 million). Contract services revenues increased approximately 17.1% from approximately $85.5 million for the fiscal year ended June 30, 1999, to approximately $100.1 million for the fiscal year ended June 30, 2000. This increase was due primarily to the acquisitions discussed above (approximately $4.0 million) and an increase in our existing mobile customer base (approximately $10.6 million). The increase in our existing mobile customer base was due to (1) the addition of six mobile facilities and (2) higher utilization (approximately 14%) at our existing mobile facilities, partially offset by a decline in reimbursement from customers (approximately 3%). Patient services revenues increased approximately 17.9% from approximately $73.6 million for the fiscal year ended June 30, 1999, to approximately $86.8 million for the fiscal year ended June 30, 2000. This increase was due primarily to the acquisitions and opened fixed-site centers discussed above (approximately $11.1 million) and an increase in revenues at existing facilities (approximately 52 $2.3 million), partially offset by reduced revenues from the closure of the Open MRI fixed-site center 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%). Costs of Operations: Costs of operations increased approximately 15.3% from approximately $131.3 million for the fiscal year ended June 30, 1999, to approximately $151.4 million for the fiscal year ended June 30, 2000. This increase was due primarily to additional costs related to the acquisitions and opened fixed-site centers discussed above (approximately $14.5 million) and at existing facilities (approximately $5.9 million), partially offset by reduced expenses for the closed Open MRI fixed-site center discussed above (approximately $0.3 million). Costs of operations, as a percentage of total revenues, decreased to approximately 80.3% for the fiscal year ended June 30, 2000 from approximately 81.1% for the fiscal year ended June 30, 1999. The percentage decrease is primarily due to reduced costs in equipment lease, depreciation, equipment maintenance and occupancy, partially offset by higher salary and benefit costs. Corporate Operating Expenses: Corporate operating expenses increased approximately 3.8% from approximately $10.5 million for the fiscal year ended June 30, 1999, to approximately $10.9 million for the fiscal year ended June 30, 2000. This increase was due primarily to additional information systems costs, partially 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 fiscal year ended June 30, 1999, to approximately 5.8% for the fiscal year ended June 30, 2000. Interest Expense, Net: Interest expense, net increased approximately 29.0% from approximately $14.5 million for the fiscal year ended June 30, 1999, to approximately $18.7 million for the fiscal year ended June 30, 2000. This increase was due primarily to additional debt related to (1) the acquisitions discussed above, (2) the buy-out of operating leases discussed above, (3) higher interest rates on our floating rate debt and (4) the upgrade of our existing diagnostic imaging equipment, partially offset by reduced interest as a result of principal payments of long-term debt. EBITDA: EBITDA increased approximately 32.9% from approximately $45.6 million for the fiscal year ended June 30, 1999, to approximately $60.6 million for the fiscal year ended June 30, 2000. EBITDA for the fiscal year ended June 30, 1999 excludes the provision for reorganization and other costs of approximately $3.3 million. This increase was primarily due to higher revenues at existing facilities as a result of the revenue enhancing efforts described above, lower costs of services as a result of the cost reduction initiatives described above, and decreased equipment lease expense as a result of the buy-out of operating leases discussed above. Provision for Income Taxes: Provision for income taxes increased from a benefit of approximately $3.2 million for the fiscal year ended June 30, 1999, to approximately $1.1 million for the fiscal year ended June 30, 2000. The increase is due to our 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 our net operating loss carryforwards. Income per Common and Converted Preferred Share: On a diluted basis, net income per common and converted preferred share was $0.76 for the fiscal year ended June 30, 2000, compared to net income per common and converted preferred share of $0.65 for the fiscal 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 fiscal 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 (1) increased income from company operations and (2) an increase in earnings from unconsolidated partnerships, as a result of new diagnostic imaging equipment installed in 1999, partially offset by (1) increased interest expense and (2) an increase in provision for income taxes. 53 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We provide our services in the United States and receive payment for our services exclusively in United States dollars. Accordingly, our business is unlikely to be affected by factors such as changes in foreign market conditions or foreign currency exchange rates. Our market risk exposure relates primarily to interest rates, where we will periodically use interest rate swaps to hedge variable interest rates on long-term debt under our new senior credit facilities. We do not engage in activities using complex or highly leveraged instruments. In fiscal 1998, in the normal course of business, we entered into an interest rate swap with a notional amount of $40.0 million, for the purpose of fixing the interest rate of a corresponding amount of $40.0 million of floating rate debt. This swap had a three year term and was extendable for an additional three years at the option of the bank. Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 (collectively SFAS 133), extendable swaps do not meet the criteria for hedge accounting and changes in fair value are recognized currently in earnings. During the year ended June 30, 2001, we recorded additional interest expense of approximately $0.7 million due to changes in the fair value of the swap. In March 2001, the swap was extended for an additional three years by the bank and we expect the swap to qualify for hedge accounting through its maturity. At December 31, 2001, we had outstanding long-term debt of approximately $149.6 million, which has floating rate terms. We had outstanding an interest rate swap, converting $35.8 million of our floating rate debt to fixed rate debt. Under the terms of the interest rate swap agreement, we are exposed to credit loss in the event of nonperformance by the swap counterparty; however, we do not anticipate nonperformance by the counterparty. NEW PRONOUNCEMENTS In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 applies to all business combinations with a closing date after June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. We adopted SFAS 141, effective July 1, 2001. In accordance with SFAS 141, we engaged a valuation specialist to assist us in identifying acquired intangible assets, their respective fair values and amortization periods related to the acquisition and related financing transactions. We have made a tentative allocation of values to these identifiable intangible assets based on preliminary estimates. The final allocation of goodwill and other intangible assets may differ significantly from current estimates. SFAS 142 eliminates the amortization of goodwill, permits indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. We adopted SFAS 142 effective July 1, 2001, which required us to cease amortization of our remaining net goodwill balance and to perform a transitional goodwill impairment test as of July 1, 2001, and thereafter an impairment test at least annually. Impairment results when the fair value of our reporting segments, including goodwill, is less than its carrying value. SFAS 142 permits six months from the adoption date to complete a review of goodwill for impairment and record necessary adjustments prior to the end of fiscal 2002. We concluded that the book value of goodwill was not impaired as of July 1, 2001. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is 54 incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002 (with earlier application being encouraged). We do not expect the adoption of SFAS 143 to have a material impact on our financial condition and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 (with earlier application being encouraged) and generally are to be applied prospectively. We do not expect the adoption of SFAS 144 to have a material impact on our financial condition and results of operations. 55 THE DIAGNOSTIC IMAGING INDUSTRY OVERVIEW Diagnostic imaging involves the use of non-invasive techniques to generate representations of internal anatomy on film or video. Based on government and industry sources, in calendar year 2000, the diagnostic imaging industry generated revenues in excess of $70 billion in the United States, or approximately 6% of total healthcare spending. MRI and CT services constituted approximately $10 billion or approximately 13% of the diagnostic imaging industry in 2000. MRI services have experienced substantial scan volume growth, which increased at a compounded annual growth rate, or CAGR, of 10.7% from 9.8 million in 1996 to 13.3 million in 1999 and is projected to grow at a CAGR of approximately 10.4% to 26.6 million in 2006. We believe that growth in the diagnostic imaging industry as a whole, and MRI in particular, is attributable to: - STRONG DEMAND FOR HEALTHCARE SERVICES DUE TO AN AGING POPULATION. Based on United States Census Bureau projections, one of the fastest growing segments of the population is the group over 65 years of age, which is expected to increase 14% by 2010. This aging population is expected to drive imaging scan volume increases over the coming years primarily because annual diagnostic imaging utilization increases substantially as a person ages. - WIDER PHYSICIAN AND PAYOR ACCEPTANCE OF IMAGING SYSTEMS AS A COST-EFFECTIVE, NON-INVASIVE DIAGNOSTIC TOOL WITH SUPERIOR IMAGE QUALITY. 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 these technologies. 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. Traditional x-rays continue to be the primary diagnostic imaging modality based on the number of procedures performed. However, the use of advanced diagnostic imaging modalities, such as MRI, which provides superior image quality compared to other diagnostic imaging technologies, CT and PET has increased rapidly in recent years. These advanced modalities allow physicians to diagnose a wide variety of diseases and injuries quickly and accurately without exploratory surgery or other surgical or invasive procedures, which are usually more expensive, involve greater risk to patients and result in longer rehabilitation time. Because advanced imaging systems are increasingly seen as a tool for reducing long-term healthcare costs, they are gaining wider acceptance among payors. - EXPANDING APPLICATIONS FOR MRI TECHNOLOGY. New technological developments are expected to extend the clinical uses of MRI and increase the number of scans performed. Recent technological advancements include: (1) magnetic resonance spectroscopy, which can differentiate malignant from benign lesions; (2) magnetic resonance angiography, which can produce three-dimensional images of body parts and assess the status of blood vessels; and (3) enhancements in teleradiology systems, which permit the digital transmission of radiological images from one location to another for interpretation. Additional improvements in imaging technologies, contrast agents and scan capabilities are leading to new non-invasive methods of diagnosing blockages in the heart's vital coronary arteries, liver metastases, pelvic diseases and certain vascular abnormalities without exploratory surgery. We believe that the use of both the diagnostic and therapeutic capabilities of MRI and other imaging services will continue to increase because of their cost-effective, time- efficient and risk/benefit advantages over alternative procedures, including surgery, and that newer technologies and future technological advancements will continue the increased use of imaging services. - A CURRENTLY RELATIVELY STABLE REIMBURSEMENT ENVIRONMENT WITH RESPECT TO NON-GOVERNMENTAL PAYORS. The diagnostic imaging industry currently benefits from relatively stable pricing from managed care payors. Focusing more on product differentiation than price competition, managed care payors have 56 witnessed approximately 10% premium growth in calendar year 2000. As a result, the pricing pressure from this payor group has recently stabilized. - INCREASED ROLE OF PREVENTIVE MEDICINE. In addition, diagnostic imaging is increasingly being used as a screening tool for preventive care. We believe that future technological advances will continue to enhance the ability of radiologists to diagnose and influence treatment. For example, experimental MRI imaging techniques, such as magnetic resonance spectroscopic imaging, are used to show the functions of the brain and to investigate how epilepsy, AIDS, brain tumors, Alzheimer's and other abnormalities affect the brain. DIAGNOSTIC IMAGING TECHNOLOGY The major categories of diagnostic imaging systems currently offered in the medical marketplace are MRI systems, CT scanners, PET scanners, digital ultrasound systems, computer-based nuclear gamma cameras, conventional x-ray and radiography/fluoroscopy systems. Each of these types of imaging systems (other than conventional x-ray) represents the marriage of computer technology and various medical imaging modalities. The following highlights the key imaging systems: Magnetic Resonance Imaging or MRI MRI is a technique that involves the use of high-strength magnetic fields to produce computer-processed, three-dimensional, cross-sectional images of the body. 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, and without exposing patients to ionizing radiation. A typical MRI examination takes from 20 to 45 minutes. MRI generally reduces the cost and amount of care needed and often eliminates the need for invasive diagnostic procedures. MRI systems are typically priced in the range of $0.9 million to $2 million each. Computed Tomography or CT In CT imaging, a computer analyzes the information received from an x-ray beam to produce multiple cross-sectional images of a particular organ or area of the body. CT imaging is used to detect tumors and other conditions affecting bones and internal organs. A typical CT examination takes from 15 to 45 minutes. The current selling prices of CT systems are typically in the range of $0.3 million to $0.8 million each. Positron Emission Tomography or PET PET is a nuclear medicine procedure that produces pictures of the body's metabolic and biological functions. PET can provide earlier detection as well as monitoring of certain cancers, coronary diseases or neurological problems than other diagnostic imaging systems. 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, among others, 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, increased third-party payor coverage and reimbursement and the availability of the isotopes without an in-house cyclotron. PET systems are priced in the range of $1.0 million to $1.4 million each. OTHER IMAGING TECHNOLOGIES - Ultrasound systems use, detect and process high frequency sound waves to generate images of soft tissues and internal body organs. - X-ray is the most common energy source used in imaging the body and is now employed in conventional x-ray systems, CT scanners and digital x-ray systems. 57 - Bone densitometry uses an advanced technology called dual-energy x-ray absorptiometry, or DEXA, which safely, accurately and painlessly measures bone density and the mineral content of bone for the diagnosis of osteoporosis and other bone diseases. - 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. - 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 diagnostic x-rays. - 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. - Gamma Knife is a radiosurgical device used to treat intracranial neoplasma and vascular anomalies, that are inaccessible or unsuitable for conventional invasive surgery. DIAGNOSTIC IMAGING SETTINGS Diagnostic imaging services, such as MRI, CT and PET are typically provided in one of the following settings: Mobile Facilities Mobile imaging facilities enable small to mid-size hospitals to gain access to advanced diagnostic imaging technology. Using specially designed trailers, imaging service providers transport imaging equipment and provide services to hospitals and clinics on a shared-service or full-time basis. Generally, hospitals and clinics contract with the imaging service provider to provide a specified schedule of service to perform scans of their patients. Providers are paid, on a fee-per-scan basis, directly by the hospitals or clinics, rather than third-party payors, such as managed care organizations, insurance companies, Medicare or Medicaid. Fixed-site Centers Fixed-site centers are diagnostic imaging facilities which range from MRI-only to multi-modality centers. Fixed-site centers may be owned and operated as: Hospitals or clinics. Imaging systems are located in and owned and operated by a hospital or clinic. These systems are primarily used by patients of the hospital or clinic, and the hospital or clinic bills third-party payors. Freestanding imaging centers. Imaging systems are located in permanent facilities not generally owned by hospitals or clinics. These centers depend upon physician referrals for their patients and generally do not maintain dedicated, contractual relationships with hospitals or clinics. In fact, these centers may compete with hospitals or clinics that have their own imaging systems to provide services to these patients. Like hospitals and clinics, these centers bill third-party payors for their services. Co-source imaging centers. Imaging systems are housed in permanent or semi-transportable facilities jointly owned by imaging service providers and hospitals. Under these arrangements, the hospital outsources its radiology function to the jointly owned facility, which is managed by the imaging services provider and located on the hospital campus. Like the other fixed-site centers, these joint venture entities bill third-party payors for their services. We believe we are one of the few participants in the diagnostic imaging industry to establish these kinds of co-sourcing arrangements. 58 BUSINESS COMPANY OVERVIEW We are a leading nationwide provider of outsourced diagnostic imaging services, serving a diverse portfolio of customers, including healthcare providers, such as hospitals and physicians, and payors, such as managed care organizations and insurance companies. As the largest integrated network of mobile facilities and fixed-site imaging centers in the United States, we believe we are unique in our ability to offer healthcare providers a broad range of comprehensive imaging solutions, from MRI services to MRI-only and multi-modality fixed-site centers, many of which we jointly own with hospitals, physician groups or other healthcare providers. We deliver our services through regional networks of diagnostic imaging facilities, comprised of: - 95 mobile, including 84 MRI and seven PET, facilities. The revenues generated primarily from our mobile facilities, which we refer to as our contract services revenues, represent approximately 48% of our total revenues; and - 69 fixed-site centers operating 73 MRI systems. Approximately 38% of these are multi-modality centers, which typically include MRI and one or more of CT, x-ray, mammography, ultrasound, nuclear medicine and bone densitometry services. The revenues generated primarily from our fixed- site centers, which we refer to as our patient services revenues, represent approximately 52% of our total revenues. Healthcare providers contract with us for our outsourced imaging services because they may lack: - the financial resources to make the significant capital investments associated with the purchase of an imaging system; - the patient volume to utilize their own imaging system in a cost-effective manner; - the management and marketing expertise or the billing and collections capabilities to operate an imaging facility or center efficiently and profitably; or - the ability to add capacity independently to meet local demand. In addition, hospitals may use our outsourced imaging services to take advantage of recent federal healthcare regulatory changes that favor the outsourcing of radiology services to facilities managed by and jointly owned with a third party. We have contracts with approximately 240 hospitals and over 850 contracts with managed care organizations across 28 states. In the six months ended December 31, 2001, we completed over 371,000 procedures, and MRI services accounted for approximately 77% of our total revenues. For the fiscal year ended June 30, 2001, we had revenues of $211.5 million and EBITDA of $81.0 million. For the six months ended December 31, 2001, we had revenues of $106.8 million and EBITDA of $40.7 million. MOBILE BUSINESS OVERVIEW Hospitals can obtain access to advanced imaging technology through our network of 95 mobile, including 84 MRI, facilities. We currently have contracts with approximately 200 small to mid-size hospitals. We recruit, train, and manage the technologists that operate the equipment and provide imaging equipment services and upgrades that enable hospitals to benefit from upgraded systems without spending their own capital directly. We do not provide interpretation services for the diagnostic images produced. Interpretation services are provided by the hospital's radiologists. During the six months ended December 31, 2001, we performed over 95,000 procedures in our mobile facilities. Our mobile business operates using a wholesale model. We enter into mid-to-long-term contracts (typically three to five years) with hospitals, under which the hospitals assume responsibility for billing and collections. We are paid directly by the hospitals on a pre-determined contracted amount for our services, 59 regardless of the hospitals' reimbursement. Thus, we are able to collect our mobile revenues independently of the hospital billing and collection process. The wholesale rate is generally based upon one of three items: (1) a fee-per-scan basis (approximately 69% of our mobile business); (2) a fixed daily fee (approximately 22% of our mobile business); or (3) a monthly equipment rental fee (approximately 9% of our mobile business). We have not experienced any material write-offs with respect to our mobile business, which represents approximately 48% of our total revenues. After examining the needs of our customers, route patterns, travel times, fuel costs and system utilization, our field managers implement planning and route management to maximize the utilization of our mobile equipment while controlling the costs to locate and relocate the mobile facilities. Our mobile MRI facilities are scheduled for as little as one-half day and up to seven days per week at any particular site. Our mobile business provides a significant advantage for establishing co-source arrangements with hospitals and expanding our fixed-site business. We establish mobile routes in selected markets with the intent of growing with our customers. Our mobile facilities give us the flexibility to (1) supplement fixed-site centers operating at or near capacity until volume has grown sufficiently to warrant additional fixed-site centers, and (2) test new markets on a short-term basis prior to establishing new mobile routes or opening new fixed-site centers. Our goal is to enter into long term co-source relationships with our mobile route customers once the local market matures and sufficient patient volume is attained to support a fixed-site center. FIXED-SITE BUSINESS OVERVIEW Our fixed-site centers provide easily accessible state-of-the-art radiological services to patients, physicians, insurance payors and managed care organizations. We provide a full spectrum of imaging services through our network of 69 technologically-advanced, outpatient diagnostic imaging centers. Forty of our fixed-site centers offer MRI services exclusively while our 26 multi-modality sites typically offer MRI and one or more of CT, x-ray, mammography, ultrasound, nuclear medicine and bone densitometry services. Our fixed-site business operates using a retail model. We provide the equipment and technologists for the procedures, contract with radiologists to interpret the scans, and bill payors directly. Revenue is recorded as patient services revenues after the service has been provided, net of a contractual allowance that varies in each market. We bill the payors and patients for the technical fee associated with the use of the equipment and a professional fee associated with the radiologists interpreting the scans. We do not recognize the professional fees as revenues, and we exclude the associated receivables from our balance sheet. During the six months ended December 31, 2001, we performed over 275,000 procedures at our fixed-site centers. We do not engage in the practice of medicine. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We have approximately 40 exclusive contracts with hospitals for our fixed-site services. Our contracts with hospitals for fixed-site services are generally five to 15 years in length. We have over 850 contracts with managed care organizations at our fixed-site centers. These contracts generally have one-year terms which automatically renew for one-year periods and are primarily on a discounted fee-for-service basis. We have more than doubled our number of managed care contracts since the fiscal year ended June 30, 1997. In addition to our independent facilities, we co-source operations with hospitals through strategic partnerships, often in the form of joint ventures. Under these arrangements, the hospital outsources its radiology function (primarily MRI) to us and we then install the appropriate imaging equipment on the hospital campus. The co-source product is attractive to hospitals who cannot afford the significant capital investment associated with MRI systems or lack patient volume to utilize these systems in a cost-effective manner but want to maintain some control over the MRI operation as well as a residual equity interest. 60 These co-source arrangements provide additional benefits in that they (1) permit hospitals to take advantage of recent federal healthcare regulatory changes that favor the outsourcing of radiology services to facilities that are jointly owned with and managed by third parties and (2) obtain, for our company, a motivated partner capable of generating significant scan volumes through the fixed-site centers. A further benefit to us is that we charge the joint venture a management and billing fee for supporting the day-to-day operations of the jointly owned and managed facility. COMPETITIVE STRENGTHS We believe we are well-positioned to capitalize on the favorable trends in the diagnostic imaging industry. We attribute our leading market position to the following strengths: COMPREHENSIVE OUTSOURCED IMAGING SOLUTIONS. Unlike most of our competitors, we operate integrated, regional networks comprised of both mobile facilities and fixed-site imaging centers. Through these networks, we believe we have a unique ability to offer healthcare providers a broad range of outsourcing solutions to meet their diverse and developing imaging needs, whether through mobile MRI, MRI-only or multi-modality fixed-site centers or joint venture facilities. In addition to providing these customers with imaging equipment and technical expertise, we can tailor solutions, based on customers' needs, to include day-to-day management, marketing support, billing and collection assistance, as well as site design and development. STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. We have developed a substantial presence in our targeted markets by forming regional networks of imaging facilities that emphasize quality of care, produce cost-effective diagnostic information and provide superior service to our customers. Clustering our facilities in regional networks enables us to: - offer a broad range of imaging services; - provide access to convenient locations and greater scheduling flexibility; - maximize our equipment utilization; - leverage our marketing efforts; and - benefit from economies of scale in purchasing, negotiating payor contracts and reducing overhead through the centralization of certain administrative functions. WELL ESTABLISHED RELATIONSHIPS WITH HOSPITAL AND MANAGED CARE CUSTOMERS. Our hospital and managed care customers accounted for approximately 50% and 33%, respectively, of total revenues for the fiscal year ended June 30, 2001. Our 60-member sales force focuses its marketing efforts on maintaining and expanding our relationships with hospital and managed care customers. Hospitals. We have approximately 240 exclusive contracts with hospitals, including 200 for mobile facility services and 40 for fixed-site services. - Our mobile facilities typically operate under contracts with average terms of three to five years with an overall renewal rate of approximately 85% since July 2000. Our mobile facilities operate under a wholesale model in which we provide a specified schedule of services and bill the hospital directly, typically on a fee-per-scan basis. Our mobile facilities are rotated among multiple hospitals in a manner intended to optimize equipment utilization. - Our contracts with hospitals for fixed-site services generally have terms of five to 15 years. We primarily operate our fixed-site centers under a retail model in which we bill our payor customers and patients directly on a fee-for-service basis. As one of the largest networks of hospital outsourced radiology services, we believe we are a preferred joint venture partner for hospitals and are uniquely positioned to convert mobile customers into long-term fixed-site center relationships as these customers' scan volumes increase and it becomes more economical 61 for them to establish a fixed-site center. These conversions also decrease the risk associated with mobile contract renewal. To date, we have completed 19 mobile to fixed-site conversions. Managed Care Organizations. Through our regional networks, we offer managed care organizations "one-stop shopping," which includes centralized scheduling, single invoices, multiple locations and quality assurance. Since the fiscal year ended June 30, 1997, we have more than doubled the number of our managed care contracts, and we currently have over 850 contracts at our fixed-site centers. Due to our extensive relationships with managed care payors, we are able to provide services for a large base of referring physicians and as a result, increase scan volumes at our centers. TECHNOLOGICALLY ADVANCED MRI SYSTEMS. We operate our mobile facilities and fixed-site centers with state-of-the-art equipment that allows us to perform the variety, quality and volume of scans required by our customers. Of our 130 conventional MRI systems, 72% have a magnet field strength of 1.5 Tesla, which is the industry's highest commercial standard, and 96% have a magnet field strength of 1.0 Tesla or greater. We maintain our imaging systems with software enhancements and upgrades to increase capacity and to perform new applications, such as stroke and cardiac evaluation and cancer detection. The average age of our MRI equipment is 3.1 years with an estimated useful life of 10 years. EXPERIENCED MANAGEMENT TEAM. We have a highly experienced senior management team with an average of 17 years of experience in the healthcare services industry. Management has demonstrated its ability to generate significant growth through a combination of same-store growth, developing new mobile customers and routes, establishing fixed-site centers and successfully integrating 12 acquisitions since the fiscal year ended June 30, 1996. From the fiscal year ended June 30, 1997 to the fiscal year ended June 30, 2001, revenues increased from $92.3 million to $211.5 million, reflecting a 23.0% CAGR, while EBITDA increased from $15.5 million to $81.0 million, a 51.1% CAGR. BUSINESS STRATEGY Our objective is to be the leading provider of outsourced diagnostic imaging services in our target markets by further developing and expanding our regional networks. We plan to realize our objective by: MAXIMIZING UTILIZATION OF OUR EXISTING FACILITIES. We intend to expand in our regional markets by leveraging our existing facility network and customer relationships, while reducing costs through economies of scale and ongoing cost reduction measures. To this end, we intend to: - broaden our physician referral base and generate new sources of revenues through selective marketing activities, such as educating physicians on new applications for diagnostic imaging equipment, providing technology training for physicians and their staffs, and other customer service programs; - focus our marketing efforts on attracting additional managed care customers; - add new modalities such as CT, ultrasound and bone densitometry to increase scan volume and economies of scale by leveraging our existing fixed-site infrastructure; - expand MRI applications to increase scan volume; - continue to focus on our unique ability to convert developing mobile operations into fixed-site centers; and - maximize cost efficiencies through increased purchasing power and the continual reduction of overhead expenses. DEVELOPING DE NOVO OPPORTUNITIES. We will continue to pursue growth opportunities within our existing regional networks by opening new fixed-site centers and adding new mobile routes where attractive returns on investment can be achieved and sustained. We will also selectively implement additional mobile PET systems and routes. Mobile PET presents an attractive growth opportunity due to increased physician acceptance of PET as a diagnostic tool, and recently expanded Medicare coverage of PET procedures. In addition, we will continue to pursue partnerships with hospitals because we believe they have the potential 62 to provide us with a steady source of scan volume. We believe this will be an area for additional growth for us because we expect that hospitals may respond to recent federal healthcare regulatory changes by outsourcing radiology services to facilities that are jointly owned with and managed by third parties. PURSUING STRATEGIC ACQUISITIONS. Acquisitions have been an integral part of our strategy. We expect to selectively acquire imaging centers to augment our penetration in existing regional markets and increase economies of scale. We may also enter new markets where we believe we can establish a strong regional network. Diagnostic imaging remains a highly fragmented industry as multi-facility chains account for less than half of the total imaging centers. We believe we are well positioned to capitalize on the ongoing consolidation of the imaging industry. Our management team is experienced at successfully identifying, negotiating, completing and integrating acquisitions. Since the fiscal year ended June 30, 1996, we have completed 12 acquisitions comprising over 45 imaging facilities. CUSTOMERS AND CONTRACTS Our revenues are primarily generated from contract services and patient services. During the fiscal year ended June 30, 2001, approximately 49% of our revenues were generated from contract services, which we generally refer to as our mobile business, and approximately 51% were generated from patient services, which we generally refer to as our fixed-site business. The following illustrates our payor mix based on revenues for the fiscal year ended June 30, 2001:
PERCENT OF TOTAL PAYOR REVENUES - ----- ---------------- Hospital(1)................................................. 50% Managed Care and Insurance.................................. 33% Medicare/Medicaid........................................... 12% Workers' Compensation....................................... 3% Other....................................................... 2%
- --------------- (1) No single hospital accounts for more than 2% of our total revenues. Contract services revenues are generally earned from services billed to a hospital or other healthcare provider, which include fee-for-service arrangements in which revenues are based upon a contractual rate per procedure; equipment rental in which revenues are generally based upon a fixed monthly rental; and management fees. Contract services revenues are primarily earned through mobile facilities and are generally paid pursuant to hospital contracts with a life span of up to five years. 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. Patient services revenues are earned from services billed directly to patients or third-party payors (generally managed care organizations, Medicare, Medicaid, commercial insurance carriers and workers' compensation funds) on a fee-for-service basis and are primarily earned through fixed-site centers. Our fixed-site center operations are principally dependent on our ability (either directly or indirectly through our hospital customers) to attract referrals from physicians and other healthcare providers representing a variety of specialties. Our 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). We currently have in excess of 850 contracts with managed care organizations for diagnostic imaging services provided at our fixed-site centers 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 our business, financial condition and results of operations. 63 SALES AND MARKETING We employ 60 sales representatives serving approximately 240 hospitals and over 850 contracts with managed care organizations. We selectively invest in marketing activities to obtain new sources of revenues, expand business relationships, grow revenues at existing facilities, and maintain present business alliances and contractual relationships. Marketing activities for the fixed-site business include educating physicians on new applications, uses of the technology and customer service programs. In addition, our sales force leverages our regional market concentration to develop contractual relationships with managed care payors to increase patient volume. Marketing activities for our mobile business include direct marketing to hospitals and developing leads through current customers, equipment manufacturers, and other vendors. In addition, marketing activities for the mobile business include contacting referring physicians associated with hospital customers and educating physicians. DIAGNOSTIC IMAGING AND OTHER EQUIPMENT We own or lease 192 diagnostic imaging and treatment systems, of which 157 are MRI systems, 20 are CT systems, eight are PET systems, four are lithotripters, two are radiation oncology systems and one is a Gamma Knife. We own 148 of our imaging and treatment systems and have leases for the remaining 44 systems, of which 32 are operating and 12 are capital leases. Magnet strengths are measured in Tesla, and MRI systems typically use magnets with strengths ranging from 0.2 to 1.5 Tesla. The 1.0 and 1.5 Tesla strengths are generally considered optimal because they are strong enough to produce relatively fast scans but are not so strong as to create discomfort for most patients. We are in the process of upgrading or replacing our remaining conventional MRI systems from magnet strengths of less than 1.0 Tesla to magnet strengths of at least 1.0 Tesla. Our master lease agreement with GE Medical Systems (GEMS) includes a variable lease arrangement for four of our 32 leased imaging systems, which can significantly reduce our downside cash flow risk. Under our standard operating lease agreement with GEMS, we pay approximately $29,000 per month to lease each system. Under the variable rate election, we 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. Our variable lease arrangement with GEMS covers most of our older systems, which we either have upgraded or expect to replace within the next 18 to 24 months. As of March 1, 2002, we had elected the variable lease option with respect to three of the four systems in the variable rate pool. The option to elect the variable lease structure in the future with respect to additional systems provides us with downside cash flow protection in the event that any particular MRI system experiences low utilization. We continue to evaluate the mix of our diagnostic imaging equipment in response to changes in technology and to the surplus capacity in the marketplace. The overall technological competitiveness of our 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, Siemens Medical Systems and Phillips Medical Systems. We maintain good working relationships with many of the major manufacturers to better ensure an adequacy of supply as well as access to those types of diagnostic imaging systems which appear most appropriate for the specific imaging facility to be established. COMPETITION The healthcare industry in general, and the market for diagnostic imaging services in particular, is highly competitive and fragmented, with only a few national providers. We compete principally on the basis of our reputation for productive and cost-effective quality services. Our 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. We will 64 continue to encounter substantial competition from hospitals and independent organizations, including Alliance Imaging, Inc., Shared Medical Services, Medical Resources, Inc., Radiologix, Inc., U.S. Diagnostic Inc. and Syncor International Corporation. Some of our direct competitors that provide contract diagnostic imaging services may have access to greater financial resources than we do. 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, assume the associated financial risk, employ the necessary technologists and satisfy applicable certificate of need (CON) and licensure requirements, if any. In addition, some physician practices that refrained from establishing diagnostic imaging capability may decide to do so, in light of the flexibility provided by the final physician self-referral regulations adopted in January 2001 and the increased availability of lower-cost specialty MRI scanners. Historically, smaller hospitals have been reluctant to purchase imaging and treatment equipment. PROPERTIES We lease approximately 20,000 square feet of office space for our executive offices in Newport Beach, California, under a lease expiring on December 14, 2002; approximately 13,000 square feet of office space for part of our Eastern Division offices in Farmington, Connecticut, under a lease expiring on April 15, 2004; approximately 4,400 square feet of office space for a billing office in Merrillville, Indiana, under a lease expiring on August 31, 2003; approximately 5,400 square feet of office space for a billing office in Santa Ana, California, under a lease expiring on October 30, 2004, and approximately 3,000 square feet of office space for a billing office in Scarborough, Maine, under a lease expiring on June 30, 2006. As of June 30, 2001, we owned 14 and leased 38 properties used as office, imaging or treatment facilities. We do not own the land underlying 11 of the 14 facilities that we own. In each case, the land is leased under a long-term lease. In addition, we own 77,690 square feet of land in Fort Worth, Texas, upon which we intended to build a multi-modality fixed-site center to which certain existing operations in Fort Worth would be relocated; however, we are currently evaluating our options. We believe our existing facilities are adequate for our reasonably foreseeable needs. In addition, the following table set forth the other principal properties used as imaging or treatment facilities by us as of December 31, 2001:
APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ---------------- ----------- -------- OWNED: Western Division Northern Indiana Oncology Center....................... 800 Valparaiso, Indiana Granada Hills Open MRI Center(1)....................... 1,100 Granada Hills, California Daniel Freeman Open MRI Center(1)...................... 1,400 Marina Del Rey, California Berwyn Magnetic Resonance Center(1).................... 3,800 Berwyn, Illinois Garfield Imaging Center(1)............................. 5,000 Monterey Park, California LAC/USC Imaging Sciences Center(1)..................... 8,500 Los Angeles, California Maxum Diagnostic Center -- Eighth Avenue............... 10,000 Ft. Worth, Texas Harbor/UCLA Diagnostic Imaging Center(1)............... 15,000 Torrance, California Diagnostic Outpatient Center(1)........................ 17,800 Hobart, Indiana Eastern Division Sun Coast Imaging Center(1)............................ 1,000 Largo, Florida Thorn Run MRI(1)....................................... 1,300 Coraopolis, Pennsylvania Greater Waterbury Imaging Center(1).................... 3,700 Waterbury, Connecticut Wilkes-Barre Imaging Center(1)......................... 8,200 Wilkes-Barre, Pennsylvania Chattanooga Outpatient Center.......................... 14,700 Chattanooga, Tennessee
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APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ---------------- ----------- -------- LEASED: Western Division InSight Diagnostic Imaging Center -- N. 18th Place..... 1,800 Phoenix, Arizona Redwood City MRI....................................... 2,900 Redwood City, California InSight Diagnostic Imaging Center...................... 3,100 Tempe, Arizona Open MRI of Orange County.............................. 4,000 Santa Ana, California Open MRI of Pleasanton................................. 4,400 Pleasanton, California InSight Diagnostic Imaging Center -- 15th Avenue....... 4,600 Phoenix, Arizona Washington Magnetic Resonance Center................... 5,000 Whittier, California InSight Diagnostic Imaging Center...................... 5,800 Peoria, Arizona Parkway Imaging Center................................. 5,800 Henderson, Nevada Maxum Diagnostic Center -- Preston Road................ 5,800 Dallas/Plano, Texas Open MRI of Hayward.................................... 6,500 Hayward, California St. John's Regional Imaging Center..................... 10,000 Oxnard, California InSight Diagnostic Imaging Center -- E. Thomas Road.... 10,600 Phoenix, Arizona Maxum Diagnostic Center -- Forest Lane................. 18,500 Dallas, Texas InSight Mountain Diagnostics........................... 20,000 Las Vegas, Nevada Eastern Division Lockport MRI -- Maple Road............................. 500 Williamsville, New York Metabolic Imaging of Kentucky.......................... 1,800 Louisville, Kentucky Open MRI of Indianapolis............................... 1,900 Indianapolis, Indiana Lockport MRI -- River Road............................. 2,200 N. Tonawanda, New York Lockport MRI........................................... 2,400 Lockport, New York Open MRI of Southern Regional.......................... 2,400 Clarksville, Indiana Whitney Imaging Center................................. 2,900 Hamden, Connecticut Lockport MRI -- Sheridan Drive......................... 3,800 Tonawanda, New York Dublin Imaging Center.................................. 3,900 Dublin, Ohio Lockport MRI -- Youngs Road............................ 4,000 Williamsville, New York Marshwood Imaging Center............................... 5,000 Scarborough, Maine Lockport MRI -- Transit Road........................... 5,200 East Amherst, New York Imaging Center at Murfreesboro......................... 6,000 Murfreesboro, Tennessee Broad Street Imaging Center............................ 6,600 Columbus, Ohio Ocean Medical Imaging Center........................... 8,500 Tom's River, New Jersey Central Maine Imaging Center........................... 8,700 Lewiston, Maine
- --------------- (1) We own the building and hold the related land under a long-term lease. INFORMATION SYSTEMS Our internal information technology systems allow us to manage our operations, accounting and finance, human resources, payroll, document imaging, and data warehousing. Our primary operating system is InSight Radiological Information System (IRIS), our proprietary information system. Developed between 1994 and 1999, IRIS provides front-office support for scheduling and administration of imaging procedures and back 66 office support for billing and collections. Additional functionality includes workflow, transcription, and image management. As a result of the acquisition of imaging centers that employed other applications, we also utilize several third-party applications. At present, approximately 85% of our revenues are derived from centers that use IRIS with the remainder using third-party applications. We expect to convert the remainder of these sites to IRIS over the next 18 months. We believe that our information technology systems infrastructure has adequate capacity for our currently projected growth. In connection with the implementation of the electronic transaction, security and privacy standards mandated by HIPAA, we project spending approximately $1.5 million to make necessary software upgrades to IRIS to make the system compliant with the HIPAA transaction standards by late 2002 and with the privacy standards by 2003. See "Reimbursement of Health Care Costs -- Health Insurance Portability and Accountability Act." REIMBURSEMENT OF HEALTHCARE COSTS Medicare: Beginning in late 1983, prospective payment regulations for hospital inpatient services 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 Department of Health and Human Services (HHS) and generally accept said payment with nominal deductible and 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. On April 7, 2000, CMS published its final rules concerning the new hospital outpatient prospective payment system for most outpatient services in Medicare-participating hospitals. Effective August 1, 2000, Medicare pays 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 CMS. 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 appeared to have a severe adverse economic effect on hospitals, Congress enacted additional legislation in the BBA to ease such effect 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 payment corridors. As these transitional payments phase out or expire, some of our hospital customers may decide to discontinue or restructure their arrangements with providers of diagnostic imaging services, which may have a material adverse effect on our operations. In addition, the BIPA included certain provisions requiring CMS to revise the APCs to separate contrast-enhanced diagnostic imaging procedures from those that are not contrast-enhanced. Accordingly, payment for unenhanced MRI and other diagnostic procedures have been reduced as a result of implementation of these provisions, effective January 1, 2002; however the APC rates for certain contrast-enhanced diagnostic procedures have increased. The APC rates that became effective on January 1, 2002, and revised effective April 1, 2002, have also reduced Medicare payment for PET services provided to hospital outpatients. As a result of the implementation of the new OPPS, we believe that our hospital customers may seek reductions in contractual rates to the extent the hospital believes it will pay more to us 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 our contract services revenues; however, the reduction in contractual rates for several customers or loss of several contracts could have a material impact on our business, financial condition and results of operations. On the other hand, we believe that the impact of the new OPPS on hospital payments for diagnostic imaging services, especially for MRI services, may cause hospitals to consider restructuring their MRI 67 facilities as freestanding centers which are unaffected by the new OPPS. This may provide us with additional opportunities for our radiology co-source product which involves the joint ownership and management of MRI facilities with hospitals. On the other hand, recent reductions in Medicare payment for MRI services provided in freestanding centers will reduce the differential between the amounts payable by Medicare for services provided in freestanding and hospital-based centers. Given the infancy and complexity of the new OPPS and the reduction in the differential between hospital and freestanding payment rates, it is difficult to determine to what extent hospitals will attempt to renegotiate existing contractual arrangements. Multi-modality and certain fixed-site centers which are freestanding are not directly affected by OPPS, which applies only to hospital-based facilities. Congressional and regulatory actions reflect industry-wide cost-containment pressures that we believe will affect all healthcare providers for the foreseeable future. A recent initiative by CMS to impose a 24% reduction in Medicare payment for the technical component (i.e. the facilities, equipment, overhead and non-physician staff) of diagnostic imaging services provided in non-hospital settings was indefinitely postponed due to flaws in CMS' cost study methodology. CMS has indicated that it will continue to evaluate diagnostic imaging technical component reimbursement. Effective January 1, 2002, payment for these services has been reduced by approximately 5.4% as part of an across-the-board reduction affecting all services reimbursed under the Medicare Physician Fee Schedule. In addition, the Medicare allowances that became effective on January 1, 2002 reflect an additional 2% to 3% reduction for the technical component of all services, including the MRI and other diagnostic imaging services provided by us. We cannot assure you that Medicare payment for diagnostic imaging services will not be further reduced in the future, which would have a material adverse effect on our financial condition and results of operations. In order for our hospital customers to receive payment from Medicare with respect to our mobile services, our services must be furnished in a "provider-based" department or be a covered service furnished "under arrangements." On April 7, 2000, Medicare published new rules establishing financial, technical and administrative criteria for being a "provider-based" department, as well as new requirements for management contracts for "provider-based" departments. Our services to hospitals possibly may not meet Medicare's new standards for being a "provider-based" service, although that is uncertain because at this time very little guidance exists regarding the proper interpretation of this new Medicare regulation. If our services to hospital customers are not furnished in a "provider-based" setting, the services would not be covered by Medicare unless they are found to be a service furnished "under arrangements" to a hospital. The extent to which "under arrangements" services may be covered by Medicare when they do not meet the "provider-based" standards is unclear. In the BIPA, Congress "grandfathered" until October 1, 2002 all sites that were paid as provider-based sites as of October 1, 2000. The provision permits such sites to continue to be treated as "provider-based" during the two-year grandfather period and not be subject to penalties for past non-compliance as long as they either have a prior written determination of "provider-based" status, or apply for "provider-based" status before October 1, 2001. As the Medicare rules are clarified, it may be necessary for us to modify the contracts we have with hospital customers or to take other steps that may affect our revenues, our cost for our mobile business or the manner in which we furnish wholesale services to hospital customers. Medicaid: The Medicaid program is a jointly-funded federal and state program providing coverage for low-income persons. In addition to federally-mandated basic services, the services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program; however, an increasing number of states have established or are establishing payment methodologies intended to provide healthcare services to Medicaid patients through managed care arrangements. In addition, in a number of states, state Medicaid agencies have refused to authorize entities organized as Independent Diagnostic Treatment Facilities (IDTFs) (such as most of our fixed-site centers) to participate in the Medicaid program. Because the volume of services that we provide to Medicaid patients is limited, however, modifications of Medicaid reimbursement methodologies are not expected to have a material adverse impact on our business, financial condition and results of operations. 68 Managed Care: Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) and other managed care organizations attempt to control the cost of healthcare services, including, imposing lower payment rates, limiting services or mandating less costly treatment alternatives. 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 our regional networks could have a negative impact on utilization of our services in certain markets and/or affect the revenue per procedure which we 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 competition among healthcare providers for contracts with all types of managed care organizations has resulted in an average length of term of such contracts of between one and three years. See "-- Customers and Contracts." Some states have adopted expanded laws or regulations restricting the assumption of financial risk by healthcare providers contracting with health plans. While we are not presently subject to such regulation, we or our customers may in the future be restricted in our ability to assume financial risk, or may be subjected to reporting requirements if we do so. Any such restrictions could negatively affect our contracting relationships with health plans. Private Insurance: Private health insurance programs generally have authorized the payment for our services on satisfactory terms. However, if Medicare reimbursement is reduced, we believe that private health insurance programs will also reduce reimbursement in response to reductions in government reimbursement, which could have an adverse impact on our business, financial condition and results of operations. GOVERNMENT REGULATION The healthcare 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 our permissible activities, 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 we currently operate regulate various aspects of our business. Failure to comply with these laws could adversely affect our ability to receive reimbursement for our services and subject us and our officers and agents to civil and criminal penalties. Federal False Claims Act: There has been an increase in qui tam actions brought under the federal False Claims Act and, in particular, under the False Claims Act's "whistleblower" provisions. Those provisions allow a private individual to bring actions in the name of the government alleging that the defendant has made false claims for payment from federal funds. After the individual has initiated the lawsuit, the government must decide whether to intervene in the lawsuit and to become the primary prosecutor. Until then the lawsuit is kept secret. If the government declines to join the lawsuit, the individual may choose to pursue the case alone, in which case the individual's counsel will have primary control over the prosecution, although the government must be kept apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government intervenes in the case, it will receive the majority of any recovery. If the litigation is successful, the individual is entitled to no less than 15%, but no more than 30%, of whatever amount the government recovers. The percentage of the individual's recovery varies, depending on whether the government intervened in the case and other factors. Recently, the number of suits brought against healthcare providers by government regulators and private individuals has increased dramatically. In addition, various states are considering or have enacted laws modeled after the federal False Claims Act, penalizing false claims against state funds. If a whistleblower action is brought against us, even if it is dismissed with no judgment or settlement, we may incur substantial legal fees and other costs relating to an investigation. Actions brought under the False Claims Act may result in significant fines and legal fees and distract our management's attention, which would adversely affect our business, financial condition and results of operations. 69 When an entity is determined to have violated the federal False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim, as well as the government's attorneys fees. Liability arises when an entity knowingly submits, or causes someone else to submit, a false claim for reimbursement to the federal government or submits a false claim with reckless disregard for, or in deliberate ignorance of, its truth or falsity. Simple negligence should not give rise to liability. Examples of the other actions which may lead to liability under the Act: - Failure to comply with the many technical billing requirements applicable to our Medicare and Medicaid business. - Failure to comply with Medicare requirements concerning the circumstances in which a hospital, rather than we, must bill Medicare for diagnostic imaging services we provide to outpatients treated by the hospital. - Failure of our hospital customers to accurately identify and report our reimbursable and allowable services to Medicare. - Failure to comply with the prohibition against billing for services ordered or supervised by a physician who is excluded from any federal healthcare programs, or the prohibition against employing or contracting with any person or entity excluded from any federal healthcare programs. - Failure to comply with the Medicare physician supervision requirements for the services we provide, or the Medicare documentation requirements concerning physician supervision. - The past conduct of the businesses we have acquired. We strive to ensure that we meet applicable billing requirements. However, the costs of defending claims under the False Claims Act, as well as sanctions imposed under the Act, could significantly affect our business, financial condition and results of operations. Anti-kickback Statutes: We are subject to federal and state laws which govern financial and other arrangements between healthcare providers. These include the federal anti-kickback statute which, among other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and certain other governmental health programs. Violation of the anti-kickback statute may result in civil or criminal penalties and exclusion from the Medicare, Medicaid and other federal healthcare programs. In addition, it is possible that private parties may file qui tam actions based on claims resulting from relationships that violate this statute, seeking significant financial rewards. Many states have enacted similar statutes, which are not limited to items and services paid for under Medicare or a federally funded healthcare program. In recent years, there has been increasing scrutiny by law enforcement authorities, HHS, the courts and Congress of financial arrangements between healthcare providers and potential sources of referrals to ensure that such arrangements do not violate the anti-kickback provisions. HHS and the federal courts interpret the anti-kickback statutes broadly to apply to a wide range of financial incentives, including, under certain circumstances, distributions of partnership and corporate profits to investors who refer federal healthcare 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, even if only in part, to provide direct or indirect remuneration for patient referrals or similar opportunities to furnish reimbursable items or services. HHS has issued "safe harbor" regulations that set forth certain provisions which, if met, will assure that healthcare 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 statutes. The safe harbors are narrowly drawn and some of our relationships may not qualify for any "safe harbor"; however, failure to comply with a "safe harbor" does not create a presumption of liability. We believe that our operations materially comply with the anti-kickback statutes; however, because these provisions are interpreted broadly by law enforcement authorities, we cannot assure you that law enforcement officials or others will not challenge our operations under these statutes. 70 Health Insurance Portability and Accountability Act: In 1996, Congress passed HIPAA, designed to guarantee the availability and renewability of health insurance coverage for certain employees and individuals, while also limiting the use of pre-existing condition restrictions. HIPAA also made substantial amendments to federal healthcare fraud and abuse laws, including: - the establishment of fraud and abuse control programs to coordinate and fund the investigation and prosecution of healthcare fraud and abuse; - the establishment of a Medicare integrity program, including medical, utilization and fraud review of Medicare providers; - the extension of existing Medicare-Medicaid anti-fraud and abuse provisions to all federal healthcare programs; - the provision of enhanced civil penalties; and - the creation of new federal crimes of healthcare fraud and making false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services, including those provided by non-government payors. A violation of this statute is a felony and may result in fines or imprisonment. HIPAA requires health care providers to maintain the privacy and security of health information. It will also require us to follow federal standards for electronic transactions with health plans and for protecting the privacy of individually identifiable health information and the security standards for all electronic health information. The government recently published regulations to implement the privacy standards under the Act. We are beginning to address compliance with the Act and applicable regulations. We project spending approximately $1.5 million for necessary software upgrades to make our proprietary computer operating system, IRIS, fully compliant with the HIPPA transactions standards by late 2002 and with the privacy standards by 2003. A violation of the Act's health fraud, privacy or security provisions may result in criminal and civil penalties, which may adversely affect our business, financial condition and results of operations. 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 from federal health programs for referrals for "designated health services" by physicians or their family members to certain entities with which they have a financial relationship (subject to certain exceptions), and for claims for payments by entities receiving such referrals. A private party may also bring a qui tam action in federal court on the basis of a Stark Law violation. "Designated health services" include, among other things, radiology services, including MRI, CT and ultrasound, radiation therapy, and hospital inpatient and outpatient services. The Stark Law does not require any fraudulent intent. Providers furnishing services pursuant to a prohibited referral may not present a claim for the services and if payments are made they may be recouped. The law applies directly to services reimbursable by Medicare and may apply to services reimburseable under Medicaid, depending on state law. Final regulations partially implementing the Stark Law were issued in January 2001 and will become effective in April 2002. It is not clear when further regulations will be published, but the CMS has taken the position that the Stark Law is self-effectuating and does not require implementing regulations. In addition, several states in which we operate have enacted or are considering legislation that prohibits "self-referral" arrangements or requires physicians or other healthcare providers to disclose to their patients any financial interest they may have with a healthcare 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 we believe 71 our operations materially comply with these federal and state physician self-referral laws, we cannot assure you that Stark II or other physician self-referral regulations will not be interpreted or applied in a manner that would have a material adverse effect on our business, financial condition and results of operations. FDA: The U.S. Food and Drug Administration (FDA) has issued the requisite premarket approval for all of our MRI, CT, PET, lithotripsy and Gamma Knife systems. We do 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 MQSA, all mammography facilities must have a certificate issued by the FDA. In order to obtain a certificate, all mammography facilities are required to be accredited by an approved non-profit organization or state agency or other agency designated by the FDA. 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 our facilities which provide mammography services are currently accredited by the Mammography Accreditation Program of the American College of Radiology and we anticipate 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 as well as screening mammography. Radiologist and Facility Licensing: The radiologists with whom we may enter into agreements to provide professional services are subject to licensing and related regulations by the states, including registrations to use radioactive materials. As a result, we require our radiologists to have and maintain appropriate licensure and registrations. In addition, some states also impose licensing or other requirements on us at our facilities and other states may impose similar requirements in the future. Local authorities may also require us to obtain various licenses, permits and approvals. We believe that we have obtained all required licenses and permits; however, we cannot assure you that additional laws and state licensure requirements governing our facilities' operations will not be enacted. Liability Insurance: The hospitals and physicians who use our diagnostic imaging systems are involved in the delivery of healthcare services to the public and, therefore, are exposed to the risk of liability claims. Our position is that we do not engage in the practice of medicine. We provide only the equipment and technical components of diagnostic imaging, including certain limited nursing services, and we have not experienced any material losses due to claims for malpractice. Nevertheless, claims for malpractice have been asserted against us in the past and any future claims, if successful, could entail significant defense costs and could result in substantial damage awards to the claimants, which may exceed the limits of any applicable insurance coverage. We maintain professional liability insurance in amounts we believe are adequate for our business of providing diagnostic imaging, treatment and management services. In addition, the radiologists or other healthcare professionals with whom we contract are required by such contracts to carry adequate medical malpractice insurance. Successful malpractice claims asserted against us, to the extent not covered by our liability insurance, could have a material adverse effect on our business, financial condition and results of operations. Independent Diagnostic Treatment Facilities: Under prior 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, we preferred, to the extent possible, to operate imaging centers for Medicare purposes as IPLs. We believed that the designation of our imaging centers as IPLs gave us greater operational control than we would have had if our imaging centers were operated under the medical group model, where we would function as a "manager." 72 Under the IDTF regulations, imaging centers have the option to participate in the Medicare program as either IDTFs or medical groups. The IDTF regulations include more specific operational requirements than were previously required for IPLs. We either have converted or have submitted applications to convert all of our fixed-site 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 CMS, but it is probable that CMS will exercise increased oversight of IDTFs compared to IPLs, which could have a material adverse effect on our business, financial condition and results of operations. Certificates of Need: Some states require hospitals and certain other healthcare facilities and providers to obtain a CON or similar regulatory approval prior to the commencement of certain healthcare operations or services, the incurring of certain capital expenditures and/or the acquisition of major medical equipment including MRI, PET and Gamma Knife systems. CON regulations may limit or preclude us from providing diagnostic imaging services or systems in certain states. We believe that we have complied or will comply with applicable CON requirements in those states where we operate. Nevertheless, a significant increase in the number of states regulating our business within the CON or state licensure framework could adversely affect our business, financial condition and results of operations. Conversely, repeal of existing CON regulations in jurisdictions where we have obtained or operate under a CON could also adversely affect our business, financial condition and results of operations, since CON regulation effectively functions as a barrier to entry. This is an area of continuing legislative activity, and we cannot assure you that CON and licensing statutes will not be modified in the future in a manner that may have a material adverse effect on our business and operations. COMPLIANCE PROGRAM We have voluntarily implemented a program to monitor compliance with federal and state laws and regulations applicable to healthcare entities. We have appointed a compliance officer who is charged with implementing and supervising our compliance program, which includes a code of ethical conduct for our employees and affiliates and a process for reporting regulatory or ethical concerns to our compliance officer, including a toll-free telephone hotline. We believe that our compliance program meets the relevant standards provided by the Office of Inspector General of the HHS. An important part of our compliance program consists of conducting periodic reviews of various aspects of our operations. Our compliance program also contemplates mandatory education programs designed to familiarize our employees with the regulatory requirements and specific elements of our compliance program. EMPLOYEES As of February 28, 2002, we had approximately 1,200 full-time, 70 part-time and 340 per diem employees. None of our employees are covered by a collective bargaining agreement. Management believes its employee relations to be satisfactory. LEGAL PROCEEDINGS We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business and have insurance policies covering such potential insurable losses where such coverage is cost-effective. We believe that the outcome of any such lawsuits will not have a material adverse impact on our business, financial condition and results of operations. COMPANY HISTORY We were formed in June 1996 as a result of the merger of American Health Services Corp. and Maxum Health Corp., two publicly held providers of diagnostic imaging services. The merger was consummated in order to achieve cost savings, enhance marketing capabilities, increase market presence and financial resources, and to take advantage of positive consolidating trends in the diagnostic imaging industry. 73 In October 1997, we consummated a recapitalization pursuant to which (a) certain investors affiliated with TC Group, LLC and its affiliates (Carlyle), a private merchant bank headquartered in Washington, D.C., made a cash investment of $25 million in InSight and received convertible preferred stock and warrants and (b) General Electric Company surrendered its rights previously granted in connection with the merger and debt restructuring agreement to receive supplemental service fee payments equal to 14% of pretax income, plus existing preferred stock, in exchange for convertible preferred stock and warrants. These securities gave Carlyle and General Electric beneficial ownership of more than a majority of our common stock, all of which were purchased in the acquisition. On October 17, 2001, as a result of the acquisition, InSight became a wholly-owned subsidiary of InSight Holdings. See "The Acquisition and Related Financing Transactions." 74 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS We are a wholly-owned subsidiary of InSight Holdings, a corporation owned by J.W. Childs Equity Partners II, Halifax Capital Partners and certain of their affiliates. The following table sets forth the name, age and position of our directors and executive officers as of February 28, 2002.
NAME AGE POSITION - ---- --- -------- Steven T. Plochocki................... 50 President, Chief Executive Officer and Director Patricia R. Blank..................... 51 Executive Vice President and Chief Information Officer Michael A. Boylan..................... 45 Executive Vice President and Chief Development Officer Thomas V. Croal....................... 42 Executive Vice President and Chief Financial Officer Brian G. Drazba....................... 40 Senior Vice President, Finance and Corporate Controller Cecilia A. Guastaferro................ 41 Senior Vice President, Human Resources Marilyn U. MacNiven-Young............. 50 Executive Vice President, General Counsel and Secretary Michael S. Madler..................... 43 Executive Vice President and Chief Operating Officer Michael N. Cannizzaro................. 52 Director Kenneth M. Doyle...................... 36 Director David W. Dupree....................... 48 Director Steven G. Segal....................... 41 Director Mark J. Tricolli...................... 30 Director Edward D. Yun......................... 34 Director
Our directors are elected annually by, and serve at the discretion of, our stockholder. Our executive officers are elected annually by, and serve at the discretion of our board of directors. Steven T. Plochocki has been our President, Chief Executive Officer and a director since November 22, 1999. From January 1998 through November 19, 1999, Mr. Plochocki was President and Chief Executive Officer of Centratex Support Services, Inc., a support services company for the healthcare industry. Mr. Plochocki was President and Chief Operating Officer of Apria Healthcare Group Inc., a home healthcare company, from July 1995 through October 1997. Patricia R. Blank has been our Executive Vice President and Chief Information Officer since September 1, 1999. Prior to joining us, Ms. Blank was the principal of Blank & Company, a consulting firm specializing in healthcare consulting. From 1995 to 1998, Ms. Blank served as Executive Vice President and Chief Operating Officer of HealthHelp, Inc., a Houston, Texas-based radiology services organization managing radiology provider networks in multiple states. From 1988 to 1995, she was Corporate Director of radiology of FHP, a California insurance company. Michael A. Boylan has been our Executive Vice President and Chief Development Officer since February 7, 2002. He was the Executive Vice President, Operations, Eastern Division from July 1, 2000 to February 7, 2002. From April 1998 to July 1, 2000, he was Executive Vice President and Chief Development Officer. From February 1996 to April 1998, he was Senior Vice President-Operations. Mr. Boylan has served as Executive Vice President of Maxum Health Corp. (MHC) since March 1994. From 1992 to 1994, he served as a regional vice president of MHC's principal operating subsidiary, Maxum Health Services Corp. From 1991 to 1992, he served as an Executive Director of certain of MHC's operations. From 1986 to 1991, Mr. Boylan served in various capacities as an officer or employee, including President and Chief Operating Officer, with American Medical Imaging Corporation. 75 Thomas V. Croal has been our Executive Vice President and Chief Financial Officer since February 1996. From July 1998 to June 1999, Mr. Croal also served as Chief Operating Officer. Mr. Croal served as a director of American Health Services Corp. (AHS) from March 1991 until June 1996. He served as Vice President and Chief Financial Officer of AHS from April 1991. He was Controller of AHS from 1989 until April 1991. From 1981 to 1989, Mr. Croal was employed by Arthur Andersen & Co., an independent public accounting firm. Brian G. Drazba has been our Senior Vice President-Finance and Controller since July 1997. From March 1996 to July 1997, he served as Vice President-Finance. From June 1995, he served as Vice President-Finance of AHS. Mr. Drazba served as corporate controller for AHS from 1992 to 1995. From 1985 to 1992, Mr. Drazba was employed by Arthur Andersen & Co. Cecilia A. Guastaferro has been our Senior Vice President-Human Resources since July 1, 2000. From July 1997 to June 30, 2000, she was Vice President-Human Resources. Ms. Guastaferro served as Director of Human Resources of AHS from May 1994 through June 1996, when she became Director of Human Resources of InSight. Marilyn U. MacNiven-Young has been our Executive Vice President, General Counsel and Corporate Secretary since August 1998. From February 1996 through July 1998, she was an independent consultant to us. From September 1994 through June 1995, she was Senior Vice President and General Counsel of Abbey Healthcare Group, Inc., a home healthcare company. From 1991 through 1994, Ms. MacNiven- Young served as General Counsel of AHS. Michael S. Madler has been our Executive Vice President and Chief Operating Officer since February 7, 2002. He joined us as a Senior Vice President in October 1998 and served as such until June 8, 1999 when he was appointed Executive Vice President, Operations, Western Division. From 1993 through October 1998, Mr. Madler was Chief Operating Officer of Prime Medical Services, Inc. an Austin, Texas-based lithotripsy services management company. Michael N. Cannizzaro became a member of our board of directors upon consummation of the acquisition. He is an Operating Partner of J.W. Childs Associates, L.P. Prior to that, he was President and Chief Executive Officer of Beltone Electronics Corporation from 1998 to 2000. Prior to that, he was President of Caremark International's Prescription Service Division from 1994 to 1997; Vice President, Business Development of Caremark's Nephrology Service Division from April 1994 to September 1994; and President of Leica North America from 1993 to 1994. Prior to that, he held numerous positions in general management at Baxter Healthcare Corporation from 1976 to 1993, including the position of President of four different divisions. He is also a director of National Nephrology Associates, Inc. and Universal Hospital Services, Inc. Kenneth M. Doyle is a director and Vice President of InSight Holdings and became a member of our board of directors upon consummation of the acquisition. Mr. Doyle is a principal of The Halifax Group. Mr. Doyle joined The Halifax Group in January 2000. Prior to joining The Halifax Group, Mr. Doyle was an Industry Leader and Vice President at GE Equity, the private equity subsidiary of GE Capital. Prior to joining GE Equity, Mr. Doyle spent four years in investment banking as a Senior Associate for the Telecommunications Corporate Finance Group at Merrill Lynch and as an Associate with Chase Manhattan Bank in the Media and Telecommunications Group. Mr. Doyle also spent three years with Ernst & Young in the Entrepreneurial Services Group. Mr. Doyle currently serves on the board of directors of National Packaging Solutions Group, Inc. David W. Dupree is a director and Vice President of InSight Holdings and became a member of our board of directors upon consummation of the acquisition. Mr. Dupree is a Managing Director of The Halifax Group which he founded in January 1999. Prior to joining Halifax, Mr. Dupree was a Managing Director and Partner with The Carlyle Group, a global investment firm located in Washington, D.C., where he was primarily responsible for investments in healthcare and related sectors. Prior to joining The Carlyle Group in 1992, Mr. Dupree was a Principal in Corporate Finance with Montgomery Securities and prior to that, he was Co-Head of Equity Private Placements at Alex. Brown & Sons Incorporated. 76 Mr. Dupree currently serves on the board of directors of Whole Foods Markets, Inc. and National Packaging Solutions Group, Inc. and previously served on our board of directors, as a designee of The Carlyle Group, from October 1997 to December 1999. Steven G. Segal became a member of our board of directors upon consummation of the acquisition. He is a Partner of J.W. Childs Associates, L.P. and has been at Childs since 1995. Prior to that time, he was an executive at Thomas H. Lee Company from 1987, most recently holding the position of Managing Director. He is also a director of Quality Stores Inc., Jillian's Entertainment Corp., National Nephrology Associates, Inc., Big V Supermarkets, Inc., The NutraSweet Company, Universal Hospital Services, Inc. and is Co-Chairman of the Board of Empire Kosher Poultry, Inc. Mark J. Tricolli is a director and Vice President of InSight Holdings and became a member of our board of directors upon consummation of the acquisition. Mr. Tricolli is a Senior Associate at J.W. Childs Associates, which he joined in 2000. Prior to that Mr. Tricolli was an Associate in the Merchant Banking Division of Goldman Sachs from 1999 to 2000, an Analyst at William Blair Capital Partners, a private equity firm based in Chicago, Illinois from 1995 to 1997 and an Analyst at Chemical Securities, Inc. from 1993 to 1995. Edward D. Yun is a director and Vice President of InSight Holdings and became a member of our board of directors upon consummation of the acquisition. He is a Partner of J.W. Childs Associates, L.P. and has been at Childs since 1996. From 1994 until 1996, he was an Associate at DLJ Merchant Banking, Inc. He is also a director of Jillian's Entertainment Corp., Pan Am International Flight Academy, Inc., National Nephrology Associates, Inc., Equinox Holdings, Inc., Chevys, Inc., Universal Hospital Services, Inc. and Hartz Mountain Corporation. 77 EXECUTIVE COMPENSATION The following table sets forth information concerning the annual, long-term and all other compensation for services rendered in all capacities to InSight and its subsidiaries for the years ended June 30, 2001, 2000, and 1999 of (i) InSight's chief executive officer during the year ended June 30, 2001, and (ii) the four most highly compensated executive officers (other than the chief executive officer) of InSight serving as executive officers at June 30, 2001 ("Other Executive Officers"), and whose aggregate cash compensation exceeded $100,000 for the year ended June 30, 2001 (collectively, "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM --------------------------------------- COMPENSATION FISCAL AWARDS YEAR STOCK OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION ENDED SALARY BONUS(1) OTHER(2) (SHARES) COMP(2) - --------------------------- ------ -------- -------- -------- ------------- --------- Steven T. Plochocki.............. 2001 $280,000 $238,000 $ 9,000 50,000 $ 3,324 President and Chief 2000 158,749 125,000 5,625 125,000 1,655 Executive Officer(3) 1999 -- -- -- -- -- Thomas V. Croal.................. 2001 236,000 140,420 9,000 5,000 1,409 Executive Vice President, and 2000 225,500 75,250 9,000 -- 8,319 Chief Financial Officer 1999 215,000 -- 9,000 -- 12,596 Marilyn U. MacNiven-Young........ 2001 243,300 103,403 9,000 10,000 3,850 Executive Vice President, 2000 236,250 59,063 9,000 -- 3,964 General Counsel and Secretary 1999 206,250 -- 8,250 50,000 4,195 Michael A. Boylan................ 2001 210,000 124,950 9,000 10,000 4,365 Executive Vice President and Chief Development Officer(4) 195,000 68,250 14,000 -- 4,819 1999 195,000 -- 9,000 -- 7,277 Michael S. Madler................ 2001 200,000 119,000 9,000 50,000 6,618 Executive Vice President 175,000 61,250 16,341 -- 4,090 and Chief Operating Officer(5) 1999 106,450 25,000 4,000 30,000 3,437
- --------------- (1) Annual bonuses are earned and accrued during the fiscal years indicated, and paid subsequent to the end of each fiscal year. (2) Amounts of Other Compensation include perquisites (auto allowances and commissions for contract awards and renewals) and amounts of All Other Compensation include (i) amounts contributed to InSight's 401(k) profit sharing plan, (ii) specified premiums on executive split-dollar insurance arrangements and (iii) specified premiums on executive health insurance arrangements, for the Named Executive Officers. (3) On November 22, 1999, Mr. Plochocki joined InSight as president and chief executive officer. (4)On February 7, 2002, Mr. Boylan's title changed from Executive Vice President -- Operations, Eastern Division to Executive Vice President and Chief Development Officer. (5)On February 7, 2002, Mr. Madler's title changed from Executive Vice President -- Operations, Western Division to Executive Vice President and Chief Operating Officer. 78 OPTION GRANTS For the year ended June 30, 2001, stock options were granted under the 1999 Stock Option Plan to the Named Executive Officers, as follows:
INDIVIDUAL GRANTS POTENTIAL REALIZABLE --------------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------- NAME GRANTED FISCAL YEAR(1) PER SHARE DATE(3) 5% 10% - ---- ---------- -------------- -------------- ---------- ---------- ---------- Steven T. Plochocki........... 50,000 14% $8.37 8/25/10 $263,192 $666,982 Thomas V. Croal............... 5,000 1% $8.37 8/25/10 26,319 66,698 Marilyn U. MacNiven-Young..... 10,000 3% $8.37 8/25/10 52,638 133,398 Michael A. Boylan............. 10,000 3% $8.37 8/25/10 52,638 133,398 Michael S. Madler............. 50,000 14% $8.37 8/25/10 263,192 666,982
- --------------- (1) The options were granted at an exercise price exceeding the fair market value (the closing price reported on The Nasdaq SmallCap Market) for the common stock on the date of grant. (2) Potential realizable value is determined by taking the exercise price per share and applying the stated annual appreciation rate compounded annually for the remaining term of the option (ten years), subtracting the exercise price per share at the end of the period and multiplying the remaining number by the number of options granted. Actual gains, if any, on stock option exercises and InSight's common stock holdings are dependent on the future performance of the common stock and overall stock market conditions. (3) Options were exercisable starting twelve months after the date of grant, with 25% of the shares becoming exercisable at that time and with an additional 25% of the shares becoming exercisable on each successive anniversary date with full vesting occurring on the fourth anniversary date. The options were granted for a term of ten years, subject to earlier termination in certain events related to termination of employment. OPTION EXERCISES AND FISCAL YEAR-END VALUES. During the year ended June 30, 2001, none of the Named Executive Officers of InSight exercised any stock options. The following table sets forth information with respect to the unexercised options to purchase common stock granted under (i) MHC's and AHS's stock option plans and assumed by InSight pursuant to the merger of American Health Services Corp. and Maxum Health Corp., (ii) InSight's 1996 Employee Stock Option Plan, (iii) InSight's 1997 Management Stock Option Plan, (iv) InSight's 1998 Employee Stock Option Plan, and (v) InSight's 1999 Stock Option Plan, for the Named Executive Officers as of June 30, 2001:
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED NUMBER OPTIONS HELD IN-THE-MONEY OPTIONS OF SHARES AT JUNE 30, 2001 AT JUNE 30, 2001(1)(2) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- -------- ----------- ------------- ----------- ------------- Steven T. Plochocki........... -- -- 20,833 154,167 $ 194,372 $1,438,378 Thomas V. Croal............... -- -- 113,750 81,250 1,185,725 781,875 Marilyn U. MacNiven-Young..... -- -- 25,000 35,000 208,000 301,300 Michael A. Boylan............. -- -- 81,370 37,500 1,113,362 359,400 Michael S. Madler............. -- -- 15,000 65,000 139,950 606,450
- --------------- (1) Based on the closing price reported on The Nasdaq SmallCap Market for the InSight common stock on that date of $17.70 per share. (2) At the consummation of the acquisition, the Named Executive Officers became entitled to receive in cash the difference between $18.00 and the exercise price for each share of common stock which each 79 could acquire pursuant to the terms of their stock option agreements; except that Messrs. Plochocki, Croal, Boylan and Madler rolled over certain of their stock options (totaling an aggregate of approximately $1.7 million) into fully vested options to purchase the common stock of InSight Holdings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Upon the consummation of the acquisition, the committees of our board of directors ceased to exist and new committees have since been established. The current compensation arrangements for our chief executive officer and each of our executive officers were established pursuant to the terms of the respective employment agreements between us and each executive officer. The terms of the employment agreements were established pursuant to arms-length negotiations between the equity sponsors and each executive officer. During fiscal year ended June 30, 2001, our former board of directors established a Compensation, Audit, Executive and Nominating Committee. None of our current directors served on any of these committees. Since the acquisition, our board of directors has established the following committees: A Compensation Committee consisting of Michael Cannizzaro, David Dupree, Steven Plochocki and Steven Segal. The Compensation Committee is responsible for determining the specific forms and levels of compensation of our executive officers. An Audit Committee consisting of Kenneth Doyle, Mark Tricolli and Edward Yun. The committee's principal function is to review the results of our annual audit with our independent auditors and review the performance of our independent auditors. An Executive Committee consisting of Michael Cannizzaro, David Dupree, Steven Plochocki and Steven Segal. The committee is authorized to exercise all the power and authority of the board of directors in the management of our business, however, its authority does not extend to certain fundamental corporate transactions. A Regulatory Compliance Committee consisting of Kenneth Doyle, Mark Tricolli and Edward Yun. The committee is responsible for monitoring regulatory compliance of our business. COMPENSATION OF DIRECTORS All members of our board of directors will be reimbursed for their usual and customary expenses incurred in connection with attending all board meetings but will not otherwise be compensated for serving in such capacity. MANAGEMENT PARTICIPATION As described elsewhere in this prospectus, upon consummation of the acquisition, certain members of our senior management rolled over a portion of their options in InSight into options of InSight Holdings and exchanged their common stock and remaining options in InSight for cash. The individuals, the value of their InSight common stock and options, the value of their option rollover into InSight Holdings and cash proceeds as a result of the acquisition are indicated in the chart below.
TOTAL COMMON STOCK TOTAL CASH NAME AND OPTION VALUE OPTION ROLLOVER VALUE PROCEEDS - ---- ------------------ --------------------- ---------- Steven T. Plochocki......................... $1,685,250 $ 505,575 $1,179,675 Thomas V. Croal............................. 2,026,100 505,575 1,520,525 Michael A. Boylan........................... 1,508,370 452,514 1,055,856 Michael S. Madler........................... 770,400 231,120 539,280 ---------- ---------- ---------- TOTAL.................................. $5,990,120 $1,694,784 $4,295,336 ========== ========== ==========
80 INDEMNIFICATION AGREEMENTS InSight has entered into separate indemnification agreements with Mr. Plochocki, its executive officers and each of our former directors that could require InSight, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and executive officers and to advance expenses incurred by them as a result of any proceedings against them as to which they could be indemnified. EMPLOYMENT AGREEMENTS The employment agreement with Steven T. Plochocki is for a term of three years, subject to certain termination rights. Under the employment agreement, Mr. Plochocki receives an annual base salary as well as a discretionary bonus of up to 75% of his annual base salary if we achieve our budgetary goals and a discretionary bonus of an additional 25% of his annual base salary upon the achievement of other goals mutually agreed upon by Mr. Plochocki and our board of directors. Mr. Plochocki is currently being paid an annual base salary of $300,000. Mr. Plochocki's employment agreement also provides for a life insurance policy of three times the amount of his annual base salary and entitles him to participate during the term of his employment in our life insurance, medical, health and accident and disability plan or program, pension plan or other similar benefit plan. Mr. Plochocki is subject to a noncompetition covenant and nonsolicitation provisions (relating to our employees and customers) during the term of his employment agreement and continuing for a period of 24 months after the termination of his employment. Mr. Plochocki's employment agreement will terminate and he will be entitled to all accrued and unpaid compensation, as well as 24 months of compensation at the annual salary rate then in effect (1) upon his permanent and total disability (as defined in his employment agreement); (2) upon our 30 days' written notice to him of the termination of his employment without cause (as defined in his employment agreement); (3) if he terminates his employment with us for good reason (as defined in the employment agreement); and (4) if his employment is terminated by us without cause or he terminates his employment for good reason within 12 months of a change in control (as defined in his employment agreement) which occurs after the acquisition contemplated by the merger agreement. In addition, we will maintain at our expense until the earlier of 24 months after the date of termination or commencement of Mr. Plochocki's benefits pursuant to full time employment with a new employer under such employer's standard benefits program, all life insurance, medical, health and accident and disability plans or programs in which Mr. Plochocki was entitled to participate immediately prior to the date of termination. Mr. Plochocki's employment will immediately terminate upon his death and the executors or administrators of his estate or his heirs or legatees (as the case may be) will be entitled to all accrued and unpaid compensation up to the date of his death. Mr. Plochocki's employment will terminate and he will not be entitled to receive any monetary compensation or benefit upon (1) the termination of his employment by us for cause or (2) his voluntary termination of his employment with us without good reason. The employment agreement with each of Michael A. Boylan, Thomas V. Croal, Marilyn U. MacNiven-Young and Michael S. Madler provides for a term of 12 months on a continuing basis, subject to certain termination rights. The executives' respective employment agreement provides for an annual salary as well as a discretionary bonus of up to 75% of the executive's annual base salary if we achieve our budgetary goals and a discretionary bonus of an additional 25% of the executive's annual base salary upon the achievement of other goals mutually agreed upon by each executive and our President and Chief Executive Officer and approved by our board of directors. Mr. Boylan, Mr. Croal, Ms. MacNiven-Young and Mr. Madler are currently being paid an annual base salary of $225,000, $252,500, $260,300 and $214,000, respectively. Each executive is provided with a life insurance policy of three times the amount of his or her annual base salary and is entitled to participate in our life insurance, medical, health and accident and disability plan or program, pension plan or other similar benefit plan. Each executive is subject to a noncompetition covenant and nonsolicitation provisions (relating to our employees and customers) during the term of his or her respective employment agreement and continuing for a period of 12 months after the termination of his or her respective employment. Each executive's employment agreement will terminate and each of them will be entitled to all accrued and unpaid compensation, as 81 well as 12 months of compensation at the annual salary rate then in effect (1) upon the executive's permanent and total disability (as defined in the respective employment agreement); (2) upon our 30 days' written notice to the executive of the termination of the executive's employment without cause (as defined in the respective employment agreement); (3) if the executive terminates his or her respective employment with us for good reason (as defined in the respective employment agreement); and (4) if the executive's employment is terminated by us without cause or he or she terminates his or her employment for good reason within 12 months of a change in control (as defined in the respective employment agreement) which occurs after the acquisition contemplated in the merger agreement. In addition, we will maintain at our expense until the earlier of 12 months after the date of termination or commencement of the executive's benefits pursuant to full time employment with a new employer under such employer's standard benefits program, all life insurance, medical, health and accident and disability plans or programs in which the executive was entitled to participate immediately prior to the date of termination. Each executive's employment will immediately terminate upon his or her death and the executors or administrators of his or her estate or his or her heirs or legatees (as the case may be) will be entitled to all accrued and unpaid compensation up to the date of his or her death. The executive's employment will terminate and the executive will not be entitled to receive any monetary compensation or benefit upon (1) the termination of his or her respective employment by us for cause; or (2) his or her voluntary termination of his or her respective employment with us without good reason. The employment agreement with each of Patricia R. Blank, Brian G. Drazba and Cecilia A. Guastaferro provides for a term of 12 months on a continuing basis, subject to certain termination rights. The executives' respective employment agreements provide for an annual salary and should make them eligible for discretionary bonuses, if any, as awarded by our President and Chief Executive Officer and approved by our board of directors. Ms. Blank, Mr. Drazba and Ms. Guastaferro are currently being paid an annual base salary of $198,000, $146,000 and $145,000, respectively. Each executive is provided with a life insurance policy of three times the amount of the executive's annual base salary and is entitled to participate in our health, hospitalization or disability insurance plan, pension plan or other similar benefit plan. Each executive is subject to a noncompetition covenant and nonsolicitation provisions (relating to our employees and customers) during the term of the executive's respective employment agreement and continuing for a period of 12 months after the termination of the executive's respective employment. Each executive's employment agreement will terminate and each of them will be entitled to all accrued and unpaid compensation, as well as 12 months of compensation at the annual salary rate then in effect (1) upon the executive's permanent and total disability (as defined in the respective employment agreement); (2) upon our 30 days' written notice to the executive of the termination of the executive's employment without cause (as defined in the respective employment agreements); and (3) if the executive's employment is terminated by us within 12 months of a change in control (as defined in the respective employment agreement) which occurs after the acquisition contemplated in the merger agreement. In addition, we will maintain at our expense until the earlier of 12 months after the date of termination or commencement of the executive's benefits pursuant to full time employment with a new employer under such employer's standard benefits program, all life insurance, medical, health and accident and disability plans or programs in which the executive was entitled to participate immediately prior to the date of termination. Each executive's employment will immediately terminate upon his or her death and the executors or administrators of his or her estate or his or her heirs or legatees (as the case may be) will be entitled to all accrued and unpaid compensation up to the date of his or her death. Each of the executive's employment will terminate and each executive will not be entitled to receive any monetary compensation or benefit upon (1) the termination of his or her employment by us for cause; or (2) voluntary termination of his or her employment with us. 2001 STOCK OPTION PLAN In connection with the acquisition, Mr. Plochocki, Mr. Croal, Mr. Boylan and Mr. Madler rolled over a certain number of the stock options in our company that they held prior to the acquisition into stock options under the 2001 Stock Option Plan of InSight Holdings. Under the Stock Option Plan, the board of directors of InSight Holdings has been authorized to issue stock options to purchase the common stock of 82 InSight Holdings, not to exceed 175,990 shares, at an option price of $8.37 per share. Pursuant to stock option agreements entered into by each of Mr. Plochocki, Mr. Croal, Mr. Boylan and Mr. Madler and InSight Holdings, Mr. Plochocki and Mr. Croal both were granted options to purchase up to 52,500 shares of common stock, Mr. Boylan was granted options to purchase up to 46,990 shares of common stock, and Mr. Madler was granted options to purchase up to 24,000 shares of common stock under the Stock Option Plan. The Stock Option Plan provides for a term of ten years and any options outstanding under the Stock Option Plan upon the termination date of the Plan will continue to be exercisable pursuant to their terms. Upon consummation of the acquisition, each option granted under the Stock Option Plan vested fully and became exercisable, in whole or in part, at any time. The minimum number of shares of InSight Holdings common stock that may be purchased is the lesser of 100 shares or the maximum number of shares available for purchase under the option at the time of exercise. The exercise price will be payable (1) in cash or in cash equivalents, (2) with the consent of the board of directors of InSight Holdings through a cashless exercise, or (3) by any other method or methods as the board of directors of InSight Holdings may authorize. Upon the termination of employment of an optionee for any reason, the option granted will terminate on the earlier to occur of (1) the expiration of the term of the Stock Option Plan and (2) a change in control (as defined in the Stock Option Plan). STOCK OPTION AGREEMENTS Certain of our employees are eligible to receive a number of options to purchase the common stock of InSight Holdings. The exercise price of the options is the price per share that subscribing stockholders paid to InSight Holdings at the time the acquisition was consummated in connection with their subscription for the common stock of InSight Holdings. The options will be administered by the board of directors of InSight Holdings. Options may be exercised when fully vested by giving written notice stating the number of shares (not less than 100, unless the total shares which are vested and exercisable at such time is less than 100) to be purchased and accompanied by payment in full of the exercise price. Twenty percent of the options will vest annually on the following schedule: (1) 25% of the number of available options shall vest and become exercisable upon the anniversary of the consummation of the acquisition in each of the fiscal years ending on June 30 in the years 2003-2007 and (2) 75% of the number of available options shall vest and become exercisable for each fiscal year ending on June 30 in the years 2002-2006 upon the attainment of a set of predetermined performance-based targets. The options expire on the tenth anniversary of the consummation of the acquisition, unless: (1) the employee is terminated for cause (as defined in the employee's stock option agreement) or voluntarily terminates his or her employment without good reason (as defined in the employee's stock option agreement), in which case the options shall terminate on the date of such termination of employment, whether or not then fully vested or exercisable; or (2) the employee is terminated without cause, resigns for good reason, dies or becomes disabled (as defined in the employee's stock option agreement) at any time during the term of his or her employment, in which case any portion of the option not fully vested and exercisable shall terminate immediately, and any option that is vested and exercisable shall terminate on the 120th day following such termination of employment. However, the board of directors of InSight Holdings has discretion to vest any portion of options not already vested at the time of such termination. All options subject solely to time vesting will become fully vested immediately prior to a change of control (as defined in the employee's stock option agreement). In addition, in the case of a change in control, the board of directors of InSight Holdings may, in its sole discretion, accelerate the vesting of all or any portion of the options that would remain unvested. All options subject to performance-based vesting will become fully vested on the eighth anniversary of the grant date to the extent they have not previously vested. 83 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Upon consummation of the acquisition, we became a wholly-owned subsidiary of InSight Holdings, a corporation owned by J.W. Childs Equity Partners II, Halifax Capital Partners and certain of their affiliates. The following table sets forth certain information regarding beneficial ownership of the common stock of InSight Holdings, as of February 28, 2002, by: (1) each person or entity known to us owning beneficially 5% or more of InSight Holdings' common stock; (2) each director of InSight and InSight Holdings; (3) each of InSight's named executive officers; and (4) all directors of InSight and InSight Holdings and executive officers of InSight, as a group. Upon consummation of the acquisition, InSight Holdings' outstanding securities consisted of approximately 5,461,401 shares of common stock and options to purchase 175,990 shares of common stock which are immediately exercisable. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Exchange Act.
SHARES BENEFICIALLY NAME AND ADDRESS OWNED(1) PERCENT - ---------------- ------------ ------- J.W. Childs Equity Partners II, L.P.(2) 111 Huntington Avenue, Suite 2900 Boston, Massachusetts 02199............................... 4,350,290 80% JWC-InSight Co-invest LLC(3) 111 Huntington Avenue, Suite 2900 Boston, Massachusetts 02199............................... 338,532 6.0% Halifax Capital Partners, L.P.(4) 1133 Connecticut Avenue, N.W. Washington, D.C. 20036.................................... 1,111,112 20% Steven G. Segal(5) 111 Huntington Avenue, Suite 2900 Boston, Massachusetts 02199............................... -- -- Edward D. Yun(6) 111 Huntington Avenue, Suite 2900 Boston, Massachusetts 02199............................... -- -- Michael N. Cannizzaro(7) 111 Huntington Avenue, Suite 2900 Boston, Massachusetts 02199............................... -- -- Mark J. Tricolli(8) 111 Huntington Avenue, Suite 2900 Boston, Massachusetts 02199............................... -- -- David W. Dupree(9) 1133 Connecticut Avenue, N.W. Washington, D.C. 20036.................................... 4,092 * Kenneth M. Doyle(10) 1133 Connecticut Avenue, N.W. Washington, D.C. 20036.................................... -- -- Steven T. Plochocki(11) 4400 MacArthur Blvd., Suite 800 Newport Beach, California 92660........................... 52,500 * Michael A. Boylan(12) 110 Gibraltar Road Horsham, Pennsylvania 18901............................... 46,990 * Thomas V. Croal(13) 4400 MacArthur Blvd., Suite 800 Newport Beach, California 92660........................... 52,500 *
84
SHARES BENEFICIALLY NAME AND ADDRESS OWNED(1) PERCENT - ---------------- ------------ ------- Michael S. Madler(14) 4400 MacArthur Blvd., Suite 800 Newport Beach, California 92660........................... 24,000 * Marilyn U. MacNiven-Young 4400 MacArthur Blvd., Suite 800 Newport Beach, California 92660........................... -- -- All directors and executive officers, as a group (14 persons).................................................. 243,709 4.3%
- --------------- * Less than 1% (1) For purposes of this table, a person is deemed to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after the date of this prospectus. (2) Includes 4,011,758 shares of InSight Holdings common stock owned directly by J.W. Childs Equity Partners II and 338,532 shares of InSight Holdings common stock owned directly by JWC-InSight Co-invest LLC, an affiliate of J.W. Childs Equity Partners II. The general partner of J.W. Childs Equity Partners II, L.P. is J.W. Childs Advisors II, L.P., a Delaware limited partnership. The general partner of J.W. Childs Advisors II, L.P. is J.W. Childs Associates, L.P., a Delaware limited partnership. The general partner of J.W. Childs Associates, L.P. is J.W. Childs Associates, Inc., a Delaware corporation. J.W. Childs Advisors II, L.P., J.W. Childs Associates, L.P. and J.W. Childs Associates, Inc. may be deemed to beneficially own the 4,350,290 shares of InSight Holdings common stock held by J.W. Childs Equity Partners II and JWC-InSight Co-invest LLC. (3) JWC-InSight Co-invest LLC is a Delaware limited liability company and affiliate of J.W. Childs Equity Partners II. J.W. Childs Associates Inc. is the managing member of JWC-InSight Co-invest LLC. As the managing member, J.W. Childs Associates Inc. owns the 338,532 shares of InSight Holdings to be held directly by JWC-InSight Co-invest LLC. Steven G. Segal, Edward D. Yun, Michael N. Cannizzaro and Mark J. Tricolli are each members of JWC-InSight Co-invest LLC. (4) Includes 1,107,020 shares of InSight Holdings common stock owned directly by Halifax Capital Partners and 4,092 shares of InSight Holdings common stock owned directly by David W. Dupree, a Managing Director of The Halifax Group, L.L.C. The general partner of Halifax Capital Partners, L.P. is Halifax Genpar, L.P., a Delaware limited partnership. The general partner of Halifax Genpar, L.P. is The Halifax Group, L.L.C., a Delaware limited liability company. Halifax Genpar, L.P. and The Halifax Group, L.L.C. may be deemed to beneficially own the 1,111,112 shares of InSight Holdings common stock held by Halifax Capital Partners, L.P. and its affiliate, Mr. Dupree. Halifax Capital Partners, Halifax Genpar, L.P. and The Halifax Group, L.L.C. disclaim beneficial ownership of the 4,092 shares of InSight Holdings common stock owned directly by Mr. Dupree. (5) As a Senior Managing Director of J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II, and a member of JWC-InSight Co-invest LLC, Mr. Segal may be deemed to beneficially own the 4,011,758 shares of InSight Holdings common stock owned by J.W. Childs Equity Partners II and the 338,532 shares of InSight Holdings common stock held directly by JWC-InSight Co-invest LLC. Mr. Segal disclaims beneficial ownership of such shares of InSight Holdings. (6) As a Managing Director of J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr. Yun may be deemed to beneficially own the 4,011,758 shares of InSight Holdings common stock owned by J.W. Childs Equity Partners II, and the 338,532 shares of InSight Holdings common stock held directly by JWC-InSight Co-invest LLC. Mr. Yun disclaims beneficial ownership of such shares of InSight Holdings. 85 (7) As a Managing Director of J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr. Cannizzaro may be deemed to beneficially own the 4,011,758 shares of InSight Holdings common stock owned by J.W. Childs Equity Partners II and the 338,532 shares of InSight Holdings common stock held directly by JWC- InSight Co-invest LLC. Mr. Cannizzaro disclaims beneficial ownership of such shares of InSight Holdings. (8) As a Senior Associate at J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II and a member of JWC-InSight Co-invest LLC, Mr. Tricolli may be deemed to beneficially own the 4,011,758 shares of InSight Holdings common stock owned by J.W. Childs Equity Partners II and the 338,532 shares of InSight Holdings common stock held directly by JWC- InSight Co-invest LLC. Mr. Tricolli disclaims beneficial ownership of such shares of InSight Holdings. (9) As a Managing Director of The Halifax Group, L.L.C., which manages Halifax Capital Partners, L.P., Mr. Dupree may also be deemed to beneficially own the 1,107,020 shares of InSight Holdings common stock owned by Halifax Capital Partners, L.P. Mr. Dupree disclaims beneficial ownership of such shares of InSight Holdings. (10) As a Principal of The Halifax Group, L.L.C., which manages Halifax Capital Partners, L.P., Mr. Doyle may be deemed to beneficially own the 1,111,112 shares of InSight Holdings common stock owned by Halifax Capital Partners, L.P. and its affiliates. Mr. Doyle disclaims beneficial ownership of the shares of InSight Holdings owned by Halifax Capital Partners and its affiliates. (11) Consists of options to purchase 52,500 shares of InSight Holdings common stock at an exercise price of $8.37 per share which options were granted upon the consummation of the acquisition and are fully vested and immediately exercisable. (12) Consists of options to purchase 46,990 shares of InSight Holdings common stock at an exercise price of $8.37 per share which options were granted upon the consummation of the acquisition and are fully vested and immediately exercisable. (13) Consists of options to purchase 52,500 shares of InSight Holdings common stock at an exercise price of $8.37 per share which options were granted upon the consummation of the acquisition and are fully vested and immediately exercisable. (14) Consists of options to purchase 24,000 shares of InSight Holdings common stock at an exercise price of $8.37 per share which options were granted upon the consummation of the acquisition and are fully vested and immediately exercisable. Except as otherwise noted, InSight Holdings believes that each of the stockholders listed in the table above has sole voting and dispositive power over all shares beneficially owned. Each of the stockholders of InSight Holdings in the table above is party to a stockholders agreement which governs the transferability and voting of shares of InSight Holdings common stock held by them. See "Certain Relationships and Related Transactions -- Stockholders Agreement." 86 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Management Agreement. Upon the completion of the acquisition, InSight and InSight Holdings entered into a management agreement with J.W. Childs Advisors II, L.P., the general partner of J.W. Childs Equity Partners II, and Halifax Genpar, L.P., the general partner of Halifax Capital Partners. Under the agreement, InSight paid J.W. Childs Advisors II and Halifax Genpar a transaction fee of $4,500,000 and $1,125,000, respectively, for services rendered in connection with the acquisition. Additionally, J.W. Childs Advisors II and Halifax Genpar will provide business, management and financial advisory services to InSight and InSight Holdings in consideration of (1) an annual fee of $240,000 to be paid to J.W. Childs Advisors II and (2) an annual fee of $60,000 to be paid to Halifax Genpar. InSight and InSight Holdings will also reimburse such entities for all travel and other out-of-pocket expenses incurred by such entities in connection with their performance of the advisory services under the agreement. The management agreement has an initial term of five years, which term will automatically renew for one year periods thereafter and is subject to earlier termination by the board of directors of InSight and InSight Holdings. Furthermore, InSight Holdings and InSight have agreed to indemnify and hold harmless J.W. Childs Advisors II and Halifax Genpar and their affiliates, from and against any and all claims, losses, damages and expenses arising out of the acquisition or the performance by J.W. Childs Advisors II and Halifax Genpar of their obligations under the management agreement. Stockholders Agreement. InSight Holdings, J.W. Childs Equity Partners II, JWC-InSight Co-invest LLC, Halifax Capital Partners, Mr. Dupree, management of InSight and all other holders of capital stock or stock options of InSight Holdings have entered into a stockholders agreement. Under the stockholders agreement, InSight Holdings and each stockholder have a right of first refusal to purchase any stock proposed to be sold by all other stockholders, except J.W. Childs Equity Partners II and JWC-InSight Co-invest LLC. Additionally, the stockholders agreement affords (1) stockholders, other than J.W. Childs Equity Partners II and JWC-InSight Co-invest LLC, so-called "tag-along" rights on proposed sales of capital stock of InSight Holdings by J.W. Childs Equity Partners II and JWC-InSight Co-invest LLC; (2) J.W. Childs Equity Partners II and JWC-InSight Co-invest LLC so-called "drag-along" rights with respect to proposed sales of a majority of the capital stock of InSight Holdings and (3) all stockholders certain registration rights with respect to the capital stock of InSight Holdings. Furthermore, the stockholders agreement contains put and call features on capital stock and stock options held by InSight management which are triggered upon termination of such individual's employment with InSight and InSight Holdings. The stockholders agreement also obligates InSight Holdings and the stockholders to take all necessary action to appoint, as directors of InSight Holdings, up to eight nominees designated by J.W. Childs Equity Partners II (as would constitute a majority of InSight Holdings' entire board of directors) and two nominees designated by Halifax Capital Partners. 87 DESCRIPTION OF NEW SENIOR CREDIT FACILITIES Concurrently with the closing of the acquisition, we entered into new senior credit facilities for up to $275 million of senior loans, arranged by Banc of America Securities LLC, with Bank of America, N.A. and a syndicate of other financial institutions. The new senior credit facilities consist of: - a $50 million six-year revolving credit facility; - a $75 million seven-year delayed-draw term loan facility (which is available for draw for two years following the closing of the acquisition); and - a $150 million seven-year term loan B facility. REVOLVING CREDIT FACILITY The new senior credit facilities include a $50 million six-year revolving credit facility, none of which was drawn on the consummation of the acquisition. DELAYED-DRAW TERM LOAN FACILITY The new senior credit facilities include a $75 million seven-year delayed-draw term loan facility available from time to time until October 17, 2003. The delayed-draw term facility will be amortized with 1% of the initial aggregate delayed-draw term loan facility advances outstanding as of October 17, 2003 to be payable in each of years three through six following the initial borrowing under the new senior credit facilities and 96% of the initial aggregate acquisition term loan facility advances outstanding as of October 17, 2003 to be payable in year seven. TERM LOAN B The new senior credit facilities include a seven-year $150 million term loan B facility. The term loan B was drawn in full on the consummation of the acquisition. The term loan B facility will be amortized with 1% of the term loan B to be payable in each of the first six years and 94% of the initial aggregate term loan B to be payable in year seven. INTEREST RATES AND FEES The interest rates per annum applicable to the new senior credit facilities are LIBOR plus the applicable margin (as defined below) or, at the option of the borrower, the alternate base rate which will be the higher of (x) the Bank of America, N.A. prime rate and (y) the federal funds rate plus 0.50%, plus the applicable margin. The applicable margin (1) until March 31, 2002 will be (A) with respect to the revolving credit facility, 3.00% per annum in the case of LIBOR rate advances and 2.00% per annum with respect to alternate base rate advances and (B) with respect to the term loan facilities, 3.50% per annum in the case of LIBOR rate advances and from 2.50% of alternate rate advances and (2) thereafter will be determined in accordance with a performance grid based on our senior leverage ratio agreed to with Bank of America, N.A. The default rate on the new senior credit facilities will be 2% above the otherwise applicable interest rate. In addition, we will pay a commitment fee on the unused portion of the revolving credit facility of (1) until March 31, 2002, 0.50%, and (2) thereafter, a percentage per annum determined in accordance with a performance pricing grid based on our senior leverage ratio to be agreed upon with Bank of America, N.A. We will also be obligated to pay a commitment fee of 2% on the unused portion of the delayed-draw term loan facility. The commitment fees are payable quarterly in arrears and on the date of termination or expiration of the respective commitments. 88 PREPAYMENTS Subject to certain exceptions, loans under the new senior credit facilities are required to be prepaid with: - 100% of the net cash proceeds (1) from certain asset dispositions by us, InSight Holdings or our subsidiaries, (2) of extraordinary receipts which include tax refunds, indemnity payments, pension reversions and certain insurance proceeds and (3) from the issuance or incurrence after the date of the initial borrowing under the new senior credit facilities of debt or equity by us, InSight Holdings or any of our subsidiaries; and - 75% (if the senior leverage ratio is equal to or greater than 2.0 to 1.0) or 50% (if the senior leverage ratio is less than 2.0 to 1.0) of excess cash flow, as defined in the new senior credit facilities. We may prepay the new senior credit facilities at any time in whole or in part without premium or penalty, except that any prepayment of LIBOR rate advances other than at the end of the applicable interest periods therefor shall be made with reimbursement for any funding losses and redeployment costs of the lenders resulting therefrom. COVENANTS AND BORROWING LIMIT The new senior credit facilities contain customary affirmative and negative covenants, including limitations on liens, limitations on sales, transfers and other dispositions of assets, limitations on incurrence of debt, limitations on dividends, stock redemptions and the redemption and/or prepayment of other debt, limitations on investments and acquisitions, limitations on capital expenditures, limitations on granting negative pledges, limitations on amending organizational documents and material agreements and limitations on changing accounting policies and reporting practices. In addition, the credit agreement contains the following financial covenants: (1) a maximum senior leverage ratio, (2) a maximum total leverage ratio, (3) a minimum fixed charge coverage ratio, and (4) a minimum interest coverage ratio. EVENTS OF DEFAULT Events of default under the new senior credit facilities include, among others, nonpayment of principal or interest, covenant defaults, a material inaccuracy in any of the representations and warranties, bankruptcy and insolvency events, cross-defaults and a change of control. SECURITY AND GUARANTEES Our obligations under the new senior credit facilities and any interest rate protection and other hedging agreements with any lender or its affiliates are guaranteed by InSight Holdings and all of its existing and future direct and indirect subsidiaries formed under the laws of the United States, any state thereof or the District of Columbia, except for specified excluded subsidiaries. All obligations under the new senior credit facilities, the guarantees and any interest rate protection and other hedging agreements with any lender or its affiliates are secured by a first priority perfected security interest in (1) all our capital stock and other ownership or profit interests and our existing and future direct and indirect subsidiaries, excluding certain specified excluded subsidiaries and limited, in the case of each foreign subsidiary, to 65% of the voting stock of such entity and (2) all our and the guarantors' other existing and future assets and properties. 89 DESCRIPTION OF NOTES The outstanding notes were, and the exchange notes will be, issued under an indenture, dated as of October 30, 2001, by and among the Guarantors, State Street Bank and Trust Company, as trustee, and us, a copy of which is filed as an exhibit to the registration statement of which this prospectus forms a part. The terms of the notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended, as in effect on the date of the indenture. The exchange notes are substantially identical to the terms and provisions of the outstanding notes, except for certain transfer restrictions and registration rights relating to the outstanding notes. The exchange notes represent the same indebtedness as represented by the outstanding notes and are subject to the same terms. We refer you to the indenture and the Trust Indenture Act for a statement of them. The following is a summary of the material terms of the notes. It does not restate the indenture in its entirety. Because this is a summary, we urge you to read the indenture and the relevant portions of the Trust Indenture Act because they, and not this description, define your rights as holders of the notes. You can find definitions to certain capitalized terms under "-- Certain Definitions." In this description, the words the "Company" and "InSight" refer only to InSight Health Services Corp. and not any of its subsidiaries. BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES The Notes The notes: - are general unsecured obligations of the Company; - are subordinated in right of payment to all existing and future Senior Indebtedness of the Company; - are ranked equally in right of payment with any future senior subordinated Indebtedness of the Company; and - are guaranteed by the Guarantors. The Guarantees The notes are guaranteed by the Parent and by all of the Wholly Owned Restricted Subsidiaries of InSight. Each guarantee of the notes are: - a general unsecured obligation of the Guarantor; - subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantor; and - ranked equally in right of payment with any future senior subordinated Indebtedness of the Guarantor. Assuming we had completed the acquisition and the related financing transactions, including this offering, as of September 30, 2001, the Company would have had total Senior Indebtedness of approximately $150 million and $125 million available to be borrowed under the Credit Agreement (all of which would be Senior Indebtedness), and the Guarantors would have had total Senior Indebtedness of approximately $154.1 million. As indicated above and as discussed in more detail below under the caption "-- Subordination," payments on the notes and under the guarantees of the notes are subordinated to the prior payment in full of all Senior Indebtedness. The Indenture permits the Company and the Guarantors to incur additional Senior Indebtedness. 90 PRINCIPAL, MATURITY AND INTEREST The notes will mature on November 1, 2011, will be limited in aggregate principal amount to $225 million and will be senior subordinated unsecured obligations of the Company. The indenture provides for the issuance of up to $100 million aggregate principal amount of additional notes having identical terms and conditions to the notes offered hereby (the "Additional Notes"), subject to compliance with the covenants contained in the indenture. For purposes of this "Description of the Notes," reference to the notes includes Additional Notes unless otherwise indicated; however, no offering of any such Additional Notes is being or shall in any manner be deemed to be made by this prospectus. In addition, there can be no assurance as to when or whether the Company will issue any such Additional Notes or as to the aggregate principal amount of such Additional Notes. Interest on the notes will accrue at the rate of 9 7/8% per annum and will be payable semiannually on each May 1 and November 1, commencing May 1, 2002, to the Holders of record on the immediately preceding April 15 and October 15. Interest on the notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the original date of issuance (the "Issue Date"). Interest will be computed on the basis of a 360-day year comprising twelve 30-day months. The principal of and premium, if any, and interest on the notes will be payable and the notes will be exchangeable and transferable, at the office or agency of the Company in the City of New York maintained for such purposes (which initially will be the office of the Trustee located at 61 Broadway, 15th Floor, New York, New York 10006) or, at the option of the Company, payment of interest may be paid by check mailed to the address of the person entitled thereto as such address appears in the security register. The notes will be issued only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any registration of transfer or exchange or redemption of notes, but the Company may require payment in certain circumstances of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. The notes and any Additional Notes will be treated as a single class of securities under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. The notes will not be entitled to the benefit of any sinking fund. GUARANTEES Each of the Company's Wholly Owned Restricted Subsidiaries is a Subsidiary Guarantor and payment of the principal of, premium, if any and interest on the notes, when and as the same become due and payable, will be guaranteed, jointly and severally, on a senior subordinated and unsecured basis (the "Guarantees") by the Subsidiary Guarantors and by the Parent. In addition, if the Company or any of its Wholly Owned Restricted Subsidiaries acquires or creates another Wholly Owned Subsidiary (other than any Foreign Subsidiary), then such Subsidiary shall be required to execute a Guarantee, in accordance with the terms of the indenture. Each Guarantee is subordinated in right of payment, as set forth in the indenture, to the prior payment in full of Senior Indebtedness of the relevant Guarantor. See "Certain Covenants -- Guarantees of Indebtedness by Restricted Subsidiaries." The obligations of the Guarantors under the Guarantees is limited so as not to constitute a fraudulent conveyance under applicable statutes. See "Risk Factors -- Risks Relating to the Notes -- Federal and state statutes allow courts, under specific circumstances, to void guarantees and require noteholders to return payments received from guarantors." The indenture provides that upon a sale or other disposition to a Person not an Affiliate of the Company of all or substantially all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition to a Person not an Affiliate of the Company of all of the Capital Stock of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, which transaction is carried out in accordance with the covenants described below under the captions "-- Repurchase at the Option of Holders -- Asset Sales," such Subsidiary Guarantor will be deemed automatically and unconditionally released and discharged from all of its obligations under its Guarantee without any further action on the part of the Trustee or any holder of the notes; provided that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its 91 guarantees of, and under all of its pledges of assets or other security interests which secure any, Indebtedness of the Company shall also terminate upon such sale, disposition or release. SUBORDINATION The notes are unsecured senior subordinated obligations of the Company. The payment of principal of, premium, if any, and interest on the notes is subordinated in right of payment, as set forth in the indenture, to the prior payment in full of Senior Indebtedness. The holders of Senior Indebtedness are entitled to receive payment in full of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any bankruptcy, reorganization, insolvency, receivership or similar proceeding at the rate specified in the applicable Senior Indebtedness) before the Holders are entitled to receive any payment in respect of any Obligations with respect to the notes (except that Holders may receive securities that are subordinated at least to the same extent as the notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness and Holders may recover payments made from the trust described under the caption "Legal Defeasance and Covenant Defeasance"), in the event of any distribution to creditors of the Company: (1) in a liquidation or dissolution of the Company; (2) in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property; (3) in an assignment for the benefit of creditors; or (4) in any marshaling of the Company's assets and liabilities. The Company also may not make any payment upon or in respect of the notes (except in such subordinated securities or from the trust described under the caption "Legal Defeasance and Covenant Defeasance") if: (1) a default in the payment of principal of, premium, if any, or interest on Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace; or (2) any other default occurs and is continuing with respect to Designated Senior Indebtedness which permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from (A) with respect to the Designated Senior Indebtedness arising under the Credit Agreement, the Agent Bank or (B) with respect to any other Designated Senior Indebtedness, the holders or the representative of the holders of any such Designated Senior Indebtedness. Payments on the notes may and shall be resumed: (1) in the case of a payment default, upon the date on which such default is cured or waived; and (2) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced by a Payment Blockage Notice unless and until: (1) 360 days have elapsed since the first day of the effectiveness of the immediately prior Payment Blockage Notice; and (2) all scheduled payments of principal of, premium, if any, and interest on the notes that have come due have been paid in full in cash. 92 No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such default has been cured or waived for a period of not less than 90 days. If the Trustee or any Holder of the notes receives a payment in respect of the notes (except (i) for securities that are subordinated at least to the same extent as the notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness or (ii) from the trust described under "-- Legal Defeasance and Covenant Defeasance") when: (1) the payment is prohibited by these subordination provisions; and (2) the Trustee or the Holder has actual knowledge that the payment is prohibited; the Trustee or the Holder, as the case may be, shall hold the payment in trust for the benefit of the holders of Senior Indebtedness of the Company. Upon the proper written request of the holders of Senior Indebtedness of the Company, the Trustee or the Holder, as the case may be, shall deliver the amounts in trust to the holders of Senior Indebtedness of the Company or their proper representative. The indenture requires that the Company promptly notify holders of Senior Indebtedness if payment of the notes is accelerated because of any Event of Default. As a result of the subordination provisions described above, in the event of an insolvency, bankruptcy, reorganization or liquidation of the Company, creditors of the Company who are holders of Senior Indebtedness and holders of trade payables may recover more, ratably, than the holders of the notes, and assets which would otherwise be available to pay obligations in respect of the notes will be available only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the notes. See "Risk Factors -- Risks Relating to the Notes -- Your right to receive payments on these notes is junior to the issuer's existing senior indebtedness and possibly all its future borrowings. Further, the guarantees of these notes are junior to all of the guarantors' existing senior indebtedness and possibly to all of their future borrowings." Payments under the Guarantee of each Guarantor is subordinated to the prior payment in full of all Senior Indebtedness of such Guarantor, including Senior Indebtedness of such Guarantor incurred after the date of the indenture, on the same basis as provided above with respect to the subordination of payments on the notes by the Company to the prior payment in full of Senior Indebtedness of the Company. See "Risk Factors -- Risks Relating to the Notes -- Your right to receive payments on these notes is junior to the issuer's existing senior indebtedness and possibly all its future borrowings. Further, the guarantees of these notes are junior to all of the guarantors' existing senior indebtedness and possibly to all of their future borrowings." The terms of the indenture permit the Company and its Restricted Subsidiaries to incur additional Senior Indebtedness, subject to certain limitations, including Indebtedness that may be secured by Liens on property of the Company and its Restricted Subsidiaries. See the discussion below under the captions "Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock" and "Certain Covenants -- Liens." See "Risk Factors -- Risks Relating to the Notes -- Your right to receive payments on these notes is junior to the issuer's existing senior indebtedness and possibly all its future borrowings. Further, the guarantees of these notes are junior to all of the guarantors' existing senior indebtedness and possibly to all of their future borrowings." OPTIONAL REDEMPTION The notes are not redeemable at the Company's option prior to November 1, 2006. Thereafter, the notes are redeemable, at the option of the Company, as a whole or from time to time in part, on not less than 30 nor more than 60 days' prior notice to the Holders at the following redemption prices (expressed as percentages of principal amount), together with accrued interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date), if redeemed during the 12-month period beginning on November 1 of the years indicated below. 93
YEAR REDEMPTION PRICE - ---- ---------------- 2006........................................................ 104.938% 2007........................................................ 103.292% 2008........................................................ 101.646% 2009 and thereafter......................................... 100.000%
Notwithstanding the foregoing, at any time or from time to time prior to November 1, 2004, the Company may redeem, on one or more occasions, up to 35% of the aggregate principal amount of the notes issued under the indenture with the net proceeds of the initial Public Equity Offering at a redemption price equal to 109.875% of the principal amount thereof, plus accrued interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date); provided that, immediately after giving effect to such redemption, at least 65% of the aggregate principal amount of the notes issued under the indenture remains outstanding; provided further that such redemptions shall occur within 60 days of the date of closing of each such initial Public Equity Offering. If less than all the notes are to be redeemed, the particular notes to be redeemed will be selected not more than 60 days prior to the redemption date by the Trustee by such method as the Trustee deems fair and appropriate, provided that no Note of $1,000 in principal amount at maturity or less shall be redeemed in part. MANDATORY REDEMPTION Except as set forth below under "Repurchase at the Option of Holders," the Company is not required to make mandatory redemption or sinking fund payments with respect to the notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control If a Change of Control occurs at any time, then each Holder will have the right to require that the Company purchase such Holder's notes in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of the principal amount of such notes, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to the offer described below (the "Change of Control Offer") and the other procedures set forth in the indenture. Within 30 days following any Change of Control, the Company will notify the Trustee thereof and give written notice of such Change of Control to each Holder of notes by first-class mail, postage prepaid, at its address appearing in the security register, stating, among other things: (1) the purchase price and the purchase date, which will be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed or such later date as is necessary to comply with the requirements under the Exchange Act; (2) that any note not tendered will continue to accrue interest; (3) that, unless the Company defaults in the payment of the purchase price, any notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control purchase date; and (4) certain other procedures that a Holder must follow to accept a Change of Control Offer or to withdraw such acceptance. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the purchase price for all of the notes that might be tendered by Holders seeking to accept the Change of Control Offer. The failure of the Company to make or consummate the 94 Change of Control Offer or pay the applicable Change of Control purchase price when due would result in an Event of Default and would give the Trustee and the Holders the rights described under "Events of Default and Remedies." The Credit Agreement provides that certain change of control events with respect to the Company and the Parent would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Indebtedness to which the Company becomes a party may contain similar restrictions and provisions. If a Change of Control occurs at a time when the Company is prohibited from purchasing notes, the Company could seek the consent of its lenders to the purchase of notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or refinance such borrowings, the Company will remain prohibited from purchasing Notes. In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default under the indenture, which would, in turn, constitute a default under the Credit Agreement. In such circumstances, the subordination provisions in the indenture would likely restrict payments to the Holders. One of the events that constitutes a Change of Control under the indenture is the disposition of "all or substantially all" of the Company's assets. This term has not been interpreted under New York law (which is the governing law of the indenture) to represent a specific quantitative test. As a consequence, if Holders elect to require the Company to purchase the Notes and the Company elects to contest such election, there can be no assurance as to how a court interpreting New York law would interpret the phrase in many circumstances. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by the Company and purchases all the Notes validly tendered and not withdrawn under such Change of Control Offer. The existence of a Holder's right to require the Company to purchase such Holder's Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes a Change of Control. The definition of "Change of Control" in the indenture is limited in scope. The provisions of the indenture may not afford Holders the right to require the Company to repurchase such Notes in the event of a highly leveraged transaction or certain transactions with the Company's management or its Affiliates, including a reorganization, restructuring, merger or similar transaction involving the Parent or the Company (including, in certain circumstances, an acquisition of the Parent or the Company by management or its Affiliates) that may adversely affect Holders, if such transaction is not a transaction defined as a Change of Control. See "Certain Definitions" below for the definition of "Change of Control." A transaction involving the Company's management or its Affiliates, or a transaction involving a recapitalization of the Parent or the Company, would result in a Change of Control if it is the type of transaction specified in such definition. The Company will comply with the applicable tender offer rules including Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations in connection with a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the indenture by virtue thereof. Restrictions in the indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on its or their property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Notes, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. In certain circumstances, such restrictions and the restrictions on transactions 95 with Affiliates may make more difficult or discourage any leveraged buyout of the Company or any of its Restricted Subsidiaries. While such restrictions cover a variety of arrangements which have traditionally been used to effect highly leveraged transactions, the indenture may not afford the Holders protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. Asset Sales The Company will not, and will not permit any Restricted Subsidiary to, engage in any Asset Sale unless: (1) the consideration received by the Company or such Restricted Subsidiary for such Asset Sale is not less than the fair market value of the assets sold as evidenced by a resolution of the board of directors of such entity set forth in an officers' certificate delivered to the Trustee; and (2) the consideration received by the Company or the relevant Restricted Subsidiary in respect of such Asset Sale consists of at least 75% cash or cash equivalents. For purposes of this provision, cash and cash equivalents includes: (a) any liabilities (as reflected in the Company's consolidated balance sheet) of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Note Guarantee) that are assumed by any transferee of any such assets or other property in such Asset Sale, and where the Company or the relevant Restricted Subsidiary is released from any further liability in connection therewith with respect to such liabilities; (b) any securities, notes or other similar obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted within 180 days of the related Asset Sale by the Company or such Restricted Subsidiary into cash or cash equivalents (to the extent of the net cash proceeds or the cash equivalents (net of related costs) received upon such conversion); and (c) any Designated Noncash Consideration received by the Company or any such Restricted Subsidiary in the Asset Sale having an aggregate fair market value, as determined by the Board of the Company, taken together with all other Designated Noncash Consideration received pursuant to this clause that is at that time outstanding, not to exceed the greater of: (A) $10 million; and (B) 15% of Consolidated Tangible Assets at the time of the receipt of such Designated Noncash Consideration (with the fair market value of each item of such Designated Noncash Consideration being measured at the time received and without giving effect to subsequent changes in value). If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may, at its option, within 12 months after such Asset Sale (i) apply all or a portion of the Net Cash Proceeds to the permanent reduction of amounts outstanding under the Credit Agreement (and to correspondingly reduce the commitments, if any, with respect thereto) or to the repayment of other Senior Indebtedness of the Company or a Restricted Subsidiary, provided that the repayment of any Indebtedness incurred under the Credit Agreement in connection with the acquisition of any Facility with the proceeds of any subsequent Sale and Leaseback Transaction relating to such Facility shall not be required to result in the permanent reduction of the amounts outstanding under the Credit Agreement or correspondingly permanently reduce the commitments thereunder, or (ii) invest (or enter into a legally binding agreement to invest) all or a portion of such Net Cash Proceeds in properties and assets to replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in businesses of the Company or its Restricted Subsidiaries, as the case may be, existing on the Reference Date or in businesses the same, similar or reasonably related thereto. If any such legally binding agreement to invest such Net Cash 96 Proceeds is terminated, the Company may, within 90 days of such termination or within 12 months of such Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical contained in such clause (ii)) above. Pending the final application of any such Net Cash Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Cash Proceeds in a manner that is not prohibited by the indenture. The amount of such Net Cash Proceeds not so used as set forth above in this paragraph constitutes "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10 million, the Company will, within 30 days thereafter, make an offer to purchase (an "Excess Proceeds Offer") from all Holders on a pro rata basis, in accordance with the procedures set forth in the indenture, the maximum principal amount (expressed as a multiple of $1,000) of Notes that may be purchased with the Excess Proceeds, at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued interest, if any, to the date such offer to purchase is consummated. To the extent that the aggregate principal amount of Notes tendered pursuant to such offer to purchase is less than the Excess Proceeds, the Company may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes to be purchased will be selected on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds will be reset to zero. CERTAIN COVENANTS Restricted Payments The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions: (a) declare or pay any dividend on, or make any distribution to holders of, any shares of the Capital Stock of the Company or any Restricted Subsidiary, other than (i) dividends or distributions payable solely in Qualified Equity Interests or (ii) dividends or distributions by a Restricted Subsidiary payable to the Company or a Wholly Owned Restricted Subsidiary or to all holders of Capital Stock of such Restricted Subsidiary on a pro rata basis; (b) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of Capital Stock, or any options, warrants or other rights to acquire such shares of Capital Stock, of the Company, any direct or indirect parent of the Company or any Subsidiary of the Company (other than a Wholly Owned Restricted Subsidiary); (c) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Indebtedness; and (d) make any Investment (other than a Permitted Investment) in any Person (such payments or other actions described in (but not excluded from) clauses (a) through (d) being referred to as "Restricted Payments"), unless at the time of, and immediately after giving effect to, the proposed Restricted Payment: (i) no Default or Event of Default has occurred and is continuing, (ii) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption "-- Incurrence of Indebtedness and Issuance of Disqualified Stock," and 97 (iii) the aggregate amount of all Restricted Payments made after the Reference Date does not exceed the sum of: (A) 50% of the aggregate Consolidated Net Income of the Company during the period (taken as one accounting period) from the first day of the Company's first fiscal quarter commencing after the Closing Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net Income is a loss, minus 100% of such amount); plus (B) 100% of the aggregate net cash proceeds received by the Company after the Reference Date as a capital contribution or from the issuance or sale (other than to a Subsidiary) of either (1) Qualified Equity Interests of the Company or (2) debt securities or Disqualified Stock that have been converted into or exchanged for Qualified Stock of the Company, together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions, so long as no Default or Event of Default has occurred and is continuing or would occur: (a) the payment of any dividend within 60 days after the date of declaration thereof, if at the declaration date such payment would not have been prohibited by the foregoing provisions; (b) the repurchase, redemption or other acquisition or retirement for value of any shares of Capital Stock of the Company, in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, Qualified Equity Interests of the Company or of the Parent, the proceeds of which are contributed to the Company as a capital contribution on a substantially concurrent basis; (c) the purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, shares of Qualified Equity Interests of the Company or of the Parent, the proceeds of which are contributed to the Company as a capital contribution on a substantially concurrent basis; (d) the purchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance or sale (other than to a Subsidiary) of, Subordinated Indebtedness, so long as the Company or a Restricted Subsidiary would be permitted to refinance such original Subordinated Indebtedness with such new Subordinated Indebtedness pursuant to clause (4) of the definition of Permitted Indebtedness set forth in the covenant entitled "Incurrence of Indebtedness and Issuance of Disqualified Stock;" (e) the repurchase of any Subordinated Indebtedness at a purchase price not greater than 101% of the principal amount of such Subordinated Indebtedness in the event of a Change of Control in accordance with provisions similar to the "Change of Control" covenant; provided that, prior to or simultaneously with such repurchase, the Company has made the Change of Control Offer as provided in such covenant with respect to the Notes and has repurchased all Notes validly tendered for payment in connection with such Change of Control Offer; (f) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company, options on any such shares or related stock appreciation rights or similar securities, or any dividend, distribution or advance to the Parent for the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Parent, options on any such shares or related stock appreciation rights or similar securities, in each case held by officers, directors or employees or former officers, directors or employees (or their estates or beneficiaries under their estates) of the Company, the Parent or any Subsidiary of the Company, as 98 applicable, or by any employee benefit plan of the Company, the Parent or any Subsidiary of the Company, as applicable, upon death, disability, retirement or termination of employment or pursuant to the terms of any employee benefit plan or any other agreement under which such shares of stock or related rights were issued; provided that the aggregate amount of cash applied by the Company for such purchase, redemption, acquisition, cancellation or other retirement of such shares of Capital Stock of the Company or the Parent after the Reference Date does not exceed $7.5 million in the aggregate (excluding for purposes of calculating such amount the aggregate amount received by any Person in connection with such purchase, redemption, acquisition, cancellation or other retirement of such shares that is concurrently used to repay loans made to such Person by the Company pursuant to clause (f) of the definition of "Permitted Investment"); (g) the payment of dividends or other distributions or the making of loans or advances to the Parent in amounts required for the Parent to pay franchise taxes and other fees required to maintain its existence and provide for all other customary operating costs of the Parent to the extent attributable to the ownership and operation of the Company and its Restricted Subsidiaries, including, without limitation, in respect of director fees and expenses, administrative, legal and accounting services provided by third parties and other customary costs and expenses including all costs and expenses with respect to filings with the Commission; (h) the payment of dividends or other distributions by the Company to the Parent in amounts required to pay the tax obligations of the Parent attributable to the Company and its Subsidiaries, determined as if the Company and its Subsidiaries had filed a separate consolidated, combined or unitary return for the relevant taxing jurisdiction; provided that (x) the amount of dividends paid pursuant to this clause (h) to enable the Parent to pay Federal and state income taxes (and franchise taxes based on income) at any time shall not exceed the amount of such Federal and state income taxes (and franchise taxes based on income) actually owing by the Parent at such time to the respective tax authorities for the respective period and (y) any refunds received by the Parent attributable to the Company or any of its Subsidiaries shall promptly be returned by the Parent to the Company through a contribution or purchase of common stock (other than Disqualified Stock) of the Company; (i) the payment of dividends or other distributions or the making of loans or advances to the Parent in amounts required for the Parent to pay to the Equity Sponsors an annual amount not to exceed $500,000 for payment of management consulting or financial advisory services provided to the Company or any of the Subsidiaries; and (j) other Restricted Payments not to exceed $10 million at any one time outstanding. The actions described in clauses (e), (f), (g), (h), (i) and (j) of this paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph but will reduce the amount that would otherwise be available for Restricted Payments under clause (iii) of the first paragraph of this covenant and the actions described in clauses (a), (b), (c) and (d) of the preceding paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph and will not reduce the amount that would otherwise be available for Restricted Payments under clause (iii) of the first paragraph of this covenant. For the purpose of making any calculations under the indenture (i) if a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will be deemed to have made an Investment in an amount equal to the greater of the fair market value or net book value of the net assets of such Restricted Subsidiary at the time of such designation as determined by the Board of the Company, and (ii) any property transferred to or from an Unrestricted Subsidiary will be valued at fair market value at the time of such transfer, as determined by the Board of the Company. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined by the Board of the Company whose resolution with respect thereto shall be delivered 99 to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officer's certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required under "Certain Covenants -- Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the indenture. If the aggregate amount of all Restricted Payments calculated under the foregoing provision includes an Investment in an Unrestricted Subsidiary or other Person that thereafter becomes a Restricted Subsidiary, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the lesser of (x) the net asset value of such Subsidiary at the time it becomes a Restricted Subsidiary and (y) the initial amount of such Investment. If an Investment resulted in the making of a Restricted Payment, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the amount of any net reduction in such Investment (resulting from the payment of interest or dividends, loan repayment, transfer of assets or otherwise, other than the redesignation of an Unrestricted Subsidiary or other Person as a Restricted Subsidiary), to the extent such net reduction is not included in the Company's Consolidated Net Income; provided that the total amount by which the aggregate amount of all Restricted Payments may be reduced may not exceed the lesser of (x) the cash proceeds received by the Company and its Restricted Subsidiaries in connection with such net reduction and (y) the initial amount of such Investment. In computing the Consolidated Net Income of the Company for purposes of the foregoing clause (iii)(A) of the first paragraph of this covenant, (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of the indenture, such Restricted Payment will be deemed to have been made in compliance with the indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. Incurrence of Indebtedness and Issuance of Disqualified Stock The Company will not, and will not permit any Restricted Subsidiary to, create, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of, or otherwise incur (collectively, "incur"), any Indebtedness (including Acquired Indebtedness and the issuance of Disqualified Stock), except that the Company and any Subsidiary Guarantors may incur Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for the immediately preceding four full fiscal quarters for which internal financial statements are available, taken as one accounting period, would have been equal to at least 2.0 to 1.0. In making the foregoing calculation for any four-quarter period that includes the Reference Date, pro forma effect will be given to the acquisition and related financing transactions, as if such transactions had occurred at the beginning of such four-quarter period. In addition (but without duplication), in making the foregoing calculation, pro forma effect will be given to: (i) the incurrence of such Indebtedness and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred and the application of such proceeds occurred at the beginning of such four-quarter period; (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company or its Restricted Subsidiaries since the first day of such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period; and (iii) the 100 acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any company, entity or business acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, as if such acquisition or disposition occurred at the beginning of such four-quarter period. In making a computation under the foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving credit facility will be computed based on the average daily balance of such Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at the option of the Company, a fixed or floating rate of interest, interest thereon will be computed by applying, at the option of the Company, either the fixed or floating rate, and (C) the amount of any Indebtedness that bears interest at a floating rate will be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligations applicable to such Indebtedness if such Hedging Obligations have a remaining term at the date of determination in excess of 12 months). Notwithstanding the foregoing, the Company may, and may permit its Restricted Subsidiaries to, incur the following Indebtedness ("Permitted Indebtedness"): (1) Indebtedness of the Company or any Subsidiary Guarantor under the Credit Agreement (and the incurrence by any Guarantor of guarantees thereof) in an aggregate principal amount at any one time outstanding not to exceed $375 million, less any amounts applied to the permanent reduction of such credit facilities pursuant to the provisions of the covenant described under the caption "-- Repurchase at the Option of Holders -- Asset Sales;" (2) Indebtedness represented by the notes (other than the Additional Notes) and the Guarantees; (3) Existing Indebtedness; (4) the incurrence by the Company of Permitted Refinancing Indebtedness in exchange for, or the net cash proceeds of which are used to refund, refinance or replace, any Indebtedness that is permitted to be incurred under clause (2) or (3) above; (5) Indebtedness owed by the Company to any Restricted Subsidiary or owed by any Restricted Subsidiary to the Company or a Restricted Subsidiary (provided that such Indebtedness is held by the Company or such Restricted Subsidiary); provided, however, that: (a) any Indebtedness of the Company or any Subsidiary Guarantor owing to any such Restricted Subsidiary is unsecured and subordinated in right of payment from and after such time as the notes shall become due and payable (whether at Stated Maturity, acceleration, or otherwise) to the payment and performance of the Company's obligations under the notes or the Subsidiary Guarantor's obligations under its Guarantee, as the case may be; and (b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary thereof and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary thereof, shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (5); (6) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; (7) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (8) either (A) Capitalized Lease Obligations of the Company or any Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests so long as (x) such Indebtedness is not secured by any property or assets of the Company or any 101 Restricted Subsidiary other than the property and assets so acquired and (y) such Indebtedness is created within 90 days of the acquisition of the related property; provided that the aggregate amount of Indebtedness under clauses (A) and (B) does not exceed 15% of Consolidated Tangible Assets at any one time outstanding; (9) Guarantees by any Restricted Subsidiary made in accordance with the provisions of the covenant described under the caption "-- Guarantees of Indebtedness by Restricted Subsidiaries;" (10) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two business days of incurrence; (11) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self- insurance or similar requirements in the ordinary course of business; (12) the incurrence of Non-Recourse Indebtedness by Permitted Joint Ventures that are Restricted Subsidiaries; (13) Indebtedness incurred by a Receivables Subsidiary pursuant to a Receivables Program; provided that, after giving effect to any such incurrence of Indebtedness, the aggregate principal amount of all Indebtedness incurred under this clause (13) and then outstanding does not exceed $30 million; and (14) Indebtedness of the Company, any Restricted Subsidiary or any Permitted Joint Venture not permitted by any other clause of this definition, in an aggregate principal amount not to exceed $30 million at any one time outstanding. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Disqualified Stock" covenant, in the event that any proposed Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (1) through (14) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company will be permitted to classify such item of Indebtedness on the date of its incurrence, or later reclassify all or a portion of such item of Indebtedness, in any manner that complies with this covenant. Indebtedness under the Credit Agreement incurred on the Reference Date shall be deemed to have been incurred on the Reference Date in reliance on the exception provided by clause (1) above. Liens The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Pari Passu Indebtedness or Subordinated Indebtedness of the Company on or with respect to any of its property or assets, including any shares of stock or Indebtedness of any Restricted Subsidiary, whether owned at the Closing Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (i) in the case of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien and (ii) in the case of any Lien securing Pari Passu Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to or ranks equally with such Lien. The Company will not permit any Subsidiary Guarantor to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Pari Passu Indebtedness or Subordinated Indebtedness of such Subsidiary Guarantor on or with respect to such Subsidiary Guarantor's properties or assets, including any shares of stock or Indebtedness of any other Restricted Subsidiary, whether owned at the date of the indenture or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (i) in the case of any Lien securing Pari Passu 102 Indebtedness of such Subsidiary Guarantor, each Guarantee of such Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds that is senior in priority to or ranks equally with such Lien and (ii) in the case of any Lien securing Subordinated Indebtedness of such Subsidiary Guarantor, each Guarantee of such Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien. Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to: (1) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock; (2) pay any Indebtedness owed to the Company or any other Restricted Subsidiary; (3) make loans or advances to the Company or any other Restricted Subsidiary; or (4) transfer any of its properties or assets to the Company or any other Restricted Subsidiary. However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) any agreement (including the Credit Agreement) in effect on the Reference Date; (2) customary non-assignment provisions of any lease, license or other contract entered into in the ordinary course of business by the Company or any Restricted Subsidiary; (3) the refinancing or successive refinancing of Indebtedness incurred under the agreements in effect on the Reference Date (including the Credit Agreement), so long as such encumbrances or restrictions are no more restrictive, taken as a whole, than those contained in such original agreement; (4) any agreement or other instrument of a Person acquired by the Company or any Restricted Subsidiary in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; (5) purchase money obligations for acquired property permitted under the covenant entitled "-- Incurrence of Indebtedness and Issuance of Disqualified Stock" that impose restrictions of the nature described in clause (4) of the preceding paragraph on the property so acquired; (6) any agreement for the sale of a Restricted Subsidiary or an asset that restricts distributions by that Restricted Subsidiary or transfers of such asset pending its sale; (7) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described above under the caption "-- Liens" that limits the right of the debtor to dispose of the assets securing such Indebtedness; (8) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; (9) Non-Recourse Indebtedness of any Permitted Joint Venture permitted to be incurred under the indenture; (10) applicable law or regulation; (11) a Receivables Program with respect to a Receivables Subsidiary; and (12) customary provisions in joint venture, limited liability company operating, partnership, shareholder and other similar agreements entered into in the ordinary course of business reasonably consistent with past practice by the Company or any Restricted Subsidiary. 103 Limitation on Layering Debt Neither the Company nor any Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness or guarantee, as applicable, that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the notes or such Guarantor's Guarantee, respectively. Merger, Consolidation or Sale of Assets Neither the Company nor the Parent will, in a single transaction or series of related transactions, consolidate or merge with or into (whether or not the Company or the Parent, as the case may be, is the surviving corporation), or directly and/or indirectly through its Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (determined on a consolidated basis for the Company or the Parent, as the case may be, and its Subsidiaries, taken as a whole) in one or more related transactions to, another corporation, Person or entity unless: (a) either (i) the Company or the Parent, as the case may be, is the surviving corporation or (ii) the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (the "Surviving Entity") is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia and assumes all the obligations of the Company or the Parent, as the case may be, under the Notes and the indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (b) immediately after giving effect to such transaction and treating any obligation of the Company in connection with or as a result of such transaction as having been incurred as of the time of such transaction, no Default or Event of Default has occurred and is continuing; (c) if such transaction involves the Company, the Company (or the Surviving Entity if the Company is not the continuing obligor under the indenture) could, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the first paragraph of "-- Incurrence of Indebtedness and Issuance of Disqualified Stock;" (d) each Guarantor, unless it is the other party to the transaction described above, has by supplemental indenture confirmed that its Guarantee applies to the Surviving Entity's obligations under the indenture and the Notes; (e) if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of the covenant described above under the caption "--Liens" are complied with; and (f) the Company or the Parent, as the case may be, delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such transaction complies with the requirements of the indenture. The indenture will provide that no Subsidiary Guarantor may consolidate with or merge with or into any other Person or convey, sell, assign, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any other Person (other than the Company or another Subsidiary Guarantor) unless: (a) subject to the provisions of the following paragraph, the Person formed by or surviving such consolidation or merger (if other than such Subsidiary Guarantor) or to which such properties and assets are transferred assumes all of the obligations of such Subsidiary Guarantor under the indenture and its Guarantee, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, (b) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing and (c) the Subsidiary Guarantor delivers, or causes to be 104 delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such transaction complies with the requirements of the indenture. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. In the event of any transaction described in and complying with the conditions listed in the first paragraph of this covenant in which the Company is not the continuing obligor under the indenture, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under the indenture, and thereafter the Company will, except in the case of a lease, be discharged from all of its obligations and covenants under the indenture and Notes. Transactions with Affiliates The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or suffer to exist any transaction with, or for the benefit of, any Affiliate of the Company ("Interested Persons"), unless (a) such transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could have been obtained in an arm's-length transaction with third parties who are not Interested Persons and (b) the Company delivers to the Trustee (i) with respect to any transaction or series of related transactions entered into after the Reference Date involving aggregate payments in excess of $5 million, a resolution of the Company's Board set forth in an officers' certificate certifying that such transaction or transactions complies with clause (a) above and that such transaction or transactions have been approved by the Board (including a majority of the Disinterested Directors) of the Company and (ii) with respect to a transaction or series of related transactions involving aggregate payments equal to or greater than $10 million, a written opinion as to the fairness to the Company or such Restricted Subsidiary of such transaction or series of transactions from a financial point of view issued by an accounting, appraisal or investment banking firm, in each case of national standing. The foregoing covenant will not restrict: (A) transactions among the Company and/or its Restricted Subsidiaries; (B) the Company from paying reasonable and customary regular compensation, indemnification, reimbursement and fees to officers of the Company or any Restricted Subsidiary and to directors of the Company or any Restricted Subsidiary who are not employees of the Company or any Restricted Subsidiary; (C) transactions permitted by the provisions of the covenant described under the caption "Certain Covenants--Restricted Payments;" (D) advances to employees for moving, entertainment and travel expenses and similar expenditures in the ordinary course of business and consistent with past practice; (E) any Receivables Program of the Company or a Restricted Subsidiary; (F) the agreements described herein under the caption "Certain Relationships And Related Transactions" and certain other agreements listed on a schedule to the indenture, in each case as in effect as of the Reference Date or any amendment thereto (so long as the amended agreement is not more disadvantageous to the Holders in any material respect than such agreement immediately prior to such amendment) or any transaction contemplated thereby; and (G) sales of Equity Interests to Affiliates. 105 Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries The Company (a) will not permit any Restricted Subsidiary to issue any Capital Stock unless after giving effect thereto the Company's percentage interest (direct and indirect) in the Capital Stock of such Restricted Subsidiary is at least equal to its percentage interest prior thereto, and (b) will not, and will not permit any Restricted Subsidiary to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted Subsidiary to any Person (other than the Company or a Wholly Owned Restricted Subsidiary); provided, however, that this covenant will not prohibit (i) the sale or other disposition of all, but not less than all, of the issued and outstanding Capital Stock of a Restricted Subsidiary owned by the Company and its Restricted Subsidiaries in compliance with the other provisions of the indenture, (ii) the sale or other disposition of a portion of the issued and outstanding Capital Stock of a Restricted Subsidiary (other than a Subsidiary Guarantor), whether or not as a result of such sale or disposition such Restricted Subsidiary continues or ceases to be a Restricted Subsidiary, if (A) at the time of such sale or disposition, the Company could make an Investment in the remaining Capital Stock held by it or one of its Restricted Subsidiaries in an amount equal to the amount of its remaining Investment in such Person pursuant to the covenant entitled "Restricted Payments" and (B) such sale or disposition is permitted under, and the Company or such Restricted Subsidiary applies the Net Cash Proceeds of any such sale in accordance with, the "Asset Sales" covenant, or (iii) the ownership by directors of director's qualifying shares or the ownership by foreign nationals of Capital Stock of any Restricted Subsidiary, to the extent mandated by applicable law. The Company will not permit any Restricted Subsidiary to issue any Preferred Stock other than to the Company or any Subsidiary Guarantor. Payments for Consent The indenture will provide that neither the Company nor any of its Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Guarantees of Indebtedness by Restricted Subsidiaries The Company will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any other manner become liable for the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for a guarantee of payment of the Notes by such Restricted Subsidiary on a senior subordinated basis on the same terms as set forth in the indenture and (b) with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee is subordinated to such Restricted Subsidiary's guarantee with respect to the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes, provided that the foregoing provision will not be applicable to any guarantee by any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. Any guarantee by a Restricted Subsidiary of the Notes pursuant to the preceding paragraph may provide by its terms that it will be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer to any Person not an Affiliate of the Company of all of the Company's and the Restricted Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the indenture) or (ii) the release or discharge of the guarantee that resulted in the creation of such guarantee of the Notes, except a discharge or release by or as a result of payment under such guarantee. 106 Issuances of Guarantees by New Restricted Subsidiaries The Company will provide to the Trustee, on the date that any Person (other than a Foreign Subsidiary) becomes a Wholly Owned Restricted Subsidiary, a supplemental indenture to the indenture, executed by such new Wholly Owned Restricted Subsidiary, providing for a full and unconditional guarantee on a senior subordinated basis by such new Wholly Owned Restricted Subsidiary of the Company's obligations under the Notes and the indenture to the same extent as that set forth in the indenture. Unrestricted Subsidiaries The Board of the Company may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as (i) such Subsidiary has no Indebtedness other than Non-Recourse Indebtedness, (ii) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity, (iii) any Investment in such Subsidiary made as a result of designating such Subsidiary an Unrestricted Subsidiary will not violate the provisions of the covenant described under the caption "-- Restricted Payments," (iv) neither the Company nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, with such Subsidiary other than those that might be obtained at the time from Persons who are not Affiliates of the Company, (v) neither the Company nor any Restricted Subsidiary has any obligation to subscribe for additional shares of Capital Stock or other equity interests in such Subsidiary, or to maintain or preserve such Subsidiary's financial condition or to cause such Subsidiary to achieve certain levels of operating results, and (vi) such Unrestricted Subsidiary has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Notwithstanding the foregoing, the Company may not designate any Subsidiary Guarantor (whether or not existing as of the Closing Date) as an Unrestricted Subsidiary. The Board of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary; provided that (i) no Default or Event of Default has occurred and is continuing following such designation and (ii) the Company would, at the time of making such designation and giving such pro forma effect as if such designation had been made at the beginning of the applicable four quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption "Incurrence of Indebtedness and Issuance of Disqualified Stock" (treating any Indebtedness of such Unrestricted Subsidiary as the incurrence of Indebtedness by a Restricted Subsidiary). Reports Whether or not the Company is required to file reports with the Commission, the Company will file with the Commission all such annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Section 13(a) or 15(d) under the Exchange Act. The Company will also be required (a) to supply to the Trustee and each Holder, or supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective Holder promptly upon written request. Notwithstanding the foregoing, so long as the Parent guarantees the Notes, the reports, information and other documents required to be filed and provided as described above may be those of the Parent, 107 rather than the Company, so long as such filings (i) would satisfy the requirements of the Exchange Act and regulations promulgated thereunder and (ii) disclose the Company's results of operations and financial condition in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in at least such detail as would be required if the Company were filing such report. EVENTS OF DEFAULT AND REMEDIES The following will be "Events of Default" under the indenture: (a) default in the payment of any interest on any note when it becomes due and payable, and continuance of such default for a period of 30 days (whether or not prohibited by the subordination provisions of the indenture); (b) default in the payment of the principal of (or premium, if any, on) any note when due (whether or not prohibited by the subordination provisions of the indenture); (c) failure to perform or comply with the indenture provisions described under the captions "-- Repurchase at the Option of Holders -- Change of Control," "-- Repurchase at the Option of Holders -- Asset Sales," "-- Certain Covenants -- Restricted Payments," "Incurrence of Indebtedness and Issuance of Disqualified Stock" or "-- Merger, Consolidation or Sale of Assets;" (d) default in the performance, or breach, of any covenant or agreement of the Company or any Guarantor contained in the indenture or in any Guarantee (other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with elsewhere herein), and continuance of such default or breach for a period of 60 days after written notice has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes then outstanding; (e) (i) an event of default has occurred under any mortgage, bond, indenture, loan agreement or other document evidencing an issue of Indebtedness of the Company, the Parent or any Restricted Subsidiary, which issue individually or in the aggregate has an aggregate outstanding principal amount of not less than $10 million, and such default has resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable or (ii) a default in any payment when due at final maturity of any such Indebtedness; (f) failure by the Company, the Parent or any of its Restricted Subsidiaries to pay one or more final judgments the uninsured portion of which exceeds in the aggregate $10 million, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; (g) any Guarantee ceases to be in full force and effect or is declared null and void or any such Guarantor denies that it has any further liability under any Guarantee, or gives notice to such effect (other than by reason of the termination of the indenture or the release of any such Guarantee in accordance with the indenture); or (h) the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to the Company, the Parent or any Significant Subsidiary. If an Event of Default (other than as specified in clause (h) above) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the notes then outstanding may, and the Trustee at the request of such Holders will, declare the principal of, and accrued interest on, all of the notes then outstanding immediately due and payable and, upon any such declaration, such principal and such interest will become due and payable immediately. If an Event of Default specified in clause (h) above occurs and is continuing, then the principal of and accrued interest on all of the outstanding notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration under the indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate 108 principal amount of the outstanding notes, by written notice to the Company and the Trustee, may rescind such declaration and its consequences if: (i) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all notes, (B) all unpaid principal of (and premium, if any, on) any outstanding notes that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the notes, (C) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the notes and (D) all sums paid or advanced by the Trustee under the indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (ii) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the notes that have become due solely by such declaration of acceleration, have been cured or waived. No such rescission will affect any subsequent default or impair any right consequent thereon. No Holder has any right to institute any proceeding with respect to the indenture or any remedy thereunder, unless the Holders of at least 25% in aggregate principal amount of the outstanding notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding, the Trustee has failed to institute any such proceeding within 60 days after receipt of such notice, request and offer of indemnity and the Trustee, within such 60-day period, has not received directions inconsistent with such written request by Holders of a majority in aggregate principal amount of the outstanding notes. Such limitations do not apply, however, to a suit instituted by a Holder for the enforcement of the payment of the principal of, premium, if any, or interest on such note on or after the respective due dates expressed in such Note. The Holders of not less than a majority in aggregate principal amount of the notes then outstanding may, on behalf of the Holders of all of the notes waive any past defaults under the indenture, except a default in the payment of the principal of (and premium, if any) or interest on any note, or in respect of a covenant or provision that under the indenture cannot be modified or amended without the consent of the holder of each note outstanding. If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee will mail to each Holder notice of the Default or Event of Default within 90 days after the occurrence thereof. Except in the case of a Default or an Event of Default in payment of principal of (and premium, if any, on) or interest on any notes, the Trustee may withhold the notice to the Holders if a committee of its trust officers in good faith determines that withholding such notice is in the interests of the Holders. The Company is required to furnish to the Trustee annual statements as to the performance by the Company and the Guarantors of their obligations under the indenture and as to any default in such performance. The Company is also required to notify the Trustee within five days of any Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No past, present or future director, officer, employee, incorporator or stockholder of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or the Guarantors under the notes, the indenture or the Guarantees, as applicable, or any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, terminate the obligations of the Company and the Guarantors with respect to the outstanding notes ("legal defeasance"). Such legal defeasance means that the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding notes, except for (i) the rights of Holders of outstanding notes to receive payments in respect of the principal of (and premium, if any, on) and interest on such notes when such payments are due, (ii) the Company's obligations to issue temporary notes, register the transfer or exchange of any notes, 109 replace mutilated, destroyed, lost or stolen notes, maintain an office or agency for payments in respect of the notes and segregate and hold such payments in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv) the legal defeasance provisions of the indenture. In addition, the Company may, at its option and at any time, elect to terminate the obligations of the Company and any Guarantor with respect to certain covenants set forth in the indenture and described under "Certain Covenants" above, and any omission to comply with such obligations would not constitute a Default or an Event of Default with respect to the notes ("covenant defeasance"). In order to exercise either legal defeasance or covenant defeasance: (a) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders, money in an amount, or U.S. Government Obligations (as defined in the indenture) that through the scheduled payment of principal and interest thereon will provide money in an amount, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of (and premium, if any, on) and interest on the outstanding notes at maturity (or upon redemption, if applicable) of such principal or installment of interest; (b) no Default or Event of Default has occurred and is continuing on the date of such deposit or, insofar as an event of bankruptcy under clause (h) of "Events of Default" above is concerned, at any time during the period ending on the 91st day after the date of such deposit; (c) such legal defeasance or covenant defeasance may not result in a breach or violation of, or constitute a default under, the indenture, the Credit Agreement or any other material agreement or instrument to which the Company or any Guarantor is a party or by which it is bound; (d) in the case of legal defeasance, the Company must deliver to the Trustee an opinion of counsel stating that the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or since the date hereof, there has been a change in applicable federal income tax law, to the effect, and based thereon such opinion must confirm that, the Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (e) in the case of covenant defeasance, the Company must have delivered to the Trustee an opinion of counsel to the effect that the Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (f) the Company must have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to either the legal defeasance or the covenant defeasance, as the case may be, have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange notes in accordance with the indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer document and the Company may require a Holder to pay any taxes and fees required by law or permitted by the indenture. The Company is not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed. The registered Holder of a note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Modifications and amendments of the indenture and any Guarantee may be made by the Company, any affected Guarantor and the Trustee with the consent of the Holders of a majority in aggregate outstanding principal amount of the notes; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding notes affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, any notes, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon 110 the redemption thereof, or change the coin or currency in which any notes or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (b) amend, change or modify the obligation of the Company to make and consummate an Excess Proceeds Offer with respect to any Asset Sale in accordance with the covenant described under the covenant entitled "Repurchase at the Option of Holders -- Asset Sales" or the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control in accordance with the covenant entitled "Repurchase at the Option of Holders -- Change of Control," including, in each case, amending, changing or modifying any definition relating thereto; (c) reduce the percentage in principal amount of notes outstanding, the consent of whose Holders is required for any waiver of compliance with certain provisions of, or certain defaults and their consequences provided for under, the indenture; (d) waive a default in the payment of principal of, or premium, if any, or interest on the notes or reduce the percentage or aggregate principal amount of notes outstanding the consent of whose Holders is necessary for waiver of compliance with certain provisions of the indenture or for waiver of certain defaults; (e) modify the ranking or priority of the notes or the Guarantee of any Guarantor; or (f) release any Guarantor from any of its obligations under its Guarantee or the indenture other than in accordance with the terms of the indenture. The Holders of a majority in aggregate principal amount of the notes outstanding may waive compliance with certain restrictive covenants and provisions of the indenture. Without the consent of any Holders, the Company and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental to the indenture for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company in the indenture and in the notes; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to add additional Events of Default; or (4) to provide for uncertificated notes in addition to or in place of the certificated notes; or (5) to evidence and provide for the acceptance of appointment under the indenture by a successor Trustee; or (6) to secure the notes; or (7) to cure any ambiguity, to correct or supplement any provision in the indenture that may be defective or inconsistent with any other provision in the indenture, or to make any other provisions with respect to matters or questions arising under the indenture, provided that such actions pursuant to this clause do not adversely affect the interests of the Holders in any material respect; or (8) to comply with any requirements of the Commission in order to effect and maintain the qualification of the indenture under the Trust indenture Act; or (9) to provide for the issuance of Additional notes in accordance with the limitations set forth in the indenture; or (10) to allow any Guarantor to execute a supplemental indenture and a Guarantee with respect to the notes. Notwithstanding the foregoing, neither the Company nor the Trustee may amend any provisions of the indenture or the notes concerning (i) the subordination of the notes and the Guarantees or (ii) legal defeasance or covenant defeasance without, in either case, the prior written consent of the Agent Bank, acting on behalf of the Banks under the Credit Agreement. CONCERNING THE TRUSTEE State Street Bank and Trust Company, N.A., the Trustee under the indenture, is the initial paying agent and registrar for the Notes. The indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the indenture. Under the indenture, the Holders of 111 a majority in outstanding principal amount of the notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. If an Event of Default has occurred and is continuing, the Trustee will exercise such rights and powers vested in it under the indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The indenture and provisions of the Trust indenture Act, incorporated by reference therein, contain limitations on the rights of the Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided, however, that, if it acquires any conflicting interest (as defined in the Trust indenture Act), it must eliminate such conflict upon the occurrence of an Event of Default or else resign. BOOK-ENTRY, DELIVERY AND FORM The exchange notes will be represented by one or more notes in registered, global form without interest coupons (collectively, the "Global Notes"). The Global Notes will be deposited upon issuance with the Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of Cede & Co., as nominee of DTC, for credit to an account of a direct or indirect participant in DTC, including the Euroclear System ("Euroclear") and Clearstream Banking, S.A. ("Clearstream"). Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be exchanged for Notes in certificated form except in the limited circumstances described below. See "-- Exchange of Global Notes for Certificated Notes." Except in the limited circumstances described below, owners of beneficial interests in the Global Notes will not be entitled to receive physical delivery of Notes in certificated form. Transfers of beneficial interests in the Global Notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and Clearstream), which may change from time to time. Depositary Procedures The following description of the operations and procedures of DTC are provided solely as a matter of convenience. These operations and procedures are solely within the control of DTC and are subject to changes by them. We take no responsibility for these operations and procedures and urges investors to contact the system or its participants directly to discuss these matters. DTC has advised us that DTC is a limited-purpose trust company that was created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks and trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depositary only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants or Indirect Participants. DTC has also advised us that pursuant to procedures established by it: (i) upon deposit of the Global Notes, DTC will credit the accounts of Participants designated by the Initial Purchasers with portions of the principal amount of the Global Notes; and 112 (ii) ownership of the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC, with respect to the Participants, or by the Participants and the Indirect Participants with respect to other owners of beneficial interests in the Global Notes. DTC has advised us that its current practice, upon receipt of any payment in respect of securities such as the exchange notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant Participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the Participants and the Indirect Participants to the beneficial owners of exchange notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee or us. Neither we nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the exchange notes, and we may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Transfers between Participants in DTC will be effected in accordance with DTC's procedures and will be settled in same day funds. DTC has advised us that it will take any action permitted to be taken by a Holder of notes only at the direction of one or more Participants to whose account DTC has credited the interests in the Global Notes and only in respect of such portion of the aggregate principal amount of the notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the notes, DTC reserves the right to exchange the Global Notes for legended notes in certificated form, and to distribute such notes to its Participants. Although DTC has agreed to the foregoing procedures to facilitate transfers of interests in the Global Notes among participants in DTC, it is under no obligation to perform or to continue to perform these procedures, and may discontinue them at any time. Neither the Company nor the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Exchange of Global Notes for Certificated Notes A Global Note is exchangeable for definitive notes in registered certificated form ("Certificated Notes") if: (1) DTC (a) notifies the Company that it is unwilling or unable to continue as depositary for the Global Notes and the Company fails to appoint a successor depositary within 90 days or (b) has ceased to be a clearing agency registered under the Exchange Act; (2) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Certificated Notes; or (3) there shall have occurred and be continuing a Default or Event of Default with respect to the notes. In addition, beneficial interests in a Global Note may be exchanged for Certificated Notes upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the indenture. In all cases, Certificated Notes delivered in exchange for any Global Note or beneficial interests in Global Notes will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear an applicable restrictive legend, unless that legend is not required by applicable law. 113 Exchange of Certificated Notes for Global Notes Certificated Notes may be exchanged for beneficial interests in the Global Note. Same-Day Settlement and Payment The indenture requires that payments in respect of the notes represented by the Global Notes (including principal, premium, if any, and interest, if any) be made by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. With respect to Certificated Notes, we will make all payments of principal, premium, if any, and interest, if any, by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. The notes represented by the Global Notes are expected to be eligible to trade in the PORTAL market and to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such notes will, therefore, be required by DTC to be settled in immediately available funds. We expect that secondary trading in any Certificated Notes will also be settled in immediately available funds. ADDITIONAL INFORMATION Anyone who receives this prospectus may obtain a copy of the indenture without charge by writing to InSight Health Services Corp., 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660, Attention: General Counsel. GOVERNING LAW The Indenture and the notes will be governed by, and in accordance with, the laws of the State of New York. CERTAIN DEFINITIONS "Acquired Indebtedness" means Indebtedness of a Person (a) existing at the time such Person is merged with or into the Company or a Subsidiary or becomes a Subsidiary or (b) assumed in connection with the acquisition of assets from such Person. "Affiliate" means, with respect to any specified person, (a) any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 10% or more of such specified person's Capital Stock or any executive officer or director of any such specified person or other person. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Bank" means Bank of America, N.A. and its successors under the Credit Agreement, in its capacity as administrative agent. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of merger, consolidation or similar arrangement) (collectively, a "transfer") by the Company or any Restricted Subsidiary other than in the ordinary course of business and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Shares of Capital Stock of any of the Company's Restricted Subsidiaries (which shall be deemed to include the sale, grant or conveyance of any interest in the income, profits or proceeds therefrom), in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (x) that have a fair market value in excess of $2 million or (y) for Net Cash Proceeds in excess of $2 million. For the purposes of this definition, the term "Asset Sale" does not include (a) any transfer of properties or assets (i) that is governed by the provisions of the indenture described under the captions "-- Certain Covenants--Merger, Consolidation or Sale of Assets," "-- Limitation on Issuances and sales of Capital Stock of Restricted Subsidiaries" (to the 114 extent of clause (a) thereof) or "-- Restricted Payments," (ii) between or among the Company and its Restricted Subsidiaries pursuant to transactions that do not violate any other provision of the indenture or (iii) representing obsolete or permanently retired equipment and facilities or (b) the sale or exchange of equipment in connection with the purchase or other acquisition of other equipment, in each case used in the business of the Company or its Restricted Subsidiaries as it was in existence on the Reference Date or any business determined by the Board of the Company in its good faith judgment to be reasonably related thereto. Notwithstanding anything to the contrary set forth above, a disposition of Receivables and Related Assets other than pursuant to a Receivables Program contemplated under the provisions described under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock" shall be deemed to be an Asset Sale. "Banks" means the banks and other financial institutions that from time to time are lenders under the Credit Agreement. "Board" means the Company's Board of Directors or the Parent's Board of Directors, as applicable. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are authorized or obligated by law or executive order to close. "Capital Stock" of any Person means any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such Person's equity interest (however designated), whether now outstanding or issued after the Closing Date. "Capitalized Lease Obligation" means, with respect to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is required to be accounted for as a capital lease on the balance sheet of that Person. "Change of Control" means the occurrence of any of the following: (a) the consummation of any transaction (including, without limitation, any merger or consolidation) (a) prior to a Public Equity Offering by the Company or the Parent, the result of which is that the Principals and their Related Parties become the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act) of less than 50% of the Voting Stock of the Company or the Parent, as the case may be (measured by voting power rather than the number of shares), or (b) after a Public Equity Offering of the Company or the Parent, any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act), other than the Principals and their Related Parties, become the beneficial owner (as defined above), directly or indirectly, of 35% or more of the Voting Stock of the Company or the Parent, as the case may be, and such person is or becomes, directly or indirectly, the beneficial owner of a greater percentage of the voting power of the Voting Stock of the Company or the Parent, as the case may be, calculated on a fully diluted basis, than the percentage beneficially owned by the Principals and their Related Parties; (b) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Company and its Subsidiaries or the Parent and its Subsidiaries, in each case, taken as a whole, to any "person" (as the term is defined in Section 13(d)(3) of the Exchange Act) other than the Principals or Related Parties of the Principals; (c) the first day on which a majority of the members of the Board of the Company or the Parent are not Continuing Directors; or (d) the Company or the Parent is liquidated or dissolved or adopts a plan of liquidation or dissolution, other than in a transaction that complies with the provisions described under "Certain Covenants -- Consolidation, Merger or Sale of Assets." "Closing Date" means the date on which the notes are originally issued under the indenture. 115 "Consolidated EBITDA" means, for any period, the sum of, without duplication, Consolidated Net Income for such period, plus (or, in the case of clause (d) below, plus or minus) the following items to the extent included in computing Consolidated Net Income for such period (a) Fixed Charges for such period, plus (b) the provision for federal, state, local and foreign income taxes of the Company and its Restricted Subsidiaries for such period, plus (c) the aggregate depreciation and amortization expense of the Company and its Restricted Subsidiaries for such period, plus (d) any other non-cash charges for such period, and minus non-cash items increasing Consolidated Net Income for such period, other than non-cash charges or items increasing Consolidated Net Income resulting from changes in prepaid assets or accrued liabilities in the ordinary course of business, plus (e) Minority Interest; provided that fixed charges, income tax expense, depreciation and amortization expense and non-cash charges of a Restricted Subsidiary will be included in Consolidated EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income for such period. "Consolidated Net Income" means, for any period, the net income (or net loss) of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, adjusted to the extent included in calculating such net income or loss by excluding (a) any net after-tax extraordinary or nonrecurring gains or losses (less all fees and expenses relating thereto), (b) any net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales or discontinued operations, (c) the portion of net income (or loss) of any Person (other than the Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Restricted Subsidiary in cash during such period, (d) the net income (or loss) of any Person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, (e) the net income (but not the net loss) of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is at the date of determination restricted, directly or indirectly, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal repayments or otherwise and (f) the cumulative effect of a change in accounting principles. "Consolidated Tangible Assets" means, as of the date of determination, the total assets, less goodwill and other intangibles, shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such a balance sheet is available, determined on a consolidated basis in accordance with GAAP. "Continuing Directors" means, as of any date of determination, any member of the Board of the Company or the Parent, as the case may be, who: (1) was a member of such Board on the Reference Date; (2) was nominated for election or elected to such Board with the approval of the majority of the Continuing Directors who were members of such Board at the time of such nomination or election; or (3) was nominated by one or more of the Principals and the Related Parties. "Credit Agreement" means the credit agreement, to be dated as of the date of the Acquisition, among the Company, the Parent, the Subsidiary Guarantors, the lenders named therein and Bank of America, N.A., as administrative agent, First Union National Bank, as syndication agent, and The CIT Group/ Business Credit, Inc., as documentation agent, providing for up to $225 million in term loan borrowings and $50 million of revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, as such credit agreement (and related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith) may be amended, restated, supplemented, refinanced, extended or otherwise modified from time to time. 116 "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Designated Noncash Consideration" means the fair market value of noncash consideration received by the Company or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Noncash Consideration pursuant to an officer's certificate, setting forth the basis of such valuation, executed by the principal executive officer and the principal financial officer of the Company, less the amount of cash or cash equivalents received in connection with a sale of such Designated Noncash Consideration. "Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior Indebtedness permitted under the indenture the principal amount of which is $25 million or more and that has been specifically designated by the Company, in the instrument creating or evidencing such Senior Indebtedness or in an officers' certificate delivered to the Trustee, as "Designated Senior Indebtedness." "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board is required to deliver a resolution of the Board, to make a finding or otherwise take action under the indenture, a member of the Board who does not have any material direct or indirect financial interest in or with respect to such transaction or series of transactions. "Disqualified Stock" means any class or series of Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise (i) is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the Notes, (ii) is redeemable at the option of the Holder thereof, at any time prior to such final Stated Maturity or (iii) at the option of the Holder thereof is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; provided that any Capital Stock that would constitute Disqualified Stock solely as a result of the provisions therein giving holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the covenants described under the captions "Repurchase at the Option of Holders -- Change of Control" and "-- Asset Sales" described herein and such Capital Stock specifically provides that the issuer will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to the provisions contained in the covenants described under the captions "Repurchase at the Option of Holders--Change of Control" and "-- Asset Sales." "Equity Interests" means Capital Stock and all warrants, options and other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means a public or private offering of Capital Stock (other than Disqualified Stock) of the Parent or the Company. "Equity Sponsors" means J.W. Childs Associates, L.P., J.W. Childs Equity Partners II, L.P., The Halifax Group, L.L.C. and Halifax Capital Partners L.P. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Indebtedness" means the Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Credit Agreement) outstanding on the Reference Date and listed on a schedule to the indenture, until such amounts are repaid. "Existing Notes" means the 9 5/8% Senior Subordinated Notes due 2008 of the Company. "Facility" means any premises, together with the diagnostic imaging and treatment equipment installed therein, used by the Company in the conduct of the business of providing diagnostic imaging and information, treatment and related management services. 117 "Fixed Charge Coverage Ratio" means, for any period, the ratio of Consolidated EBITDA for such period to Fixed Charges for such period. "Fixed Charges" means, for any period, without duplication, the sum of (a) the amount that, in conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on a consolidated statement of operations of the Company and its Restricted Subsidiaries for such period, including, without limitation, (i) amortization of original issue discount, (ii) the net cost of interest rate contracts (including, amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) amortization of debt issuance costs, and (v) the interest component of Capitalized Lease Obligations, plus (b) all dividends and distributions paid (whether or not in cash) on Preferred Stock and Disqualified Stock by the Company or any Restricted Subsidiary (to any Person other than the Company or any of its Restricted Subsidiaries), other than dividends on Equity Interests payable solely in Qualified Equity Interests of the Company, computed on a tax effected basis, plus (c) all interest on any Indebtedness of any Person guaranteed by the Company or any of its Restricted Subsidiaries or secured by a lien on the assets of the Company or any of its Restricted Subsidiaries; provided, however, that Fixed Charges will not include (i) any gain or loss from extinguishment of debt, including the write-off of debt issuance costs, and (ii) the fixed charges of a Restricted Subsidiary to the extent (and in the same proportion) that the net income of such Subsidiary was excluded in calculating Consolidated Net Income pursuant to clause (e) of the definition thereof for such period. "Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a jurisdiction other than the United States or a state thereof or the District of Columbia and that has no material operations or assets in the United States. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, that are in effect on the Closing Date. "guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person entered into in the ordinary course of business under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and other similar financial agreements or arrangements designed to protect such Person against, or manage the exposure of such Person to, fluctuations in interest rates, and (ii) forward exchange agreements, currency swap, currency option and other similar financial agreements or arrangements designed to protect such Person against, or manage the exposure of such Person to, fluctuations in foreign currency exchange rates. "Holder" means the Person in whose name a Note is, at the time of determination, registered on the Registrar's books. "Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (a) every obligation of such Person for money borrowed, (b) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (d) every obligation of such Person issued or assumed as the deferred purchase price of property or services, (e) the attributable value of every Capitalized Lease Obligation of such Person, (f) all Disqualified Stock of such Person valued at its maximum fixed repurchase price, plus accrued and unpaid dividends thereon, (g) all obligations of such Person under or in respect of Hedging Obligations, and (h) every obligation of the type referred to in clauses (a) through (g) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed. For purposes of this definition, the "maximum fixed repurchase price" of any Disqualified Stock that does not have a fixed repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness is required to be determined pursuant to the indenture, and if such price 118 is based upon, or measured by, the fair market value of such Disqualified Stock, such fair market value will be determined in good faith by the board of directors of the issuer of such Disqualified Stock. Notwithstanding the foregoing, trade accounts payable and accrued liabilities arising in the ordinary course of business and any liability for federal, state or local taxes or other taxes owed by such Person will not be considered Indebtedness for purposes of this definition. "Investment" in any Person means, (i) directly or indirectly, any advance, loan or other extension of credit (including, without limitation, by way of guarantee or similar arrangement) or capital contribution to such Person, the purchase or other acquisition of any stock, bonds, notes, debentures or other securities issued by such Person, the acquisition (by purchase or otherwise) of all or substantially all of the business or assets of such Person, or the making of any investment in such Person, (ii) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary. Investments exclude endorsements for deposit or collection in the ordinary course of business and extensions of trade credit on commercially reasonable terms in accordance with normal trade practices. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon, or with respect to, any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. A Person will be deemed to own subject to a Lien any property that such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Minority Interest" means, with respect to any Person, interests in income of such Person's Subsidiaries held by Persons other than such Person or another Subsidiary of such Person, as reflected on such Person's consolidated financial statements. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or cash equivalents, including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (a) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment banks) related to such Asset Sale, (b) provisions for all taxes payable as a result of such Asset Sale, (c) payments made to retire Indebtedness where such Indebtedness is secured by the assets that are the subject of such Asset Sale, (d) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets that are subject to the Asset Sale and (e) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the seller after such Asset Sale, including pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-Recourse Indebtedness" means Indebtedness of a Person (i) as to which neither the Company nor any of its Restricted Subsidiaries (other than such Person), (a) provides any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor or otherwise), and (ii) the obligees of which will have recourse for repayment of the principal of and interest on such Indebtedness and any fees, indemnities, expense reimbursements or other amount of whatsoever nature accrued or payable in connection with such Indebtedness solely against the assets of such Person and not against any of the assets of the Company or its Restricted Subsidiaries (other than such Person). "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Parent" means InSight Health Services Holdings Corp. 119 "Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness that ranks pari passu in right of payment to the Notes and (b) with respect to any Guarantee, Indebtedness that ranks pari passu in right of payment to such Guarantee. "Permitted Business" means the business conducted by the Company, its Restricted Subsidiaries and Permitted Joint Ventures as of the Reference Date and any and all diagnostic imaging and information businesses that in the good faith judgment of the Board of the Company are reasonably related thereto. "Permitted Investments" means any of the following: (a) Investments in (i) United States dollars (including such dollars as are held as overnight bank deposits and demand deposits with banks), (ii) securities with a maturity of one year or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof); (iii) certificates of deposit, Euro-dollar time deposits or acceptances with a maturity of one year or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus of not less than $500,000,000; (iv) any shares of money market mutual or similar funds having assets in excess of $500,000,000; (v) repurchase obligations with a term not exceeding seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above; and (vi) commercial paper with a maturity of one year or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and having a rating (A) from Moody's Investors Service, Inc. of at least P-1 or (B) from Standard & Poor's Ratings Group of at least A-1; (b) Investments by the Company or any Restricted Subsidiary in another Person, if as a result of such Investment (i) such other Person becomes a Restricted Subsidiary or (ii) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its assets to, the Company or a Restricted Subsidiary; (c) Investments by the Company or a Restricted Subsidiary in the Company or a Restricted Subsidiary; (d) Investments in existence on the Reference Date; (e) promissory notes or other evidence of Indebtedness received as a result of Asset Sales permitted under the covenant entitled "Repurchase at the Option of Holders -- Asset Sales;" (f) loans or advances to officers, directors and employees of the Company or any of its Restricted Subsidiaries made (i) in the ordinary course of business in an amount not to exceed $5 million in the aggregate at any one time outstanding or (ii) in connection with the purchase by such Persons of Equity Interests of the Parent so long as the cash proceeds of such purchase received by the Parent are contemporaneously remitted by the Parent to the Company as a capital contribution; (g) any Investment by the Company or any Restricted Subsidiary of the Company in Permitted Joint Ventures made after the Reference Date having an aggregate fair market value, when taken together with all other Investments made pursuant to this clause (g) that are at the time outstanding, not exceeding the greater of (i) $30 million and (ii) 10% of the Consolidated Tangible Assets of the Company as of the last day of the most recent full fiscal quarter ending immediately prior to the date of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value); (h) any Investment by the Company or any Restricted Subsidiary in a trust, limited liability company, special purpose entity or other similar entity in connection with a Receivables Program; provided that (A) such Investment is made by a Receivables Subsidiary and (B) the only assets 120 transferred to such trust, limited liability company, special purpose entity or other similar entity consists of Receivables and Related Assets of such Receivables Subsidiary; and (i) other Investments that do not exceed $20 million in the aggregate at any one time outstanding. "Permitted Joint Venture" means any joint venture, partnership or other Person designated by the Board of the Company, (i) at least 20% of whose Capital Stock with voting power under ordinary circumstances to elect directors (or Persons having similar or corresponding powers and responsibilities) is at the time owned (beneficially or directly) by the Company and/or by one or more Restricted Subsidiaries of the Company and if the Company owns more than 50% of the Capital Stock of the Permitted Joint Venture, such Permitted Joint Venture is either a Restricted Subsidiary of the Company or has been designated as an Unrestricted Subsidiary of the Company in accordance with the provisions described under the caption "-- Unrestricted Subsidiaries," (ii) (x) if it is an Unrestricted Subsidiary, all Indebtedness of such Person is Non-Recourse Indebtedness or (y) if it is a Person other than an Unrestricted Subsidiary, either all Indebtedness of such Person is Non-Recourse Indebtedness or the only Indebtedness of such Person that is not Non-Recourse Indebtedness is Indebtedness as to which any guarantee provided by the Company or a Restricted Subsidiary complies with the covenants described under the captions "Certain Covenants -- Restricted Payments" and "-- Incurrence of Indebtedness and Issuance of Disqualified Stock" and (iii) which is engaged in a Permitted Business; provided that each of Berwyn Magnetic Resonance Center, LLC, Garfield Imaging Center, Ltd., Tom's River Imaging Associates, L.P., St. John's Regional Imaging Center, LLC, Dublin Diagnostic Imaging, LLC, Connecticut Lithotripsy, LLC, Northern Indiana Oncology Center of Porter Memorial Hospital, LLC, Lockport MRI, LLC, Wilkes-Barre Imaging, LLC, Sun Coast Imaging Center, LLC, Granada Hills Open MRI, LLC, Daniel Freeman MRI, LLC, InSight-Premier Health, LLC, Southern Connecticut Imaging Centers, LLC, Parkway Imaging Center, LLC, Metabolic Imaging of Kentucky, LLC, Maine Molecular Imaging, LLC, Greater Waterbury Imaging Center, L.P. and Central Maine Magnetic Imaging Associates shall be deemed to be a Permitted Joint Venture. Any such designation (other than with respect to the Persons identified in the preceding sentence) shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution giving effect to such designation and an officer's certificate certifying that such designation complied with the foregoing provisions. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount of such Permitted Refinancing Indebtedness does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded plus accrued interest plus the lesser of the amount of any premium required to be paid in connection with such refinancings pursuant to the terms of such indebtedness or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing (in each case plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date not earlier than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Permitted Refinancing Indebtedness shall not include Indebtedness of a Restricted Subsidiary that refinances Indebtedness of the Company or Indebtedness of a Restricted Subsidiary that is not a Subsidiary Guarantor that refinances Indebtedness of a Subsidiary Guarantor. 121 "Person" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, partnership interests, participation, rights in or other equivalents (however designated) of such Person's preferred or preference stock, whether now outstanding or issued after the Closing Date, and including, without limitation, all classes and series of preferred or preference stock of such Person. "Principals" means the Equity Sponsors and their respective Affiliates. "Public Equity Offering" means an offer and sale of Capital Stock (other than Disqualified Stock) of the Company or the Parent pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-8 or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "Qualified Equity Interest" means any Qualified Stock and all warrants, options or other rights to acquire Qualified Stock (but excluding any debt security that is convertible into or exchangeable for Capital Stock). "Qualified Stock" of any Person means any and all Capital Stock of such Person, other than Disqualified Stock. "Receivables and Related Assets" means accounts receivable, instruments, chattel paper, health care insurance receivables, obligations, general intangibles and other similar assets, including interest in merchandise or goods, the sale or lease of which give rise to the foregoing, related contractual rights, guarantees, insurance proceeds, collections, other related assets and proceeds of all the foregoing. "Receivables Program" means with respect to any Person, any securitization program pursuant to which such Person pledges, sells or otherwise transfers or encumbers its Receivables and Related Assets, including a trust, limited liability company, special purpose entity or other similar entity. "Receivables Subsidiary" means a Wholly Owned Subsidiary (i) created for the purpose of financing Receivables and Related Assets created in the ordinary course of business of the Company and its Subsidiaries and (ii) the sole assets of which consist of Receivables and Related Assets of the Company and its Subsidiaries and Permitted Investments. "Reference Date" means October 17, 2001, the date of the consummation of the acquisition. "Related Party" means: (1) any controlling stockholder, partner, member, 80% (or more) owned Subsidiary, or immediate family member (in the case of an individual) of any Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of any one or more Principals and/or such other Persons referred to in the immediately preceding clause. "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. Notwithstanding anything to the contrary herein or in the Notes, Toms River Imaging Associates, L.P. will be deemed a Restricted Subsidiary of the Company so long as the Company, directly or indirectly, owns at least 50% of the Voting Stock thereof. "Sale and Leaseback Transaction" means any transaction or series of related transactions pursuant to which the Company or a Restricted Subsidiary sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, of such property or asset to the seller or transferor. "Senior Bank Debt" means the Obligations outstanding under the Credit Agreement. 122 "Senior Indebtedness" means (i) the Senior Bank Debt and any Hedging Obligations owing by the Company or any Guarantor to any lender which is a party to the Credit Agreement (or to any Affiliate of any such lender), (ii) any other Indebtedness permitted to be incurred by the Company or any Restricted Subsidiary under the terms of the indenture and (iii) any Indebtedness of the Parent, unless, in the case of clauses (ii) and (iii), the instrument under which such Indebtedness is incurred expressly provides that it is subordinated in right of payment to any Indebtedness for money borrowed. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness will not include (i) Indebtedness evidenced by the Notes or the Guarantees, (ii) Indebtedness of the Company or any Guarantor that is expressly subordinated in right of payment to any Senior Indebtedness of the Company or such Guarantor or the Notes or such Guarantor's Guarantee, (iii) Indebtedness of the Company that by operation of law is subordinate to any general unsecured obligations of the Company, (iv) Indebtedness of the Company or any Guarantor to the extent incurred in violation of the indenture, (v) any liability for federal, state or local taxes or other taxes, owed or owing by the Company or the Parent, (vi) trade account payables owed or owing by the Company or any Guarantor, (vii) amounts owed by the Company or any Guarantor for compensation to employees or for services rendered to the Company or such Guarantor, (viii) Indebtedness of the Company to any Restricted Subsidiary or any other Affiliate of the Company, (ix) Disqualified Stock of the Company or any Guarantor, and (x) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 of the United States Code is without recourse to the Company or any Restricted Subsidiary. "Significant Subsidiary" means any Restricted Subsidiary of the Company that, together with its Subsidiaries, (a) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated net revenues of the Company and its Subsidiaries, (b) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the most recently available consolidated financial statements of the Company for such fiscal year or (c) was organized or acquired after the beginning of such fiscal year and would have been a Significant Subsidiary if it had been owned during such entire fiscal year. "Stated Maturity" means, when used with respect to any note or any installment of interest thereon, the date specified in such note as the fixed date on which the principal of such note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor that is subordinated in right of payment to the Notes or the Guarantee issued by such Guarantor, as the case may be. "Subsidiary" means any Person a majority of the equity ownership or Voting Stock of which is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company. Notwithstanding anything to the contrary herein or in the Notes, Toms River Imaging Associates, L.P. will be deemed a Subsidiary of the Company so long as the Company, directly or indirectly, owns at least 50% of the Voting Stock thereof. "Subsidiary Guarantors" means, collectively, all Wholly Owned Restricted Subsidiaries that are incorporated in the United States or a state thereof or the District of Columbia. "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the Board of the Company as an Unrestricted Subsidiary in accordance with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted Subsidiary. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes has, or might have, voting power by reason of the happening of any contingency). 123 "Weighted Average Life" means, as of the date of determination with respect to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a) the sum of the products of (i) the number of years from the date of determination to the date or dates of each successive scheduled principal or liquidation value payment of such Indebtedness or Disqualified Stock, respectively, multiplied by (ii) the amount of each such principal or liquidation value payment by (b) the sum of all such principal or liquidation value payments. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of the outstanding Voting Stock (other than directors' qualifying shares or shares of foreign Restricted Subsidiaries required to be owned by foreign nationals pursuant to applicable law) of which is owned, directly or indirectly, by the Company. "Wholly Owned Subsidiary" means any Subsidiary, all of the outstanding Voting Stock (other than directors' qualifying shares or shares of foreign Subsidiaries required to be owned by foreign nationals pursuant to applicable law) of which is owned, directly or indirectly, by the Company. 124 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS GENERAL The following discussion summarizes certain material U.S. federal income tax considerations generally applicable to holders of the notes. The U.S. federal income tax considerations set forth below are based upon currently existing provisions of the Internal Revenue Code (Code), applicable permanent, temporary and proposed Treasury regulations, judicial authority, and current administrative rulings and pronouncements of the IRS. There can be no assurance that the IRS will not take a contrary view, and no ruling from the IRS has been, or will be, sought on the issues discussed herein. Legislative, judicial, or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences discussed below. The summary is not a complete analysis or description of all potential U.S. federal income tax considerations that may be relevant to, or of the actual tax effect that any of the matters described herein will have on, particular holders, and does not address foreign, state, local or other tax consequences. This summary does not purport to address special classes of taxpayers (such as S corporations, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, broker-dealers and tax-exempt organizations) who are subject to special treatment under the U.S. federal income tax laws, or persons that hold notes that are a hedge against, or that are hedged against, currency risk or that are part of a straddle or conversion transaction, or persons whose functional currency within the meaning of section 985 of the Code is not the U.S. dollar. Furthermore, estate and gift tax consequences are not discussed herein. The following discussion assumes that the exchange notes are held as capital assets within the meaning of section 1221 of the Code. As used herein, the term "U.S. Holder" means a beneficial owner of the notes that is (1) a citizen or resident of the United States for U.S. federal income tax purposes, (2) a corporation or a partnership (or entity treated as a corporation or partnership for U.S. tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof (including the District of Columbia), (3) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or (4) a trust if (a) a U.S. court can exercise primary supervision over the administration of such trust and (b) one or more U.S. fiduciaries has the authority to control all of the substantial decisions of such trust. As used herein the term "Non-U.S. Holder" means a beneficial holder of notes that is not a U.S. Holder. Because individual circumstances may differ, each holder of the notes is strongly urged to consult his or her own tax advisor with respect to his or her particular tax situation and as to any U.S. federal, foreign, state, local or other tax considerations (including any possible changes in tax law) affecting the exchange, holding and disposition of the notes. EXCHANGE OFFER We have obtained an opinion from Kaye Scholer LLP to the effect that, if the exchange offer is consummated in accordance with this prospectus, a U.S. Holder will not recognize taxable gain or loss on the exchange of outstanding notes for exchange notes pursuant to the exchange offer. A U.S. Holder's tax basis and holding period for such exchange notes will be the same as for the outstanding notes immediately before the exchange. FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS This section describes certain U.S. federal income tax considerations applicable to U.S. Holders. Non-U.S. Holders should see the discussion below under the heading "Federal Income Tax Consequences to Non-U.S. Holders" for a discussion of certain tax considerations applicable to them. Interest and OID. Interest on the exchange notes generally will be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder's method of accounting for U.S. federal income tax purposes. 125 In the event that the issue price of the notes is less than the "stated redemption price at maturity" of the notes by more than a de minimis amount, the notes will be considered to have original issue discount (OID). The "stated redemption price at maturity" of a debt instrument is equal to the sum of all payments to be received other than payments of stated interest. The "issue price" of a debt instrument issued for cash is equal to the first price at which a substantial amount of such debt instruments are sold. If the notes are treated as having OID, a U.S. Holder (including a cash basis holder) generally would be required to include the OID on the notes in income for U.S. federal income tax purposes under the accrual method on a constant yield basis resulting in the inclusion of interest in income in advance of the receipt of cash attributable to that income. Amortizable Bond Premium. A U.S. Holder that purchases a note for an amount in excess of the stated redemption price at maturity will be considered to have purchased the note with "amortizable bond premium". Such holder may elect to amortize such premium (as an offset to interest income), using a constant-yield method, over the remaining term of the note. Such election, once made, generally applies to all debt instruments held or subsequently acquired by the U.S. Holder on or after the first day of the first taxable year to which the election applies and may be revoked only with the consent of the IRS. A U.S. Holder that elects to amortize such premium must reduce its tax basis in the note by the amount of the premium amortized during its holding period. With respect to a U.S. Holder that does not elect to amortize bond premium, the amount of such premium will be included in the U.S. Holder's tax basis for purposes of computing gain or loss in connection with taxable disposition of the note. Market Discount on Resale of the Notes. If a U.S. Holder acquires a note (generally other than in an original issue) at a market discount that exceeds a statutorily defined de minimis amount and thereafter recognizes gain upon a disposition (or makes a gift) of the note, the lesser of (1) such gain (or appreciation, in the case of a gift) or (2) the portion of the market discount that accrued while the note was held by such U.S. Holder will be treated as ordinary income at the time of the disposition. For these purposes, market discount equals the excess of the stated redemption price at maturity (or, if the note is issued with OID, its "revised issued price" as defined in the Code) over the basis of the note in the hands of such U.S. Holder immediately after its acquisition. A U.S. Holder of a note may elect to include any market discount in income currently as it accrues, either ratably or on a constant yield basis, rather than upon disposition of the note. This election is revocable only with the consent of the IRS and applies to all market discount bonds acquired by the U.S. Holder on or after the first day of the taxable year in which the holder makes the election. A U.S. Holder of a note who acquired it at a market discount may be required to defer the deduction of all or a portion of any interest paid or accrued on any indebtedness incurred or continued to purchase or carry the note until the market discount is recognizable upon a subsequent disposition of the note. Such a deferral is not required, however, if the U.S. Holder elects to include accrued market discount in income currently. Disposition of the Notes. Unless a nonrecognition provision applies, the sale, exchange, redemption (including pursuant to an offer by InSight) or other disposition of a note will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of notes will recognize gain or loss equal to the difference between (1) the amount of cash plus the fair market value of property received (except to the extent attributable to any accrued interest on the notes which will be taxable as such) and (2) the U.S. Holder's tax basis in the notes (as increased by any OID and market discount previously included in income by the U.S. Holder and decreased by any amortizable bond premium deducted over the term of the notes). Subject to the market discount rules discussed above, any such gain or loss generally will be long-term capital gain or loss, provided the notes have been held for more than one year. The deductibility of capital losses is subject to limitations. Backup Withholding. Under section 3406 of the Code and applicable Treasury regulations, a noncorporate U.S. Holder of the notes may be subject to backup withholding at the rate of 30% (subject to change in future years) with respect to "reportable payments," which include interest paid on, or, in certain cases, the proceeds of a sale, exchange or redemption of, the notes. The payor will be required to deduct and withhold the prescribed amounts if (1) the payee fails to furnish a taxpayer identification number (TIN) to the payor in the manner required, (2) the IRS notifies the payor that the TIN 126 furnished by the payee is incorrect, (3) there has been a "notified payee underreporting" described in section 3406(c) of the Code or (4) there has been a failure of the payee to certify under penalty of perjury that the payee is not subject to withholding under section 3406(a)(1)(C) of the Code. Amounts paid as backup withholding do not constitute an additional tax and may be refunded (or credited against the holder's U.S. federal income tax liability, if any) so long as the required information is provided to the IRS. The Company will report to the holders of the notes and to the IRS the amount of any "reportable payments" for each calendar year and the amount of tax withheld, if any, with respect to payment on those securities. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS The following information describes the U.S. federal income tax treatment of "Non-U.S. Holders." Interest on the Notes. If the income or gain on the notes is "effectively connected with the conduct of a trade or business within the United States" by a Non-U.S. Holder, and, if a tax treaty applies, the income or gain generally is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder, such income or gain will be subject to U.S. federal income tax essentially in the same manner as if the notes were held by a U.S. Holder, as described above, and in the case of a Non-U.S. Holder that is a corporation, may also be subject to U.S. branch profits tax. Such Non-U.S. Holder will not be subject to withholding taxes, however, if it provides a properly executed IRS Form W-8ECI. Interest on the notes held by other Non-U.S. Holders may be subject to withholding of up to 30% of each payment made to the holders or other payee unless the "portfolio interest exemption" applies or an applicable income tax treaty reduces the withholding rate. The interest paid on the notes generally will qualify for the portfolio interest exemption. Accordingly, interest paid on the notes to a Non-U.S. Holder will not be subject to withholding if (1) the U.S. person who would otherwise be required to deduct and withhold the tax receives from the Non-U.S. Holder who is the beneficial owner of the notes a statement signed by such person under penalties of perjury, certifying that such owner is not a U.S. person on IRS Form W-8BEN (or successor form); (2) such Non-U.S. Holder does not actually or constructively own 10 percent or more of the total combined voting power of all classes of stock in the Company; (3) such Non-U.S. Holder is not a "controlled foreign corporation" (within the meaning of section 957 of the Code) related to the Company; and (4) the Non-U.S. Holder is not a foreign "bank" receiving the interest on an extension of credit pursuant to a loan agreement entered into in the ordinary course of its trade or business. If you do not claim, or do not qualify for, the benefit of the portfolio interest exemption, you may be subject to a 30% withholding tax on interest payments on the notes. However, you may be able to claim the benefit of a reduced withholding tax rate under an applicable income tax treaty. The required information for claiming treaty benefits is generally submitted, under current regulations, on IRS Form W-8BEN. Sale or Other Disposition of the Notes. A Non-U.S. Holder will generally not be subject to U.S. federal income tax or withholding tax on gain recognized on a sale, exchange, redemption, retirement, or other disposition of the notes. A Non-U.S. Holder may, however, be subject to tax on such gain if: (1) it is an individual who was present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met; (2) it is an individual who is a former citizen or long-term resident of the United States subject to certain U.S. tax rules relevant to such status; or (3) the gain is effectively connected with the conduct of a U.S. trade or business, as provided in applicable U.S. tax rules. Backup Withholding and Information Reporting. Payments of interest or principal may be subject to both backup withholding at a rate of 30% (subject to change in future years) and information reporting. Backup withholding and information reporting generally will not apply to payments on the notes if the Non-U.S. Holder certifies, on a Form W-8BEN, or successor form, that it is not a U.S. person, provided that the payor does not have actual knowledge that the Non-U.S. Holder is, in fact, a U.S. person. Any 127 amounts withheld under the backup withholding rules may be refunded or credited against the Non-U.S. Holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS. The foregoing summary is included herein for general information only and does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular holder of the notes in light of his or her particular circumstances and income tax situation. Holders are urged to consult their own tax advisors as to any tax consequences to them from the exchange, ownership, and disposition of the notes, including the application and effect of state, local, foreign, and other tax laws. 128 PLAN OF DISTRIBUTION Each participating broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where such outstanding notes were acquired as a result of market-making activities or other trading activities. We have agreed that for a period of 180 days after the expiration of the exchange offer, we will make this prospectus, as amended or supplemented, available to any participating broker-dealer for use in connection with any such resale. We will not receive any proceeds from any sales of the exchange notes by participating broker-dealers. Exchange notes received by participating broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such participating broker-dealer and/or the purchasers of any such exchange notes. Any participating broker-dealer that resells the exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of exchange notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the expiration of the exchange offer we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any participating broker-dealer that requests such documents in the letter of transmittal. Prior to the exchange offer, there has not been any public market for the outstanding notes. The outstanding notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for exchange notes by holders who are entitled to participate in this exchange offer. The holders of outstanding notes who timely notify us under the registration rights agreement, and are not eligible to participate in the exchange offer, are not permitted to resell the exchange notes using this prospectus or is a broker-dealer and holds outstanding notes acquired directly from us or any of our affiliates are entitled to certain registration rights, and we are required to file a shelf registration statement with respect to their outstanding notes. The exchange notes will constitute a new issue of securities with no established trading market. We do not intend to list the exchange notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act and may be limited during the exchange offer and the pendency of the shelf registration statements. Accordingly, no assurance can be given that an active public or other market will develop for the exchange notes or as to the liquidity of the trading market for the exchange notes. If a trading market does not develop or is not maintained, holders of the exchange notes may experience difficulty in reselling the exchange notes or may be unable to sell them at all. If a market for the exchange notes develops, any such market may be discontinued at any time. LEGAL MATTERS The validity of the notes offered hereby and certain other legal matters will be passed upon on behalf of InSight by Kaye Scholer LLP, New York, New York. Certain legal matters will be passed upon on behalf of InSight by Hunton & Williams, McLean, Virginia. 129 EXPERTS The consolidated financial statements of InSight as of June 30, 2001 and 2000 and for the three years in the period ended June 30, 2001 and the consolidated financial statements of InSight Holdings as of June 30, 2001 and for the period from inception (June 13, 2001) to June 30, 2001, included in this prospectus and elsewhere in the registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION Since the consummation of the acquisition, InSight is no longer subject to the informational requirements of the Securities Exchange Act of 1934. As a result, and until the registration statement filed in connection with the exchange offer described herein for the exchange notes has been declared effective, InSight will not be required to file periodic reports with the SEC. InSight has agreed that, whether or not it is required to do so by the rules and regulations of the SEC, for so long as any of the notes remain outstanding, it will furnish to the holders of the notes and file with the SEC, unless the SEC will not accept such a filing, following the consummation of the exchange offer: (1) all quarterly and annual reports that would be required to be filed with the SEC on Forms 10-Q and 10-K if InSight was required to file such reports and (2) all reports that would be required to be filed with the SEC on Form 8-K if InSight was required to file such reports. So long as InSight Holdings guarantees the notes, InSight's reporting obligations will be satisfied by InSight Holdings. All reports, exhibits to such reports and other information that InSight files with the SEC will be available on the SEC's web site at www.sec.gov. 130 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER ----------- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of June 30, 2001 and 2000.... F-3 Consolidated Statements of Income for the years ended June 30, 2001, 2000 and 1999................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended June 30, 2001, 2000 and 1999.................. F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999.............................. F-6 Notes to Consolidated Financial Statements.................. F-7 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001 (unaudited)........................ F-33 Condensed Consolidated Statements of Operations for the six months ended December 31, 2001, the period from July 1, 2001 through October 17, 2001, and the six months ended December 31, 2000 (unaudited)............................. F-34 Condensed Consolidated Statements of Operations for the three months ended December 31, 2001, the period from October 1, 2001 through October 17, 2001, and the three months ended December 31, 2000 (unaudited)................ F-35 Condensed Consolidated Statements of Stockholders' Equity for the period from July 1, 2001 through October 17, 2001, and the six months ended December 31, 2001 (unaudited).... F-36 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2001, the period from July 1, 2001 through October 17, 2001, and the six months ended December 31, 2000 (unaudited)............................. F-37 Notes to Condensed Consolidated Financial Statements........ F-38 Report of Independent Public Accountants ................... F-56 Consolidated Balance Sheet as of June 30, 2001.............. F-57 Consolidated Statement of Stockholders' Equity from Inception (June 13, 2001) to June 30, 2001................ F-58 Notes to Consolidated Financial Statements.................. F-59
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Orange County, California August 29, 2001 F-2 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND 2000 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
2001 2000 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 23,254 $ 27,133 Trade accounts receivables, net........................... 43,355 40,598 Other current assets...................................... 5,029 5,811 Deferred income taxes..................................... 3,350 3,350 -------- -------- Total current assets................................... 74,988 76,892 -------- -------- PROPERTY AND EQUIPMENT, net................................. 148,255 148,469 INVESTMENTS IN PARTNERSHIPS................................. 1,783 1,782 OTHER ASSETS................................................ 6,828 7,799 INTANGIBLE ASSETS, net...................................... 89,202 93,930 -------- -------- $321,056 $328,872 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment and other notes.............. $ 21,259 $ 18,813 Current portion of capital lease obligations.............. 12,603 10,652 Accounts payable and other accrued expenses............... 24,335 26,613 -------- -------- Total current liabilities.............................. 58,197 56,078 -------- -------- LONG-TERM LIABILITIES: Equipment and other notes, less current portion........... 150,696 172,379 Capital lease obligations, less current portion........... 43,695 46,388 Other long-term liabilities............................... 2,997 2,540 -------- -------- Total long-term liabilities............................ 197,388 221,307 -------- -------- 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, 2001 and 2000, with a liquidation preference of $25,000 as of June 30, 2001.................................................. 23,923 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at June 30, 2001 and 2000, with a liquidation preference of $27,953 as of June 30, 2001.................................................. 13,173 13,173 Common stock, $.001 par value, 25,000,000 shares authorized, 3,011,656 and 2,979,293 shares outstanding at June 30, 2001 and 2000, respectively............... 3 3 Additional paid-in capital................................ 23,926 23,743 Retained earnings (deficit)............................... 4,446 (9,355) -------- -------- Total stockholders' equity............................. 65,471 51,487 -------- -------- $321,056 $328,872 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999 -------- -------- ------- REVENUES: Contract services......................................... $103,421 $100,135 $85,491 Patient services.......................................... 107,468 86,838 73,565 Other..................................................... 614 1,601 2,936 -------- -------- ------- Total revenues......................................... 211,503 188,574 161,992 -------- -------- ------- COSTS OF OPERATIONS: Costs of services......................................... 109,216 101,323 85,317 Provision for doubtful accounts........................... 3,594 2,907 2,618 Equipment leases.......................................... 7,928 13,569 18,522 Depreciation and amortization............................. 41,134 33,630 24,886 -------- -------- ------- Total costs of operations.............................. 161,872 151,429 131,343 -------- -------- ------- Gross profit........................................... 49,631 37,145 30,649 CORPORATE OPERATING EXPENSES................................ 10,783 10,946 10,475 PROVISION FOR REORGANIZATION AND OTHER COSTS................ -- -- 3,300 -------- -------- ------- Income from company operations............................ 38,848 26,199 16,874 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS.............................................. 971 817 548 -------- -------- ------- Operating income.......................................... 39,819 27,016 17,422 INTEREST EXPENSE, net....................................... 23,394 18,696 14,500 -------- -------- ------- Income before income taxes................................ 16,425 8,320 2,922 PROVISION (BENEFIT) FOR INCOME TAXES........................ 2,624 1,131 (3,190) -------- -------- ------- Net income................................................ $ 13,801 $ 7,189 $ 6,112 ======== ======== ======= INCOME PER COMMON AND PREFERRED SHARE: Basic..................................................... $ 1.48 $ 0.78 $ 0.67 ======== ======== ======= Diluted................................................... $ 1.42 $ 0.76 $ 0.65 ======== ======== ======= WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING: Basic..................................................... 9,321 9,258 9,158 ======== ======== ======= Diluted................................................... 9,719 9,398 9,376 ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK ----------------------------------- SERIES B SERIES C COMMON STOCK ADDITIONAL RETAINED ---------------- ---------------- ------------------ PAID-IN EARNINGS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------ ------- ------ ------- --------- ------ ---------- --------- ------- BALANCE AT JUNE 30, 1998.................... 25,000 $23,923 27,953 $13,173 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.................... 25,000 23,923 27,953 13,173 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.................... 25,000 23,923 27,953 13,173 2,979,293 3 23,743 (9,355) 51,487 Stock options and warrants exercised............... -- -- -- -- 32,375 -- 183 -- 183 Adjustment for fractional shares on MHC and IHC exchange................ -- -- -- -- (12) -- -- -- -- Net income................ -- -- -- -- -- -- -- 13,801 13,801 ------ ------- ------ ------- --------- -- ------- -------- ------- BALANCE AT JUNE 30, 2001.................... 25,000 $23,923 27,953 $13,173 3,011,656 $3 $23,926 $ 4,446 $65,471 ====== ======= ====== ======= ========= == ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (AMOUNTS IN THOUSANDS)
2001 2000 1999 ------- -------- -------- OPERATING ACTIVITIES: Net income................................................ $13,801 $ 7,189 $ 6,112 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 41,134 33,630 24,886 Amortization of deferred gain on debt restructure...... -- -- (75) Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables, net........................ (2,757) (4,611) (8,324) Other current assets................................... 782 (1,803) (4,106) Accounts payable and other accrued expenses............ (2,278) 6,119 (7,601) ------- -------- -------- Net cash provided by operating activities............ 50,682 40,524 10,892 ------- -------- -------- INVESTING ACTIVITIES: Cash acquired in acquisitions............................. -- -- 850 Acquisition of Centers and Fixed Facilities............... -- (25,346) (28,046) Additions to property and equipment....................... (22,911) (23,170) (18,440) Other..................................................... (531) (554) (1,565) ------- -------- -------- Net cash used in investing activities................ (23,442) (49,070) (47,201) ------- -------- -------- FINANCING ACTIVITIES: Proceeds from stock options and warrants exercised........ 183 192 115 Proceeds from issuance of common stock.................... -- -- 21 Principal payments of debt and capital lease obligations............................................ (31,759) (25,468) (17,495) Proceeds from issuance of debt............................ -- 45,200 23,820 Other..................................................... 457 1,461 (598) ------- -------- -------- Net cash provided by (used in) financing activities........................................ (31,119) 21,385 5,863 ------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:........... (3,879) 12,839 (30,446) Cash, beginning of year................................... 27,133 14,294 44,740 ------- -------- -------- Cash, end of year......................................... $23,254 $ 27,133 $ 14,294 ======= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $22,947 $ 18,086 $ 14,923 Income taxes paid......................................... 2,582 452 71 Equipment additions under capital leases.................. 11,780 55,290 1,507
The accompanying notes are an integral part of these consolidated financial statements. F-6 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Nature of Business InSight Health Services Corp. (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 28 states throughout the United States. The Company has two reportable segments: Eastern Division and Western Division. The Company's services are provided through a network of 82 mobile magnetic resonance imaging (MRI) facilities, four mobile lithotripsy facilities, four mobile positron emission tomography (PET) facilities (collectively Mobile Facilities), 35 fixed-site MRI facilities (Fixed Facilities), 27 multi-modality imaging centers (Centers), one Leksell Stereotactic Gamma Knife treatment center, one 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 has a substantial presence in California, Texas, New England, the Carolinas, Florida and the Midwest (Indiana and Ohio). At its Centers, the Company typically 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. 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 in consolidation. 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. F-7 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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................... Lesser of the useful life or term of lease Computer and office equipment............ 3 to 5 years Diagnostic and related equipment......... 5 to 8 years Equipment and vehicles under capital Lesser of the useful life or term of leases................................. 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 accumulated depreciation 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 undiscounted 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. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. F-8 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) i. Income Per Common and Preferred Share The Company reports basic and diluted earnings per share (EPS) for common and preferred stock (Note 13). Basic EPS is computed by dividing reported earnings by weighted average common and preferred shares outstanding. Diluted EPS is computed by adding to the weighted average common and preferred shares the dilutive effect of stock options and warrants. j. Fair Value of Financial Instruments The fair value of financial instruments is estimated using available market information and other valuation methodologies. The fair value of the Company's financial instruments is estimated to approximate the related book value, unless otherwise indicated. k. New Pronouncements In the first quarter of fiscal 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 (collectively, SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (i) fair value of a recognized asset or liability or firm commitment, (ii) cash flows of a recognized or forecasted transaction, or (iii) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any change in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. The adoption of SFAS 133 on July 1, 2000 did not have a material impact on the Company's financial condition and results of operations. In fiscal 1998, the Company entered into an interest rate swap with a notional amount of $40 million for the purpose of fixing the interest rate of a corresponding amount of $40 million of floating rate debt. This swap had a three year term and was extendable for an additional three years at the option of the bank. Under SFAS 133, extendable swaps do not meet the criteria for hedge accounting and changes in fair value are recognized currently in earnings. During the year ended June 30, 2001, the Company recorded additional interest expense of approximately $0.7 million due to changes in the fair value of the swap. In March 2001, the swap was extended for an additional three years by the bank and the Company expects the swap to qualify for hedge accounting through its maturity. In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 explains the SEC staff's general framework for revenue recognition, stating that certain criteria need to be met in order to recognize revenue. The adoption of SAB 101 did not have a material impact on the Company's financial condition and results of operations. In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modifications to outstanding awards and changes in grantee status that occur on or after July 1, 2001, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The requirements of FIN 44 did not have a material impact on the Company's financial condition and results of operations. F-9 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of SFAS 141 are to be accounted for using the purchase method of accounting. The Company will adopt SFAS 141 for all business combinations initiated after June 30, 2001. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill would no longer be amortized but would be assessed at least annually for impairment using a fair value methodology. The Company will adopt SFAS 142 for all goodwill and other intangible assets acquired after June 30, 2001 and for all existing goodwill and other intangible assets beginning July 1, 2001. The Company expects that upon adoption of SFAS 142 on July 1, 2001 it will cease recording annual goodwill amortization of approximately $5.4 million. For the year ending June 30, 2002, SFAS 142 also changes the methodology and potential timing of impairment charges; however, the effect of these charges (if any) cannot be determined at this time. Under the transition arrangements of SFAS 142, the Company is required to complete a preliminary evaluation of impairment charges by December 31, 2001 and recognize the effects of any impairment charges prior to June 30, 2002. Such amounts would be recorded as a cumulative effect of a change in accounting principle, effective in the first quarter of fiscal 2002. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002 (with earlier application being encouraged). The Company does not expect the adoption of SFAS 143 to have a material impact on the Company's financial condition and results of operations. l. Reclassifications Reclassifications have been made to certain 2000 and 1999 amounts to conform to the 2001 presentation. 2. TRADE ACCOUNTS RECEIVABLES Trade accounts receivables, net are comprised of the following (amounts in thousands):
JUNE 30, ----------------- 2001 2000 ------- ------- Trade accounts receivables.................................. $79,607 $70,907 Less: Allowances for doubtful accounts and contractual adjustments............................................... 26,611 22,291 Allowances for professional fees.......................... 9,641 8,018 ------- ------- Trade accounts receivables, net............................. $43,355 $40,598 ======= =======
F-10 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The allowance for doubtful accounts and contractual adjustments includes 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, 2001. 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. 3. PROPERTY AND EQUIPMENT Property and equipment, net are stated at cost and are comprised of the following (amounts in thousands):
JUNE 30, ------------------- 2001 2000 -------- -------- Vehicles.................................................... $ 2,964 $ 2,426 Land, building and leasehold improvements................... 26,409 24,265 Computer and office equipment............................... 20,161 19,192 Diagnostic and related equipment............................ 118,112 107,639 Equipment and vehicles under capital leases................. 68,573 57,752 -------- -------- 236,219 211,274 Less: Accumulated depreciation and amortization............. 87,964 62,805 -------- -------- Property and equipment, net................................. $148,255 $148,469 ======== ========
4. INTANGIBLE ASSETS Intangible assets consist of the following (amounts in thousands):
JUNE 30, ------------------- 2001 2000 -------- -------- Intangible assets........................................... $107,208 $108,014 Less: Accumulated amortization.............................. 18,006 14,084 -------- -------- Intangible assets, net...................................... $ 89,202 $ 93,930 ======== ======== Net intangible assets: Goodwill.................................................... $ 87,933 $ 92,980 Other....................................................... 1,269 950 -------- -------- $ 89,202 $ 93,930 ======== ========
Amortization of intangible assets was approximately $6.2 million, $5.3 million, and $4.7 million for the years ended June 30, 2001, 2000 and 1999, respectively. F-11 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $17.4 million. 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. 5. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES Accounts payable and other accrued expenses are comprised of the following (amounts in thousands):
JUNE 30, ----------------- 2001 2000 ------- ------- Accounts payable............................................ $ 2,202 $ 133 Accrued equipment related costs............................. 3,030 8,526 Accrued payroll and related costs........................... 7,351 4,519 Other accrued expenses...................................... 11,752 13,435 ------- ------- $24,335 $26,613 ======= =======
6. EQUIPMENT AND OTHER NOTES PAYABLE Equipment and other notes payable are comprised of the following (amounts in thousands):
JUNE 30, ------------------- 2001 2000 -------- -------- Notes payable to bank (Bank Financing), bearing interest at LIBOR plus 1.75 percent (5.46 and 6.78 percent at June 30, 2001 and 2000), principal and interest payable quarterly, maturing in June 2004. The notes are secured by substantially all of the Company's assets................. $ 70,663 $ 89,055 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...................................... 1,234 1,587 Unsecured senior subordinated notes payable (Existing Notes), bearing interest at 9.625 percent, interest payable semi-annually, principal due in June 2008. At June 30, 2001, the fair value of the Existing Notes was approximately $99.5 million............................... 100,000 100,000 Other notes payable......................................... 58 550 -------- -------- Total equipment and other notes payable..................... 171,955 191,192 Less: Current portion....................................... 21,259 18,813 -------- -------- Long-term equipment and other notes payable................. $150,696 $172,379 ======== ========
F-12 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of equipment and other notes payable at June 30, 2001, are as follows (amounts in thousands): 2002........................................................ $ 21,259 2003........................................................ 24,132 2004........................................................ 26,379 2005........................................................ 185 2006........................................................ -- Thereafter.................................................. 100,000 -------- $171,955 ========
As part of the Bank Financing, the Company has a $25 million revolving working capital facility, which expires in June 2003. There were no borrowings under the working capital facility as of June 30, 2001. The Company is also required to pay an unused facility fee of 0.375% on unborrowed amounts under the working capital facility. The credit agreement related to the Bank Financing and the indenture related to the Existing Notes contain limitations on additional borrowings, capital expenditures, dividend payments and certain financial covenants. As of June 30, 2001, 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 was extended in 2001 for an additional three years and expires in 2004. At June 30, 2001, 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):
NOTIONAL EFFECTIVE MAXIMUM FAIR MARKET AMOUNT INTEREST RATE VALUE - -------- ----------------- ----------- $36,250.................................................. 7.47% $(669)
F-13 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LEASE OBLIGATIONS, COMMITMENTS AND CONTINGENCIES The Company leases diagnostic equipment, certain other equipment and its office, imaging and treatment facilities under various capital and operating leases. Future minimum scheduled rental payments required under these noncancelable leases at June 30, 2001 are as follows (amounts in thousands):
CAPITAL OPERATING ------- --------- 2002........................................................ $17,182 $12,342 2003........................................................ 16,892 10,857 2004........................................................ 15,294 8,220 2005........................................................ 11,756 6,806 2006........................................................ 6,532 5,629 Thereafter.................................................. 229 9,929 ------- ------- Total minimum lease payments................................ 67,885 $53,783 ======= ======= Less: Amounts representing interest......................... 11,587 ------- Present value of capital lease obligations.................. 56,298 Less: Current portion....................................... 12,603 ------- Long-term capital lease obligations......................... $43,695 =======
As of June 30, 2001, certain equipment leased by the Company is subject to contingent rental adjustments dependent on certain operational factors. No contingent rental expense was paid for the years ended June 30, 2001, 2000 and 1999. Rental expense for diagnostic equipment and other equipment for the years ended June 30, 2001, 2000 and 1999 was $7.9 million, $13.6 million and $18.5 million, respectively. The Company occupies facilities under lease agreements expiring through June 2007. Rental expense for these facilities for the years ended June 30, 2001, 2000 and 1999 was $5.4 million, $5.1 million, and $3.7 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: In 1998, 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 previously granted in connection with the Merger and debt restructuring arrangement 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, 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 F-14 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 33% of the then outstanding common stock of the Company. Assuming the conversion of all of the Series C Preferred Stock and the exercise of the GE Warrants, GE would own approximately 37% of the then outstanding common stock of the Company (Note 17). 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 Company's board of directors (Board) proportionate to their respective common stock ownership percentages on an as-if-converted basis but would limit such representation to less than two thirds of the Board for a certain period of time. 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 6,323,660 shares of common stock. Holders of the Preferred Stock also have a right of first offer with respect to future sales of common stock in certain transactions or proposed transactions not involving a public offering by the Company of its common stock or securities convertible into common stock. Holders of the Preferred Stock are also entitled to certain demand and "piggyback" registration rights. 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 the 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 F-15 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the status of the Company's warrants at June 30, 2001, 2000 and 1999 and changes during the years is presented below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- -------------- Outstanding, June 30, 1999.................................. 662,183 $9.00 Granted................................................... 15,000 6.00 Exercised................................................. (35,000) 5.50 ------- ----- Outstanding, June 30, 2000.................................. 642,183 9.12 Granted................................................... 15,000 7.96 Exercised................................................. (15,000) 5.50 ------- ----- Outstanding, June 30, 2001.................................. 642,183 $9.17 ======= =====
Of the 642,183 warrants outstanding at June 30, 2001, the characteristics are as follows:
EXERCISE PRICE WEIGHTED AVERAGE WARRANTS TOTAL WARRANTS REMAINING RANGE EXERCISE PRICE EXERCISABLE OUTSTANDING CONTRACTUAL LIFE - -------------- ---------------- ----------- -------------- ---------------- $4.56 - $ 6.00 $4.92 82,183 82,183 3.68 years $7.25 - $10.00 $9.80 554,584 560,000 5.69 years ------- ------- 636,767 642,183 ======= =======
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 ten years from the grant date. In addition, two wholly owned subsidiaries of the Company have two 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. F-16 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of June 30, 2001, the Company has 287,308 shares available for issuance under its plans. A summary of the status of the Company's stock option plans at June 30, 2001, 2000 and 1999 and changes during the years is presented below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- -------------- 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 Granted................................................... 370,000 8.71 Exercised................................................. (17,375) 5.79 Forfeited................................................. (105,667) 11.33 --------- ------ Outstanding, June 30, 2001.................................. 1,555,698 $ 7.88 ========= ====== Exercisable at: June 30, 1999............................................. 558,838 $ 6.12 June 30, 2000............................................. 751,887 $ 7.61 June 30, 2001............................................. 867,239 $ 7.41
All unvested options and warrants will become fully vested upon consummation of the proposed acquisition (Note 17). Of the 1,555,698 options outstanding at June 30, 2001, the characteristics are as follows:
EXERCISE PRICE WEIGHTED AVERAGE OPTIONS TOTAL OPTIONS REMAINING RANGE EXERCISE PRICE EXERCISABLE OUTSTANDING CONTRACTUAL LIFE - --------------- ---------------- ----------- ------------- ---------------- $ 0.10 - $ 1.25 $ 0.59 98,670 98,670 2.98 years $ 4.56 - $ 7.00 $ 5.58 320,708 343,000 6.49 years $ 8.37 - $12.57 $ 8.98 423,173 1,074,340 8.21 years $15.64 - $17.25 $16.33 24,688 39,688 3.49 years ------- --------- 867,239 1,555,698 ======= =========
As permitted under SFAS No. 123, "Accounting for Stock Based Compensation", the Company accounts for the options and warrants issued to employees and non-employee directors in accordance with APB Opinion No. 25, and no compensation cost has been recognized in the financial statements. SFAS 123 requires that the Company present 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 F-17 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, ------------------------- 2001 2000 1999 ------- ------ ------ Net income: As Reported.................................. $13,801 $7,189 $6,112 Pro Forma.................................... 12,458 5,469 4,446 Diluted EPS: As Reported.................................. 1.42 0.76 0.65 Pro Forma.................................... 1.28 0.58 0.47
The fair value of each option grant and warrant issued is estimated on the date of grant or issuance using the Black-Scholes pricing model with the following assumptions used for the grants and issuances in the fiscal years ended June 30, 2001, 2000 and 1999, respectively:
YEARS ENDED JUNE 30, ------------------------------------ ASSUMPTION 2001 2000 1999 - ---------- ---------- ---------- ---------- Risk-free interest rate........................... 5.87% 6.22% 5.08% Volatility........................................ 71.27% 71.23% 64.90% Expected dividend yield........................... 0.00% 0.00% 0.00% Estimated contractual life........................ 9.19 years 9.38 years 9.35 years
9. PROVISION FOR REORGANIZATION AND OTHER COSTS In 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, 2001, 2000 and 1999 was computed using effective tax rates calculated as follows:
YEARS ENDED JUNE 30, ---------------------- 2001 2000 1999 ----- ----- ------ Federal statutory tax rate.................................. 34.0% 34.0% 34.0% State income taxes, net of federal benefit.................. 6.0 6.0 6.0 Permanent items, including goodwill and non-deductible merger costs.............................................. 5.0 3.7 12.3 Changes in valuation allowance.............................. (29.1) (30.1) (161.5) ----- ----- ------ Net effective tax rate...................................... 15.9% 13.6% (109.2)% ===== ===== ======
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. F-18 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income taxes for the years ended June 30, 2001, 2000 and 1999 consisted of the following (amounts in thousands):
YEARS ENDED JUNE 30, -------------------------- 2001 2000 1999 ------ ------- ------- Current provision: Federal................................................ $2,931 $ 548 $ 60 State.................................................. 1,173 283 100 ------ ------- ------- 4,104 831 160 ------ ------- ------- Deferred taxes arising from temporary differences: State income taxes..................................... (480) (186) (144) Accrued expenses (not currently deductible)............ (198) 769 (706) Reserves............................................... (1,790) (1,110) (958) Depreciation and amortization.......................... 7,920 1,004 1,383 Utilization of net operating losses.................... 836 75 346 Net operating losses reduced due to prior ownership changes............................................. -- 5,111 -- Changes in valuation allowance reducing goodwill....... -- 400 1,300 Changes in valuation allowance......................... (4,044) (5,795) (4,691) Alternative minimum tax credit carryforwards........... (3,038) -- -- Other.................................................. (686) 32 120 ------ ------- ------- (1,480) 300 (3,350) ------ ------- ------- Total provision (benefit) for income taxes............... $2,624 $ 1,131 $(3,190) ====== ======= =======
The components of the Company's net deferred tax asset (including current and noncurrent portions) as of June 30, 2001 and 2000, 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, ----------------- 2001 2000 -------- ------ Reserves.................................................... $ 5,754 $3,964 Accrued expenses (not currently deductible)................. 1,214 1,016 Depreciation and amortization............................... (11,248) (3,328) NOL carryforwards........................................... 9,784 10,620 Valuation allowance......................................... (3,683) (7,727) Alternative minimum tax credit carryforwards................ 3,038 -- Other....................................................... 141 (545) -------- ------ $ 5,000 $4,000 ======== ======
As of June 30, 2001, the Company had NOL carryforwards of approximately $29.0 million, expiring on various dates through 2019. 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. In addition, the Company has alternative minimum tax credit carryforwards of approximately $3.0 million which do not expire. F-19 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. RETIREMENT SAVINGS PLANS The Company has a 401(k) profit sharing plan (Plan), which is available to all eligible employees, pursuant to which the Company may match a percentage of employee contributions to the Plan. Company contributions of approximately $0.7 million, $0.7 million and $0.6 million were made for the years ended June 30, 2001, 2000 and 1999, respectively. 12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS The Company has direct ownership in four Partnerships at June 30, 2001, 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, ----------------- 2001 2000 ------- ------- Combined Financial Position: Current assets: Cash...................................................... $ 1,281 $ 1,098 Trade accounts receivables, net........................... 3,250 1,840 Other..................................................... 19 107 Property and equipment, net................................. 7,134 6,957 Intangible assets, net...................................... 543 613 ------- ------- Total assets................................................ 12,227 10,615 Current liabilities......................................... (2,077) (1,455) Due to the Company.......................................... (1,830) (1,194) Long-term liabilities....................................... (4,278) (3,877) ------- ------- Net assets.................................................. $ 4,042 $ 4,089 ======= =======
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, ------------------------- 2001 2000 1999 ------- ------ ------ Operating Results: Net revenues.............................................. $11,344 $7,493 $5,673 Expenses.................................................. 9,211 5,717 4,334 ------- ------ ------ Net income................................................ $ 2,133 $1,776 $1,339 ======= ====== ====== Equity in earnings of partnerships........................ $ 971 $ 817 $ 548 ======= ====== ======
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 F-20 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) below is the summarized financial data of the Company's 50 percent controlled entity which is consolidated (amounts in thousands):
JUNE 30, --------------- 2001 2000 ------ ------ Condensed Combined Balance Sheet Data: Current assets............................................ $1,622 $1,490 Total assets.............................................. 1,844 1,706 Current liabilities....................................... 426 623 Minority interest equity.................................. 608 441
YEARS ENDED JUNE 30, ------------------------ 2001 2000 1999 ------ ------ ------ Condensed Combined Statement of Income Data: Net revenues............................................. $5,844 $5,484 $5,551 Expenses................................................. 3,740 3,702 3,973 Provision for center profit distribution................. 1,052 891 789 ------ ------ ------ Net income............................................... $1,052 $ 891 $ 789 ====== ====== ======
13. INCOME PER COMMON AND PREFERRED SHARE The number of shares used in computing EPS is equal to the weighted average number of common and preferred shares outstanding during the respective period. The preferred stock has certain rights, including conversion into common stock on a one-to-one basis, voting rights, no stated dividend rate and participates in any dividends paid with respect to the common stock. Accordingly, the preferred stock is included in the computation of basic EPS only if the effect on EPS is dilutive as required by SFAS No. 128, "Earnings per Share" and Emerging Issues Task Force Topic D-95. The Company uses the as-if converted method in computing 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 (amounts in thousands):
YEARS ENDED JUNE 30, --------------------- 2001 2000 1999 ----- ----- ----- Average common stock outstanding............................ 2,998 2,935 2,835 Effect of preferred stock................................... 6,323 6,323 6,323 ----- ----- ----- Denominator for basic EPS................................... 9,321 9,258 9,158 Dilutive effect of stock options and warrants............... 398 140 218 ----- ----- ----- 9,719 9,398 9,376 ===== ===== =====
14. RELATED PARTY TRANSACTIONS The Company has purchased a majority of its diagnostic imaging equipment from GE. At June 30, 2001, the Company had outstanding notes payable and capital lease obligations to GE totaling approximately $1.2 million and $56.3 million, respectively. In addition, at June 30, 2001 the Company's future operating lease obligations to GE were approximately $28.3 million. GE also provides maintenance services with respect to the Company's diagnostic imaging equipment, totaling approximately $9.9 million for the year ended June 30, 2001. F-21 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company paid $120,000 to Shattuck Hammond Partners, an investment banking firm in which a director of the Company is a managing director, for general strategic advisory and investment banking services during the year ended June 30, 2001. Additionally, the Company paid $85,000 to the chairman of the board for acquisition and financing activities during the year ended June 30, 2001. 15. SEGMENT INFORMATION The Company has two reportable segments: Western Division and Eastern Division. The Company's reportable segments are geographical business units defined by management's division of responsibility between two executive vice presidents -- operations, who are responsible for the Western and Eastern Divisions and who report directly to the Company's chief operating decision maker. Each segment owns and operates Centers, Fixed and Mobile Facilities within their respective geographic areas. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" except that the Company does not allocate income taxes to the two Divisions. The Company manages cash flows and assets on a consolidated basis, and not by segment, and does not allocate or report assets and capital expenditures by segment. Information for the fiscal year ended June 30, 2000 and 1999 has been recast, as required by SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." The following tables summarize the operating results by segment for fiscal 2001, 2000 and 1999 (amounts in thousands):
EASTERN WESTERN OTHER CONSOLIDATED -------- ------- -------- ------------ YEAR ENDED JUNE 30, 2001: Contract services revenues................ $ 89,615 $ 6,266 $ 7,540 $103,421 Patient services revenues................. 39,390 66,776 1,302 107,468 Other revenues............................ 321 70 223 614 -------- ------- -------- -------- Total revenues.......................... 129,326 73,112 9,065 211,503 Depreciation and amortization............. 25,021 9,234 6,879 41,134 Total costs of operations................. 93,896 54,299 13,677 161,872 Equity in earnings of unconsolidated partnerships............................ 973 (2) -- 971 Operating income.......................... 36,403 18,811 (15,395) 39,819 Interest expense, net..................... 14,206 3,774 5,414 23,394 Income before income taxes................ 22,197 15,037 (20,809) 16,425
EASTERN WESTERN OTHER CONSOLIDATED -------- ------- -------- ------------ YEAR ENDED JUNE 30, 2000: Contract services revenues................ $ 80,847 $ 7,063 $ 12,225 $100,135 Patient services revenues................. 26,953 58,660 1,225 86,838 Other revenues............................ 562 652 387 1,601 -------- ------- -------- -------- Total revenues.......................... 108,362 66,375 13,837 188,574 Depreciation and amortization............. 20,668 8,191 4,771 33,630 Total costs of operations................. 80,980 52,420 18,029 151,429 Equity in earnings of unconsolidated partnerships............................ 813 4 -- 817 Operating income.......................... 28,195 13,959 (15,138) 27,016 Interest expense, net..................... 11,261 3,533 3,902 18,696 Income before income taxes................ 16,934 10,426 (19,040) 8,320
F-22 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EASTERN WESTERN OTHER CONSOLIDATED -------- ------- -------- ------------ YEAR ENDED JUNE 30, 1999: Contract services revenues................ $ 66,205 $ 6,713 $ 12,573 $ 85,491 Patient services revenues................. 24,323 47,995 1,247 73,565 Other revenues............................ 726 1,588 622 2,936 -------- ------- -------- -------- Total revenues.......................... 91,254 56,296 14,442 161,992 Depreciation and amortization............. 15,504 6,503 2,879 24,886 Total costs of operations................. 71,885 43,618 15,840 131,343 Equity in earnings of unconsolidated partnerships............................ 528 20 -- 548 Operating income.......................... 19,897 12,698 (15,173) 17,422 Interest expense, net..................... 8,904 2,488 3,108 14,500 Income before income taxes................ 10,993 10,210 (18,281) 2,922
16. RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL(1) ------- ------- ------- ------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001: Revenues.................................... $52,220 $51,794 $53,815 $53,674 $211,503 Gross profit................................ 11,671 11,452 12,694 13,814 49,631 Net income.................................. 2,757 2,971 3,768 4,305 13,801 Diluted income per common and preferred share..................................... $ 0.29 $ 0.31 $ 0.38 $ 0.43 $ 1.42 ======= ======= ======= ======= ======== 2000: Revenues.................................... $46,166 $46,121 $47,690 $48,597 $188,574 Gross profit................................ 8,070 8,627 9,955 10,493 37,145 Net income.................................. 1,320 1,322 1,990 2,557 7,189 Diluted income per common and preferred share..................................... $ 0.14 $ 0.14 $ 0.21 $ 0.27 $ 0.76 ======= ======= ======= ======= ========
- --------------- (1) Some amounts do not add across due to differences generated from the quarterly and annual weighted average shares calculations. 17. PROPOSED ACQUISITION AND RELATED FINANCING TRANSACTIONS On June 29, 2001, the Company entered into an agreement and plan of merger (Merger Agreement) with InSight Health Services Holdings Corp. (InSight Holdings) and its wholly owned subsidiary InSight Health Services Acquisition Corp. (formerly JWCH Merger Corp.) (Acquisition Corp.). Pursuant to the Merger Agreement, Acquisition Corp. will merge with and into the Company and the Company will become a wholly owned subsidiary of InSight Holdings (Acquisition). At the consummation of the Acquisition, J.W. Childs Equity Partners II and certain of its affiliates and co-investors will own approximately 80% of the outstanding common stock of InSight Holdings and Halifax Capital Partners and certain of its affiliates will own approximately 20% of the outstanding common stock of InSight Holdings. J.W. Childs Equity Partners II and Halifax Capital Partners are collectively known as Equity Sponsors. Certain members of the Company's senior management have agreed to rollover a portion of their existing stock options into InSight Holdings' stock options at the consummation of the Acquisition. Pursuant to the Merger Agreement, the Company's stockholders will be entitled to receive $18.00 in cash for each share of the Company's common stock they own. In addition, holders of stock options and warrants which are exercisable for the Company's common stock F-23 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) will receive the difference between $18.00 and the exercise price for each share of common stock the holder could have acquired pursuant to the terms of the options or warrants. The options and warrants will be terminated pursuant to the Merger Agreement. The Merger Agreement contains customary provisions, including representations and warranties, covenants with respect to the conduct of the business and various closing conditions, including the continued accuracy of representations and warranties, and the completion of the related financing transactions described below. The Company's stockholders, option holders and warrant holders immediately prior to the Acquisition will receive cash consideration of approximately $187.7 million as a result of the Acquisition. The transactions and related fees and expenses will be financed through (i) the sale of $200 million in aggregate principal amount of new senior subordinated notes due 2011; (ii) borrowings of approximately $145 million under the proposed $275 million new senior secured credit facilities; (iii) the investment by the Equity Sponsors of up to $101.5 million less the net value of the management options rollover totaling approximately $1.7 million; and (iv) a portion of the Company's cash on hand of approximately $6.6 million. The Company's Board and the boards of Acquisition Corp. and InSight Holdings have approved the Acquisition. A special meeting of the Company's stockholders to consider and vote upon the Acquisition will be scheduled shortly. Approval of the Acquisition requires the affirmative vote of a majority of the Company's capital stock. Pursuant to voting agreements entered into by InSight Holdings and Acquisition Corp. with each of GE, GE Fund and certain affiliates of The Carlyle Group, the holders of more than a majority of the Company's capital stock have agreed to convert the Preferred Stock which they currently hold into Series D Preferred Stock which they will vote in favor of the Acquisition. Contemporaneously with the Acquisition, Acquisition Corp. will repurchase by tender offer the Existing Notes up to their aggregate principal amount of $100 million. On August 15, 2001, Acquisition Corp. commenced a tender offer to repurchase all of the Existing Notes. 100% of the Existing Notes have been tendered. In connection with the tender offer, Acquisition Corp. has also successfully solicited the requisite consents from the holders of the Existing Notes to eliminate certain restrictive covenants and certain events of default in the indenture relating to the Existing Notes. If InSight Holdings, Acquisition Corp. or the Company elect to terminate the Merger Agreement due to the failure of the Company's stockholders to approve the Merger Agreement at the special meeting or any adjournment or postponement of that meeting, then the Company is obligated to reimburse InSight Holdings for its fees and expenses incurred in connection with the Acquisition and the related financing transactions up to a maximum of $1 million. In addition, if the Company terminates the Merger Agreement and enters into a superior proposal with a third party, the Company is obligated to pay InSight Holdings a termination fee of $7 million, of which $5 million is payable immediately prior to the termination of the Merger Agreement and $2 million is payable upon the earlier of (i) six months from the date of termination of the Merger Agreement and (ii) consummation of a superior proposal with a third party. 18. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION The Company's payment obligations under the Existing 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. 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. F-24 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2001 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents....... $ -- $ 19,921 $ 3,333 $ -- $ 23,254 Trade accounts receivables, net.......................... -- 32,758 10,597 -- 43,355 Other current assets............ -- 8,273 106 -- 8,379 Intercompany accounts receivable................... 241,016 27,590 -- (268,606) -- -------- -------- ------- --------- -------- Total current assets......... 241,016 88,542 14,036 (268,606) 74,988 Property and equipment, net....... -- 123,579 24,676 -- 148,255 Investments in partnerships....... -- 1,783 -- -- 1,783 Investments in consolidated subsidiaries.................... (4,882) 9,328 -- (4,446) -- Other assets...................... -- 6,828 -- -- 6,828 Intangible assets, net............ -- 84,358 4,844 -- 89,202 -------- -------- ------- --------- -------- $236,134 $314,418 $43,556 $(273,052) $321,056 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes........................ $ 20,810 $ 12,275 $ 777 $ -- $ 33,862 Accounts payable and other accrued expenses............. -- 23,033 1,302 -- 24,335 Intercompany accounts payable... -- 241,016 27,590 (268,606) -- -------- -------- ------- --------- -------- Total current liabilities.... 20,810 276,324 29,669 (268,606) 58,197 Equipment, capital leases and other notes, less current portion......................... 149,853 42,409 2,129 -- 194,391 Other long-term liabilities....... -- 567 2,430 -- 2,997 Stockholders' equity (deficit).... 65,471 (4,882) 9,328 (4,446) 65,471 -------- -------- ------- --------- -------- $236,134 $314,418 $43,556 $(273,052) $321,056 ======== ======== ======= ========= ========
F-25 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2000 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents....... $ -- $ 25,375 $ 1,758 $ -- $ 27,133 Trade accounts receivables, net.......................... -- 32,841 7,757 -- 40,598 Other current assets............ -- 8,954 207 -- 9,161 Intercompany accounts receivable................... 253,181 24,776 -- (277,957) -- -------- -------- ------- --------- -------- Total current assets......... 253,181 91,946 9,722 (277,957) 76,892 Property and equipment, net....... -- 129,499 18,970 -- 148,469 Investments in partnerships....... -- 1,782 -- -- 1,782 Investments in consolidated subsidiaries.................... (12,639) 3,284 -- 9,355 -- Other assets...................... -- 7,799 -- -- 7,799 Intangible assets, net............ -- 92,478 1,452 -- 93,930 -------- -------- ------- --------- -------- $240,542 $326,788 $30,144 $(268,602) $328,872 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes........................ $ 18,393 $ 10,809 $ 263 $ -- $ 29,465 Accounts payable and other accrued expenses............. -- 25,712 901 -- 26,613 Intercompany accounts payable... -- 253,181 24,776 (277,957) -- -------- -------- ------- --------- -------- Total current liabilities.... 18,393 289,702 25,940 (277,957) 56,078 Equipment, capital leases and other notes, less current portion......................... 170,662 47,257 848 -- 218,767 Other long-term liabilities....... -- 2,468 72 -- 2,540 Stockholders' equity (deficit).... 51,487 (12,639) 3,284 9,355 51,487 -------- -------- ------- --------- -------- $240,542 $326,788 $30,144 $(268,602) $328,872 ======== ======== ======= ========= ========
F-26 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 2001 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ Revenues........................... $ -- $166,433 $45,070 $ -- $211,503 Costs of operations................ -- 127,329 34,543 -- 161,872 ------- -------- ------- -------- -------- Gross profit....................... -- 39,104 10,527 -- 49,631 Corporate operating expenses....... -- 10,783 -- -- 10,783 ------- -------- ------- -------- -------- Income from company operations..... -- 28,321 10,527 -- 38,848 Equity in earnings of unconsolidated partnerships...... -- 971 -- -- 971 ------- -------- ------- -------- -------- Operating income................... -- 29,292 10,527 -- 39,819 Interest expense, net.............. -- 20,727 2,667 -- 23,394 ------- -------- ------- -------- -------- Income before income taxes......... -- 8,565 7,860 -- 16,425 Provision for income taxes......... -- 2,624 -- -- 2,624 ------- -------- ------- -------- -------- Income before equity in income of consolidated subsidiaries........ -- 5,941 7,860 -- 13,801 Equity in income of consolidated subsidiaries..................... 13,801 7,860 -- (21,661) -- ------- -------- ------- -------- -------- Net income......................... $13,801 $ 13,801 $ 7,860 $(21,661) $ 13,801 ======= ======== ======= ======== ========
F-27 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 2000 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ 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 ====== ======== ======= ======= ========
F-28 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1999 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ 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 ====== ======== ======= ======= ========
F-29 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2001 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ OPERATING ACTIVITIES: Net income....................... $13,801 $13,801 $ 7,860 $(21,661) $13,801 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.... -- 34,882 6,252 -- 41,134 Equity in income of consolidated subsidiaries.................. (13,801) (7,860) -- 21,661 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables....... -- 83 (2,840) -- (2,757) Intercompany receivables, net.... 18,209 (19,207) 998 -- -- Other current assets............. -- 681 101 -- 782 Accounts payable and other accrued expenses.............. -- (2,679) 401 -- (2,278) ------- ------- -------- -------- ------- Net cash provided by operating activities.................. 18,209 19,701 12,772 -- 50,682 ------- ------- -------- -------- ------- INVESTING ACTIVITIES: Additions to property and equipment..................... -- (13,281) (9,630) -- (22,911) Other............................ -- 3,459 (3,990) -- (531) ------- ------- -------- -------- ------- Net cash used in investing activities.................. -- (9,822) (13,620) -- (23,442) ------- ------- -------- -------- ------- FINANCING ACTIVITIES: Proceeds from stock options and warrants exercised............ 183 -- -- -- 183 Principal payments of debt and capital lease obligations..... (18,392) (13,432) 65 -- (31,759) Other............................ -- (1,901) 2,358 -- 457 ------- ------- -------- -------- ------- Net cash provided by (used in) financing activities........ (18,209) (15,333) 2,423 -- (31,119) ------- ------- -------- -------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. -- (5,454) 1,575 -- (3,879) CASH AND CASH EQUIVALENTS: Cash, beginning of year.......... -- 25,375 1,758 -- 27,133 ------- ------- -------- -------- ------- Cash, end of year................ $ -- $19,921 $ 3,333 $ -- $23,254 ======= ======= ======== ======== =======
F-30 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2000 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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............. -- 5,853 266 -- 6,119 -------- -------- ------ ------- -------- Net cash provided by (used in) operating activities......... (27,447) 66,730 1,241 -- 40,524 -------- -------- ------ ------- -------- INVESTING ACTIVITIES: Acquisitions of Centers and Fixed 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..................... -- 12,666 173 -- 12,839 CASH AND CASH EQUIVALENTS: Cash, beginning of year......... -- 12,709 1,585 -- 14,294 -------- -------- ------ ------- -------- Cash, end of year............... $ -- $ 25,375 $1,758 $ -- $ 27,133 ======== ======== ====== ======= ========
F-31 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1999 (AMOUNTS IN THOUSANDS)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ 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........ -- 21,976 2,910 -- 24,886 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.......................... -- (7,293) (308) -- (7,601) -------- -------- ------ ------- -------- 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 and Fixed 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 ======== ======== ====== ======= ========
F-32 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
COMPANY PREDECESSOR ------------ ----------- DECEMBER 31, JUNE 30, 2001 2001 ------------ ----------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 22,891 $ 23,254 Trade accounts receivables, net........................... 41,687 43,355 Other current assets...................................... 9,748 8,379 -------- -------- Total current assets................................... 74,326 74,988 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $7,335 and $87,964, respectively.......... 158,161 148,255 INVESTMENTS IN PARTNERSHIPS................................. 1,924 1,783 OTHER ASSETS................................................ 21,393 6,828 OTHER INTANGIBLE ASSETS, net................................ 19,460 -- GOODWILL, net............................................... 215,299 89,202 -------- -------- $490,563 $321,056 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment, capital leases and other notes.................................................. $ 3,196 $ 33,862 Accounts payable and other accrued expenses............... 27,228 24,335 -------- -------- Total current liabilities.............................. 30,424 58,197 -------- -------- LONG-TERM LIABILITIES: Equipment, capital leases and other notes, less current portion................................................ 376,547 194,391 Other long-term liabilities............................... 3,073 2,997 -------- -------- Total long-term liabilities............................ 379,620 197,388 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series B preferred stock, 25,000 shares outstanding at June 30, 2001.......................... -- 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at June 30, 2001.......................... -- 13,173 Common stock, $.001 par value, 10,000,000 shares authorized, 5,461,402 shares issued and outstanding at December 31, 2001...................................... 5 -- Common stock, $.001 par value, 25,000,000 shares authorized, 3,011,656 shares issued and outstanding at June 30, 2001.......................................... -- 3 Additional paid-in capital................................ 87,566 23,926 Accumulated other comprehensive income.................... 127 -- Retained earnings (accumulated deficit)................... (7,179) 4,446 -------- -------- Total stockholders' equity............................. 80,519 65,471 -------- -------- $490,563 $321,056 ======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. F-33 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
COMPANY PREDECESSOR PREDECESSOR ------------ ----------- ------------ SIX MONTHS PERIOD FROM SIX MONTHS ENDED JULY 1 TO ENDED DECEMBER 31, OCTOBER 17, DECEMBER 31, 2001 2001 2000 ------------ ----------- ------------ (AMOUNTS IN THOUSANDS) REVENUES: Contract services...................................... $21,060 $ 29,767 $ 52,168 Patient services....................................... 21,946 33,693 51,503 Other.................................................. 105 218 343 ------- -------- -------- Total revenues...................................... 43,111 63,678 104,014 ------- -------- -------- COSTS OF OPERATIONS: Costs of services...................................... 23,149 32,197 53,646 Provision for doubtful accounts........................ 730 1,110 1,672 Equipment leases....................................... 1,501 2,557 4,637 Depreciation and amortization.......................... 7,823 9,823 20,936 ------- -------- -------- Total costs of operations........................... 33,203 45,687 80,891 ------- -------- -------- Gross profit........................................ 9,908 17,991 23,123 CORPORATE OPERATING EXPENSES............................. 2,129 3,184 5,277 ------- -------- -------- Income from company operations...................... 7,779 14,807 17,846 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS........ 110 382 425 ACQUISITION RELATED COMPENSATION CHARGE.................. -- (15,616) -- ------- -------- -------- Operating income (loss)............................. 7,889 (427) 18,271 INTEREST EXPENSE, net.................................... 7,690 6,321 11,907 ------- -------- -------- Income (loss) before income taxes................... 199 (6,748) 6,364 PROVISION (BENEFIT) FOR INCOME TAXES..................... -- (2,100) 636 ------- -------- -------- Income (loss) before extraordinary item............. 199 (4,648) 5,728 EXTRAORDINARY ITEM -- Loss on debt extinguishment........ (7,378) -- -- ------- -------- -------- Net income (loss)................................... $(7,179) $ (4,648) $ 5,728 ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-34 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
COMPANY PREDECESSOR PREDECESSOR ------------ ------------ ------------ THREE MONTHS PERIOD FROM THREE MONTHS ENDED OCTOBER 1 TO ENDED DECEMBER 31, OCTOBER 17, DECEMBER 31, 2001 2001 2000 ------------ ------------ ------------ (AMOUNTS IN THOUSANDS) REVENUES: Contract services.................................... $21,060 $ 4,981 $25,889 Patient services..................................... 21,946 5,528 25,792 Other................................................ 105 52 113 ------- -------- ------- Total revenues.................................... 43,111 10,561 51,794 ------- -------- ------- COSTS OF OPERATIONS: Costs of services.................................... 23,149 5,488 26,562 Provision for doubtful accounts...................... 730 179 839 Equipment leases..................................... 1,501 408 2,345 Depreciation and amortization........................ 7,823 1,541 10,596 ------- -------- ------- Total costs of operations......................... 33,203 7,616 40,342 ------- -------- ------- Gross profit...................................... 9,908 2,945 11,452 CORPORATE OPERATING EXPENSES........................... 2,129 524 2,575 ------- -------- ------- Income from company operations.................... 7,779 2,421 8,877 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS...... 110 48 299 ACQUISITION RELATED COMPENSATION CHARGE................ -- (15,616) -- ------- -------- ------- Operating income (loss)........................... 7,889 (13,147) 9,176 INTEREST EXPENSE, net.................................. 7,690 985 5,875 ------- -------- ------- Income (loss) before income taxes................. 199 (14,132) 3,301 PROVISION (BENEFIT) FOR INCOME TAXES................... -- (4,517) 330 ------- -------- ------- Income (loss) before extraordinary item........... 199 (9,615) 2,971 EXTRAORDINARY ITEM -- Loss on debt extinguishment...... (7,378) -- -- ------- -------- ------- Net income (loss)................................. $(7,179) $ (9,615) $ 2,971 ======= ======== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-35 INSIGHT HEALTH SERVICES HOLDINGS CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
PREFERRED STOCK ------------------------------------------------------------- SERIES B SERIES C SERIES D COMMON STOCK ------------------ ------------------ ------------------- ------------------- PREDECESSOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ----------- ------- -------- ------- -------- -------- -------- --------- ------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE AT JUNE 30, 2001............. 25,000 $ 23,923 27,953 $ 13,173 -- $ -- 3,011,656 $ 3 Stock options and warrants exercised.......................... -- -- -- -- -- -- 13,911 -- Conversion of Series B and Series C to Series D Preferred Stock........ (25,000) (23,923) (27,953) (13,173) 632,266 37,096 -- -- Conversion of Series D Preferred Stock to common stock.............. -- -- -- -- (632,266) (37,096) 6,323,660 62 Acquisition related compensation charge............................. -- -- -- -- -- -- -- -- Other comprehensive loss............. -- -- -- -- -- -- -- -- Net loss............................. -- -- -- -- -- -- -- -- ------- -------- ------- -------- -------- -------- --------- ------- BALANCE AT OCTOBER 17, 2001.......... -- $ -- -- $ -- -- $ -- 9,349,227 $ 65 ======= ======== ======= ======== ======== ======== ========= ======= ADDITIONAL OTHER RETAINED PAID-IN COMPREHENSIVE EARNINGS PREDECESSOR CAPITAL LOSS (DEFICIT) TOTAL - ----------- ---------- ------------- ----------- ------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE AT JUNE 30, 2001............. $23,926 $ -- $ 4,446 $65,471 Stock options and warrants exercised.......................... 145 -- -- 145 Conversion of Series B and Series C to Series D Preferred Stock........ -- -- -- -- Conversion of Series D Preferred Stock to common stock.............. 37,034 -- -- -- Acquisition related compensation charge............................. 15,616 -- -- 15,616 Other comprehensive loss............. -- (682) -- (682) Net loss............................. -- -- (4,648) (4,648) ------- ----- ------- ------- BALANCE AT OCTOBER 17, 2001.......... $76,721 $(682) $ (202) $75,902 ======= ===== ======= =======
COMMON STOCK ------------------- COMPANY SHARES AMOUNT - ------- --------- ------- BALANCE AT JUNE 30, 2001............... -- $ -- Sale of common stock, net of equity issuance costs....................... 5,461,402 5 Issuance of stock options.............. -- -- Other comprehensive income............. -- -- Net loss............................... -- -- --------- ------- BALANCE AT DECEMBER 31, 2001........... 5,461,402 $ 5 ========= ======= ADDITIONAL OTHER PAID-IN COMPREHENSIVE ACCUMULATED COMPANY CAPITAL INCOME DEFICIT TOTAL - ------- ---------- ------------- ----------- ------- BALANCE AT JUNE 30, 2001............... $ -- $ -- $ -- $ -- Sale of common stock, net of equity issuance costs....................... 85,871 -- -- 85,876 Issuance of stock options.............. 1,695 -- -- 1,695 Other comprehensive income............. -- 127 -- 127 Net loss............................... -- -- (7,179) (7,179) ------- ----- ------- ------- BALANCE AT DECEMBER 31, 2001........... $87,566 $ 127 $(7,179) $80,519 ======= ===== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-36 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
COMPANY PREDECESSOR PREDECESSOR ------------ ----------- ------------ SIX MONTHS PERIOD FROM SIX MONTHS ENDED JULY 1 TO ENDED DECEMBER 31, OCTOBER 17, DECEMBER 31, 2001 2001 2000 ------------ ----------- ------------ (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss)...................................... $ (7,179) $ (4,648) $ 5,728 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss on debt extinguishment........... 7,378 -- -- Acquisition related compensation charge............. -- 15,616 -- Depreciation and amortization....................... 7,823 9,823 20,936 Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables, net..................... 4,046 (2,378) (4,096) Other current assets................................ (1,102) (3,616) (741) Accounts payable and other accrued expenses......... 351 23 (2,834) --------- -------- -------- Net cash provided by operating activities......... 11,317 14,820 18,993 --------- -------- -------- INVESTING ACTIVITIES: Purchase of InSight common stock....................... (187,722) -- -- Cash acquired in the Acquisition....................... 8,429 -- -- Additions to property and equipment.................... (11,436) (20,852) (18,642) Other.................................................. (634) (740) (273) --------- -------- -------- Net cash used in investing activities............. (191,363) (21,592) (18,915) --------- -------- -------- FINANCING ACTIVITIES: Proceeds from stock options exercised.................. -- 145 89 Proceeds from sale of common stock, net of equity issuance costs...................................... 85,876 -- -- Payment of deferred loan fees.......................... (27,594) -- -- Principal payments of debt and capital lease obligations......................................... (430,040) (8,579) (15,074) Proceeds from issuance of debt......................... 575,000 -- 2,500 Other.................................................. (305) 381 421 --------- -------- -------- Net cash provided by (used in) financing activities..................................... 202,937 (8,053) (12,064) --------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 22,891 (14,825) (11,986) Cash, beginning of period.............................. -- 23,254 27,133 --------- -------- -------- Cash, end of period.................................... $ 22,891 $ 8,429 $ 15,147 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid.......................................... $ 3,553 $ 6,799 $ 11,000 ========= ======== ======== Income taxes paid...................................... $ 14 $ 943 $ 199 ========= ======== ======== Equipment additions under capital leases............... $ -- $ -- $ 7,404 ========= ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-37 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND ACQUISITION InSight Health Services Holdings Corp. (Company), a Delaware corporation, was incorporated on June 13, 2001 under the name JWC/Halifax Holdings Corp. The Company was funded through an equity contribution from J.W. Childs Equity Partners II, Halifax Capital Partners and certain of their affiliates. On June 29, 2001, the Company's name was changed to InSight Health Services Holdings Corp. The Company and its former wholly owned subsidiary, InSight Health Services Acquisition Corp. (Acquisition Corp.) were created to acquire all the outstanding shares of InSight Health Services Corp. (InSight). On October 17, 2001, the Company acquired InSight pursuant to an agreement and plan of merger dated June 29, 2001, as amended, among the Company, Acquisition Corp. and InSight (the Acquisition). Acquisition Corp. was merged with and into InSight, with InSight being the surviving corporation. The operations of the Company after the Acquisition are substantially the same as the operations of InSight prior to the Acquisition. In addition, the Company has no operations other than its investment in InSight. As such, InSight is considered the predecessor to the Company in accordance with Regulation S-X. At the effective time of the Acquisition, InSight became a wholly owned subsidiary of the Company. Pursuant to the terms of the merger agreement, each of InSight's stockholders received $18.00 in cash for each share of common stock they owned prior to the Acquisition. Holders of options and warrants, which prior to the Acquisition were exercisable for InSight common stock, received the difference between $18.00 and the exercise price of each share of common stock the holder could have acquired pursuant to the terms of the options and warrants, and the options and warrants were terminated. This resulted in a charge of approximately $15.6 million, which is reflected in the accompanying statement of operations of InSight. In addition, certain members of senior management rolled a portion of their InSight common stock options into stock options of the Company. InSight's stockholders, option holders and warrant holders received aggregate cash consideration of approximately $187.7 million as a result of the Acquisition. Concurrently with the Acquisition, InSight (i) repurchased by tender offer all of its 9 5/8% senior subordinated notes due 2008 in an aggregate principal amount of $100 million, (ii) repaid its then outstanding senior credit facilities and certain other indebtedness and (iii) paid fees and expenses relating to the Acquisition and related financing transactions. These transactions were financed through: - Borrowings of $150 million under $275 million of new senior credit facilities; - A $200 million senior subordinated bridge financing; and - The investment by the Company, before equity issuance costs, of approximately $98.1 million; management options and common stock rollover with a total net value of approximately $1.9 million. 2. BASIS OF PREPARATION The accompanying unaudited condensed consolidated balance sheet as of December 31, 2001, the unaudited condensed consolidated statements of operations and cash flows for the six and three months ended December 31, 2001, reflect the consolidated financial position, results of operations and cash flows of the Company and also include the consolidated financial position, statements of operations and cash flows of InSight from the date of the Acquisition and include all material adjustments required under purchase accounting. InSight is considered the predecessor to the Company in accordance with Regulation S-X. As such, the historical financial statements of InSight prior to the Acquisition are included in the accompanying unaudited condensed consolidated financial statements, including the condensed consolidated balance sheet as of June 30, 2001, the condensed consolidated statements of F-38 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) operations for the periods from July 1, 2001 to October 17, 2001, and from October 1, 2001 to October 17, 2001, and for the six and three months ended December 31, 2000, and the condensed consolidated statements of cash flows for the period from July 1, 2001 to October 17, 2001 and for the six months ended December 31, 2000 (collectively Predecessor financial statements). The Predecessor financial statements have not been adjusted to reflect the acquisition of InSight by the Company. As such, the condensed consolidated financial statements of the Company after the Acquisition are not directly comparable to the Predecessor financial statements prior to the Acquisition. Unaudited combined results of the Company assuming the Acquisition had occurred as of July 1, 2001 are presented below. These combined results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been, and may not be indicative of future operating results (in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) Revenues............................................. $106,789 $104,014 $53,672 $51,794 Costs of operations.................................. 78,890 80,891 40,819 40,342 -------- -------- ------- ------- Gross profit......................................... 27,899 23,123 12,853 11,452 Corporate operating expenses......................... 5,313 5,277 2,653 2,575 -------- -------- ------- ------- Income from company operations....................... 22,586 17,846 10,200 8,877 Equity in earnings of unconsolidated partnerships.... 492 425 158 299 Acquisition related compensation charge.............. (15,616) -- (15,616) -- -------- -------- ------- ------- Operating income (loss).............................. 7,462 18,271 (5,258) 9,176 Interest expense..................................... 14,011 11,907 8,675 5,875 -------- -------- ------- ------- Income (loss) before income taxes.................... (6,549) 6,364 (13,933) 3,301 Provision (benefit) for income taxes................. (2,100) 636 (4,517) 330 -------- -------- ------- ------- Income (loss) before extraordinary item.............. $ (4,449) $ 5,728 $(9,416) $ 2,971 ======== ======== ======= =======
3. PURCHASE ACCOUNTING The Acquisition was accounted for as a purchase by the Company. The preliminary purchase accounting adjustments of the Company have been recorded in the accompanying unaudited condensed consolidated financial statements as of and for any periods subsequent to October 17, 2001. The excess purchase price paid by the Company over its preliminary estimates of the fair market value of the tangible assets and liabilities of InSight as of the date of the Acquisition was approximately $233.5 million and is reflected as Goodwill, net and Other Intangible Assets, net in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2001. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," the new intangible asset balance has been allocated between identifiable intangible assets and remaining goodwill. Goodwill will not be amortized but is subject to an ongoing assessment for impairment. The determination of the fair value of assets and liabilities at the Acquisition date as well as the identification of other intangible assets is F-39 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) continuing, and the final allocation may be significantly different. A summary of the assets acquired and liabilities assumed in the Acquisition follows (amounts in thousands): Cash purchase price......................................... $ 187,722 Estimated fair values Assets acquired: Tangible............................................... 393,487 Other intangible assets................................ 19,860 Liabilities assumed....................................... (385,770) --------- Goodwill.................................................... $ 215,299 =========
The net book value of other intangible assets and their estimated useful lives are as follows (amounts in thousands): Trademark................................................... $ 8,680 Indefinite Life Contracts................................................... 11,180 5 Years
4. NATURE OF BUSINESS The Company, through InSight and its consolidated subsidiaries, provides diagnostic imaging, treatment and related management services in 28 states throughout the United States. The Company has two reportable segments: Eastern Division and Western Division. The Company's services are provided through a network of 83 mobile magnetic resonance imaging (MRI) facilities, six mobile positron emission tomography (PET) facilities, four mobile lithotripsy facilities (collectively, Mobile Facilities), 40 fixed-site MRI facilities (Fixed Facilities), 27 multi-modality imaging centers (Centers), one Leksell Stereotactic Gamma Knife treatment center, one 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 has a substantial presence in California, Texas, New England, the Carolinas, Florida and the Midwest (Indiana and Ohio). At its Centers, the Company typically 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. 5. INTERIM FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements of the Company and Predecessor included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all of the information and disclosures required by accounting principles generally accepted in the United States for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included as part of the Predecessor's Annual Report on Form 10-K for the period ended June 30, 2001 filed with the Securities and Exchange Commission (SEC) on October 14, 2001. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for fair presentation of results for the period have been included. The results of operations for the periods ended December 31, 2001 are not necessarily indicative of the results to be achieved for the full fiscal year. Certain reclassifications have been made to conform prior year amounts to the current year presentation. F-40 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 6. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS The unaudited condensed 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 Partnerships and does not have primary responsibility for the Partnerships' long-term debt. The Company's investment interests in Partnerships are consolidated for ownership of 50 percent owned entities when the Company exercises significant control over the operations and is primarily responsible for the associated long-term debt. Total assets and revenues as of and for the six months ended December 31, 2001 for the Company's 50 percent controlled entity which is consolidated were approximately $2.0 million and $2.8 million, respectively. 7. SEGMENT INFORMATION The Company has two reportable segments: Western Division and Eastern Division. Through December 31, 2001, the Company's reportable segments are geographical business units defined by management's division of responsibility between two executive vice presidents -- operations, who are responsible for the Western and Eastern Divisions and who report directly to the Company's chief operating decision maker. Each segment owns and operates Centers, Fixed and Mobile Facilities within their respective geographic areas. The Company does not allocate income taxes to the two Divisions. The Company manages cash flows and assets on a consolidated basis, and not by segment, and does not allocate or report assets and capital expenditures by segment. The following tables summarize the operating results by segment (amounts in thousands)(unaudited): Company Six and three months ended December 31, 2001:
EASTERN WESTERN OTHER CONSOLIDATED ------- ------- -------- ------------ Contract services revenues....................... $18,793 $ 954 $ 1,313 $ 21,060 Patient services revenues........................ 7,247 14,475 224 21,946 Other revenues................................... 64 10 31 105 ------- ------- -------- -------- Total revenues................................ 26,104 15,439 1,568 43,111 Depreciation and amortization.................... 4,365 2,034 1,424 7,823 Total costs of operations........................ 18,716 11,389 3,098 33,203 Equity in earnings of unconsolidated partnerships.................................. 141 (31) -- 110 Operating income (loss).......................... 7,529 4,019 (3,659) 7,889 Interest expense, net............................ 2,811 771 4,108 7,690 Income (loss) before income taxes................ 4,718 3,248 (7,767) 199
F-41 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Predecessor Period from July 1, 2001 through October 17, 2001:
EASTERN WESTERN OTHER CONSOLIDATED ------- ------- -------- ------------ Contract services revenues....................... $26,354 $ 1,448 $ 1,965 $ 29,767 Patient services revenues........................ 11,735 21,657 301 33,693 Other revenues................................... 167 14 37 218 ------- ------- -------- -------- Total revenues................................ 38,256 23,119 2,303 63,678 Depreciation and amortization.................... 5,839 2,584 1,400 9,823 Total costs of operations........................ 25,985 15,788 3,914 45,687 Equity in earnings of unconsolidated partnerships.................................. 354 28 -- 382 Acquisition related compensation charge.......... -- -- (15,616) (15,616) Operating income (loss).......................... 12,630 7,354 (20,411) (427) Interest expense, net............................ 3,864 1,039 1,418 6,321 Income (loss) before income taxes................ 8,766 6,315 (21,829) (6,748) Predecessor Six months ended December 31, 2000: Contract services revenues....................... $45,521 $ 2,839 $ 3,808 $ 52,168 Patient services revenues........................ 19,533 31,386 584 51,503 Other revenues................................... 147 37 159 343 ------- ------- -------- -------- Total revenues................................ 65,201 34,262 4,551 104,014 Depreciation and amortization.................... 12,824 4,666 3,446 20,936 Total costs of operations........................ 45,829 26,322 8,740 80,891 Equity in earnings of unconsolidated partnerships.................................. 463 (38) -- 425 Operating income (loss).......................... 19,835 7,902 (9,466) 18,271 Interest expense, net............................ 7,191 1,831 2,885 11,907 Income (loss) before income taxes................ 12,644 6,071 (12,351) 6,364
F-42 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Predecessor Period from October 1, 2001 through October 17, 2001:
EASTERN WESTERN OTHER CONSOLIDATED ------- ------- -------- ------------ Contract services revenues....................... $ 4,453 $ 231 $ 297 $ 4,981 Patient services revenues........................ 1,895 3,578 55 5,528 Other revenues................................... 47 1 4 52 ------- ------- -------- -------- Total revenues................................ 6,395 3,810 356 10,561 Depreciation and amortization.................... 893 414 234 1,541 Total costs of operations........................ 4,281 2,627 708 7,616 Equity in earnings of unconsolidated partnerships.................................. 42 6 -- 48 Acquisition related compensation charge.......... -- -- (15,616) (15,616) Operating income (loss).......................... 2,156 1,189 (16,492) (13,147) Interest expense, net............................ 581 159 245 985 Income (loss) before income taxes................ 1,575 1,030 (16,737) (14,132) Predecessor Three months ended December 31, 2000: Contract services revenues....................... $22,583 $ 1,361 $ 1,945 $ 25,889 Patient services revenues........................ 9,743 15,796 253 25,792 Other revenues................................... 66 24 23 113 ------- ------- -------- -------- Total revenues................................ 32,392 17,181 2,221 51,794 Depreciation and amortization.................... 6,492 2,323 1,781 10,596 Total costs of operations........................ 23,185 13,150 4,007 40,342 Equity in earnings of unconsolidated partnerships.................................. 301 (2) -- 299 Operating income (loss).......................... 9,508 4,029 (4,361) 9,176 Interest expense, net............................ 3,573 926 1,376 5,875 Income (loss) before income taxes................ 5,935 3,103 (5,737) 3,301
8. HEDGING ACTIVITIES In the first quarter of fiscal 2001, InSight adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138 (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) the fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Additionally, any ineffective portion of the hedging transaction is recorded currently in net income with the remainder deferred in accumulated other comprehensive income (loss). The Company has established policies and procedures to permit limited types and amounts of off-balance sheet hedges to help manage interest rate risk. InSight had entered into an interest rate swap to pay a fixed rate of interest to the counterparty and received a floating rate of interest and has designated F-43 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) the interest rate swap as a cash flow hedge of its floating rate debt. Such swaps have the effect of converting variable rate borrowings into fixed rate borrowings. Subsequent to the Acquisition, the Company re-designated the acquired swap as a cash flow hedge and established a new hedging relationship with the new senior credit facilities. At December 31, 2001 the notional amount of this swap was $35.8 million with a fair value loss of approximately $1.5 million. The fair value of the swap at the time of the Acquisition represents hedge ineffectiveness that will be recognized in net income over the remaining life of the swap. $217,000 of hedge ineffectiveness was recognized as a reduction to interest expense for the period ended December 31, 2001. 9. COMPREHENSIVE INCOME (LOSS) Components of comprehensive income are changes in equity other than those resulting from investments by owners and distributions to owners. Net income (loss) is the primary component of comprehensive income. For the Company, the only component of comprehensive income other than net income (loss) is the change in unrealized gain or loss on derivatives qualifying for hedge accounting, net of tax. The aggregate amount of such changes to equity that have not yet been recognized in net income are reported in the equity portion of the condensed consolidated balance sheets as accumulated other comprehensive income (loss). 10. DEBT On October 17, 2001, in connection with the Acquisition, InSight repurchased by tender offer all of its 9 5/8% senior subordinated notes due 2008 in an aggregate principal amount of $100 million and repaid its then outstanding credit facilities and certain other indebtedness. On October 30, 2001, the Company, through InSight, its wholly owned subsidiary, issued new 9 7/8% senior subordinated notes due 2011 (Notes) in the aggregate principal amount of $225 million. The net proceeds from the issuance of the Notes was approximately $211.5 million, $200 million of which was used to retire in full the senior subordinated bridge financing and the balance of which is being used for general corporate purposes. As a result, an extraordinary loss of approximately $7.4 million was recorded related to the write-off of associated debt issuance costs. On December 27, 2001, the Company filed a Form S-4 registration statement with the SEC to register an offer to exchange all of the outstanding Notes for new notes registered under the Securities Act of 1933, as amended. The terms of the exchange notes to be issued in the exchange offer are substantially identical to the Notes; however the exchange notes will be freely tradeable, except in limited circumstances. 11. NEW PRONOUNCEMENTS In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 applies to all business combinations with a closing date after June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. InSight adopted SFAS 141, effective July 1, 2001. In accordance with SFAS 141 the Company engaged a valuation specialist to assist the Company in identifying acquired intangible assets, their respective fair values and amortization period related to the Acquisition. The Company has made a tentative allocation of values to these identifiable intangible assets based on preliminary estimates. The final allocation of goodwill and other intangible assets may differ significantly from current estimates. F-44 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SFAS 142 eliminates the amortization of goodwill, permits indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. InSight adopted SFAS 142 effective July 1, 2001, which required InSight to cease amortization of its remaining net goodwill balance and to perform a transitional goodwill impairment test of July 1, 2001, and thereafter an impairment test at least annually. Impairment results when the fair value of InSight's reporting segments, including goodwill, is less than its carrying value. SFAS 142 permits six months from the adoption date to complete a review of goodwill for impairment and record necessary adjustments prior to the end of fiscal 2002. InSight concluded that the book value of goodwill was not impaired as of July 1, 2001. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 (with earlier application being encouraged) and generally are to be applied prospectively. The Company does not expect the adoption of SFAS 144 to have a material impact on the Company's financial condition and results of operations. 12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The Notes issued on October 30, 2001 by InSight, the Company's wholly owned subsidiary, and the exchange notes to be issued in the exchange offer, are or will be guaranteed by the Company (Parent Company) and all of InSight's wholly owned subsidiaries (Guarantor Subsidiaries). These guarantees are full, unconditional, joint and several. The following condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and issuers of guaranteed securities registered or being registered." This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with accounting principles generally accepted in the United States. F-45 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) DECEMBER 31, 2001 (COMPANY)
PARENT NON- COMPANY GUARANTOR GUARANTOR ONLY INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- -------- ------------ ------------ ------------ ------------ (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents......... $ -- $ -- $ 19,785 $ 3,106 $ -- $ 22,891 Trade accounts receivables, net... -- -- 31,341 10,346 -- 41,687 Other current assets.............. -- -- 9,595 153 -- 9,748 Intercompany accounts receivables.................... 87,698 374,625 30,476 -- (492,799) -- ------- -------- -------- ------- --------- -------- Total current assets........... 87,698 374,625 91,197 13,605 (492,799) 74,326 Property and equipment, net......... -- -- 131,732 26,429 -- 158,161 Investments in partnerships......... -- -- 1,924 -- -- 1,924 Investments in consolidated subsidiaries...................... (7,179) (7,179) 9,311 -- 5,047 -- Other assets........................ -- -- 21,393 -- -- 21,393 Goodwill and other intangible assets, net....................... -- -- 229,957 4,802 -- 234,759 ------- -------- -------- ------- --------- -------- $80,519 $367,446 $485,514 $44,836 $(487,752) $490,563 ======= ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes.......................... $ -- $ 1,500 $ 1,442 $ 254 $ -- $ 3,196 Accounts payable and other accrued expenses....................... -- -- 26,199 1,029 -- 27,228 Intercompany accounts payable..... -- -- 462,323 30,476 (492,799) -- ------- -------- -------- ------- --------- -------- Total current liabilities...... -- 1,500 489,964 31,759 (492,799) 30,424 Equipment, capital leases and other notes, less current portion....... -- 373,125 2,278 1,144 -- 376,547 Other long-term liabilities......... -- -- 451 2,622 -- 3,073 Stockholders' equity (deficit)...... 80,519 (7,179) (7,179) 9,311 5,047 80,519 ------- -------- -------- ------- --------- -------- $80,519 $367,446 $485,514 $44,836 $(487,752) $490,563 ======= ======== ======== ======= ========= ========
F-46 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) JUNE 30, 2001 (PREDECESSOR)
NON- GUARANTOR GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents....... $ -- $ 19,921 $ 3,333 $ -- $ 23,254 Trade accounts receivables, net.......................... -- 32,758 10,597 -- 43,355 Other current assets............ -- 8,273 106 -- 8,379 Intercompany accounts receivable................... 241,016 27,590 -- (268,606) -- -------- -------- ------- --------- -------- Total current assets......... 241,016 88,542 14,036 (268,606) 74,988 Property and equipment, net....... -- 123,579 24,676 -- 148,255 Investments in partnerships....... -- 1,783 -- -- 1,783 Investments in consolidated subsidiaries.................... (4,882) 9,328 -- (4,446) -- Other assets...................... -- 6,828 -- -- 6,828 Goodwill, net..................... -- 84,358 4,844 -- 89,202 -------- -------- ------- --------- -------- $236,134 $314,418 $43,556 $(273,052) $321,056 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases and other notes........................ $ 20,810 $ 12,275 $ 777 $ -- $ 33,862 Accounts payable and other accrued expenses............. -- 23,033 1,302 -- 24,335 Intercompany accounts payable... -- 241,016 27,590 (268,606) -- -------- -------- ------- --------- -------- Total current liabilities.... 20,810 276,324 29,669 (268,606) 58,197 Equipment, capital leases and other notes, less current portion......................... 149,853 42,409 2,129 -- 194,391 Other long-term liabilities....... -- 567 2,430 -- 2,997 Stockholders' equity (deficit).... 65,471 (4,882) 9,328 (4,446) 65,471 -------- -------- ------- --------- -------- $236,134 $314,418 $43,556 $(273,052) $321,056 ======== ======== ======= ========= ========
F-47 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED) FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2001 (COMPANY)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED -------- ------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS) Revenues................. $ -- $ -- $36,033 $7,078 $ -- $43,111 Costs of operations...... -- -- 27,424 5,779 -- 33,203 ------- ------- ------- ------ ------- ------- Gross profit........ -- -- 8,609 1,299 -- 9,908 Corporate operating expenses............... -- -- 2,129 -- -- 2,129 ------- ------- ------- ------ ------- ------- Income from company operations........ -- -- 6,480 1,299 -- 7,779 Equity in earnings of unconsolidated partnerships........... -- -- 110 -- -- 110 ------- ------- ------- ------ ------- ------- Operating income.... -- -- 6,590 1,299 -- 7,889 Interest expense, net.... -- -- 7,265 425 -- 7,690 ------- ------- ------- ------ ------- ------- Income (loss) before income taxes...... -- -- (675) 874 -- 199 Provision for income taxes.................. -- -- -- -- -- -- ------- ------- ------- ------ ------- ------- Income (loss) before equity in income of consolidated subsidiaries...... -- -- (675) 874 -- 199 Equity in income of consolidated subsidiaries........... (7,179) (7,179) 874 -- 13,484 -- ------- ------- ------- ------ ------- ------- Income (loss) before extraordinary item.............. (7,179) (7,179) 199 874 13,484 199 Extraordinary item -- loss on debt extinguishment......... -- -- (7,378) -- -- (7,378) ------- ------- ------- ------ ------- ------- Net income (loss)... $(7,179) $(7,179) $(7,179) $ 874 $13,484 $(7,179) ======= ======= ======= ====== ======= =======
F-48 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED) FOR THE PERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001 (PREDECESSOR)
GUARANTOR NON-GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS) Revenues........................... $ -- $ 48,002 $15,676 $ -- $ 63,678 Costs of operations................ -- 33,654 12,033 -- 45,687 ------- -------- ------- ------ -------- Gross profit.................. -- 14,348 3,643 -- 17,991 Corporate operating expenses....... -- 3,184 -- -- 3,184 ------- -------- ------- ------ -------- Income from company operations.................. -- 11,164 3,643 -- 14,807 Equity in earnings of unconsolidated partnerships...... -- 382 -- -- 382 Acquisition related compensation charge........................... -- (15,616) -- -- (15,616) ------- -------- ------- ------ -------- Operating income (loss)....... -- (4,070) 3,643 -- (427) Interest expense, net.............. -- 5,489 832 -- 6,321 ------- -------- ------- ------ -------- Income (loss) before income taxes....................... -- (9,559) 2,811 -- (6,748) Provision (benefit) for income taxes............................ -- (2,100) -- -- (2,100) ------- -------- ------- ------ -------- Income (loss) before equity in income of consolidated subsidiaries................ -- (7,459) 2,811 -- (4,648) Equity in income (loss) of consolidated subsidiaries........ (4,648) 2,811 -- 1,837 -- ------- -------- ------- ------ -------- Net income (loss)............. $(4,648) $ (4,648) $ 2,811 $1,837 $ (4,648) ======= ======== ======= ====== ========
F-49 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 (PREDECESSOR)
GUARANTOR NON-GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS) Revenues............................ $ -- $84,709 $19,305 $ -- $104,014 Costs of operations................. -- 65,865 15,026 -- 80,891 ------ ------- ------- ------- -------- Gross profit................... 18,844 4,279 -- 23,123 Corporate operating expenses........ -- 5,277 -- -- 5,277 ------ ------- ------- ------- -------- Income from company operations................... -- 13,567 4,279 -- 17,846 Equity in earnings of unconsolidated partnerships...................... -- 425 -- -- 425 ------ ------- ------- ------- -------- Operating income............... -- 13,992 4,279 -- 18,271 Interest expense, net............... -- 10,758 1,149 -- 11,907 ------ ------- ------- ------- -------- Income before income taxes..... -- 3,234 3,130 -- 6,364 Provision for income taxes.......... -- 636 -- -- 636 ------ ------- ------- ------- -------- Income before equity in income of consolidated subsidiaries................. -- 2,598 3,130 -- 5,728 Equity in income of consolidated subsidiaries...................... 5,728 3,130 -- (8,858) -- ------ ------- ------- ------- -------- Net income..................... $5,728 $ 5,728 $ 3,130 $(8,858) $ 5,728 ====== ======= ======= ======= ========
F-50 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED) FOR THE PERIOD FROM OCTOBER 1, 2001 THROUGH OCTOBER 17, 2001 (PREDECESSOR)
GUARANTOR NON-GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS) Revenues........................... $ -- $ 6,437 $4,124 $ -- $ 10,561 Costs of operations................ -- 4,527 3,089 -- 7,616 ------- -------- ------ ------ -------- Gross profit.................. -- 1,910 1,035 -- 2,945 Corporate operating expenses....... -- 524 -- -- 524 ------- -------- ------ ------ -------- Income from company operations.................. -- 1,386 1,035 -- 2,421 Equity in earnings of unconsolidated partnerships...... -- 48 -- -- 48 Acquisition related compensation charge........................... -- (15,616) -- -- (15,616) ------- -------- ------ ------ -------- Operating income (loss)....... -- (14,182) 1,035 -- (13,147) Interest expense, net.............. -- 778 207 -- 985 ------- -------- ------ ------ -------- Income (loss) before income taxes....................... -- (14,960) 828 -- (14,132) Provision (benefit) for income taxes............................ -- (4,517) -- -- (4,517) ------- -------- ------ ------ -------- Income (loss) before equity in income of consolidated subsidiaries................ -- (10,443) 828 -- (9,615) Equity in income (loss) of consolidated subsidiaries........ (9,615) 828 -- 8,787 -- ------- -------- ------ ------ -------- Net income (loss)............. $(9,615) $ (9,615) $ 828 $8,787 $ (9,615) ======= ======== ====== ====== ========
F-51 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 (PREDECESSOR)
GUARANTOR NON-GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS) Revenues............................ $ -- $42,271 $9,523 $ -- $51,794 Costs of operations................. -- 32,837 7,505 -- 40,342 ------ ------- ------ ------- ------- Gross profit................... -- 9,434 2,018 -- 11,452 Corporate operating expenses........ -- 2,575 -- -- 2,575 ------ ------- ------ ------- ------- Income from company operations................... -- 6,859 2,018 -- 8,877 Equity in earnings of unconsolidated partnerships...................... -- 299 -- -- 299 ------ ------- ------ ------- ------- Operating income............... -- 7,158 2,018 -- 9,176 Interest expense, net............... -- 5,291 584 -- 5,875 ------ ------- ------ ------- ------- Income before income taxes..... -- 1,867 1,434 -- 3,301 Provision for income taxes.......... -- 330 -- -- 330 ------ ------- ------ ------- ------- Income before equity in income of consolidated subsidiaries................. -- 1,537 1,434 -- 2,971 Equity in income of consolidated subsidiaries...................... 2,971 1,434 -- (4,405) -- ------ ------- ------ ------- ------- Net income..................... $2,971 $ 2,971 $1,434 $(4,405) $ 2,971 ====== ======= ====== ======= =======
F-52 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 (COMPANY)
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------- ------------ ------------ (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss)............. $ (7,179) $ (7,179) $(7,179) $ 874 $13,484 $ (7,179) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary loss on debt extinguishment............ -- -- 7,378 -- -- 7,378 Depreciation and amortization.............. -- -- 6,833 990 -- 7,823 Equity in income (loss) of consolidated subsidiaries.............. 7,179 7,179 (874) -- (13,484) -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables, net....................... -- -- 3,758 288 -- 4,046 Intercompany receivables, net....................... 101,846 (204,337) 102,615 (124) -- -- Other current assets........ -- -- (1,154) 52 -- (1,102) Accounts payable and other accrued expenses.......... -- -- 546 (195) -- 351 --------- --------- ------- ------- ------- --------- Net cash provided by (used in) operating activities............. 101,846 (204,337) 111,923 1,885 -- 11,317 --------- --------- ------- ------- ------- --------- INVESTING ACTIVITIES: Purchase of InSight common stock....................... (187,722) -- -- -- -- (187,722) Cash acquired in the Acquisition................. -- -- 4,682 3,747 -- 8,429 Additions to property and equipment................... -- -- (9,109) (2,327) -- (11,436) Other......................... -- -- (634) -- -- (634) --------- --------- ------- ------- ------- --------- Net cash provided by (used in) investing activities............. (187,722) -- (5,061) 1,420 -- (191,363) --------- --------- ------- ------- ------- --------- FINANCING ACTIVITIES: Proceeds from sale of common stock, net of equity issuance costs.............. 85,876 -- -- -- -- 85,876 Payment of deferred loan fees........................ -- -- (27,594) -- -- (27,594) Principal payments of debt and capital lease obligations... -- (370,663) (59,338) (39) -- (430,040) Proceeds from issuance of debt........................ -- 575,000 -- -- -- 575,000 Other......................... -- -- (145) (160) -- (305) --------- --------- ------- ------- ------- --------- Net cash provided by (used in) financing activities............. 85,876 204,337 (87,077) (199) -- 202,937 --------- --------- ------- ------- ------- --------- INCREASE IN CASH AND CASH EQUIVALENTS................... -- -- 19,785 3,106 -- 22,891 Cash, beginning of period..... -- -- -- -- -- -- --------- --------- ------- ------- ------- --------- Cash, end of period........... $ -- $ -- $19,785 $ 3,106 $ -- $ 22,891 ========= ========= ======= ======= ======= =========
F-53 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE PERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001 (PREDECESSOR)
GUARANTOR NON-GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss).................... $(4,648) $ (4,648) $ 2,811 $ 1,837 $ (4,648) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Acquisition related compensation charge.......................... -- 15,616 -- -- 15,616 Depreciation and amortization..... -- 7,920 1,903 -- 9,823 Equity in income (loss) of consolidated subsidiaries....... 4,648 (2,811) -- (1,837) -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables, net... -- (2,341) (37) -- (2,378) Intercompany receivables, net..... (145) 837 (692) -- -- Other current assets.............. -- (3,517) (99) -- (3,616) Accounts payable and other accrued expenses........................ -- 101 (78) -- 23 ------- -------- ------- ------- -------- Net cash provided by (used in) operating activities......... (145) 11,157 3,808 -- 14,820 ------- -------- ------- ------- -------- INVESTING ACTIVITIES: Additions to property and equipment......................... -- (18,575) (2,277) -- (20,852) Other................................ -- (740) -- -- (740) ------- -------- ------- ------- -------- Net cash used in investing activities................... -- (19,315) (2,277) -- (21,592) ------- -------- ------- ------- -------- FINANCING ACTIVITIES: Proceeds from stock options exercised......................... 145 -- -- -- 145 Principal payments of debt and capital lease obligations......... -- (7,110) (1,469) -- (8,579) Other................................ -- 29 352 -- 381 ------- -------- ------- ------- -------- Net cash provided by (used in) financing activities......... 145 (7,081) (1,117) -- (8,053) ------- -------- ------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... -- (15,239) 414 -- (14,825) Cash, beginning of period............ -- 19,921 3,333 -- 23,254 ------- -------- ------- ------- -------- Cash, end of period.................. $ -- $ 4,682 $ 3,747 $ -- $ 8,429 ======= ======== ======= ======= ========
F-54 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 (PREDECESSOR)
GUARANTOR NON-GUARANTOR INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income........................... $ 5,728 $ 5,728 $ 3,130 $(8,858) $ 5,728 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..... -- 18,362 2,574 -- 20,936 Equity in income of consolidated subsidiaries.................... (5,728) (3,130) -- 8,858 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables........ -- (1,956) (2,140) -- (4,096) Intercompany receivables, net..... 6,607 (5,090) (1,517) -- -- Other current assets.............. -- (695) (46) -- (741) Accounts payable and other accrued expenses........................ -- (2,856) 22 -- (2,834) ------- -------- ------- ------- -------- Net cash provided by operating activities................... 6,607 10,363 2,023 -- 18,993 ------- -------- ------- ------- -------- INVESTING ACTIVITIES: Additions to property and equipment......................... -- (16,703) (1,939) -- (18,642) Other................................ -- (149) (124) -- (273) ------- -------- ------- ------- -------- Net cash used in investing activities................... -- (16,852) (2,063) -- (18,915) ------- -------- ------- ------- -------- FINANCING ACTIVITIES: Proceeds from stock options exercised......................... 89 -- -- -- 89 Principal payments of debt and capital lease obligations......... (9,196) (5,638) (240) -- (15,074) Proceeds from issuance of debt....... 2,500 -- -- -- 2,500 Other................................ -- 291 130 -- 421 ------- -------- ------- ------- -------- Net cash used in financing activities................... (6,607) (5,347) (110) -- (12,064) ------- -------- ------- ------- -------- DECREASE IN CASH AND CASH EQUIVALENTS.......................... -- (11,836) (150) -- (11,986) Cash, beginning of period............ -- 25,375 1,758 -- 27,133 ------- -------- ------- ------- -------- Cash, end of period.................. $ -- $ 13,539 $ 1,608 $ -- $ 15,147 ======= ======== ======= ======= ========
F-55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of InSight Health Services Holdings Corp.: We have audited the accompanying consolidated balance sheet of InSight Health Services Holdings Corp. (a Delaware corporation) and subsidiary as of June 30, 2001 and the related statement of stockholders' equity for the period from inception (June 13, 2001) to June 30, 2001. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InSight Health Services Holdings Corp. and subsidiary as of June 30, 2001 and for the period from inception (June 13, 2001) to June 30, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Orange County, California September 10, 2001 F-56 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
JUNE 30, 2001 ------------- ASSETS ASSETS...................................................... $ -- ==== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES................................................. $ -- STOCKHOLDERS' EQUITY:....................................... -- Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued or outstanding............... -- Common stock subscription receivable........................ (90) Common stock, $.001 par value; 10,000,000 shares authorized, 5 shares issued and outstanding........................... -- Additional paid-in capital.................................. 90 ---- Total stockholders' equity............................. -- ---- Total liabilities and stockholders' equity................ $ -- ====
The accompanying notes are an integral part of this consolidated balance sheet. F-57 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FROM INCEPTION (JUNE 13, 2001) TO JUNE 30, 2001
COMMON COMMON STOCK STOCK ADDITIONAL --------------- SUBSCRIPTION PAID-IN SHARES AMOUNT RECEIVABLE CAPITAL TOTAL ------ ------ ------------ ---------- ----- Balance at Inception (June 13, 2001)............ -- $-- $ -- $-- $-- Issuance of common stock........................ 5 -- (90) 90 -- -- --- ---- --- --- Balance at June 30, 2001........................ 5 $-- $(90) $90 $-- == === ==== === ===
The accompanying notes are an integral part of this consolidated financial statement. F-58 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE ORGANIZATION AND BUSINESS InSight Health Services Holdings Corp. (Company), a Delaware corporation, was originally incorporated on June 13, 2001 under the name of JWC/Halifax Holdings Corp. On June 29, 2001, the Company's name was changed to InSight Health Services Holdings Corp. The Company was formed for the purpose of consummating an acquisition of InSight Health Services Corp. (InSight), a Delaware corporation, through a merger of the Company's wholly owned subsidiary, InSight Health Services Acquisition Corp. (formerly JWCH Merger Corp.) (Acquisition Corp) with and into InSight whereby InSight would become the wholly-owned subsidiary of the Company. The acquisition was consummated on October 17, 2001. The Company has no prior or current operations or cash activity. Acquisition Corp. was merged out of existence of October 17, 2001 and had no prior operations or cash activity. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany amounts have been eliminated in consolidation. 2. ACQUISITION AND RELATED FINANCING TRANSACTIONS (SUBSEQUENT EVENT -- UNAUDITED) On October 17, 2001, Acquisition Corp. merged with InSight. InSight was the surviving corporation and became a wholly-owned subsidiary of the Company. InSight is deemed to be the predecessor for future SEC reporting purposes. J.W. Childs Equity Partners II (Childs) and an affiliate own approximately 80% of the outstanding common stock of the Company and Halifax Capital Partners (Halifax) and an affiliate own approximately 20% of the outstanding common stock of the Company. In addition, certain members of senior management rolled over portion of their InSight stock options into stock options of the Company at the consummation of the acquisition. In connection with the Company's acquisition of InSight, the Company's stockholders purchased additional shares of the Company's common stock, resulting in net proceeds as follows (in millions): J.W. Childs Equity Partners II and affiliate................ $ 79.8 Halifax Capital Partners and affiliate...................... 20.0 Net value of rolled management options...................... 1.7 ------ $101.5 ======
Upon consummation of the acquisition, each of InSight's stockholders became entitled to receive $18.00 in cash for each share of InSight common stock that they owned prior to the acquisition. Holders of options and warrants, which prior to the acquisition were exercisable for InSight common stock, received the difference between $18.00 and the exercise price for each share of common stock the holder could have acquired pursuant to the terms of the options or warrants, and the options and warrants were terminated. This resulted in a charge of approximately $19.7 million, which will be reflected in InSight's pre-merger financial statements in the second quarter of fiscal 2002. InSight's stockholders, option holders and warrant holders immediately prior to the acquisition became entitled to receive aggregate cash consideration of approximately $187.7 million as a result of the acquisition. Concurrently with the acquisition, (i) Acquisition Corp. repurchased by tender offer all of InSight's 9 5/8% senior subordinated notes due 2008 (Prior Notes) in an aggregate principal amount of $100 million, (ii) InSight repaid its then outstanding senior credit facilities and certain other indebtedness and (iii) InSight paid fees and expenses relating to the acquisition and related financing transactions. InSight will record a pre-merger extraordinary loss on extinguishment of existing indebtedness of approximately $20.0 million in the second quarter of fiscal 2002. F-59 INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These transactions were financed through: - Borrowings of $150 million under $275 million of new senior credit facilities; - A $200 million senior subordinated bridge financing; and - The investment by Childs, Halifax and certain of their affiliates of $98.1 million; management options and common stock rollover with a total net value of approximately $1.9 million as discussed above. The acquisition will be accounted for as a purchase of InSight by the Company. As such, the recorded amounts of InSight's assets and liabilities will change significantly as a result of the application of purchase accounting. Management is currently in the process of evaluating the appropriate purchase accounting adjustments. On October 30, 2001, InSight issued new 9 7/8% senior subordinated notes due 2011 (Outstanding Notes) in the aggregate principal amount of $225 million. The net proceeds from the issuance of the Outstanding Notes was approximately $211.5 million, $200 million of which was used to retire in full the senior subordinated bridge financing and the balance is being used for general corporate purposes. InSight will record a post-merger extraordinary loss on extinguishment of the senior subordinated bridge financing of approximately $7.8 million in the second quarter of fiscal 2002. Upon the completion of the acquisition, InSight and the Company entered into a management agreement with J.W. Childs Advisors II, L.P., the general partner of J.W. Childs Equity Partners II, and Halifax Genpar L.P., the general partner of Halifax Capital Partners. Under the agreement, InSight paid J.W. Childs Advisors II and Halifax Genpar a transaction fee of $4,500,000 and $1,125,000, respectively, for services rendered in connection with the acquisition. Additionally, J.W. Childs Advisors II and Halifax Genpar will provide business, management and financial advisory services to InSight and the Company in consideration of (1) an annual fee of $240,000 to be paid to J.W. Childs Advisors II and (2) an annual fee of $60,000 to be paid to Halifax Genpar. InSight and the Company will also reimburse such entities for all travel and other out-of-pocket expenses incurred by such entities in connection with their performance of the advisory services under the agreement. The management agreement has an initial term of five years, which term will automatically renew for one year periods thereafter and is subject to earlier termination by the board of directors of InSight and the Company. Furthermore, the Company and InSight have agreed to indemnify and hold harmless J.W. Childs Advisors II and Halifax Genpar and their affiliates, from and against any and all claims, losses, damages and expenses arising out of the acquisition or the performance by J.W. Childs Advisors II and Halifax Genpar of their obligations under the management agreement. F-60 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $225,000,000 INSIGHT HEALTH SERVICES CORP. OFFER TO EXCHANGE $225,000,000 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011 ------------------------- PROSPECTUS ------------------------- , 2002 We have not authorized any dealer, salesperson or other person to give any information or represent anything to you other than the information contained in this prospectus. You must not rely on unauthorized information or representations. This prospectus does not offer to sell or ask for offers to buy any of the securities in any jurisdiction where it is unlawful, where the person making the offer is not qualified to do so, or to any person who cannot legally be offered the securities. The information in this prospectus is current only as of the date on its cover, and may change after that date. For any time after the cover date of this prospectus, we do not represent that our business is the same as described or that the information in this prospectus is correct -- nor do we imply those things by delivering this prospectus or selling securities to you. Until , 2002 (90 days after the date of this prospectus), all dealers effecting transactions in the exchange notes, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when selling exchange notes received in exchange for outstanding notes held for their own account. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF DELAWARE CORPORATE REGISTRANTS The following is a summary of the statues, charter and bylaw provisions, contracts or other arrangements under which each of the Registrants' directors and officers are insured or indemnified against liability in their capacities as such. All of the directors and officers of the Registrants are covered by insurance policies maintained and held in effect by InSight against certain liabilities for actions taken in their capacities as such, including liabilities under the Securities Act. REGISTRANTS INCORPORATED UNDER DELAWARE LAW InSight, InSight Holdings, InSight Health Corp., Signal Medical Services, Inc., Open MRI, Inc., Maxum Health Corp., Radiosurgery Centers, Inc., Maxum Health Services Corp., and Diagnostic Solutions Corp. are incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law ("DGCL") provides that a corporation may indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or complete action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or suit by or the right of the corporation to procure a judgment in its favor, against expenses actually and reasonably incurred in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court or Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. InSight's certificate of incorporation limits the liability of its directors and officers to the fullest extent permitted under the DGCL. The certificate of incorporation specifies that the directors and officers will not be personally liable for monetary damages for breach of fiduciary duty as a director or officer, as applicable. This limitation does not apply to actions by a director or officer that do not meet the standards of conduct which make it permissible under the DGCL for InSight Holdings to indemnify such director or officer. InSight has entered into separate indemnification agreements with its executive officers and each of its former directors that could require InSight, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and executive officers and to advance expenses incurred by them as a result of any proceedings against them as to which they could be indemnified. InSight Holdings's certificate of incorporation limits the liability of its directors and officers to the fullest extent permitted under the DGCL. The certificate of incorporation specifies that the directors and officers will not be personally liable for monetary damages for breach of fiduciary duty as a director or II-1 officer. This limitation does not apply to actions by a director or officer that do not meet the standards of conduct which make it permissible under the DGCL for us to indemnify such director or officer. InSight Health Corp.'s certificate of incorporation limits the personal liability of its directors for monetary damages for breach of fiduciary duty as a director except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, under Section 174 of the DGCL, or for any transaction from which the director derived any improper personal benefit. It also indemnifies its officers, directors, and employees and agents to the extent permitted by the DGCL. The right to indemnification shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition, provided however, that, if the DGCL requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer shall be made only upon delivery to the corporation of an undertaking to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses. Its bylaws provide for indemnification of any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or any constituent corporation absorbed in a consolidation or merger, or serves or served with another corporation, partnership, joint venture, trust or other enterprise at the request of the corporation or any such constituent corporation and provide such expenses incurred in defending such actions upon receipt of an undertaking by or on behalf of such persons to repay such advances unless it shall be ultimately determined that such person is entitled to indemnification by the corporation. Signal Medical Services, Inc.'s certificate of incorporation limits the personal liability of its directors for monetary damages for breach of fiduciary duty as a director except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, under Section 174 of the DGCL, or for any transaction from which the director derived any improper personal benefit. The corporation also indemnifies its officers, directors, and employees and agents to the extent permitted by the DGCL. Article VII of its bylaws indemnifies to the fullest extent provided by the DGCL each person who was or is made a party or is threatened to be a party to or is involved in any action, suit or proceeding by reason of the fact that he or she, as a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The corporation may provide indemnification to employees and agents of the corporation with the same scope and effect as the indemnification for directors and officers. Open MRI, Inc.'s certificate of incorporation limits the liability of its directors to the fullest extent permitted by the DGCL for monetary damages for a breach of fiduciary duty as a director. Article VII of its bylaws indemnifies to the fullest extent provided by the DGCL each person who was or is made a party or is threatened to be a party to or is involved in any action, suit or proceeding by reason of the fact that he or she, as a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The corporation may provide indemnification to employees and agents of the corporation with the same scope and effect as the indemnification for directors and officers. Maxum Health Corp.'s certificate of incorporation limits a directors liability to the fullest extent permitted by the DGCL for monetary damages for a breach of fiduciary duty as a director. Article V of its bylaws indemnifies to the fullest extent provided by the DGCL each person who was or is made a party or is threatened to be a party to or is involved in any action, suit or proceeding by reason of the fact that he or she, as a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The corporation II-2 may provide indemnification to employees and agents of the corporation with the same scope and effect as the indemnification for directors and officers. Radiosurgery Centers, Inc.'s certificate of incorporation limits the personal liability of its directors for monetary damages for breach of fiduciary duty as a director except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, under Section 174 of the DGCL, or for any transaction from which the director derived any improper personal benefit. Article VII of its bylaws also indemnifies its officers, directors, and employees and agents to the extent permitted by the DGCL. The right to indemnification shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition, provided however, that, if the DGCL requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer shall be made only upon delivery to the corporation of undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses. Maxum Health Services Corp.'s bylaws limit the personal liability of its directors for monetary damages for breach of fiduciary duty as a director except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, under Section 174 of the DGCL, or for any transaction from which the director derived any improper personal benefit. The liability of a director shall be further eliminated or limited to the fullest extent provided by an amendment to the DGCL or any other applicable law authorizing such corporate action. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding by reason of the fact that he or she or a person of whom he or she is a legal representative or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer or employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified by the corporation to the fullest extent authorized by the DGCL. Such right to indemnification includes the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition, provided that if the DGCL or any other applicable law requires the payment of such expenses in advance of the final disposition of a proceeding, payment shall be made only upon delivery to the corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified. REGISTRANTS INCORPORATED UNDER INDIANA LIMITED PARTNERSHIP LAW MRI Associates, L.P. is a limited partnership formed under the laws of the State of Indiana. Under Section 2(9) of Indiana's Limited Liability Partnership Act, a limited partnership may indemnify a person made a party to an action because the person is or was a partner, employee, officer, or agent of the partnership against liability incurred in the action if (1) the person's conduct was in good faith; and (2) the person reasonably believed (a) in the case of conduct in the person's capacity as a partner, that the person's conduct was in the best interests of the partnership; and (b) in all other cases that the person's conduct was at least not opposed to the best interests of the partnership; and (3) in the case of any criminal action, the person either had reasonable cause to believe the person's conduct was lawful or had no reasonable cause to believe the person's conduct was unlawful. These indemnification provisions do not exclude any other rights to indemnification that a partner, employee, officer or agent of the limited partnership may have under the partnership agreement or with the written consent of all partners. MRI Associates, L.P.'s Agreement of Limited Partnership provides for indemnification of the general partner, its agents and employees so long as the acts or omissions were taken in good faith and in a manner reasonably believed by the general partner to be, or not opposed to, the best interests of the partnership. However, no indemnity is made if the conduct II-3 was found by a court of competent jurisdiction to be the result of gross negligence or reckless or intentional misconduct or breach of fiduciary duty, unless and only to the extent that the court determines that in view of all circumstances the general partner, agent or employee is entitled to indemnity for such expense as the court deems proper. If the partnership is made a party to a claim as a result of or in connection with any partner's obligations or liabilities unrelated to the partnership business, such partners cumulatively, jointly and severally shall indemnify and reimburse the partnership for all loss and expense incurred, including reasonable attorney's fees. If the partnership, general partner, or any limited partner is sued as a result of the medical activities of any other limited partner, then the limited partner whose activity resulted in a claim being made shall, jointly and severally, indemnify the partnership, general partner, the other limited partners and all of their officers, directors, agents and employees arising from or related to that claim of medical malpractice. In addition, the partnership agreement also provides that if the Partnership, the General Partner or any Limited Partner is sued as a result of the medical activities of any other Limited Partner, then the Limited Partner whose activity resulted in the claim being made shall, jointly and severally, indemnify the Partnership, the General Partner, the other Limited Partners and all of their officers, directors, agents and employees, if any, from and against any loss, liability, damage, cost or expense arising from or related to that claim of medical malpractice. REGISTRANTS INCORPORATED UNDER PENNSYLVANIA LIMITED LIABILITY COMPANY LAW Wilkes-Barre Imaging, L.L.C. is a limited liability company formed under the laws of the State of Pennsylvania. Under Section 8945 of the Pennsylvania Limited Liability Company Law of 1994 ("PLLCL"), a limited liability company may and shall have the power to indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever, subject to such standards and restrictions, if any, as are set forth in the operating agreement. Indemnification is not permitted under the PLLCL in any case where the act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Wilkes-Barre Imaging, L.L.C.'s Operating Agreement provides that Wilkes-Barre Imaging, L.L.C. will indemnify and hold harmless, to the fullest extent permitted by law, each member from and against any and all losses, claims, damages, liabilities and expenses of whatever nature, as incurred, arising out of or relating to the fact that such person was or is a member and/or a manager of Wilkes-Barre Imaging, L.L.C. The Operating Agreement limits indemnification for any member or manager if a final judgment or other final adjudication adverse to the member or manager establishes (i) that the member or manager's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or (ii) that the member or manager personally gained financial profit or other advantage to which the member or manager was not legally entitled. REGISTRANTS INCORPORATED UNDER TEXAS LAW Maxum Health Services of North Texas, Inc., Maxum Health Services of Dallas, Inc., and NDDC, Inc. are incorporated under the laws of the State of Texas. Article 2.02-1 of the Texas Business Corporation Act ("TBCA") provides that a corporation may indemnify any director or officer who was, is or is threatened to be made a named defendant or respondent in a proceeding because he or she is or was a director or officer, provided that the director or officer (1) conducted himself in good faith, (2) reasonably believed (a) in the case of conduct in his or her official capacity, that his or her conduct was in the corporation's best interests, and/or (b) in other cases, that his or her conduct was at least not opposed to the corporation's best interest, and (3) in the case of any criminal proceeding, has no reasonable cause to believe his or her conduct was unlawful. Subject to certain exceptions, a director or officer may not be indemnified if he or she is found liable to the corporation or if he or she is found liable on the basis that he or she improperly received a personal benefit. Under Texas law reasonable expenses incurred by a director or officer may be paid or reimbursed by the corporation in advance of a final disposition of the proceeding after the corporation receives a written affirmation by the director or officer of his or her good faith belief that he or she has met the standards of conduct necessary for indemnification and a written undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined that the director or officer is not entitled to indemnification by the corporation. II-4 Texas law requires a corporation to indemnify a director or officer against reasonable expenses incurred in connection with the proceeding to which such director or officer is named defendant or respondent because he or she is or was a director or officer if he or she is wholly successful in defense of the proceeding. Texas law also permits a corporation to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director or officer against any liability asserted against him and incurred by him in such a capacity or arising out of his or her status as such a director or officer, whether or not the corporation would have the power to indemnify him against liability under Article 2.02-1 of the TBCA. Maxum Health Services of North Texas, Inc.'s certificate of incorporation eliminates the liability of directors to the fullest extent permitted by the provisions of the TBCA and indemnifies any and all persons whom it shall have power to indemnify from and against any and all of the expenses, liabilities or other matters. Article V of the bylaws of Maxum Health Services of North Texas states that the corporation indemnifies, to the fullest extent provided by the TBCA, each person who was or is made a party or is threatened to be a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she, as a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The bylaws provide that the corporation may indemnify employees and agents of the corporation with the same scope and effect as the indemnification for directors and officers. Maxum Health Services of Dallas, Inc.'s certificate of incorporation eliminates the liability of directors to the fullest extent permitted by the provisions of the TBCA and indemnifies any and all persons whom it shall have power to indemnify from and against any and all of the expenses, liabilities or other matters. NDDC, Inc.'s certificate of incorporation eliminates the liability of directors to the fullest extent permitted by the provisions of the TBCA and indemnifies any and all persons whom it shall have power to indemnify from and against any and all of the expenses, liabilities or other matters. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 2.1 -- Agreement and Plan of Merger dated as of June 29, 2001, by and among InSight Health Services Holdings Corp., JWCH Merger Corp. and InSight, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. 2.2 -- Amendment No. 1 to Agreement and Plan of Merger dated as of June 29, 2001, by and among InSight Health Services Holdings Corp., JWCH Merger Corp. and InSight, previously filed and incorporated by reference from InSight's Annual Report on Form 10-K, filed September 14, 2001. 2.3 -- Amendment No. 2 to Agreement and Plan of Merger, dated as of October 9, 2001, by and among InSight Health Services Holdings Corp., InSight Health Services Acquisition Corp. and InSight Health Corp., previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed October 9, 2001. 2.4 -- Second Amended and Restated Stockholders Agreement, dated as of February 8, 2002, among InSight Health Services Holdings Corp., the JWC Holders (as defined therein), the Halifax Holders (as defined therein), the Management Holders (as defined therein) and the Additional Holders (as defined therein), filed herewith. *2.5 -- Management Agreement, dated as of October 17, 2001, by and among J.W. Childs Advisors II., L.P, Halifax Genpar, L.P., InSight Health Services Holdings Corp. and InSight Health Services Corp. *3.1 -- Certificate of Incorporation of InSight, as amended. *3.2 -- Bylaws of InSight, as amended. *3.3 -- Certificate of Incorporation of InSight Health Services Holdings Corp., as amended. *3.4 -- Bylaws of InSight Health Services Holdings Corp.
II-5 *3.5 -- Certificate of Incorporation of InSight Health Corp., as amended. *3.6 -- Bylaws of InSight Health Corp., as amended. *3.7 -- Certificate of Incorporation of Signal Medical Services, Inc., as amended. *3.8 -- Bylaws of Signal Medical Services, Inc., as amended. *3.9 -- Certificate of Incorporation of Open MRI, Inc., as amended. *3.10 -- Bylaws of Open MRI, Inc. *3.11 -- Certificate of Incorporation of Maxum Health Corp., as amended. *3.12 -- Bylaws of Maxum Health Corp., as amended. *3.13 -- Certificate of Incorporation of Radiosurgery Centers, Inc. *3.14 -- Bylaws of Radiosurgery Centers, Inc. *3.15 -- Certificate of Incorporation of Maxum Health Services Corp., as amended. *3.16 -- Bylaws of Maxum Health Services Corp. *3.17 -- Certificate of Limited Partnership of MRI Associates, L.P. *3.18 -- Agreement of Limited Partnership of MRI Associates, L.P. *3.19 -- Certificate of Incorporation of Maxum Health Services of North Texas, Inc. *3.20 -- Bylaws of Maxum Health Services of North Texas, Inc. *3.21 -- Certificate of Incorporation of Maxum Health Services of Dallas, Inc. *3.22 -- Bylaws of Maxum Health Services of Dallas, Inc. *3.23 -- Certificate of Incorporation of NDDC, Inc. *3.24 -- Bylaws of NDDC, Inc. *3.25 -- Certificate of Incorporation of Diagnostic Solutions Corp., as amended. *3.26 -- Bylaws of Diagnostic Solutions Corp. 3.27 -- Certificate of Organization of Wilkes-Barre Imaging, L.L.C., filed herewith. 3.28 -- Operating Agreement of Wilkes-Barre Imaging, L.L.C., filed herewith. *4.1 -- Indenture with respect to 9 7/8% Senior Subordinated Notes due 2011 with State Street Bank and Trust Company, N.A., as Trustee, dated October 30, 2001. 4.2 -- Supplemental Indenture with respect to Wilkes-Barre Imaging, L.L.C. with State Street Bank and Trust Company, N.A., dated February 25, 2002, filed herewith. *4.3 -- Purchase Agreement, dated October 25, 2001 by and among InSight, Banc of America Securities LLC and First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011. *4.4 -- Registration Rights Agreement, dated October 30, 2001, by and among InSight, Banc of America Securities LLC and First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011. 5.1 -- Opinion of Kaye Scholer LLP, filed herewith. 5.2 -- Opinion of Hunton & Williams, filed herewith. 8.1 -- Tax Opinion of Kaye Scholer LLP, filed herewith. 10.1 -- Voting Agreement dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger Corp., Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle International Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, State Board of Administration of Florida, Carlyle Investment Group, L.P., Carlyle-InSight International Partners, L.P., Carlyle-InSight Partners L.P. and T.C. Group, LLC, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. 10.2 -- Voting Agreement dated as of July 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger Corp. and General Electric Company, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001.
II-6 10.3 -- Voting Agreement, dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger Corp. and GE Fund, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. *10.4 -- Credit Agreement, dated October 17, 2001, by and among InSight, Banc of America Securities LLC and First Union Securities, LLC. *10.5 -- Note Purchase Agreement, dated as of October 17, 2001, by and among InSight Health Services Acquisition Corp., InSight Health Services Corp., InSight Health Services Holdings Corp., the Subsidiary Guarantors (as defined therein), Banc of America Bridge LLC, and Banc of America Securities LLC. *10.6 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan. *10.7 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Steven T. Plochocki. *10.8 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Michael A. Boylan. *10.9 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Thomas V. Croal. *10.10 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Michael S. Madler. *10.11 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Steven T. Plochocki. *10.12 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Patricia R. Blank. *10.13 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Michael A. Boylan. *10.14 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Thomas V. Croal. *10.15 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Brian G. Drazba. *10.16 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Michael S. Madler. *10.17 -- Executive Employment Agreement, dated December 7, 2001, between InSight Health Services Corp. and Marilyn U. MacNiven-Young. 10.18 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Cecilia A. Guastaferro, filed herewith. *10.19 -- Form of InSight Health Services Holdings Corp. Performance Based Option Agreement. *12.1 -- Computation of ratio of earnings to fixed charges. *21 -- Subsidiaries of InSight. 23.1 -- Consent of Independent Public Accountants, filed herewith. 23.2 -- Consent of Kaye Scholer LLP, included in Exhibit 5.1 hereto. 23.3 -- Consent of Hunton & Williams, included in Exhibit 5.2 hereto. 25.1 -- Form T-1 Statement regarding eligibility of State Street Bank and Trust Company, N.A., as Trustee, filed herewith. 99.1 -- Form of Letter of Transmittal, filed herewith. 99.2 -- Form of Notice of Guaranteed Delivery, filed herewith. 99.3 -- Broker Letter, filed herewith. 99.4 -- Client Letter, filed herewith.
- --------------- * Previously filed. II-7 ITEM 22. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrants pursuant to the provisions described under Item 20 or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of a registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrants hereby undertake: (1) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (2) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (A) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933. (B) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (C) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (3) That, for the purpose of determining liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the exchange offer. (5) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form S-4, within one business day of the receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. INSIGHT HEALTH SERVICES CORP. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer - ----------------------------------------------------- (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer) /s/ STEVEN G. SEGAL Director - ----------------------------------------------------- Steven G. Segal /s/ EDWARD D. YUN Director - ----------------------------------------------------- Edward D. Yun /s/ MICHAEL N. CANNIZZARO Director - ----------------------------------------------------- Michael N. Cannizzaro /s/ MARK J. TRICOLLI Director - ----------------------------------------------------- Mark J. Tricolli /s/ DAVID W. DUPREE Director - ----------------------------------------------------- David W. Dupree /s/ KENNETH M. DOYLE Director - ----------------------------------------------------- Kenneth M. Doyle
II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. INSIGHT HEALTH SERVICES HOLDINGS CORP. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer - ----------------------------------------------------- (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer) /s/ MARK J. TRICOLLI Director - ----------------------------------------------------- Mark J. Tricolli /s/ STEVEN G. SEGAL Director - ----------------------------------------------------- Steven G. Segal /s/ MICHAEL N. CANNIZZARO Director - ----------------------------------------------------- Michael N. Cannizzaro /s/ EDWARD D. YUN Director - ----------------------------------------------------- Edward D. Yun /s/ DAVID W. DUPREE Director - ----------------------------------------------------- David W. Dupree /s/ KENNETH M. DOYLE Director - ----------------------------------------------------- Kenneth M. Doyle
II-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. INSIGHT HEALTH CORP. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI - ----------------------------------------------------- President and Chief Executive Officer and Steven T. Plochocki sole Director (principal executive officer) /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. SIGNAL MEDICAL SERVICES, INC. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI - ----------------------------------------------------- President and Chief Executive Officer and Steven T. Plochocki sole Director (principal executive officer) /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-12 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. OPEN MRI, INC. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI - ----------------------------------------------------- President and Chief Executive Officer and Steven T. Plochocki sole Director (principal executive officer) /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. MAXUM HEALTH CORP. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI - ----------------------------------------------------- President and Chief Executive Officer and Steven T. Plochocki sole Director (principal executive officer) /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-14 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. RADIOSURGERY CENTERS, INC. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-15 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. MAXUM HEALTH SERVICES CORP. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-16 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. MRI ASSOCIATES, L.P. By: InSight Health Corp., its general partner By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - --------------------------------------------- sole Director of InSight Health Corp., its Steven T. Plochocki general partner (principal executive officer) /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - --------------------------------------------- Officer of InSight Health Corp., its general Thomas V. Croal partner (principal financial and accounting officer)
II-17 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-18 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. MAXUM HEALTH SERVICES OF DALLAS, INC. By: /s/ STEVEN T. PLOCHOCKI -------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-19 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. NDDC, INC. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-20 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. DIAGNOSTIC SOLUTIONS CORP. By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director (principal executive officer) Steven T. Plochocki /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (principal financial and accounting Thomas V. Croal officer)
II-21 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Newport Beach, State of California, on March 22, 2002. WILKES-BARRE IMAGING, L.L.C. By: InSight Health Corp., its sole member and sole manager By: /s/ STEVEN T. PLOCHOCKI ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amended registration statement has been signed by the following persons in the capacities indicated on March 22, 2002.
SIGNATURE --------- /s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and - ----------------------------------------------------- sole Director of InSight Health Corp., its Steven T. Plochocki sole member and sole manager (principal executive officer) /s/ THOMAS V. CROAL Executive Vice President and Chief Financial - ----------------------------------------------------- Officer of InSight Health Corp., its sole Thomas V. Croal member and sole manager (principal financial and accounting officer)
II-22 EXHIBIT INDEX 2.1 -- Agreement and Plan of Merger dated as of June 29, 2001, by and among InSight Health Services Holdings Corp., JWCH Merger Corp. and InSight, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. 2.2 -- Amendment No. 1 to Agreement and Plan of Merger dated as of June 29, 2001, by and among InSight Health Services Holdings Corp., JWCH Merger Corp. and InSight, previously filed and incorporated by reference from InSight's Annual Report on Form 10-K, filed September 14, 2001. 2.3 -- Amendment No. 2 to Agreement and Plan of Merger, dated as of October 9, 2001, by and among InSight Health Services Holdings Corp., InSight Health Services Acquisition Corp. and InSight Health Corp., previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed October 9, 2001. 2.4 -- Second Amended and Restated Stockholders Agreement, dated as of February 8, 2002, among InSight Health Services Holdings Corp., the JWC Holders (as defined therein), the Halifax Holders (as defined therein), the Management Holders (as defined therein) and the Additional Holders (as defined therein), filed herewith. *2.5 -- Management Agreement, dated as of October 17, 2001, by and among J.W. Childs Advisors II., L.P., Halifax Genpar, L.P., InSight Health Services Holdings Corp. and InSight Health Services Corp. *3.1 -- Certificate of Incorporation of InSight, as amended. *3.2 -- Bylaws of InSight, as amended. *3.3 -- Certificate of Incorporation of InSight Health Services Holdings Corp., as amended. *3.4 -- Bylaws of InSight Health Services Holdings Corp. *3.5 -- Certificate of Incorporation of InSight Health Corp., as amended. *3.6 -- Bylaws of InSight Health Corp., as amended. *3.7 -- Certificate of Incorporation of Signal Medical Services, Inc., as amended. *3.8 -- Bylaws of Signal Medical Services, Inc., as amended. *3.9 -- Certificate of Incorporation of Open MRI, Inc., as amended. *3.10 -- Bylaws of Open MRI, Inc. *3.11 -- Certificate of Incorporation of Maxum Health Corp., as amended. *3.12 -- Bylaws of Maxum Health Corp., as amended. *3.13 -- Certificate of Incorporation of Radiosurgery Centers, Inc. *3.14 -- Bylaws of Radiosurgery Centers, Inc. *3.15 -- Certificate of Incorporation of Maxum Health Services Corp., as amended. *3.16 -- Bylaws of Maxum Health Services Corp. *3.17 -- Certificate of Limited Partnership of MRI Associates, L.P. *3.18 -- Agreement of Limited Partnership of MRI Associates, L.P. *3.19 -- Certificate of Incorporation of Maxum Health Services of North Texas, Inc. *3.20 -- Bylaws of Maxum Health Services of North Texas, Inc. *3.21 -- Certificate of Incorporation of Maxum Health Services of Dallas, Inc. *3.22 -- Bylaws of Maxum Health Services of Dallas, Inc. *3.23 -- Certificate of Incorporation of NDDC, Inc. *3.24 -- Bylaws of NDDC, Inc. *3.25 -- Certificate of Incorporation of Diagnostic Solutions Corp., as amended. *3.26 -- Bylaws of Diagnostic Solutions Corp. 3.27 -- Certificate of Organization of Wilkes-Barre Imaging, L.L.C., filed herewith. 3.28 -- Operating Agreement of Wilkes-Barre Imaging, L.L.C., filed herewith. *4.1 -- Indenture with respect to 9 7/8% Senior Subordinated Notes due 2011 with State Street Bank and Trust Company, N.A., as Trustee, dated October 30, 2001.
4.2 -- Supplemental Indenture with respect to Wilkes-Barre Imaging, L.L.C. with State Street Bank and Trust Company, N.A., dated February 25, 2002, filed herewith. *4.3 -- Purchase Agreement, dated October 25, 2001 by and among InSight, Banc of America Securities LLC and First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011. *4.4 -- Registration Rights Agreement, dated October 30, 2001, by and among InSight, Banc of America Securities LLC and First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011. 5.1 -- Opinion of Kaye Scholer LLP, filed herewith. 5.2 -- Opinion of Hunton & Williams, filed herewith. 8.1 -- Tax Opinion of Kaye Scholer LLP, filed herewith. 10.1 -- Voting Agreement dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger Corp., Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle International Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, State Board of Administration of Florida, Carlyle Investment Group, L.P., Carlyle-InSight International Partners, L.P., Carlyle-InSight Partners L.P. and T.C. Group, LLC, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. 10.2 -- Voting Agreement dated as of July 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger Corp. and General Electric Company, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. 10.3 -- Voting Agreement, dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger Corp. and GE Fund, previously filed and incorporated herein by reference from InSight's Current Report on Form 8-K, filed July 2, 2001. *10.4 -- Credit Agreement, dated October 17, 2001, by and among InSight, Banc of America Securities LLC and First Union Securities, LLC. *10.5 -- Note Purchase Agreement, dated as of October 17, 2001, by and among InSight Health Services Acquisition Corp., InSight Health Services Corp., InSight Health Services Holdings Corp., the Subsidiary Guarantors (as defined therein), Banc of America Bridge LLC, and Banc of America Securities LLC. *10.6 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan. *10.7 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Steven T. Plochocki. *10.8 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Michael A. Boylan. *10.9 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Thomas V. Croal. *10.10 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by and between InSight Health Services Holdings Corp. and Michael S. Madler. *10.11 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Steven T. Plochocki. *10.12 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Patricia R. Blank. *10.13 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Michael A. Boylan. *10.14 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Thomas V. Croal. *10.15 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Brian G. Drazba. *10.16 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Michael S. Madler.
*10.17 -- Executive Employment Agreement, dated December 7, 2001, between InSight Health Services Corp. and Marilyn U. MacNiven-Young. 10.18 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Cecilia A. Guastaferro, filed herewith. *10.19 -- Form of InSight Health Services Holdings Corp. Performance Based Option Agreement. *12.1 -- Computation of ratio of earnings to fixed charges. *21 -- Subsidiaries of InSight. 23.1 -- Consent of Independent Public Accountants, filed herewith. 23.2 -- Consent of Kaye Scholer LLP, included in Exhibit 5.1 hereto. 23.3 -- Consent of Hunton & Williams, included in Exhibit 5.2 hereto. 25.1 -- Form T-1 Statement regarding eligibility of State Street Bank and Trust Company, N.A., as Trustee, filed herewith. 99.1 -- Form of Letter of Transmittal, filed herewith. 99.2 -- Form of Notice of Guaranteed Delivery, filed herewith. 99.3 -- Broker Letter, filed herewith. 99.4 -- Client Letter, filed herewith.
- --------------- * Previously filed. EX-2.4 3 y55701a1ex2-4.txt AMENDED AND RESTATED STOCKHOLDERS AGREEMENT Exhibit 2.4 EXECUTION COPY SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT THIS SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this "AGREEMENT") is entered into as of February 8, 2002 by and among InSight Health Services Holdings Corp., a Delaware corporation (the "COMPANY"), the JWC Holders (as defined below), the Halifax Holders (as defined below), the Management Holders (as defined below) and the Additional Holders (as defined below). RECITALS A. As a result of the consummation of the transactions contemplated by the Agreement and Plan of Merger, dated as of June 29, 2001 (the "MERGER AGREEMENT"), and of certain related transactions to be consummated concurrently therewith, the Stockholders (as defined below) own (and may hereafter acquire) certain shares of Common Stock (as defined below) and certain options, warrants, securities and other rights to acquire from the Company, by exercise, conversion, exchange or otherwise, shares of Common Stock or securities convertible into Common Stock. B. The Stockholders entered into that certain Stockholders Agreement dated as of June 29, 2001, which was superceded by that certain Amended and Restated Stockholders Agreement dated as of October 17, 2001 (the "Existing Agreement") for the purpose of regulating certain aspects of the Stockholders' relationships with one another and with the Company. C. All of the Stockholders now desire to amend and restate the Existing Agreement in the manner set forth below. AGREEMENT In consideration of the premises and the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the receipt and sufficiency of which are acknowledged by all parties to this Agreement, the parties to this Agreement mutually agree as follows: ARTICLE I Definitions For the purposes of this Agreement, the following terms shall be defined as follows: "ACTIVE TRADING MARKET" shall mean the New York or American Stock Exchange or the National Association of Securities Dealers, Inc.'s National Market System or Small Capitalization System. 1 "ADDITIONAL HOLDERS" shall mean those Persons listed as Additional Holders on the signature pages hereof and all Persons that became Stockholders as of the date hereof and are designated as Additional Holders pursuant to Section 2.13 hereof. An "AFFILIATE" of a specified Person shall mean a Person who, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the specified Person and, when used with respect to the Company or any Subsidiary of the Company, shall include any holder of capital stock holding greater than 5% of the total number of outstanding shares of Common Stock of the Company on a fully-diluted basis or any officer or director of the Company or any Subsidiary of the Company. "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company. "BUSINESS DAY" shall mean any day, other than a Saturday, Sunday or legal holiday, on which banks in New York, New York and Boston, Massachusetts are permitted to be open for business. "CALL EVENT" shall have the meaning set forth in Section 2.5(a). "CALL GROUP" shall have the meaning set forth in Section 2.5(a). "CALL OPTION" shall have the meaning set forth in Section 2.5(a). "CALL PRICE" shall mean, as of any date, with respect to any Subject Securities, a per share price equal to (a) the quotient of (i) the excess of (A) the product of 5.25 times EBITDA, over (B) the aggregate amount of the Consolidated Indebtedness as of the end of the period for which EBITDA is calculated, plus (C) the amount of cash and cash equivalents of the Company and its Subsidiaries as of the end of the period for which EBITDA is calculated which is not required to fund the day-to-day operations of the Company and its Subsidiaries as reasonably determined by the Board of Directors in good faith, divided by (ii) the aggregate number of Common Stock Equivalents at the time of the relevant Call Event or Put Event, as applicable, outstanding, minus, (b) in the case of Vested Options, the per share exercise price payable in connection with such Vested Options. "CALL SECURITIES" shall have the meaning set forth in Section 2.5(a). "CAUSE," with respect to a Management Holder, shall have the meaning attributed to it under the executed written employment agreement between such Management Holder and the Company (or a Subsidiary thereof) or, in the absence of such employment agreement, "CAUSE" shall mean the occurrence of any of the following during the term of such Management Holder's employment with the Company (or a Subsidiary thereof): (a) such Management Holder has performed his duties negligently; 2 (b) such Management Holder is guilty of misconduct in connection with the performance of such Management Holder's duties; (c) such Management Holder has committed any serious crime or offense; (d) such Management Holder has failed or refused to comply with the oral or written policies or directives of the Board of Directors; or (e) such Management Holder has breached any provision or covenant contained in this Agreement. "COMMON STOCK" shall mean shares of Common Stock, par value $0.001 per share, of the Company. "COMMON STOCK EQUIVALENTS" shall mean, as of any date, (a) all shares of Common Stock outstanding as of such date and (b) all Vested Options, convertible securities, warrants and other securities convertible, exchangeable into or redeemable for Common Stock, which securities are vested and/or exercisable within 60 days of the date of measurement. Solely for the purposes of Section 2.4, Common Stock Equivalents shall mean all shares of Common Stock and all options, convertible securities, warrants and other securities convertible, exchangeable into or redeemable for Common Stock, whether or not vested and/or exercisable. "COMPANY CALL PERIOD" shall have the meaning set forth in Section 2.5(a)(i). "COMPANY EXCLUSIVE FIRST REFUSAL PERIOD" shall have the meaning set forth in Section 2.2(a). "COMPETITOR " shall mean any existing or new firm that competes with the Company in any activity in which the Company is currently engaged, or has plans to be engaged in the future as disclosed or discussed at the meetings of the Board of Directors. "CONSOLIDATED INDEBTEDNESS" shall mean, as of any date, the aggregate amount outstanding, on a consolidated basis, of (a) all obligations of the Company or its Subsidiaries for borrowed money, (b) all obligations of the Company or its Subsidiaries evidenced by bonds, debentures, notes or other similar instruments or upon which interest charges are customarily paid, (c) all obligations of the Company or its Subsidiaries for the deferred purchase price of property or services, except current accounts payable arising in the ordinary course of business and not overdue beyond such period as is commercially reasonable for the Company or its Subsidiaries' business, (d) all obligations of the Company or its Subsidiaries under conditional sale or other title retention agreements relating to property purchased by such Person and all capitalized lease obligations, (e) all payment obligations of the Company or its Subsidiaries on or for currency protection agreements, (f) all obligations of the Company or its Subsidiaries as an account party under any letter of credit (excluding those supporting trade payables), (g) all obligations of any third party secured by property 3 or assets of the Company or its Subsidiaries (regardless of whether or not such Person is liable for repayment of such obligations) and (h) all guarantees of the Company or its Subsidiaries. "COST PRICE" shall mean, with respect to any Subject Securities, the purchase price, if any, per share of Common Stock or per Vested Option, as the case may be, paid to the Company for such Subject Securities by the original holder thereof or, if no shares were so purchased at the Closing (as defined in the Merger Agreement), then the price per share paid by the JWC Holders; provided that the Cost Price with respect to (i) Common Stock issued to the Management Holders pursuant to an exercise of options granted under the Company's 2001 Stock Option Plan shall equal $18.00 per share and (ii) options granted to the Management Holders under the Company's 2001 Stock Option Plan shall equal to $9.63 per share. If at any time the number of shares of Common Stock outstanding is (a) increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock or (b) decreased by a combination of shares of such Common Stock, the Cost Price per share of Common Stock shall be adjusted upward or downward, as appropriate, to reflect the decrease or increase in shares of Common Stock outstanding. "DESIGNATED EMPLOYEE" shall have the meaning set forth in Section 2.5(c). "DISABLED," with respect to a Management Holder, shall have the meaning attributed to it under the executed written employment agreement between such Management Holder and the Company (or a Subsidiary thereof) or, in the absence of such employment agreement, such Management Holder shall be deemed to have become "DISABLED" if, during the term of such Management Holder's employment with the Company (or a Subsidiary thereof), such Management Holder shall become physically or mentally disabled, whether totally or partially, either permanently or so that such Management Holder, in the good faith judgment of the Board of Directors, is unable substantially and competently to perform his duties on behalf of the Company for a period of 90 consecutive days or for 90 days during any six month period during the said term of employment. In order to assist the Board of Directors in making that determination, such Management Holder shall, as reasonably requested by the Board of Directors, (i) make himself available for medical examinations by one or more physicians chosen by the Board and (ii) grant to the Board of Directors and any such physicians access to all relevant medical information concerning him, arrange to furnish copies of his medical records to the Board of Directors and use his best efforts to cause his own physicians to be available to discuss his health with the Board of Directors. "DRAGALONG GROUP" shall have the meaning set forth in Section 2.4. "EBITDA" shall mean consolidated earnings of the Company and its Subsidiaries, including equity in the earnings from non-consolidated subsidiaries, before interest, taxes, depreciation, amortization and the management fee paid to JWC Inc., Halifax Capital Partners or any of their respective Affiliates and after deduction of all operating expenses, minority interests expenses and incentive compensation, all as calculated in accordance with GAAP consistently applied, as reflected in the Company's most recently available audited consolidated financial statements for the immediately preceding fiscal year. 4 "EXCLUDED SECURITIES" shall have the meaning set forth in Section 4.1(e). "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute thereto, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect from time to time. "GAAP" shall mean the generally accepted accounting principles in the United States of America, as such principles are changed from time to time, consistent with those applied in the preparation of the financial statements of such Person. "GOOD REASON," with respect to a Management Holder, shall have the meaning attributed to it under the executed written employment agreement between such Management Holder and the Company (or a Subsidiary thereof) or, in the absence of such employment agreement, "GOOD REASON" shall be deemed to have occurred if, other than for Cause, any of the following has occurred during the term of such Management Holder's employment with the Company (or a Subsidiary thereof): (a) such Management Holder's base salary has been reduced, other than in connection with a reduction of executive compensation imposed by the Board of Directors in response to negative financial results or other adverse circumstances affecting the Company or its Subsidiaries; or (b) the Company has reduced or reassigned, in any material respect, the duties of such Management Holder as an employee of the Company and such event has not been rescinded within 10 business days after such Management Holder notifies the Company in writing that he objects thereto. "HALIFAX AFFIRMATIVE BOARD VOTE" shall have the meaning set forth in Section 4.2. "HALIFAX CAPITAL PARTNERS" shall mean Halifax Capital Partners, L.P., a Delaware limited partnership. "HALIFAX DIRECTOR" shall have the meaning set forth in Section 4.1(c). "HALIFAX HOLDER" shall mean each of those Persons listed as Halifax Holders on the signature pages hereof and, after the date hereof, shall mean all such Persons and Permitted Transferees of the Halifax Holders, other than those transferees who qualify as JWC Holders or Management Holders immediately prior to or upon such Transfer. "HALIFAX REPRESENTATIVE" shall have the meaning set forth in Section 6.9. "HOLDER" shall have the meaning set forth in Section 3.1. "INITIATING STOCKHOLDER" shall have the meaning set forth in Section 2.3(a). 5 "INVOLUNTARY TRANSFER" shall have the meaning set forth in Section 2.9. "INVOLUNTARY TRANSFER NOTICE" shall have the meaning set forth in Section 2.9. "INVOLUNTARY TRANSFEREE" shall have the meaning set forth in Section 2.8. "JOINDER AGREEMENT" shall mean a joinder agreement substantially in the form of Exhibit B attached hereto which is entered into pursuant to Section 2.13 hereof. "JWC EQUITY PARTNERS II" shall mean J.W. Childs Equity Partners II, L.P., a Delaware limited partnership. "JWC HOLDERS" shall mean each of those Persons listed as JWC Holders on the signature pages hereof and, after the date hereof, shall mean all such Persons and Permitted Transferees of the JWC Holders, other than those transferees who qualify as Halifax Holders or Management Holders immediately prior to or upon such Transfer. "JWC INC." shall mean J.W. Childs Associates, Inc., a Delaware corporation. "JWC REPRESENTATIVE" shall have the meaning set forth in Section 6.8. "LIEN" shall mean any lien, mortgage, pledge, security interest (as defined in the New York Uniform Commercial Code), claim or other type of charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property and any financing statement filed in respect of any of the foregoing. "MANAGEMENT HOLDERS" shall mean any Person listed as a Management Holder on the signature pages hereof and shall also include (a) any director, officer or employee of the Company or any of its Subsidiaries who hereafter becomes a Stockholder and (b) Permitted Transferees of the Management Holders, unless immediately prior to such Transfer such transferee was a JWC Holder or a Halifax Holder. "MATERIAL TRANSACTION" means any material transaction in which the Company or any of its Subsidiaries proposes to engage or is engaged, including a purchase or sale of assets or securities, financing, merger, consolidation, tender offer or any other transaction that would require disclosure pursuant to the Exchange Act, and with respect to which the Board of Directors reasonably has determined in good faith that compliance with this Agreement may reasonably be expected to either materially interfere with the Company's or such Subsidiary's ability to consummate such transaction in a timely fashion or require the Company to disclose material, non-public information prior to such time as it would otherwise be required to be disclosed. "MERGER AGREEMENT" shall have the meaning set forth in Recital A. 6 "OFFER PERIOD" shall have the meaning set forth in Section 2.2(a). "OFFERED SECURITIES" shall have the meaning set forth in Section 5.1(a). "OFFEREE PERCENTAGE" shall mean, as to each offeree, the fraction, expressed as a percentage, the numerator of which is the total number of shares of Common Stock Equivalents held by such offeree, and the denominator of which is the total number of shares of Common Stock Equivalents held by all of the offerees. "OFFEROR" shall have the meaning set forth in Section 2.2(a). "ORIGINAL HALIFAX HOLDERS" shall mean the Halifax Holders as of the date of this Agreement. "ORIGINAL JWC HOLDERS" shall mean the JWC Holders as of the date of this Agreement. "ORIGINAL MANAGEMENT HOLDERS" shall mean the Management Holders as of the date of this Agreement. "PARTICIPATING OFFEREES" shall have the meaning set forth in Section 2.4(a). "PARTICIPATION NOTICE" shall have the meaning set forth in Section 2.4(a). "PARTICIPATION SECURITIES" shall have the meaning set forth in Section 2.4(a). "PERMITTED TRANSFER" shall mean a Transfer that is not a Prohibited Transfer and is one of the following: (a) a Transfer of any Subject Securities between any JWC Holder, Halifax Holder or Management Holder and such Stockholder's spouse, children (whether natural, step or by adoption), grandchildren (whether natural, step or by adoption) or parents or to a trust, partnership or limited liability company solely for the benefit of one or more of any of such Persons; (b) a Transfer of Subject Securities by a JWC Holder to JWC Inc. or JWC Equity Partners II or to the limited partners, co-investors, officers, employees or consultants of JWC Inc. or JWC Equity Partners II or to a corporation or corporations or to a partnership or partnerships, limited liability company or companies (or other entity for collective investment, such as a fund) which is (and continues to be) an Affiliate of or controlled by, controlling or under common control with JWC Inc. or JWC Equity Partners II (other than the Company and its Subsidiaries); (c) a Transfer of Subject Securities by a Halifax Holder to Halifax Capital Partners or to the limited partners, co-investors, officers, employees or consultants of Halifax Capital Partners or to a corporation or corporations or to a partnership or partnerships, limited liability company or companies (or other entity for collective investment, such as a fund) which is (and 7 continues to be) an Affiliate of or controlled by, controlling or under common control with Halifax Capital Partners; (d) a Transfer of Subject Securities between or among the JWC Holders or the Halifax Holders; (e) a Transfer of Subject Securities between any Stockholder who is a natural person and such Stockholder's guardian or conservator; (f) a bona fide pledge of Subject Securities by a JWC Holder or a Halifax Holder to a bank or financial institution; and (g) a Transfer of Subject Securities by a JWC Holder or a Halifax Holder to a Management Holder who is not an Affiliate (other than as an officer, employee, director or stockholder of the Company and its direct or indirect Subsidiaries) of JWC Inc. or Halifax Capital Partners. No Permitted Transfer shall be effective unless and until the transferee of the Subject Securities so transferred executes and delivers to the Company an executed Joinder Agreement in accordance with Section 2.13 hereof; provided, however, that the Permitted Transfer to a bank or a financial institution pursuant to clause (e) above shall be effective upon delivery of the Subject Securities and such entity shall not execute and deliver an executed Joinder Agreement in accordance with Section 2.13 hereof unless and until foreclosure or similar action by any such pledgee. "PERMITTED TRANSFEREE" shall mean, with respect to any Stockholder, any Person who shall have directly or indirectly acquired and who shall hold any Subject Securities pursuant to a Permitted Transfer from that Stockholder. Notwithstanding the foregoing, a Permitted Transferee shall not include any Person that is in receivership, bankruptcy, insolvency, dissolution, liquidation or any similar proceeding or any Person whose incompetence has been established pursuant to a judicial determination. "PERSON" shall mean an individual, corporation, partnership, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof, or any other entity. "PREEMPTIVE OFFER" shall have the meaning set forth in Section 5.1(a). "PREEMPTIVE OFFER ACCEPTANCE NOTICE" shall have the meaning set forth in Section 5.1(b). "PREEMPTIVE OFFER PERIOD" shall have the meaning set forth in Section 5.1(a). "PRIMARY SHARES" shall mean at any time the authorized but unissued shares of Common Stock or shares of Common Stock held by the Company in its treasury. 8 "PROHIBITED TRANSFER" shall mean any Transfer of any Subject Security to a Person which (a) may not be effected without registering the securities involved under the Securities Act of 1933, as amended, (b) would result in the assets of the Company constituting "Plan Assets" as such term is defined in the Department of Labor regulations promulgated under the Employee Retirement Income Security Act of 1974, as amended, (c) would cause the Company to be, be controlled by, or be under common control with an "investment company" for purposes of the Investment Company Act of 1940, as amended, (d) would require any securities of the Company to be registered under the Exchange Act, (e) is a Competitor of the Company (other than Transfers in accordance with Section 2.4) or (f) is in violation of this Agreement. A "PUBLIC OFFERING" shall mean the completion of a sale of shares of Common Stock pursuant to a registration statement which has become effective under the Securities Act, excluding a registration form relating solely to employee benefit plans, or on a registration form which does not permit secondary sales or does not include substantially the same information as would be required in a Form S-1 or Form S-3 Registration Statement (or any successor forms) covering the sale of Registrable Securities. "PUT NOTICE" shall have the meaning set forth in Section 2.6(a). "PUT OPTION" shall have the meaning set forth in Section 2.6(a). "PUT PERIOD" shall have the meaning set forth in Section 2.6(a). "PUT PRICE" shall mean, as of any date, with respect to any Subject Securities, a per share price equal to (a) the quotient of (i) the excess of (A) the product of 4.75 times EBITDA, over (B) the aggregate amount of the Consolidated Indebtedness as of the end of the period for which EBITDA is calculated, plus (C) the amount of cash and cash equivalents of the Company and its Subsidiaries as of the end of the period for which EBITDA is calculated which is not required to fund the day-to-day operations of the Company and its Subsidiaries as reasonably determined by the Board of Directors in good faith, divided by (ii) the aggregate number of Common Stock Equivalents at the time of the relevant Call Event or Put Event, as applicable, outstanding, minus, (b) in the case of Vested Options, the per share exercise price payable in connection with such Vested Options. "PUT SECURITIES" shall have the meaning set forth in Section 2.6(a). "REFUSED SECURITIES" shall have the meaning set forth in Section 5.1(c). "REGISTRABLE SECURITIES" shall mean, as of any date, with respect to any Stockholder, (a) all shares of Common Stock held by such Stockholder as of such date and (b) all shares of Common Stock that may be acquired as of such date by such Stockholder upon exercise of Vested Options; 9 provided that, as to any particular Registrable Security, such security shall cease to be a Registrable Security when (i) a registration statement (other than a registration statement on Form S-8) with respect to the sale or exchange of such security shall have become effective under the Securities Act and such security shall have been disposed of in accordance with such registration statement, (ii) a registration statement on Form S-8 with respect to such security shall have become effective under the Securities Act, (iii) such security shall have been sold or acquired in a Rule 144 Transaction, or (iv) such security (once issued) has ceased to be outstanding. "RULE 144 TRANSACTION" means a transfer of Common Stock complying with Rule 144 under the Securities Act as such rule or a successor thereto is in effect on the date of such transfer. "SALE REQUEST" shall have the meaning set forth in Section 2.4. "SCHEDULE OF STOCKHOLDERS" shall refer to the Schedule of Stockholders attached hereto as EXHIBIT A. "SEC" shall mean the Securities and Exchange Commission or successor agency or commission of the United States federal government. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any successor federal statute thereto, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect from time to time. "STOCKHOLDER" shall mean any party hereto other than the Company, including any Person who hereafter becomes a party to this Agreement pursuant to Section 2.13 hereof. "STOCKHOLDER GROUP" shall mean any of (a) the JWC Holders, taken as a group, (b) the Halifax Holders, taken as a group, (c) the Management Holders, taken as a group, and/or (d) the Additional Holders, taken as a group. The Company shall not in any case be deemed to be a member of any Stockholder Group (whether or not the Company holds or repurchases any Common Stock Equivalents). "STOCK OPTION AGREEMENT" shall mean any stock option agreement between the Company and an employee thereof. "SUBJECT SECURITIES" shall mean any Common Stock or Common Stock Equivalents now or hereafter held by any Stockholder. "SUBSIDIARY" with respect to any Person (the "PARENT") shall mean any Person of which such parent, at the time in respect of which such term is used, (a) owns directly or indirectly more than 50% of the equity or beneficial interest, on a consolidated basis, or (b) owns directly or controls with power to vote, indirectly through one or more Subsidiaries, shares of capital stock or beneficial interest having the power to cast at least a majority of the votes entitled to be cast for the election of directors, trustees, managers or other officials having powers analogous to those of directors of 10 a corporation. Unless otherwise specifically indicated, when used herein, the term Subsidiary shall refer to a direct or indirect Subsidiary of the Company. "THIRD PARTY" shall mean any Person other than the Company. "TRANSFER" shall mean to transfer, sell, assign, pledge, hypothecate, give, grant or create a security interest in or Lien on, place in trust (voting or otherwise), assign an interest in or in any other way encumber or dispose of, directly or indirectly and whether or not by operation of law or for value, any of the Subject Securities. "TRANSFER NOTICE" shall have the meaning set forth in Section 2.2(a). "TRANSFER OFFER" shall have the meaning set forth in Section 2.2(a). "TRANSFER STOCK" shall have the meaning set forth in Section 2.2(a). "TRANSFERRED SECURITIES" shall have the meaning set forth in Section 2.8. "UNMATURED SHARES" shall have the meaning set forth in Section 2.5(f). "VESTED OPTIONS" shall mean, as of any date, options, securities and other rights to acquire from the Company, by exercise, conversion, exchange or otherwise, shares of Common Stock or securities convertible into Common Stock, which are vested and exercisable within 60 days of such date of measurement. "VOTING STOCK" shall mean the Common Stock, Common Stock Equivalents and any other securities of the Company entitled to vote at a meeting of the Stockholders, including, but not limited to, with respect to the election of the Board of Directors. ARTICLE II Rights With Respect To The Subject Securities 2.1 Limited Rights of Transfer. (a) Transfers. Except for the JWC Holders, no Stockholder shall Transfer all or any part of the Subject Securities at the time held by such Stockholder. Subject to Section 2.1(b), no Transfer of or attempt to Transfer any Subject Securities in violation of the preceding sentence shall be effective or valid for any purpose. No Transfer of any Subject Securities shall be effective or valid under this Section 2.1(a) if such Transfer constitutes a Prohibited Transfer, or unless and until the transferee executes and delivers to the Company a Joinder Agreement in accordance with Section 2.13 hereof. 11 (b) Exceptions. Notwithstanding Section 2.1(a), a Transfer may be effectively and validly made hereunder if such Transfer is not a Prohibited Transfer and is either (i) a Permitted Transfer, (ii) made pursuant to the registration rights granted under Article III hereof, (iii) made pursuant to and/or following a Public Offering, (iv) made pursuant to Sections 2.2, 2.3 (as a Participating Offeree), 2.4 or 2.5 or (v) made with the written consent of the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative) and the holders of a majority of the Common Stock Equivalents at the time held by the Halifax Holders (or the Halifax Representative). No Transfer of any Subject Securities shall be effective or valid under this Section 2.1(b) if such Transfer constitutes a Prohibited Transfer. In addition, no Transfer shall be effective or valid under this Section 2.l(b) unless and until the transferee executes and delivers to the Company a Joinder Agreement in accordance with Section 2.13 hereof. 2.2 Right of First Refusal. (a) Notice of Offer. If (i) at any time any Halifax Holder, Management Holder, Additional Holder or any of their Permitted Transferees (the "OFFERING HOLDER") receives a bona fide offer to purchase any or all of such Offering Holder's Subject Securities (the "TRANSFER STOCK") from any Third Party (other than to a Permitted Transferee) (the "OFFEROR") and (ii) such Offering Holder wishes to accept such offer (a "TRANSFER OFFER"), then the Offering Holder shall cause the Transfer Offer to be reduced to writing and shall provide a notice containing the offer to purchase specified below (the "TRANSFER NOTICE") to the Company and all other Stockholders. The Transfer Notice shall be accompanied by a true and correct copy of the Transfer Offer (which shall identify in reasonable detail all material terms, including, but not limited to, the Offeror, the Transfer Stock, the price contained in the Transfer Offer and all the other terms and conditions of the Transfer Offer). The Transfer Notice shall constitute an irrevocable offer to sell any or all of the Transfer Stock to the Company and to all other Stockholders within 30 days of receipt by the Company of the Transfer Notice (the "OFFER PERIOD"). During the Offer Period, subject to the limitation in the next sentence, any combination of the Company and/or the other Stockholders will have the right and option to purchase all of the Transfer Stock at a price equal to the price contained in the Transfer Offer and upon the same terms as contained in the Transfer Offer. During the first 15 days of the Offer Period (the "COMPANY EXCLUSIVE FIRST REFUSAL PERIOD"), the Company shall have the exclusive right and option to purchase all of the Transfer Stock. Following the expiration of the Company Exclusive First Refusal Period, if the Company has not opted to purchase all of the Transfer Stock, the Company and any combination of the other Stockholders may purchase all of the Transfer Stock. For the avoidance of doubt, unless the Offering Holder shall have consented to the purchase of less than all of the Transfer Stock by the Company and/or the other Stockholders, neither the Company nor any Stockholder, nor any combination of the Company and any Stockholder may purchase any Transfer Stock pursuant to the foregoing provisions unless all of the Transfer Stock is to be so purchased (whether by the Company, the other Stockholders, or any combination thereof). Notwithstanding any other provision of this Agreement, unless otherwise agreed to by at least 50% of the Subject Securities held by the JWC Holders and 50% of the Subject Securities held by the Halifax Holders, no Management Holder or Additional Holder may Transfer their Subject Securities in exchange for consideration other than cash. 12 (b) Closing of Transfer Stock. If, during the Offer Period, the Company, or any combination of the Company and the other Stockholders, has accepted the offer contained in the Transfer Notice, the closing of the purchase of such Transfer Stock shall take place at the principal offices of the Company within 10 days of such acceptance. At such closing, the Company and/or the other Stockholders, as applicable, and/or its or their designees, as the case may be, shall deliver a certified check or checks calculated at the price set forth in the Transfer Notice to the Offering Holder against delivery of certificates and/or other instruments representing the Transfer Stock, together with stock or other appropriate powers duly endorsed with respect to the Transfer Stock, free and clear of all Liens (other than pursuant to securities laws, this Agreement or a Stock Option Agreement). All of the foregoing deliveries will be deemed to be made simultaneously and none shall be deemed completed until all have been completed. (c) Completion of Sale to Third Party. If, during the Offer Period, neither the Company nor any combination of the Company and the other Stockholders has accepted the offer contained in the Transfer Notice in writing as to all the Transfer Stock covered thereby, or within 15 days of acceptance by any combination of the Company and any Stockholder the closing has not occurred, and Section 2.4 does not apply to such Transfer, then during the next 60 days, the Offering Holder may sell the Transfer Stock to the Offeror at the price and on the other terms contained in the Transfer Notice. No sale may be made by the Offering Holder to any Offeror if such sale would constitute a Prohibited Transfer or unless and until such Offeror executes and delivers to the Company a Joinder Agreement in accordance with Section 2.13 hereof. Promptly after any sale pursuant to this Section 2.2, the Offering Holder shall furnish such evidence of the completion (including time of completion) of such sale and of the terms thereof as the Company may reasonably request. If the Offering Holder has not completed the sale of the Transfer Stock during the applicable period referred to above, such Offering Holder shall no longer be permitted to sell such shares pursuant to this Section 2.2 without again fully complying with the provisions of this Section 2.2 and all the restrictions on sale, transfer or assignment contained in this Agreement shall again be in effect with respect to the Transfer Stock. 2.3 Tagalong. No JWC Holder shall Transfer any shares of Subject Securities to a Third Party (other than a Permitted Transferee) in one or a series of related bona fide arm's-length transactions without complying with the terms and conditions set forth in this Section 2.3; provided, however, that the JWC Holders shall be permitted to Transfer up to 5%, in the aggregate, of the number of shares of Subject Securities held by the Original JWC Holders as of the date of this Agreement without compliance with this Section 2.3; provided further, however, that this Section 2.3 shall not in any way limit or affect the restriction contained in the last sentence of Section 2.1(a). (a) Any JWC Holder (the "INITIATING STOCKHOLDER") desiring to Transfer shares of Subject Securities subject to the restriction in Section 2.3 shall give not less than 10 Business Days' prior written notice of such intended Transfer to each other Stockholder ("PARTICIPATING OFFEREES") and to the Company. Such notice (the "PARTICIPATION NOTICE") shall set forth general terms and conditions of such proposed Transfer, including the name of the prospective transferee, the number of Subject Securities proposed to be transferred to the extent known (the "PARTICIPATION SECURITIES") by the Initiating Stockholder, the purchase price per share to the extent known proposed 13 to be paid therefor and the payment terms and type of Transfer to be effectuated. Within 10 Business Days following the delivery of the Participation Notice by the Initiating Stockholder to each Participating Offeree and to the Company, each Participating Offeree shall, by notice in writing to the Initiating Stockholder and to the Company, have the opportunity and right to sell to the purchasers in such proposed Transfer (upon the same terms and conditions as the Initiating Stockholder). If the Halifax Holder is a Participating Offeree, the Halifax Holder shall have the opportunity and right to include in such proposed Transfer an amount of Subject Securities representing the same proportion (i.e., in relation to the aggregate amount at the time held by the Halifax Holders) of the Subject Securities being sold by the Initiating Stockholder (i.e., in relation to the aggregate amount at the time held by the JWC Holders). Other Participating Offerees shall have the opportunity and right to include in such proposed Transfer an amount of Subject Securities up to that number of Subject Securities representing Subject Securities at the time held by such Participating Offeree as shall equal the product of (i) a fraction, the numerator of which is the number of Subject Securities owned by such Participating Offeree as of the date of such proposed Transfer and the denominator of which is the aggregate number of Subject Securities owned as of the date of such Participation Notice by each Initiating Stockholder and by all Participating Offerees so electing to sell Subject Securities pursuant to this Section 2.3(a), multiplied by (ii) the number of Subject Securities proposed to be transferred. (b) At the closing of any proposed Transfer in respect of which a Participation Notice has been delivered, the Initiating Stockholder, together with all Participating Offerees so electing to sell Subject Securities pursuant to Section 2.3(a) shall execute and deliver such documents or instruments reasonably requested by the proposed transferee and deliver to the proposed transferee certificates and/or other instruments representing the Subject Securities to be sold, free and clear of all Liens, together with stock or other appropriate powers duly endorsed therefor, and shall receive in exchange therefor the consideration to be paid or delivered by the proposed transferee in respect of such Subject Securities as described in the Participation Notice. (c) The provisions of this Section 2.3 shall not apply to (i) any Transfer pursuant to a Public Offering or, following a Public Offering, pursuant to a Rule 144 Transaction or (ii) any Transfers pursuant to Section 2.4 hereof. 2.4 Dragalong. (a) If the JWC Holders (the "DRAGALONG GROUP") determine to sell or exchange (in a sale or exchange of securities of the Company or in a merger, consolidation or other business combination or any similar transaction) in one or a series of related bona fide arms-length transactions to an unaffiliated Third Party and not pursuant to a Permitted Transfer, at least 50% of the Subject Securities (which defined term shall, for purposes of this Section 2.4 only, include all Subject Securities regardless of vesting or exercisability) at the time held by the JWC Holders, then upon 10 days' written notice from the Dragalong Group to the other Stockholders, which notice shall include reasonable details and all material terms of the proposed sale or exchange, including the proposed time and place of closing and the form and amount of consideration to be received by the Stockholders (such notice being referred to as the "SALE REQUEST"), each other Stockholder shall be 14 obligated to, and shall, (i) sell, transfer and deliver, or cause to be sold, transferred and delivered, to such Third Party the proportion of such Stockholder's Subject Securities as is being sold by the JWC Holders in the same transaction at the closing thereof (and shall (A) execute and deliver such agreements for the purchase of such Subject Securities and other agreements, instruments and certificates as the members of the Dragalong Group shall execute and deliver in connection with such proposed transaction and (B) deliver certificates and/or other instruments representing the proportion of such Stockholder's Subject Securities being sold, together with stock or other appropriate powers therefore duly executed, at the closing, free and clear of all Liens), and each Stockholder shall receive upon the closing of such transaction the pro rata portion (as defined below) of the consideration to be paid or delivered by the proposed transferee in respect of such Stockholder's Subject Securities as shall be payable to the members of the Dragalong Group in respect of their Subject Securities (in the case of Options, warrants or other Common Stock Equivalents, subject to subtraction of the exercise price) and (ii) if stockholder approval of the transaction is required, vote such Stockholder's Common Stock in favor thereof. The "PRO RATA PORTION" of each Stockholder shall be the number of Subject Securities issued to and owned by such Stockholder multiplied by a fraction, the numerator of which shall be the number of Subject Securities the JWC Holders wish to Transfer, and the denominator of which shall be the aggregate number of Subject Securities issued to or beneficially owned by the JWC Holders participating in the sale. (b) Each Stockholder shall be severally obligated to join on a pro rata basis (based on such Stockholder's pro rata share of the net proceeds paid by such Third Party) in an indemnification that is to be provided in connection with such Sale, other than any such indemnification that relates specifically to a particular Stockholder; provided that no Stockholder shall be obligated in connection with such Sale to agree to indemnify or hold harmless the Third Party with respect to an amount in excess of the net cash proceeds paid to such Stockholder in connection with such Sale. All Stockholders will bear their pro rata share of the costs and expenses incurred in connection with such Sale to the extent such costs are incurred for the benefit of all Stockholders and are not otherwise paid by the Company to the Third Party. (c) Each Stockholder agrees that, in such Stockholder's capacity as a stockholder of the Company, such Stockholder shall, including pursuant to Section 2.4(a) hereof, vote, or grant proxies relating to the Common Stock at the time held by such Stockholder to vote, all of such Stockholder's Common Stock in favor of any sale or exchange of securities of the Company or any merger, consolidation, recapitalization, reorganization or other business combination or any similar transaction, including pursuant to Section 2.4(a) hereof, if, and to the extent that, approval of the Company's stockholders is required in order to effect such transaction. (d) If, at the end of 90 days following the receipt by the Stockholders of a Sale Request, the Dragalong Group has not completed the sale, (i) each Stockholder shall be released from its obligation under the Sale Request, (ii) the Dragalong Group shall return to each Stockholder all certificates evidencing unsold Subject Securities and all related powers of attorney and instruments of transfer, if any, and (iii) it shall be necessary for a new and separate Sale Request to be furnished and the terms and provisions of this Section 2.4 to be separately complied with in order to consummate such sale pursuant to this Section 2.4, unless the failure to complete such sale 15 resulted from any failure by any Stockholder to comply in any material respect with the terms of this Section 2.4. 2.5 Call by the Company. (a) (i) If the employment of a Management Holder with the Company and any of its Subsidiaries shall terminate (a "CALL EVENT") for any reason, then, subject to Section 2.5(a)(ii), the Company shall have the right to purchase (the "CALL OPTION"), by delivery of a written notice (the "CALL NOTICE") to such terminated Management Holder (with a copy thereof to the JWC Representative) no later than 30 days after the date of the Call Event (the "COMPANY CALL PERIOD"), and such Management Holder and such Management Holder's direct and indirect Permitted Transferees (a "CALL GROUP") shall be required to sell any and all of the Subject Securities that are owned by such Call Group on the date of the Call Event (such Subject Securities to be purchased hereunder being referred to collectively as the "CALL SECURITIES") at, except as otherwise provided in Section 2.5(a)(ii) hereof, a price per share equal to the greater of (I) the Call Price of such Call Securities as of the date of the Call Event and (II) the Cost Price of such Call Securities. (ii) Notwithstanding anything set forth in this Section 2.5 to the contrary, in the event a Management Holder resigns, other than upon death or disability, without Good Reason from his employment with the Company and its Subsidiaries, or his employment is terminated for Cause by the Company and its Subsidiaries, then the purchase price per share payable for the Call Securities shall be an amount equal to the Cost Price of such Call Securities; provided, however, that if a Management Holder resigns six or more years from the issuance of the Call Securities (or Common Stock Equivalents that were converted or exercised into such Call Securities), then the purchase price per share payable for the Call Securities shall equal the greater of (I) the Call Price of such Call Securities as of the date of the Call Event and (II) the Cost Price of such Call Securities. (b) The closing of any purchase of Call Securities by the Company from a Call Group pursuant to this Section 2.5 shall take place at the principal office of the Company on such date within 15 days after the expiration of the Company Call Period with respect to such Call Group as the Company shall specify to the members of such Call Group in writing. At such closing, the members of the Call Group shall deliver to the Company, against payment by the Company of the purchase price for the Call Securities in cash (by delivery of a certified check or checks payable to the respective members of the Call Group, as the case may be), certificates and/or other instruments representing, together with stock or other appropriate powers duly endorsed with respect to, the Call Securities, free and clear of all Liens (other than pursuant to securities laws, this Agreement or a Stock Option Agreement). All of the foregoing deliveries will be deemed to be made simultaneously and none shall be deemed completed until all have been completed. (c) Notwithstanding anything set forth in this Section 2.5 to the contrary, prior to the exercise by the Company of its Call Option to purchase Call Securities pursuant to this Section 2.5, one or more prospective or existing employees of the Company or any Subsidiary may be designated by the Board of Directors (individually, a "DESIGNATED EMPLOYEE" and, collectively, "DESIGNATED EMPLOYEES") who shall have the right, but not the obligation, to exercise the Call 16 Option and to acquire, in lieu of the Company, some or all (as determined by the Company) of the Call Securities that the Company is entitled to purchase from the Call Group hereunder, for cash and otherwise on the same terms and conditions as set forth in Section 2.5(b) which apply to the repurchase of Call Securities by the Company. Concurrently with any such purchase of Call Securities by any such Designated Employee, such Designated Employee shall execute a counterpart of this Agreement whereupon such Designated Employee shall be deemed a "Management Holder" and shall have the same rights and be bound by the same obligations as the other Management Holders hereunder. Payment under this Section 2.5(c) and under Section 2.5(d) below shall be made by a certified check or checks payable to the respective members of the Call Group, in an amount equal to the purchase price for such Call Securities under Section 2.5(a) hereof against delivery of certificates and/or other instruments representing, together with stock or other appropriate powers duly endorsed with respect to such Call Securities, free and clear of all Liens (other than pursuant to securities laws, this Agreement or a Stock Option Agreement). All of the foregoing deliveries will be deemed to be made simultaneously and none shall be deemed completed until all have been completed. (d) If and to the extent neither the Company nor any Designated Employee elects to exercise the Call Option and deliver a Call Notice prior to the expiration of the Company Call Period with respect to such Management Holder, then the JWC Holders and the Halifax Holders, pro rata in accordance with the respective Common Stock Equivalents at the time held by the JWC Holders and the Halifax Holders so exercising their rights under this Section 2.5(d), may exercise the Call Option in lieu of the Company and such Designated Employee by delivery of a Call Notice to such terminated Management Holder within the Company Call Period. The closing of any purchase of Call Securities by such JWC Holders and the Halifax Holders shall take place at the principal offices of the Company on such date within 15 days after the expiration of the Company Call Period with respect to such Management Holder as the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders and the Halifax Holders so exercising their rights under this Section 2.5(d) shall specify to the members of such Call Group in writing, provided that if any such JWC Holder or Halifax Holder fails to purchase all or a portion of the number of Call Securities which such JWC Holder or Halifax Holder may purchase pursuant to this Section 2.5(d), then the other JWC Holders and the Halifax Holders so exercising their rights under this Section 2.5(d) shall be entitled to purchase such Call Securities (pro rata based upon their respective Common Stock Equivalents at the time held, or as otherwise agreed, by such JWC Holders and the Halifax Holders). (e) If and to the extent none of the Company, any Designated Employees, any JWC Holders or any Halifax Holder elects to exercise the Call Option and deliver a Call Notice within the Company Call Period or if the closing of the purchase of all Call Securities does not occur within 15 days after the expiration of the Company Call Period, then the Call Option provided for in this Section 2.5 shall terminate with respect to such Subject Securities not so purchased under this Section, but the parties hereto shall continue to be bound by the remaining provisions of this Agreement. 17 (f) Notwithstanding the foregoing with respect to any shares of Common Stock which, as of the date of the purchase and sale pursuant to this Call Option, (i) were purchased as the result of the exercise of a stock option and (ii) have not been owned by the Call Group for at least 180 days ("UNMATURED SHARES"), the closing with respect to such Unmatured Shares shall be delayed until a date no later than the 10th day after the 180th day following the acquisition by the Call Group of such Unmatured Shares and the purchase price for such Unmatured Shares will be determined at the time of such delayed closing. 2.6 Put by the Management Holders. (a) If a Call Event occurs by reason of a Management Holder terminating his employment with the Company and any of its Subsidiaries for Good Reason or his employment being terminated without Cause by the Company and any of its Subsidiaries, then such Management Holder shall have the right to require the Company to purchase (the "PUT OPTION"), by delivery of a written notice (the "PUT NOTICE") to the Company during the 30-day period after the expiration of the Company Call Period pertaining to such Management Holder (the "PUT PERIOD"), and the Company shall be required to purchase all of the Subject Securities described in the Put Notice (other than Subject Securities purchased under Section 2.5) (such Subject Securities to be purchased hereunder being referred to collectively as the "PUT SECURITIES") at a price per share equal to the Put Price; provided that if a Management Holder exercises a Put Option within 18 months of the date hereof the Company shall be required to purchase all of the Subject Securities described in the Put Notice at a price per share equal to the Call Price. (b) The closing of any purchase of Put Securities by the Company from a Management Holder pursuant to this Section 2.6 shall take place at the principal office of the Company on such date within 15 days after the expiration of the Put Period with respect to such Management Holder as the Company shall specify to such Management Holder in writing. At such closing, the Management Holder shall deliver to the Company, against payment by the Company of the purchase price for the Put Securities in cash (by delivery of a certified check payable to the Management Holder) or, if the Company is required by its senior lenders, by subordinated promissory note with a ten year maturity and interest paid at the prime rate announced from time to time by the Company's senior lenders (such interest payable in kind), certificates and/or other instruments representing, together with stock or other appropriate powers duly endorsed with respect to, the Put Securities, free and clear of all Liens (other than pursuant to securities laws, this Agreement or a Stock Option Agreement). All of the foregoing deliveries will be deemed to be made simultaneously and none shall be deemed completed until all have been completed. (c) If and to the extent a Management Holder elects not to exercise the Put Option and deliver a Put Notice within the Put Period or if the closing of the purchase of all Put Securities does not occur within 15 days after the expiration of the Put Period through the fault of such Management Holder, then the Put Option provided for in this Section 2.6 shall terminate with respect to such Subject Securities not so purchased under this Section, but the parties hereto shall continue to be bound by the remaining provisions of this Agreement. 18 (d) Notwithstanding the foregoing with respect to any shares of Common Stock which, as of the date of the purchase and sale pursuant to this Put Option, were Unmatured Shares, the closing with respect to such Unmatured Shares shall be delayed until a date no later than the 10th day after the 180th day following the acquisition by the Management Holder of such Unmatured Shares and the purchase price for such Unmatured Shares will be determined at the time of such delayed closing. 2.7 Restrictions on Other Agreements. No Stockholder shall grant any proxy or enter into or agree to be bound by any voting trust with respect to any Subject Securities other than as set forth in this Agreement nor shall any Stockholder enter into any stockholders agreements or arrangements of any kind with any Person with respect to any of the Subject Securities on terms which conflict with the provisions of this Agreement (whether or not such agreements and arrangements are with other Stockholders or holders of Common Stock Equivalents that are not parties to this Agreement), including but not limited to, agreements or arrangements with respect to the acquisition, disposition or voting of Subject Securities inconsistent herewith. 2.8 Transfer Subject Hereto. Except as otherwise provided in this Agreement, in the event of an Involuntary Transfer (as defined in the following sentence) of any Subject Securities (the "TRANSFERRED SECURITIES") of any JWC Holder, Halifax Holder, Management Holder or Additional Holder to any Person, the transferee, including, without limitation, any and all transferees and subsequent transferees of the initial transferee (the "INVOLUNTARY TRANSFEREE"), shall take and hold the Transferred Securities subject to this Agreement and to all of the obligations of, and restrictions imposed hereby upon, the transferor holder and shall comply with this Agreement. As used in this Agreement, the term "Involuntary Transfer" shall mean any transaction, proceeding or action by or in which the JWC Holder, Halifax Holder, Management Holder or Additional Holder is involuntarily deprived or divested of any right, title or interest in or to any of such holder's Subject Securities (including, without limitation, a seizure under levy of attachment or execution, a foreclosure under a pledge of Subject Securities, a transfer to a trustee in bankruptcy or receiver or other officer or agency, or a transfer to a state or to a public officer or agency pursuant to a statute pertaining to escheat or abandoned property but specifically excluding death, incapacity, divorce and similar events). 2.9 Provisions in the Event of Involuntary Transfers. In the event of an Involuntary Transfer, the Stockholders and the Company shall not take any action to approve any such involuntary transfer not in accordance with this Section, and the transferor Stockholder (or, if it fails to do so, the Involuntary Transferee) shall forthwith give notice (the "INVOLUNTARY TRANSFER NOTICE") to the Company stating (i) when the involuntary transfer occurred or is to occur, (ii) the circumstances alleged to require such involuntary transfer, (iii) the number and type of securities involved and (iv) the name, address and capacity of the Involuntary Transferee. 2.10 Option. If an Involuntary Transfer of the Subject Securities of any Stockholder occurs, the Company and its designees shall have the same rights of first refusal with respect to the Transferred Shares as if the involuntary transfer had been a proposed voluntary transfer by the transferor Stockholder governed by Section 2.2 except that: (i) the periods within which such right 19 must be exercised shall run from the date the Involuntary Transfer Notice is given in accordance with this Agreement; and (ii) such rights shall be exercised by notice to the Involuntary Transferee rather than to the transferor Stockholder. The closing of any purchase of Transferred Shares pursuant to this Section shall be in accordance with the procedures set forth in Section 2.2. 2.11 (a) Purchase for Investment; Legend on Certificate. Each Stockholder acknowledges that all of the securities of the Company held by such Stockholder are being (or have been) acquired for investment and not with a view to the distribution thereof and that no Transfer, hypothecation or assignment of any such securities (including the Common Stock for which such securities may be exercisable or exchangeable or into which such securities may be convertible) may be made except in compliance with applicable federal and state securities laws. All the certificates or other instruments representing any of such securities (including the Common Stock for which such securities may be exercisable or exchangeable or into which such securities may be convertible) which are now or hereafter held by any Stockholder shall be subject to the terms of this Agreement and shall have endorsed in writing, stamped or printed, thereon the following legends: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT DATED AS OF OCTOBER 17, 2001, AS AMENDED FROM TIME TO TIME, A COPY OF WHICH IS ON FILE WITH AND AVAILABLE FROM THE SECRETARY OF THE COMPANY." "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE REQUIREMENTS OF SUCH ACT." (b) Removal of Legends, Etc. Notwithstanding the provisions of Section 2.11(a) upon the transferability of any Subject Securities, the restrictions thereunder shall cease and terminate when (i) such Subject Securities are sold or otherwise disposed of in accordance with the intended method of disposition by the seller or sellers thereof set forth in a registration statement or are sold or otherwise disposed of in a transaction which does not require that the securities transferred bear the legend set forth in Section 2.11 or (ii) the holder of such Subject Securities has met the requirement of transfer of such Subject Securities pursuant to subparagraph (k) of Rule 144. Whenever the restrictions imposed by Section 2.11(a) shall terminate, as herein provided, the holder of any Subject Securities shall be entitled to receive from the Company, without expense, a new certificate not bearing the restrictive legend set forth in Section 2.11(a) and not containing any other reference to the restrictions imposed by Section 2.11(a). 2.12 Effectiveness of Transfers. Any Subject Securities transferred by a Stockholder (other than pursuant to an effective registration statement under the Securities Act or a Rule 144 Transaction if the Subject Securities are listed or admitted to trading on an Active Trading Market) shall be held by the transferee thereof pursuant to this Agreement. Such transferee shall, except as 20 otherwise expressly stated herein, have all the rights and be subject to all of the obligations of a Stockholder under this Agreement automatically and without requiring any further act by such transferee or by any parties to this Agreement. Without affecting the preceding sentence, if such transferee is not a Stockholder on the dates of such transfer, then such transferee, as a condition to such transfer, shall confirm such transferee's obligations hereunder in accordance with Section 2.13 hereof. No Subject Securities shall be transferred on the Company's books and records, and no transfer thereof shall be otherwise effective, unless any such transfer is made in accordance with the terms and conditions of this Agreement, and the Company is hereby authorized by all of the Stockholders to enter appropriate stop transfer notations on its transfer records to give effect to this Agreement. 2.13 Additional Stockholders. Any Person that is not already a party to this Agreement in the same Stockholder capacity as such Person would be following the Transfer and who is acquiring any Subject Securities (except for any acquisition thereof (a) in an offering registered under the Securities Act or (b) in a Rule 144 Transaction if the Subject Securities are listed or admitted to trading on an Active Trading Market) shall on or before the transfer or issuance to it of such Subject Securities, sign and deliver to the Company a Joinder Agreement and shall thereby become a party to this Agreement. If such Person meets the definition of a JWC Holder, then such Person shall be treated as a JWC Holder hereunder, if such Person meets the definition of a Halifax Holder, such Person shall be treated as a Halifax Holder hereunder, if such Person meets the definition of a Management Holder, such Person shall be treated as a Management Holder hereunder, and if such Person meets none of the foregoing definitions, such Person shall be treated as an Additional Holder hereunder. The Company shall require each Person acquiring an option, warrant or other right to purchase shares of Common Stock under any option or other equity participation plan to execute a Joinder Agreement. 2.14 Notice of Transfer. Each JWC Holder, Halifax Holder, Management Holder or Additional Holder agrees, prior to any Transfer of any Subject Securities (except pursuant to an effective registration statement), to give written notice to the Company of such holder's intent to effect such Transfer and agrees to comply in all other respects with the provisions of this Agreement. Each such notice shall describe the manner and circumstances of the proposed Transfer and, unless the proposed Transfer is a Permitted Transfer or unless waived by the Company, shall be accompanied by the written opinion, addressed to the Company, of counsel for the holder of such Subject Securities (which counsel shall be reasonably satisfactory to the Company), stating that in the opinion of such counsel (which opinion shall be reasonably satisfactory to the Company) such proposed Transfer does not involve a transaction requiring registration or qualification of such Subject Securities under the Securities Act or the securities laws of any state of the United States or of any foreign jurisdiction. Subject to complying with the other applicable provisions of this Agreement, such holder of Subject Securities shall be entitled to consummate such Transfer in accordance with the terms of the notice delivered by it to the Company if the Company does not object (on the basis that such Transfer violates this Section 2.14) to such Transfer within 5 Business Days after the delivery of such notice. 21 ARTICLE III Registration Rights 3.1 General. For purposes of this Article III, (a) the terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement on Form S-1, S-2 or S-3 in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement and (b) the term "HOLDER" means any Stockholder electing to register any Registrable Securities pursuant to Section 3.2 or 3.3. The registration rights granted pursuant to Sections 3.2 and 3.3 shall terminate and expire on the fourth anniversary of the occurrence of a Public Offering. 3.2 Required Registration. If the Company shall be requested, in writing, by the holders of a majority of the Common Stock Equivalents then held by the JWC Holders (or the JWC Representative) to effect a registration statement under the Securities Act of Registrable Securities, the Company shall promptly (i) give written notice of the proposed registration to all other Stockholders and (ii) use its best efforts to effect the registration under the Securities Act of the Registrable Securities which the Company has been so requested to register by the JWC Holders and by other Stockholders in a written request received by the Company within 10 Business Days after the giving of the written notice specified in clause (i) above; provided, however, that the Company shall not be obligated to effect any registration under the Securities Act except in accordance with the following provisions: (a) The Company shall not be obligated to use its best efforts to file and cause to become effective any registration statement during any period in which any other registration statement (other than on Forms S-4, F-4 or S-8 promulgated under the Securities Act or any successor forms thereto) pursuant to which Primary Shares are to be or were sold has been filed and not withdrawn or has been declared effective within the prior 90 days. (b) The Company may delay the filing or effectiveness of any registration statement for a period of up to 90 days after the date of a request for registration pursuant to this Section 3.2 if at the time of such request (i) the Company is engaged, or has fixed plans to engage within 90 days after the date of such request, in a firm commitment underwritten public offering of Primary Shares in which the holders of Registrable Securities may include Registrable Securities pursuant to Section 3.3 or (ii) a Material Transaction exists, provided that the Company may only so delay the filing or effectiveness of its registration statements (if any) once pursuant to this Section 3.2(b). (c) With respect to any registration pursuant to this Section 3.2, the Company may include in such registration any Primary Shares; provided, however, that, if the managing underwriter advises the Company that the inclusion of all Registrable Securities and Primary Shares proposed to be included in such registration would interfere with the successful marketing (including pricing) of the Registrable Securities proposed to be included in such registration, then the number 22 of Registrable Securities and Primary Shares proposed to be included in such registration shall be included in the following order: (i) first, the Registrable Securities requested to be included in such registration (or, if necessary, such Registrable Securities pro rata among the Holders of such Registrable Securities based upon the number of Registrable Securities requested to be included in such registration); and (ii) second, the Primary Shares. (d) If the method of disposition requested by the holders pursuant to this Section 3.2 is an underwritten public offering, Stockholders holding a majority of the Registrable Securities requested to be registered shall have the right to designate the managing underwriter of such offering, subject to the consent of the Company, which consent shall not be unreasonably withheld. (e) At any time before the registration statement covering Registrable Securities becomes effective, the Stockholders holding a majority of the Registrable Securities requested to be registered may request the Company to withdraw or not to file the registration statement. 3.3 Piggyback Registration. (a) If, at any time, the Company determines to register any Common Stock under the Securities Act in connection with a Public Offering of such securities, the Company shall, at each such time, promptly give each Stockholder written notice of such determination no later than 30 days before its intended filing with the SEC. Upon the written request of any Stockholder received by the Company within 10 Business Days after the giving of any such notice by the Company, the Company shall use its best efforts to cause to be registered under the Securities Act all of the Registrable Securities of such Stockholder that such Holder has requested be registered for disposition in accordance with the Company's intended method of disposition as stated in such notice and with the underwriter selected by the Company. If the total amount of Registrable Securities that are to be included by the Company in such registration exceeds the amount of securities that the managing underwriters reasonably believe can be sold in an orderly manner in such offering within a price range acceptable to the Company, then the Company will include in such registration only the number of securities which in the opinion of such underwriters can be sold in the manner described above, in the following order: (i) first, all securities of the Company to be offered for the account of the Company; and (ii) second, the Registrable Securities requested to be included in such registration, (or if necessary, such Registrable Securities pro rata among the Holders of such securities based on the number of Registrable Securities requested to be included in such registration). 23 Notwithstanding the foregoing, the Company shall not be obligated to include in an initial Public Offering any Registrable Securities of any Holder if the JWC Holders do not elect to include their Registrable Securities in such a registration. If any of the Holders disapproves of the terms of any such underwriting, it may elect to withdraw therefrom by written notice to the Company and the underwriter prior to the date of pricing such offer. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 3.4 Obligations of the Company. (a) Whenever required under Section 3.2 or 3.3 to use its best efforts to effect the registration of any Registrable Securities, the Company shall (provided, that the Company may at any time delay or abandon the underlying registration without any liability to the Holders): (i) prepare and file with the SEC a registration statement (or an amendment to a registration statement) with respect to such Registrable Securities and use its best efforts to cause such registration statement to become and remain effective, including, without limitation, filing of post-effective amendments and supplements to any registration statement or prospectus necessary to keep the registration statement current; (ii) as expeditiously as reasonably possible, prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement and to keep each registration and qualification under this Agreement effective (and in compliance with the Securities Act) by such actions as may be necessary or appropriate for a period of 120 days after the effective date of such registration statement (unless all securities covered by such registration statement are sooner disposed of), all as requested by such Holder or Holders; (iii) as expeditiously as reasonably possible furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them in accordance with the plan of distribution provided for in such registration statement; (iv) as expeditiously as reasonably possible use its best efforts to register and qualify the securities covered by such registration statement under such securities or "blue sky" laws of such jurisdictions as shall be reasonably appropriate for the distribution of the securities covered by the registration statement, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business in any jurisdiction it would not otherwise be required to qualify but for this subsection (iv), to file a general consent to service of process in any such jurisdiction or subject itself to taxation in any such jurisdiction, and further provided that (anything in this Agreement to the contrary 24 notwithstanding with respect to the bearing of expenses) if any jurisdiction in which the securities shall be qualified shall require by law or regulation that expenses incurred in connection with the qualification of the securities in that jurisdiction be borne by selling stockholders, then such expenses shall be payable by selling stockholders pro rata, to the extent required by such jurisdiction; (v) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made (provided that upon such notification, each Holder agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company at the time held by such Holder or any interest or future interest therein until such statement or omission has been corrected, and there shall be added to the period during which the Company is obligated to keep such registration effective the number of days for which such sales or other transfers or dispositions were suspended), and at the request of any such Holder promptly prepare and furnish, without charge, to such seller or Holder a reasonable number of copies of a supplement to such prospectus or an amendment of such registration statement as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (vi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months but not more than 18 months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 thereunder; and (vii) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any class of similar Securities is then listed. (b) If the Company at any time proposes to register any of its securities under the Securities Act subject to the registration rights of the Holders under Section 3.2 or 3.3, and such securities are to be distributed by or through one or more underwriters selected by the Company, then the Company will make reasonable efforts, if requested by any Holder of Registrable Securities who requests such registration, to arrange for such underwriters to include such Registrable Securities among the securities to be distributed by or through such underwriters. 25 (c) In connection with the preparation and filing of each registration statement registering Registrable Securities under this Agreement, the Company will give the Holders of Registrable Securities on whose behalf such Registrable Securities are to be so registered and their underwriters, if any, and their respective counsel and accountants the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers, its counsel and the independent public accountants who have certified its financial statements, as shall be reasonably necessary, in the opinion of such Holders or such underwriters or their respective counsel, in order to conduct a reasonable and diligent investigation within the meaning of the Securities Act. 3.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Article III that each Holder shall furnish to the Company such information regarding such Holder, the Registrable Securities held by such Holder, and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company. 3.6 Expenses of Registration. Registration, filing and qualification fees, printers' and accounting fees, fees and expenses of compliance with securities or blue sky laws, fees and expenses relating to filings with the National Association of Securities Dealers, Inc. or any applicable securities exchange, fees of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals attributable to the Registrable Securities being registered), and fees and disbursements of counsel for the Company incurred in connection with a registration pursuant to Section 3.2 or 3.3 shall be borne by the Company. Each Holder whose shares are being sold will bear, pro rata, underwriters' discounts and brokerage and other commissions, fees and disbursements of its own counsel and all of its other expenses of such registration, offering and sale. 3.7 Underwriting Requirements. In connection with any registration of Registrable Securities under this Agreement, the Holders whose shares are being sold shall, if requested by the Company or the underwriters, enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnification and contribution. The Holders on whose behalf Registrable Securities are to be distributed shall also complete and execute all questionnaires, powers of attorney and/or other documents required under the terms of such underwriting agreement. 3.8 Indemnification. In the event any Registrable Securities are included in a registration statement pursuant to this Article III: (a) To the fullest extent permitted by law, the Company will indemnify and hold harmless each Holder joining in a registration and its directors and officers, any underwriter (as defined in the Securities Act) for it, and each Person, if any, who controls such Holder or such 26 underwriter within the meaning of the Securities Act, from and against any losses, claims, damages, expenses (including reasonable attorneys' fees and expenses and reasonable costs of investigation) or liabilities, joint or several, to which they or any of them may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based on any untrue or alleged untrue statement of any material fact contained in such registration statement including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading in light of the circumstances under which they were made, provided that the indemnity agreement contained in this Section 3.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon (i) an untrue statement or omission made in connection with such registration statement, preliminary prospectus, final prospectus or amendments or supplements thereto in reliance upon and in conformity with written information furnished by such Holder, underwriter or control person to the Company specifically for inclusion in the Registration Statement in connection with such registration, or (ii) such Holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Holder with a sufficient number of copies of the same. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder, underwriter or control person and shall survive the transfer of such securities by such Holder. (b) To the fullest extent permitted by law, each Holder joining in a registration shall indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each Person, if any, who controls the Company within the meaning of the Securities Act, and each agent and any underwriter for the Company and any Person who controls any such agent or underwriter and each other Holder and any Person who controls such Holder (within the meaning of the Securities Act) against any losses, claims, damages, expenses (including reasonable attorney's fees and expenses and reasonable costs of investigation) or liabilities to which the Company or any such director, officer, control person, agent, underwriter or other Holder may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon an untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent that such untrue statement or omission was made in such registration statement, preliminary or final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with written information furnished by such Holder in connection with such registration, provided that the indemnity agreement contained in this Section 3.8(b) shall not apply to amounts paid in settlements effected without the consent of such Holder (which consent shall not be unreasonably withheld). Such indemnity shall remain in full force and effect regardless 27 of any investigation made by or on behalf of the Company or any such director, officer, Holder, underwriter or control person and shall survive the transfer of such securities by such Holder. (c) Any Person seeking indemnification under this Section 3.8 will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification, but the failure to give such notice will not affect the right to indemnification hereunder, except to the extent the indemnifying party is actually prejudiced by such failure and (ii) unless in such indemnified party's reasonable judgment a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party, and other indemnifying parties similarly situated, jointly to assume the defense of such claim with counsel reasonably satisfactory to the parties. In the event that the indemnifying parties cannot mutually agree as to the selection of counsel, each indemnifying party may retain separate counsel to act on its behalf and at its expense. The indemnified party shall in all events be entitled to participate in such defense at its expense through its own counsel. If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim. (d) If for any reason the foregoing indemnification is unavailable to any party or insufficient to hold it harmless as and to the extent contemplated by the preceding paragraphs of this Section 3.8, then each indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage expense or liability in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party, on the one hand, and the applicable indemnified party, as the case may be, on the other hand, and also the relative fault of the indemnifying party and any applicable indemnified party, as the case may be, as well as any other relevant equitable considerations. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 3.9 Market Stand-Off Agreement. If requested by the managing underwriter of the initial Public Offering on behalf of the Company of its Common Stock, or by the managing underwriter of a Public Offering for which Registrable Securities of any Holders have been registered, all Holders (in the case of such initial Public Offering) or such participating Holders (in the case of such other Public Offering) shall not sell or otherwise transfer or dispose of any Registrable Securities held by such Holders (other than pursuant to Permitted Transfers, pursuant to Section 2.3 and other than those Registrable Securities included in the registration) during such period following the effective date of such registration as is usual and customary at such time in similar public offerings of similar securities. 28 ARTICLE IV Corporate Governance 4.1 Board of Directors. (a) The Company and each of the Stockholders shall take all action, including, but not limited to, such Stockholder's voting, or executing proxies or written consents with respect to, the Voting Stock at the time held by such Stockholder as may be from time to time requested by holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative) so that the Board of Directors shall consist of such number of directors, no less than seven and up to a maximum of ten directors, as may be from time to time designated by the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative). (b) The Company and each of the Stockholders shall take all action, including, but not limited to, such Stockholder's voting, or executing proxies or written consents with respect to, the Voting Stock at the time held by such Stockholder as may be from time to time requested by holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative) so that the Board of Directors shall include such directors as may be from time to time designated by the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative). The holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative) shall also be entitled to require that any member of the Board of Directors so designated pursuant to this Section 4.1(b) be removed or replaced by another designee of the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative), in which event the Company and each Stockholder shall take all action, including, but not limited to, such Stockholder's voting, or executing proxies or written consents with respect to, the Voting Stock at the time held by such Stockholder as may be necessary to effect such removal or replacement. (c) Notwithstanding the provisions of Section 4.1(b), the Company and each Stockholder shall take all action, including, but not limited to, such Stockholder's voting, or executing proxies or written consents with respect to, the Voting Stock at the time held by such Stockholder as may be from time to time requested by the holders of a majority of the Common Stock Equivalents at the time held by the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) or on their behalf by the Halifax Representative, so that the Board of Directors shall include two directors designated by the holders of a majority of the Common Stock Equivalents held by the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) or on their behalf by the Halifax Representative which directors (the "Halifax Directors") shall initially be David Dupree and Kenneth Doyle; provided that the number of Halifax Directors that the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) shall be entitled to designate pursuant to this Section 4.1(c) shall be permanently reduced from two to one director at such time as the Original Halifax Holders and their Permitted Transferees (other than the 29 JWC Holders and Management Holders) hold less than 50% of the Common Stock Equivalents held by the Original Halifax Holders as of the date of this Agreement; provided further, that the number of Halifax Directors designated pursuant to this Section 4.1(c) shall be permanently reduced to zero directors at such time as the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) hold less than 5% of the Common Stock Equivalents outstanding. The holders of a majority of the Common Stock Equivalents at the time held by the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) or on their behalf by the Halifax Representative shall also be entitled to require that any director so designated pursuant to this Section 4.1(c) be removed or replaced by another designee of the holders of the majority of the Common Stock Equivalents at the time held by the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) or on their behalf by the Halifax Representative, in which event the Company and each Stockholder shall take all action, including, but not limited to, such Stockholder's voting, or executing proxies or written consents with respect to, the Voting Stock at the time held by such Stockholder as may be necessary to effect such removal or replacement. 4.2 Rights of the Halifax Directors. (a) Notwithstanding that no vote may be required, or that a lesser percentage vote may be specified in the certificate of incorporation or by-laws of the Company, the Company shall not take, and no Stockholder shall cause the Company to take, any of the following actions without the affirmative vote of a majority of the Board of Directors, which majority vote shall include the affirmative vote of the directors, if any, designated pursuant to Section 4.1(c) (the "HALIFAX AFFIRMATIVE BOARD VOTE"): (i) the redemption, purchase or other acquisition of any Common Stock Equivalents other than those redemptions, purchases or acquisitions made (A) pursuant to this Agreement, (B) on a pro rata basis among the holders of a particular class or series of securities of the Company or (C) pursuant to the terms of securities of the Company created after the date hereof which require such redemption, purchase or acquisition; (ii) the declaration or payment of any dividend or other distribution by the Company with respect to any Common Stock Equivalents other than those declarations or payments of dividends or other distributions that are made (A) on pro rata basis among the holders of a particular class or series of securities of the Company or (B) pursuant to the terms of securities of the Company created after the date hereof which require such declaration, payment or other distribution; (iii) the termination of the Chief Executive Officer of the Company without Cause (as defined in such individual's then current employment agreement with the Company or one of its subsidiaries); (iv) any issuance of Common Stock Equivalents in connection with a transaction or series of related transactions involving an acquisition of the equity or assets of a Third 30 Party which results in an aggregate issuance of greater than 20% of the total outstanding Common Stock Equivalents, (v) the entering into of any transaction or agreement, directly or indirectly, by the Company with JWC Inc. or any director, officer or Affiliate of JWC Inc., including any of the portfolio companies held or managed by any such entity (which affirmative vote of the Halifax Directors shall not be unreasonably withheld); or (vi) any significant change in the nature of the Company's business as of the date hereof. Notwithstanding anything to the contrary herein, (x) the Halifax Affirmative Board Vote shall no longer be necessary with respect to the matters set forth in clauses (iii) and (iv) above at such time as the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) hold less than 50% of the Common Stock Equivalents held by the Original Halifax Holders as of the date of this Agreement and (y) the provisions of this Section 4.2 shall terminate at such time as the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) hold less than 5% of the Common Stock Equivalents. (b) As long as at least one Halifax Director is a member of the Board of Directors pursuant to Section 4.1(c), there shall be at least one Halifax Director on each committee, if any, established by the Board of Directors. 4.3 Rights Non-Transferable. Notwithstanding anything to the contrary herein, the rights of the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) and the Halifax Directors under Section 4.1 and 4.2, respectively, may only be exercised by the Original Halifax Holders and their Permitted Transferees (other than the JWC Holders and Management Holders) and Halifax Directors, respectively, and may not be transferred or assigned in connection with any other Transfer of Subject Securities or otherwise. ARTICLE V Preemptive Rights 5.1 Rights to Subscribe for Securities. (a) Except in the case of Excluded Securities (as defined in Section 5.1(e)), the Company shall not, and shall cause its Subsidiaries not to, issue or sell any Common Stock Equivalent, unless the Company shall have first offered or caused such Subsidiary to offer (the "PREEMPTIVE OFFER") to sell such Common Stock Equivalents to the JWC Holders and Halifax Holders (the "OFFERED SECURITIES") by delivery to such JWC Holders and Halifax Holders of written notice of such offer stating that the Company or such Subsidiary proposes to sell such Offered Securities, the number or amount of the Offered Securities proposed to be sold, the proposed purchase price therefor and any other terms and conditions of such offer. The Preemptive Offer shall 31 by its terms remain open and irrevocable for a period of 10 Business Days from the date it is received from the Company (the "PREEMPTIVE OFFER PERIOD"). (b) Each JWC Holder and Halifax Holder shall have the option, exercisable at any time during the Preemptive Offer Period by delivering written notice to the Company or such Subsidiary (a "PREEMPTIVE OFFER ACCEPTANCE NOTICE"), to subscribe for the number or amount of such Offered Securities that would permit such JWC Holders and Halifax Holders to maintain its Offeree Percentage as it existed immediately prior to such issuance, sale or exchange. The Company or such Subsidiary shall notify each JWC Holder and Halifax Holder within five days following the expiration of the Preemptive Offer Period of the number or amount of Offered Securities which such JWC Holder and Halifax Holder has subscribed to purchase. (c) If Preemptive Offer Acceptance Notices are not given by the JWC Holders and Halifax Holders for all of the Offered Securities, the Company or such Subsidiary making such Preemptive Offer shall have 60 days from the expiration of the Preemptive Offer Period to sell all or any part of such Offered Securities as to which Preemptive Offer Acceptances Notices have not been given by the JWC Holders and Halifax Holders (the "REFUSED SECURITIES") to any other Persons upon the terms and conditions including price, which are no more favorable, in the aggregate, to such other Persons or less favorable to the Company or such Subsidiary than those set forth in the Preemptive Offer. (d) Upon the closing, which shall include full payment to the Company or such Subsidiary, of the sale to such other Persons of all the Refused Securities, such JWC Holders and Halifax Holders shall purchase from the Company or such Subsidiary, and the Company or such Subsidiary shall sell to such JWC Holders and Halifax Holders, the Offered Securities with respect to which Preemptive Offer Acceptance Notices were delivered by such JWC Holders and Halifax Holders, at the terms specified in the Preemptive Offer. (e) The rights of the JWC Holders and Halifax Holders under this Section 5.1 shall not apply to the following securities (the "EXCLUDED SECURITIES"): (i) any Common Stock Equivalents issued or granted pursuant to a stock option or other similar equity incentive plan providing for issuance to employees or consultants of the Company or its Subsidiaries or upon the exercise or conversion of options or other Common Stock Equivalents issued to employees and consultants of the Company or its Subsidiaries; (ii) any Common Stock Equivalents and other derivative securities issued upon the exercise or conversion of outstanding Common Stock Equivalents; (iii) any Common Stock Equivalents issued to any individual or entity which, in connection with the issuance of Common Stock Equivalents to such entity, simultaneously enters into a significant business transaction with the Company which is directly related to the Company's business; 32 (iv) any Common Stock Equivalents issued as part of a Public Offering or any effective registration statement under the Securities Act; and (v) any Common Stock Equivalents issued to the Company or a Subsidiary. ARTICLE VI Certain Miscellaneous Other Provisions 6.1 Remedies. Each of the parties hereto acknowledges and agrees that no remedy at law would be adequate in the event of any breach of this Agreement. Accordingly, if any dispute arises concerning the sale or other disposition of any of the securities of the Company subject to this Agreement or concerning any other provisions hereof or the obligations of the parties hereunder, each party hereto agrees that, in addition to any other remedy to which they may be entitled at law or in equity, the other parties hereto shall be entitled to a decree of specific performance to enforce this Agreement (without bond or other security being required unless the party seeking such remedy fails to demonstrate to an appropriate court having jurisdiction that such party has a likelihood of success on the merits), and each party hereto waives the defense in any action or proceeding brought to enforce this Agreement that there exists an adequate remedy at law. Such remedies shall be cumulative and non-exclusive and shall be in addition to any other rights and remedies the parties may have under this Agreement or otherwise. 6.2 Entire Agreement; Amendment; Termination. (a) This Agreement sets forth the entire understanding of the parties, and supersedes all prior agreements and all other arrangements and communications, whether oral or written, with respect to the subject matter hereof. (b) The Schedule of Stockholders may be amended in writing by the Company to reflect changes in the composition of the Stockholders and changes in their addresses or telecopy numbers that may occur from time to time as a result of Permitted Transfers, Transfers permitted under Article II hereof or any new issuance by the Company of Common Stock or Common Stock Equivalents; provided, however, that no new issuance of Common Stock or Common Stock Equivalents shall be effective unless and until the Person receiving such securities (if not already a party hereto in such capacity) executes and delivers to the Company an executed Joinder Agreement in accordance with Section 2.13 hereof. Amendments to the Schedule of Stockholders reflecting Permitted Transfers or Transfers permitted under Article II hereof shall become effective when the amended Schedule of Stockholders, and a copy of a Joinder Agreement as executed by any new transferee in accordance with Section 2.13, are filed with the Company. 33 (c) Any other amendment to this Agreement shall be in writing and shall require the written consent of (a) the Company, (b) either the JWC Representative or the holders of a majority of Common Stock Equivalents at the time held by the JWC Holders, and, (c) if adverse to the interests of a particular Stockholder or Stockholder Group, then the consent of each particular Stockholder or the holders of a majority of the Common Stock Equivalents at the time held by such particular Stockholder Group, as the case may be, to whose interest such amendment is adverse. (d) Notwithstanding the foregoing provisions of this Section 6.2, this Agreement may be terminated at any time upon the written consent of (i) the Company and (ii) the holders of a majority of the Common Stock Equivalents at the time held by the Management Holders and (iii) the holders of a majority of the Common Stock Equivalents at the time held by the Halifax Holders and (iv) the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders (or the JWC Representative), each voting separately as a group. 6.3 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties agree that the body making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 6.4 Notices. All notices, consents and other communications required, or contemplated under this Agreement shall be in writing and shall be delivered in the manner specified herein or, in the absence of such specification, shall be deemed to have been duly given (i) 3 Business Days after mailing by first class certified mail, postage prepaid, (ii) when delivered by hand, (iii) upon confirmation of receipt by telecopy, or (iv) 1 day after sending by overnight delivery service, to the respective addresses or telecopy numbers of the parties set forth below: (a) For notices and communications to the Company: c/o J.W. Childs Associates, L.P. 111 Huntington Avenue Suite 2900 Boston, MA 02199 Attention: Edward D. Yun Telecopy: 617-753-1101 and 34 InSight Health Services Holdings Corp. c/o J.W. Childs Associates, L.P. 111 Huntington Avenue Suite 2900 Boston, MA 02199 Attention: Edward D. Yun Telecopy: 617-753-1101 (b) For notices and communications to the Stockholders, to the respective addresses or telecopy numbers set forth in the Schedule of Stockholders. (c) With a copy in the case of the JWC Holders and the Company to: Kaye Scholer LLP 425 Park Avenue New York, NY 10022 Attention: Stephen C. Koval, Esq. Telecopy: 212-836-8689 (d) With a copy in the case of the Halifax Holders to: The Halifax Group, L.L.C. 1133 Connecticut Avenue, N.W. Suite 700 Washington, D.C. 20036 Attention: David W. Dupree and Kenneth M. Doyle Telecopy: 202-296-7133 (e) With a copy in the case of the Management Holders to: InSight Health Services Corp. 4400 MacArthur Blvd., Suite 800 Newport Beach, CA 92660 Attention: General Counsel and President Telecopy: (949) 476-0137 By notice complying with the foregoing provisions of this Section 6.4, each party shall have the right to change the mailing address or telecopy numbers for future notices and communications to such Party. 6.5 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective transferees, successors, assigns, heirs and administrators, provided that the rights under this Agreement may not be assigned except as expressly provided herein. No such assignment shall relieve an assignor of its obligations hereunder. 35 6.6 Termination. Without affecting any other provision of this Agreement requiring termination of any rights in favor of any Stockholder, Permitted Transferee or any other transferee of Common Stock Equivalents, the provisions of Articles II and III (other than the indemnity and contribution provisions set forth therein) of this Agreement shall terminate as to such Stockholder, Permitted Transferee or other transferee, when, pursuant to and in accordance with this Agreement, such Stockholder, Permitted Transferee or other transferee, as the case may be, no longer owns any Common Stock Equivalents. 6.7 Recapitalizations, Exchanges, etc. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to Common Stock Equivalents, to any and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution of the Common Stock Equivalents, by reason of a stock dividend, stock split, stock issuance, reverse stock split, combination, recapitalization, reclassification, merger, consolidation or otherwise. Upon the occurrence of any such events, amounts (including the Cost Price) hereunder shall be appropriately adjusted. 6.8 JWC Representative. Each JWC Holder hereby designates and appoints (and each Permitted Transferee of each such JWC Holder shall be deemed to have so designated and appointed) Steven G. Segal and Edward D. Yun (so long as they are employees of J.W. Childs Associates, Inc. or its Affiliates or successor entities), or either of them, with full power of substitution (the "JWC REPRESENTATIVE") the representative of each such Person to perform all such acts as are required, authorized or contemplated by this Agreement to be performed by any such Person and hereby acknowledges that the JWC Representative shall be the only Person authorized to take any action so required, authorized or contemplated by this Agreement by each such Person. Each such Person further acknowledges that the foregoing appointment and designation shall be deemed to be coupled with an interest and shall survive the death or incapacity of such Person. Each such Person hereby authorizes (and each Permitted Transferee shall be deemed to have authorized) the other parties hereto to disregard any notice or other action taken by such Person pursuant to this Agreement except for the JWC Representative. The other parties hereto are and will be entitled to rely on any action so taken or any notice given by the JWC Representative and are and will be entitled and authorized to give notices only to the JWC Representative for any notice contemplated by this Agreement to be given to any such Person. A successor to the JWC Representative may be chosen by the holders of a majority of the Common Stock Equivalents at the time held by the JWC Holders, provided that written notice thereof is given by the successor JWC Representative to the Company, the Halifax Holders, the Management Holders, the Additional Holders and the other JWC Holders. 6.9 Halifax Representative. Each Halifax Holder hereby designates and appoints (and each Permitted Transferee of each such Halifax Holder shall be deemed to have so designated and appointed) David W. Dupree and Kenneth M. Doyle (so long as they are employees of Halifax Capital Partners or its Affiliates or successor entities), or either of them, with full power of substitution (the "HALIFAX REPRESENTATIVE") the representative of each such Person to perform all 36 such acts as are required, authorized or contemplated by this Agreement to be performed by any such Person and hereby acknowledges that the Halifax Representative shall be the only Person authorized to take any action so required, authorized or contemplated by this Agreement by each such Person. Each such Person further acknowledges that the foregoing appointment and designation shall be deemed to be coupled with an interest and shall survive the death or incapacity of such Person. Each such Person hereby authorizes (and each Permitted Transferee shall be deemed to have authorized) the other parties hereto to disregard any notice or other action taken by such Person pursuant to this Agreement except for the Halifax Representative. The other parties hereto are and will be entitled to rely on any action so taken or any notice given by the Halifax Representative and are and will be entitled and authorized to give notices only to the Halifax Representative for any notice contemplated by this Agreement to be given to any such Person. A successor to the Halifax Representative may be chosen by the holders of a majority of the Common Stock Equivalents at the time held by the Halifax Holders, provided that written notice thereof is given by the successor Halifax Representative to the Company, the JWC Holders, the Management Holders, the Additional Holders and the other Halifax Holders. 6.10 Action Necessary to Effectuate the Agreement. The parties hereto agree to take or cause to be taken all such corporate and other action as may be necessary to effect the intent and purposes of this Agreement. 6.11 No Waiver. No course of dealing and no delay on the part of any party hereto in exercising any right, power or remedy conferred by this Agreement shall operate as waiver thereof or otherwise prejudice such party's rights, powers and remedies. No single or partial exercise of any rights, powers or remedies conferred by this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 6.12 Counterparts. This Agreement may be executed in two or more counterparts (including Joinder Agreements as counterparts), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 6.13 Headings, etc. All headings and captions in this Agreement are for purposes of references only and shall not be construed to limit or affect the substance of this Agreement. Words used in this Agreement, regardless of the gender and number used, will be deemed and construed to include any other gender, masculine, feminine, or neuter, and any other number, singular or plural, as the context requires. As used in this Agreement, the word "INCLUDING" is not limiting, and the word "OR" is not exclusive. The words "THIS AGREEMENT", "HERETO", "HEREIN", "HEREUNDER", "HEREOF", and words or phrases of similar import refer to this Agreement as a whole, together with any and all Schedules and Exhibits hereto, and not to any particular article, section, subsection, paragraph, clause or other portion of this Agreement. 6.14 Governing Law; Jurisdiction; Service of Process. This Agreement shall, in accordance with section 5-1401 of the General Obligations Law of the State of New York, be governed by the laws of the State of New York, without regard to any conflicts of laws principles 37 thereof that would call for the application of the laws of any other jurisdiction. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of New York, or if it has or can acquire jurisdiction, in the United States District Court for the Southern District of New York, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world, whether within or without the State of New York. 6.15 Confidentiality; Public Announcements. No JWC Holder, Halifax Holder, Management Holder or Additional Holder shall disclose or use in any manner whatsoever, in whole or in part, any information concerning the Company or any of its direct or indirect shareholders, or any of their respective employees, directors or Subsidiaries or Affiliates (including, without limitation, the JWC Holders) received on a confidential basis from the Company or any other Person under or pursuant to this Agreement or any other agreement with the Company including without limitation financial terms and financial and organizational information contained in any documents, statements, certificates, materials or information furnished, or to be furnished, by or on behalf of the Company or any other Person in connection with the purchase or ownership of any Common Stock Equivalent; provided, however, that the foregoing shall not be construed, now or in the future, to apply to any information reflected in any recorded document, information which is independently developed by such Stockholder, information obtained from sources other than the Company or any of its direct or indirect shareholders, or any of their respective employees, directors, Subsidiaries or Affiliates (including without limitation the JWC Holders) or any of their respective agents or representatives (including without limitation attorneys, accountants, financial advisors, engineers and insurance brokers) or information that is or becomes in the public domain, nor shall it be construed to prevent such Stockholder from (i) making any disclosure of any information (A) if required to do so by any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any court or other governmental authority, in each case applicable to or binding upon such Stockholder, (B) to any governmental authority having or claiming authority to regulate or oversee any aspect of such Stockholder business or that of the corporate parent or affiliates of such Stockholder in connection with the exercise of such authority or claimed authority, or (C) pursuant to subpoena; or (ii) making, on a confidential basis, such disclosures as such Stockholder deem necessary or appropriate to such Stockholder's legal counsel, accountants (including outside auditors) or general or managing partner; (iii) making such disclosures as such Stockholder reasonably deem necessary or appropriate to any Transferee and/or counsel to or other representatives of such bank or financial institution or other entity, to which such Stockholder in good faith desires to Transfer all or a portion of its interest in any Common Stock Equivalents; provided, however, that such Transferee or counsel to or representative thereof, agree maintain the confidentiality of such disclosures on the terms stated herein; or (iv) making, on a confidential basis, disclosures of such information to current Stockholders. [Signatures on Following Pages] 38 SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT COUNTERPART SIGNATURE PAGE IN WITNESS WHEREOF, the parties have executed this Agreement as an instrument under SEAL as of the date first set forth above. THE COMPANY: INSIGHT HEALTH SERVICES HOLDINGS CORP. By: /s/ Steven T. Plochocki -------------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT CONTINUATION OF COUNTERPART SIGNATURE PAGES MANAGEMENT HOLDERS: STEVEN T. PLOCHOCKI By: /s/ Steven T. Plochocki --------------------------------------- MICHAEL A. BOYLAN By: /s/ Michael A. Boylan ---------------------------------------- THOMAS V. CROAL By: /s/ Thomas V. Croal ---------------------------------------- MICHAEL S. MADLER By: /s/ Michael S. Madler ---------------------------------------- SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT CONTINUATION OF COUNTERPART SIGNATURE PAGES THE JWC HOLDERS: J.W. CHILDS EQUITY PARTNERS II, L.P. By: J.W. Childs Advisors, L.P. By: J.W. Childs Associates, L.P. By: J.W. Childs Associates, Inc. By: /s/ Edward D. Yun ---------------------------------------- Name: Edward D. Yun Title: Vice President JWC-INSIGHT CO-INVEST LLC By: J.W. Childs Associates, Inc. By: /s/ Edward D. Yun ---------------------------------------- Name: Edward D. Yun Title: Vice President By executing above, each of the foregoing JWC Holders acknowledges that, pursuant to Section 6.8 of this Second Amended and Restated Stockholders Agreement, each of the foregoing JWC Holders has designated and appointed Steven G. Segal and Edward D. Yun, or either of them, as its representative to perform all acts as are required, authorized or contemplated by this Second Amended and Restated Stockholders Agreement. SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT CONTINUATION OF COUNTERPART SIGNATURE PAGES THE HALIFAX HOLDERS: HALIFAX CAPITAL PARTNERS, L.P. By: Halifax Genpar, L.P. By: The Halifax Group, L.L.C. By: /s/ David W. Dupree ---------------------------------------- Name: David W. Dupree Title: Managing Partner DAVID W. DUPREE /s/ David W. Dupree -------------------------------------------- By executing above, each of the foregoing Halifax Holders acknowledges that, pursuant to Section 6.9 of this Second Amended and Restated Stockholders Agreement, each of the foregoing Halifax Holders has designated and appointed David W. Dupree and Kenneth M. Doyle, or either of them, as its representative to perform all acts as are required, authorized or contemplated by this Second Amended and Restated Stockholders Agreement. SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT CONTINUATION OF COUNTERPART SIGNATURE PAGES ADDITIONAL HOLDER: By: ---------------------------------------- Name: EXHIBIT A SCHEDULE OF STOCKHOLDERS J.W. CHILDS EQUITY PARTNERS II, L.P. c/o J.W. Childs Associates, L.P. 111 Huntington Avenue Suite 2900 Boston, MA 02199 Attention: Edward D. Yun Telecopy: 617-753-1101 JWC-INSIGHT CO-INVEST LLC c/o J.W. Childs Associates, L.P. 111 Huntington Avenue Suite 2900 Boston, MA 02199 Attention: Edward D. Yun Telecopy: 617-753-1101 HALIFAX CAPITAL PARTNERS, L.P. c/o The Halifax Group, L.L.C. 1133 Connecticut Avenue, N.W. Suite 700 Washington, D.C. 20036 Attention: David W. Dupree and Kenneth M. Doyle Telecopy: 202-296-7133 DAVID W. DUPREE c/o The Halifax Group, L.L.C. 1133 Connecticut Avenue, N.W. Suite 700 Washington, D.C. 20036\ Telecopy: 202-296-7133 EXHIBIT B JOINDER AGREEMENT The undersigned is executing and delivering this Joinder Agreement pursuant to the Second Amended and Restated Stockholders' Agreement, dated as of February 8, 2002 (the "SECOND AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT"), among InSight Health Services Holdings Corp., a Delaware corporation (the "COMPANY"), the JWC Holders, Halifax Holders, Management Holders and Additional Holders named therein. By executing and delivering this Joinder Agreement to the Company, the undersigned hereby agrees to become a party to, to be bound by, and to comply with the provisions of the Second Amended and Restated Stockholders' Agreement in the same manner as if the undersigned were an original signatory to such agreement as a Management Holder. In connection therewith, effective as of the date hereof the undersigned hereby makes the representations and warranties contained in the Second Amended and Restated Stockholders' Agreement. Accordingly, the undersigned has executed and delivered this Joinder Agreement as of the 25 day of February, 2002. /s/ Roy Assael --------------------------------- Signature of Stockholder Roy Assael --------------------------------- Print Name of Stockholder EX-3.27 4 y55701a1ex3-27.txt CERTIFICATE OF ORGANIZATION Exhibit 3.27 Microfilm Number 200034 - 1529 Filed with the _____________ Department MAY 02 2000 of State on ____________________________ /s/ Kim Pizzingrilli Entity Number 2939503 ___________________________________ Secretary of the Commonwealth CERTIFICATE OF ORGANIZATION-DOMESTIC LIMITED LIABILITY COMPANY DSCD158913(rev 96) In compliance with the requirements of 15 Pa.C.S. > 8913 (relating to certificate of organization), the undersigned, desiring to organize a limited liability company, hereby state(s) that: 1. The name of the limited liability company is: Wilkes-Barre Imaging, L.L.C. _______________________________ ________________________________________________________________________________ 2. The (a) address of this limited liability company's initial registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is: (a) _________________________________________________________________________ Number and Street City State Zip County (b) c/o: CT Corporation System Wyoming _________________________________________________________________________ Name of Commercial Registered Office Provider County For a limited liability company represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the limited liability company is located for venue and official publication purposes. 3. The name and address, including street and number, if any, of each organizer are: NAME ADDRESS Paul L. Uhrig 2600 Virginia Avenue, NW - Suite 1111 _____________________________________________________________________________ Washington, D.C. 20037 _____________________________________________________________________________ _____________________________________________________________________________ 4. (Strike out if inapplicable): ----------------------------------------------- 5. (Strike out if inapplicable): Management of the company is vested in a manager or managers. 6. The specified effective date, if any is: Upon Filing ____________________________________ month day year hour, if any 7. (Strike out if inapplicable): ----------------------------------------------- _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 8. For additional provisions of the certificate, if any, attach an 8 1/2 x 11 sheet. IN TESTIMONY WHEREOF, the organizer(s) has (have) signed this Certificate of Organization this 27th day of April, 2000. Paul Uhrig ___________________________ (Signature) ___________________________ (Signature) ___________________________ (Signature) EX-3.28 5 y55701a1ex3-28.txt OPERATING AGREEMENT Exhibit 3.28 WILKES-BARRE IMAGING, LLC OPERATING AGREEMENT THIS OPERATING AGREEMENT (the "AGREEMENT") is made effective as of May 2, 2000 (the "EFFECTIVE DATE"), by and among the undersigned parties. The parties listed on Exhibit A as the members are referred to collectively herein as the "MEMBERS." Capitalized terms in this Agreement shall be defined as either set forth in Section 9.2 of this Agreement or as defined in the Section of this Agreement where they are first used. RECITALS: A. Wilkes-Barre Imaging, LLC (the "COMPANY") was organized pursuant to Articles of Organization filed with, and approved by, the Department of State of the Commonwealth of Pennsylvania (the "ARTICLES"). All references herein to the Articles shall mean such document as it is in effect on the relevant date, including any amendments thereto, made from time to time. The Members, collectively, own all of the Membership Interests in the Company. B. The Members have agreed to enter into this Agreement to regulate the affairs of the Company, the conduct of its business, and the relations of its Members. C. The Members have agreed that this Agreement shall serve as an Operating Agreement within the meaning of the Commonwealth of Pennsylvania's Limited Liability Company Act of 1994, as amended from time to time (the "ACT"). AGREEMENT: NOW, THEREFORE, it is mutually agreed as follows: ARTICLE 1 ORGANIZATION SECTION 1.1 FORMATION. The Company is a limited liability company formed pursuant to the Act. SECTION 1.2 NAME. The name of the Company is "Wilkes-Barre Imaging, LLC." SECTION 1.3 PURPOSE. The Company is formed for the purpose of owning and operating the diagnostic imaging center located at 146 Mundy Street, Wilkes-Barre, Pennsylvania, and engaging in and conducting all and every kind of lawful business for which limited liability companies may be organized according to the laws of the Commonwealth of Pennsylvania. The Company also shall have all the powers necessary, incidental, or convenient to effect any purpose for which it is formed, including all powers granted by the Act. SECTION 1.4 PRINCIPAL OFFICE, REGISTERED OFFICE AND REGISTERED AGENT. The location of the principal office of the Company is 146 Mundy Street, Wilkes-Barre, Pennsylvania, or such other locations as the Company may, from time to time, designate. CT Corporation System is the registered agent for the Company. The registered agent's business address is Oliver Building, Mellon Square, Pittsburgh, Pennsylvania 15222, which shall be the registered office of the Company. SECTION 1.5 DURATION. The Company shall continue in existence until dissolved by the Members or as otherwise provided for in this Agreement. ARTICLE 2 MEMBERS SECTION 2.1 MEMBERSHIP INTERESTS; CURRENT MEMBERS. The current Members of the Company and their respective Membership Interests are listed on Exhibit A, attached hereto and incorporated by reference. Exhibit A shall automatically be amended from time to time to reflect adjustments in Membership Interests (as defined in Section 9.2), the cessation of Membership Interests, and the addition of new Members, pursuant to the terms of this Agreement. SECTION 2.2 NO AUTHORITY TO ACT AS AN AGENT FOR THE COMPANY. No Member, solely by reason of being a Member, shall be an agent of the Company except to the extent that the majority in Interest of the Members have in writing specifically authorized such Member to act as an agent of the Company. SECTION 2.3 ADDITIONAL MEMBERS. Additional Members may be admitted into the Company on such terms and conditions as provided in Section 5.5. Unless named in this Agreement or admitted to the Company as a substitute or new Member as provided herein, no person or entity shall be considered a Member, and the Company need deal only with the Members so named and so admitted. The Company shall not be required to deal with any other person or entity by reason of an assignment by a Member or by reason of the death or bankruptcy of a Member, except as otherwise provided in this Agreement. SECTION 2.4 MEMBERS NOT LIABLE FOR COMPANY LOSSES. The Members shall have no personal liability for the losses, debts, claims, expenses, or encumbrances of or against the Company or its property. ARTICLE 3 CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS SECTION 3.1 INITIAL CAPITAL CONTRIBUTIONS. The Members have made initial Capital Contributions to the Company as set forth on Exhibit A, attached hereto and incorporated by reference (the "INITIAL CAPITAL CONTRIBUTIONS"). No interest shall be paid on the Initial Capital Contributions, any additional capital contributions, or on the balance in any Capital Account and no Member shall have the right to withdraw any portion of the Member's Capital Contributions. -2- SECTION 3.2 SEPARATE CAPITAL ACCOUNTS. The Company shall maintain a separate Capital Account for each Member in accordance with the Regulations (as defined in Section 9.2). SECTION 3.3 WORKING CAPITAL LOANS. InSight shall provide the Company with working capital loans to fund the Company's ongoing operations and purchase necessary capital equipment (the "WORKING CAPITAL LOANS"). The principal balance of a Working Capital Loan shall accrue interest at a rate equal to InSight's cost of capital at the time of the making of the loan and upon other non-financial, commercially reasonable terms and conditions, commencing on the effective date of the applicable Working Capital Loan. All Working Capital Loans shall be secured with a priority lien by the assets and the accounts receivable of the Company. SECTION 3.4 ADJUSTMENTS TO CAPITAL ACCOUNTS. The Capital Account of each Member shall be credited with all amounts contributed to capital by the Members. SECTION 3.5 NO THIRD PARTY RIGHTS. The provisions of this Article 3 are not for the benefit of any creditor or other person to whom any debts, liabilities, or obligations are owed by, or who otherwise has any claim against, the Company or any Member, and no creditor or such other person shall obtain any rights under this section or by reason of this Article, or shall be able to make any claim in respect of any debts, liabilities, or obligations against the Company or any Member. SECTION 3.6 ADJUSTMENTS TO ASSAEL'S MEMBERSHIP INTERESTS. Assael hereby guarantees that for two (2) years following the date hereof the amounts payable by Company for professional services from radiologists under the current agreement with General Medical Services Corporation and any subsequent agreement negotiated by Assael shall not exceed five hundred fifty thousand dollars ($550,000) per year (the "GUARANTEED RATE"), assuming that the volume of the Company's business is no more than 14,532 scans per year or $6,973,155 in Net Revenue per year (the "BASE VOLUME"). During such two (2) year period, if the actual rate paid by the Company for the services performed by the radiologists for the Base Volume (the "ACTUAL RATE") exceeds the Guaranteed Rate, the value of Assael's Membership Interest shall be decreased by four (4) times the difference between the Guaranteed Rate and the Actual Rate and the percentage of the Membership Interest shall be decreased accordingly. By way of illustration, if the Actual Rate during such two (2) year period for the Base Volume is six hundred fifty thousand dollars ($650,000) per year, the value of Assael's interest would be reduced by $400,000 (100,000 times 4.0). ARTICLE 4 ALLOCATIONS AND DISTRIBUTIONS ----------------------------- SECTION 4.1 GENERAL RULE. Subject to the special allocation rules set forth elsewhere in this Article 4, the Profits and Losses from the operations of the Company for each fiscal year shall be allocated among the Members in proportion to their respective Membership Interests in the Company. Any credit available for income tax purposes shall be allocated among the Members in the same manner. Notwithstanding anything herein to the contrary, Assael shall be allocated Profits of the Company in an amount equal to the distributions actually made to him by the Company during the then current fiscal year and any Profits in excess of such amount shall be allocated to InSight. -3- SECTION 4.2 ALLOCATION OF PROFITS AND LOSSES. The Profits and Losses of the Company for each fiscal year shall be allocated as follows: (a) Notwithstanding any other provision in this Article 4 to the contrary, in order to comply with the rules set forth in the Regulations for (i) allocations of income, gain, loss, and deductions attributable to nonrecourse liabilities (as defined in the Regulations), and (ii) membership allocations where Members are not liable to restore deficit capital accounts, the following rules shall apply: (i) Partner nonrecourse deductions (as that term is defined in the Regulations) attributable to a particular party nonrecourse liability (as that term is defined in the Regulations) shall be allocated among the Members in the ratio in which the Members bear the economic risk of loss with respect to such partner nonrecourse liability; (ii) Items of Company gross income and gain shall be allocated among the Members to the extent necessary to comply with the minimum gain chargeback rules for partner nonrecourse liabilities set forth in the Regulations; and (iii) Items of Company gross income and gain shall be allocated among the Members to the extent necessary to comply with the qualified income offset provisions set forth in the Regulations, relating to unexpected deficit capital account balances (after taking into account all capital account adjustments prescribed in the Regulations). Since the allocations set forth in this Article 4 (the "Regulatory Allocations") may cause results not consistent with the manner in which the Members intend to divide Company distributions, the Members may divide other allocations of Profits, Losses, and other times among the Members so as to prevent the Regulatory Allocations from distorting the manner in which distributions would be divided among the Members under this Agreement, but for application of the Regulatory Allocations. The Members may accomplish this result in any reasonable manner that is consistent with section 704 of the Code and the related Regulations. (b) In accordance with Code section 704(c) and the Regulations thereunder, taxable income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for federal income tax purposes, be allocated among the Members so as to take into account any variation between the adjusted basis of such property for federal income tax purposes and its fair market value, as recorded on the books of the Company. As provided in the Regulations, in the event that the Capital Accounts of the Members are adjusted to reflect the revaluation of Company property on the Company's books, then subsequent allocations of taxable income, gain, loss and deduction with respect to such property shall take into account any variation between the adjusted basis of such property for federal income tax purposes and its adjusted fair market value, as recorded on the Company's books. Allocations under this paragraph shall be made in accordance with the Regulations and, consequently, shall not be reflected in the Members' Capital Accounts and shall not affect distributions of the Company. -4- (c) Except as otherwise provided in Section 4.2(d), in the event of a sale, exchange, or other disposition of all or any substantial portion of the Company's assets, Profits attributable to any fiscal year or other period of the Company shall be allocated as follows: (i) first, to Assael in an amount equal to the aggregate amount of Net Cash Flow distributed to him during the current fiscal year and all prior fiscal years of the Company, less the aggregate amount of Profits previously allocated to him; (ii) second, to the Members in an amount equal to and in proportion to the amount necessary, if any, to bring the balances of their Capital Accounts to an amount equal to their unreturned initial Capital Contributions; and (iii) third, the remaining Profits shall be allocated to InSight. (d) Profits shall be allocated to the Members in the following manner in the event of a sale, exchange or other disposition of all or any substantial portion of the Company's assets; (i) first, to Assael in an amount equal to the aggregate amount of the Net Cash Flow distributed to him, less the aggregate amount of the Profits previously allocated to him; (ii) second, to Assael until the balance of his Capital Account is equal to eleven and one ninth percent (11-1/9%) of the balance of InSight's Capital Account; and (iii) third, to the Members in accordance with their Membership Interests. (e) The parties intend for Assael to be allocated Profits from the day to day operations of the Company's business in an amount equal to the distributions made to him during the current fiscal year and for certain distributions made during the first quarter of the next fiscal year, and for Profits in excess of such amount to be allocated to Insight. The goal being for the balance of Assael's Capital Account at the end of each fiscal year to be the same as it was on the first day of such fiscal year, which amount, is intended to be the unreturned initial capital contribution of Assael to the Company. In addition, Assael shall be allocated on a priority basis a sufficient amount of the Profits from the sale, exchange, or other disposition of all or any substantial portion of the Company's assets to bring the outstanding balance of his Capital Account to an amount equal to what it would have been if Profits were allocated and Net Cash Flow was distributed to the Members in accordance with their percentage Interest throughout the entire term of the Company. (f) Losses of the Company shall be allocated to the Members with positive balances in their Capital Accounts, until such balances shall be zero. Thereafter, Losses shall be allocated to the Members in accordance with their percentage Interests. (g) If a Member transfers his/its Membership Interest, there shall be allocated to each Member, who held the transferred Interest during the fiscal year of the transfer, the product of -5- (i) the Member's Profit or Loss allocated to such transferred Interest for such fiscal year, and (ii) a fraction the numerator of which is the number of days such Member held the transferred Interest during such fiscal year and the denominator of which is the total number of days in such fiscal year; provided, however, that the members may allocate such Profit or Loss by closing the books of the Company immediately after the transfer of an Interest. Such allocation shall be made without regard to the date, amount or receipt of any distributions which may have been made with respect to such transferred Interest. (h) In the event that the Company sells, exchanges, or otherwise disposes of all or any substantial portion of the Company's assets, the net cash proceeds from any such sale, exchange, or other disposition shall (after the Company's indebtedness to third parties and to Partners have been paid or provided for, and sufficient reserves are set up for any contingent or unforeseen liabilities of the Company) be distributed and applied by the Company in order of priority and in the same manner as is set forth in this Section 4.2(h); (i) first, to InSight, until the amount of aggregate distributions of Net Cash Flow are equal to nine hundred percent (900%) of the aggregate distributions of Net Cash Flow distributed to Assael; (ii) second, to the Members in accordance with the outstanding balance of their Capital Accounts after the allocation of Profits set forth in Section 4.2(d)(ii); and (iii) third, to the Members in accordance with the outstanding balance of their Capital Accounts after the allocation of Profits set forth in Section 4.2(d)(iii). SECTION 4.3 ESTABLISHMENT OF COMPANY ACCOUNT; PRIORITY OF PAYMENTS. The Company will establish a bank account into which all collections of Company revenue shall be deposited. Except as otherwise provided in this Agreement, all distributions by the Company to its Members shall be subject to the terms and conditions of the Act. SECTION 4.4 PRIORITY OF DISTRIBUTIONS OF NET CASH FLOW. The Members agree that the Manager (as defined below) shall make distributions to the Members in the event that the Manager determine that Monthly Net Cash Flow is sufficient to make such distributions. Notwithstanding the prior sentence of this Section, the minimum monthly distribution payable to Assael shall be twenty thousand dollars ($20,000) (the "MINIMUM MONTHLY ASSAEL DISTRIBUTION"), subject to adjustment and the limitations set forth below, and payable in advance on the first day of each month commencing after the first complete calendar month of operations of the Company. Within thirty (30) days following each calendar quarter commencing on the effective date of this Agreement, the Manager shall conduct a reconciliation and determine the actual amount of Quarterly Net Cash Flow and the monthly distributions to Members. In the event the actual amount of distributions that should have been paid to Assael based upon his Membership Interest for the prior three (3) months is more than the amount of Minimum Monthly Assael Distributions actually paid, then the difference shall be paid to Assael by the Company within thirty (30) days after completion of the reconciliation. In the event the actual amount of distributions that should have been paid to Assael based upon his -6- Membership Interest for the prior three (3) months is less than the amount of Minimum Monthly Assael Distributions actually paid, then the difference shall be offset from the next three (3) monthly distributions, or such greater number of distributions as may be necessary, to Assael on an equal pro rata basis until the deficiency is recouped by the Company. By way of example only, in the event Assael is paid $60,000 during a three month period, and the Company determines that the actual distributions to Assael, based upon actual cash flow and the distributions made to the other Members, should have been $54,000, then $2,000 shall be deducted from each of the next three Minimum Monthly Assael Distributions. Manager shall provide a report within thirty (30) days after the end of each three (3) month period setting forth the financial information used by Manager to calculate the actual distributions paid and payable and the calculations set forth therein. The obligation of the Company to make the Minimum Monthly Assael Distribution shall terminate in the event actual performance of the Company results in a downward adjustment of the Minimum Monthly Assael Distributions by ten thousand dollars or more for six (6) consecutive months. SECTION 4.5 RIGHT TO AUDIT. Any Member or its designee (the "AUDITING MEMBER") shall have the right to audit the books and records of the Company for the purpose of determining Quarterly Net Cash Flow and net income of the Company upon reasonable notice to the Company within the thirty (30) day period after each Member receives a quarterly report. In the event the Auditing Member determines that the Manager has made an error in calculating Quarterly Net Cash Flow or the net income within thirty (30) days of the date on which the audit began, the Auditing Member shall provide prior written notice to the Company of such discrepancy, along with a written explanation to the Auditing Member of the discrepancy. In the event that the Company acknowledges a discrepancy or cannot explain the discrepancy, the Company shall immediately correct the books and records of the Company and pay to the Auditing Member any amounts due him/it. If the Company disputes the discrepancy, the parties shall meet in good faith to discuss the discrepancy and attempt to reconcile differing determinations. If the parties cannot in good faith reconcile their differing determinations within seven (7) days, the parties may institute dispute resolution proceedings in accordance with Exhibit B, attached hereto and incorporated by reference. ARTICLE 5 MANAGEMENT AND VOTING REQUIREMENTS OF MEMBERS SECTION 5.1 GOVERNANCE BY THE MANAGER. The Manager shall be responsible for providing day-to-day management services to the Company, including those services described on Exhibit C, attached hereto and incorporated by reference (the "MANAGEMENT SERVICES"). The Manager shall direct, manage, and control the business of the Company to the best of the Manager's ability. Except for situations in which the approval of the Members is expressly required by this Agreement or by nonwaivable provisions of applicable law, the Manager shall have full and complete authority, power, and discretion to manage and control the business, affairs, and properties of the Company to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business. SECTION 5.2 MANAGEMENT FEE. In return for the Management Services provided to Company by the Manager, Company shall pay to Manager a monthly management fee in the amount -7- of five percent (5%) of the Net Collected Revenue of the Company during the prior month. Company shall also reimburse Manager for any and all costs incurred by Manager to provide the Management Services, except as is set forth in Section 5.4. SECTION 5.3 NUMBER AND APPOINTMENT OF MANAGER. The initial number of Manager of the Company shall be one (1) and the following entity shall serve as the initial Manager of the Company: InSight. Such number of Managers may be changed or the Manager may be removed or replaced upon the affirmative vote of seventy-five percent (75%) of the outstanding Membership Interests. The Manager shall hold office until such Manager's resignation, removal, or withdrawal. SECTION 5.4 EMPLOYMENT OR ENGAGEMENT OF OTHERS, INCLUDING AFFILIATES. As part of the Management Services described in Exhibit C, attached hereto and incorporated by reference, InSight shall employ or retain all of the individuals or entities necessary to work at the Center and to either operate and manage all or any portion of the Center or to provide any service relating to the business of the Center and InSight shall be reimbursed for the costs directly related to such employment or retention. Notwithstanding the foregoing, InSight, as the Manager, will not seek reimbursement from the Company for its employees who are not retained for the purpose of providing services at the Center and will not charge the Company for any indirect expenses associated with the provision of the Management Services. The parties hereby acknowledge that InSight shall employ Assael, who hereby agrees that on the closing of the Asset Purchase Agreement (as defined below), he shall enter into an Employment Agreement with InSight, a copy of which is attached hereto as Exhibit D and incorporated by reference, pursuant to which Assael will provide services to the Company (the "EMPLOYMENT AGREEMENT"). Notwithstanding the foregoing, neither the Company nor any of the other Members shall have, as a consequence of their relationship with InSight or the Company, any right in or to any income or Profits derived by a Manager or Member or an affiliate of any of the Manager or Member from any business arrangement with InSight or the Company. SECTION 5.5 LIABILITY OF THE MANAGER. No Manager or Affiliate of a Manager, or their respective officers, shareholders, controlling persons, directors, agents, and employees, shall be liable, responsible, or accountable in damages or otherwise to the Company or to any of the Members, their successors and permitted assigns, for any act or failure to act in connection with the affairs of the Company, unless such act or omission constitutes gross negligence or intentional misconduct. SECTION 5.6 SPECIAL VOTING REQUIREMENTS. Except as otherwise expressly provided for in this Agreement, the Members who are not Managers shall not have any voting rights or take part in the day-to-day management or conduct of the business of the Company, nor shall such Members have the right or authority to act for or bind the Company. Actions and decisions that do require the approval of the Members pursuant to any provision of this Agreement may be authorized by the affirmative vote of at least a majority of the outstanding Membership Interests held by the Members. Notwithstanding anything herein or in the Act to the contrary, the following decisions and actions by the Company shall require a vote of at least seventy-five percent (75%) of the Membership Interests held by the Members: -8- (a) Approval of a merger of the Company, or the sale, exchange, or other disposition of all or substantially all of the Company's property, when such merger, sale, exchange, or other disposition or is part of single transaction or plan; (b) Except as set forth in Section 7.1, dissolution of the Company; (c) Amendment of the Articles or this Agreement; and (d) Sale, transfer, assignment, pledge, hypothecation, or other disposition of a Member's Interest, and the admission of additional Members or substitute Members, except as otherwise specifically authorized under this Agreement. SECTION 5.7 TAX MATTERS PARTNER. InSight shall be the tax matters partner, as that term is defined in section 6231(a)(7) of the Code and shall have the authority to exercise all functions provided for in the Act, or in regulations promulgated thereunder. ARTICLE 6 TRANSFER OF MEMBERSHIP INTERESTS -------------------------------- SECTION 6.1 RESTRICTIONS ON TRANSFERS OF MEMBERSHIP INTEREST. Except as set forth in Section 5.6, a Member may not transfer, assign, or encumber all or any part of his/its Membership Interest in the Company except as expressly provided herein, it being agreed that upon the death of a Member, such Member's interest shall be transferred to the estate or heirs of the Member, which estate or heirs shall be bound by the terms and conditions of the Agreement. SECTION 6.2 ASSIGNMENT OF A MEMBER'S ENTIRE INTEREST. Except as otherwise provided in this Agreement, upon the transfer of a Member's entire Membership Interest, a Member ceases to be a Member and shall be deemed to have resigned from the Company. SECTION 6.3 SUBSTITUTE MEMBERS. Except as otherwise provided in this Agreement, the transferee of a Membership Interest shall have the right to become a substituted member in the Company if (i) the transferring Member so provides in the instrument of transfer; (ii) the transferee agrees in writing to be bound by the terms of this Agreement and the Articles, as amended from time to time; and(iii) the transferee pays the reasonable costs incurred by the Company in preparing and recording any necessary amendments to this Agreement and the Articles. -9- SECTION 6.4 PUT RIGHT IN FAVOR OF ASSAEL; OPTION RIGHT IN FAVOR OF INSIGHT. (a) Upon the occurrence of a Triggering Event, Assael shall have the right to "Put" all (but not part or less than all) of Assael's Membership Interest to InSight or its designee and InSight or its designee will have the right to "Call" such Membership Interest. For purposes of this Agreement, "TRIGGERING EVENT" means the (i) termination of Assael's Employment Agreement by InSight Without Cause, (ii) termination of Assael's Employment Agreement by Assael for Good Cause, (iii) upon notice by Company to Assael that it intends to execute a bona fide definitive agreement with a third party (other than to Assael or an Affiliate of InSight), which as been negotiated at arms length and in good faith and has a fair market value purchase price, and pursuant to which the Company will sell substantially all of its assets, (iv) upon notice by InSight to Assael that it intends to execute a bona fide definitive agreement with a third party (other than Assael or an Affiliate of InSight), which has been negotiated at arms length and in good faith and has a fair market value purchase price, and pursuant to which InSight will transfer its Membership Interest to such third party, or (v) the termination of Assael's Employment Agreement pursuant to Section 5.2(a) thereof. (b) In order for Assael to exercise his "Put" right or InSight to exercise its "Call" right, Assael or InSight shall provide the other party with written notice within thirty (30) days of the occurrence of a Triggering Event of his/its intent to sell or purchase Assael's Membership Interest, as the case may be (the "NOTICE"). Except for the Triggering Event defined in Section 6.4(a)(iii), any sale of all of Assael's Membership Interest pursuant to Section 6.4(a) shall close no sooner than thirty (30) days after and no later than ninety (90) days after the receipt by Assael or InSight, as the case may be, of the Notice. If Assael exercises his right to "Put" or InSight exercises its right to "Call" Assael's Membership Interest due to the occurrence of the Triggering Event defined in Section 6.4(a)(iii), the sale of Assael's Membership Interest shall occur just prior to the closing of the transactions contemplated by the definitive agreement between the Company and a third party on the date of the closing. In the event that such closing does not occur for any reason, the sale of Assael's Membership Interest to InSight or its designee shall not occur. (c) In the event Assael exercises his right to "Put" or InSight exercises its right to "Call" Assael's Membership Interest upon the execution of a definitive agreement by Company and a third party, pursuant to which Company will sell substantially all of its assets, the purchase price to be paid to Assael will be the purchase price to be paid by the third party under the definitive agreement multiplied by the percentage of Assael's Membership Interest in Company. In the event Assael exercises his right to "Put" or InSight exercises its right to "Call" Assael's Membership Interest upon the execution of a definitive agreement by InSight and a third party, pursuant to which InSight will transfer its interest to such third party, the purchase price to be paid to Assael shall be an amount determined using the same valuation methodology as was used to determine the purchase price paid to InSight for its Membership Interest. If Assael exercises his right to "Put"or InSight exercises its right to "Call" Assael's Membership Interest upon the occurrence of any other Triggering Event, the purchase price to be paid to Assael shall be the fair market value of Assael's Membership Interest. The fair market value of Assael's Membership Interest shall mean the price at which a willing and eligible buyer would buy the Membership Interest and a willing seller would sell -10- the Membership Interest, with neither under compulsion. The parties may agree upon the fair market value of Assael's Membership Interest; however,if the parties cannot agree upon a purchase price, the parties may institute dispute resolution proceedings in accordance with Exhibit B, attached hereto and incorporated by reference. (d) In the event that InSight terminates the Employment Agreement With Cause or in the event that Assael terminates the Employment Agreement Without Cause, Assael shall immediately transfer his Membership Interest in Company to InSight or its designee and InSight shall have no obligation to pay Assael for such Membership Interest. Any disputes regarding the determination of whether the Employment Agreement has been terminated With Cause shall be resolved pursuant to the Arbitration provision set forth in Section 9.8. ARTICLE 7 DISSOLUTION SECTION 7.1 DISSOLUTION PRIOR TO COMMENCEMENT OF OPERATIONS. The Members acknowledge that the Company shall not commence operations prior to the closing of the transactions contemplated by that certain Asset Purchase and Liabilities Assumption Agreement by and among InSight, Assael, and US Diagnostic, Inc. (the "ASSET PURCHASE AGREEMENT"). In the event that the closing of the Asset Purchase Agreement does not occur for any reason, by June 30, 2000, the Company shall be dissolved by the Manager as soon as possible thereafter without the vote or consent, or any further action, of the Members being necessary. SECTION 7.2 DISSOLUTION. Except as set forth in Section 7.1, the Company shall be dissolved upon the affirmative vote of at least seventy-five percent (75%) of the Membership Interests held by the Members. The Company shall not dissolve upon the occurrence of any of the events described in Section 4A-606 of the Act as in effect as of the date of this Agreement unless, immediately following the occurrence of such an event, the Company has no Members. SECTION 7.3 WINDING UP. Upon dissolution of the Company, the Company shall liquidate its assets and wind up its affairs in the following manner: (a) LIQUIDATION OF ASSETS AND DISCHARGE OF LIABILITIES. A reasonable time shall be allowed for the discharge of the Company's liabilities in order to minimize the losses potentially attendant upon such a liquidation. The Manager shall appoint a liquidator who shall liquidate the Company and shall have the authority to perform any and all acts and to take any and all actions which may be necessary, appropriate, or incidental to the process of winding up. The authority of the liquidator shall continue as long as determined necessary by the Members, and exercise of such authority shall be deemed a proper act in winding up the affairs of the Company. Further, the liquidator is authorized to sell the assets of the Company in a bona fide sale or sales to any party or parties (including one or more Members) at such price or prices and upon such terms as the liquidator may deem advisable, having due regard for the interests of all Members. Any such sale or sales shall be deemed a proper act in winding up the affairs of the Company. -11- (b) PROCEEDS OF LIQUIDATION. The net liquidation proceeds (as defined in Section 9.2) shall be applied and distributed in the following order of priority: (i) First, to the payment of or provision for the debts and liabilities of the Company (including Member loans) and the expenses of liquidation in order of priority as provided by law, and to the creation of any reserves which may be reasonably necessary for any contingent or unforeseen liabilities or obligations; (ii) Second, to the Members in repayment of their Capital Accounts in the Company; and (iii) Finally, to the Members in proportion to their respective Interests in the Company as set forth on Exhibit A. ARTICLE 8 OTHER MATTERS OF THE COMPANY SECTION 8.1 INDEMNIFICATION. To the fullest extent permitted by law, the Company shall indemnify and hold harmless each Member from and against any and all losses, claims, damages, liabilities and expenses of whatever nature, as incurred, arising out of, or relating to the fact that such person was or is a Member of the Company and/or the Manager of the Company. Notwithstanding the foregoing, no indemnification may be made to or on behalf of any Member or Manager if a final judgment or other final adjudication adverse to the Member or Manager establishes (i) that the Member's or Manager's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or (ii) that the Member or Manager personally gained financial profit or other advantage to which the Member or Manager was not legally entitled. SECTION 8.2 NONCOMPETITION AGREEMENT. Assael shall enter into the Confidentiality and Non-Competition Agreement set forth on Exhibit E, attached hereto and incorporated by reference. ARTICLE 9 MISCELLANEOUS SECTION 9.1 NOTICE. All communications provided for herein shall be made in writing and transmitted by mail, first class postage prepaid, return receipt requested, to the Members at the addresses provided to the Company by the respective Members. Any address may be changed by notice given to the Members, as aforesaid, by the party whose address for notice is to be changed. Insofar as practicable, any consent of the Members, required or appropriate under this Agreement, shall be accomplished by written instrument without the necessity of meetings of the Members. SECTION 9.2 DEFINITIONS. As used herein, the term: -12- (a) AFFILIATE means any corporation, partnership, limited liability company, or other entity which is controlled by, controls, or is under common control with any Member. (b) ARTICLES or ARTICLES OF ORGANIZATION means the Company's Articles of Organization as amended from time to time by the Members. (c) ASSAEL means Roy Assael. (d) CAPITAL ACCOUNT means, with respect to any Member, the Initial Capital Contribution made by such Member - (i) decreased by the amount of (1) any Losses or deductions allocated to such Member, (2) any distributions made to such Member hereunder; and (3) any liabilities of such Member assumed by the Company; and (ii) increased by the amount of (1) any Profits allocated to such Member, (2) any subsequent Capital Contributions made by such Member, and (3) any liabilities of the Company that are assumed by such Member. Capital Accounts shall be maintained in accordance with the provisions of section 1.704-1(b)(2)(iv) of the Regulations and, to the extent not inconsistent therewith, generally accepted accounting principles. Capital Account balances shall be determined as of the last day of the fiscal year in which a sale, refinancing or liquidation occurs, but prior to distribution of the proceeds of the sale or other disposition resulting in the gain being allocated therein. (e) CAPITAL CONTRIBUTION means, with respect to each Member, the aggregate amount of cash, the fair market value of any property, and the principal amount of indebtedness that such Member contributes to the Company, and which is accepted by the Company as a contribution to the Member's Capital Account. (f) CODE means the Internal Revenue Code of 1986, as amended from time to time. (g) EFFECTIVE DATE means the date first mentioned above. (h) GOOD CAUSE means termination of the Employment Agreement in accordance with Section 5.4 thereof. (i) INSIGHT means Insight Health Corp. (j) MEMBERSHIP INTEREST or INTEREST means a Member's percentage equity in the Company as stated on Exhibit A. -13- (k) MONTHLY NET CASH FLOW means monthly revenue received by the Company from the provision of diagnostic imaging services during such period, less monthly Operating Expenses. (l) NET CASH FLOW means revenue received by the Company from the provision of diagnostic imaging services during such period, less monthly Operating Expenses. (m) NET LIQUIDATION PROCEEDS means the amount of money, the principal amount of any indebtedness due to the Company, and the fair market value (as of the date of distribution) of any and all other property, distributed to the Members in liquidation of the Company pursuant to this Agreement reduced by any liabilities of the Company that are assumed by such Members or which are secured by any property that is distributed by the Company to such Members. (n) NET COLLECTED REVENUE means cash collections of the Company from operations. (o) OPERATING EXPENSES means all of the expenses necessary to operate the business, including, without limitation, rent, cash required to purchase or lease imaging equipment, principal and interest on loans, including Working Capital Loans, compensation and reimbursements to the Manager for services rendered, expenses incurred in connection with any casualty losses to the extent such losses are not covered by insurance, payment of management fees, payment of salaries and benefits, and reasonable cash reserves. (p) PROFIT AND LOSS means for each fiscal year of the Company or other period, an amount equal to the Company's taxable income or loss for such year or other period, as determined by the Company's accountants in accordance with Code Section 703(a), and including, without limitation, each item of Company income, gain, loss, or deduction which must be separately stated pursuant to Code Section 703(a), taking into account the following adjustments: (i) all income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profit and Loss shall be added to such taxable income or loss; (ii) any expenditure of the Company described in Code Section 705(a)(2)(B), or treated as such an expenditure and not otherwise taken into account in computing Profit or Loss shall be subtracted from such taxable income or loss; and (iii) notwithstanding any other provision of this Agreement, any items of Company income, gain, loss, or deduction which are specially allocated shall not be taken into account in computing Profit and Loss. (q) QUARTERLY NET CASH FLOW means quarterly revenue received by the Company from the provision of diagnostic imaging services during such period, less quarterly Operating Expenses. -14- (r) REGULATIONS means the regulations, including temporary regulations, promulgated by the United States Treasury Department under the Code, as the same may be amended from time to time. (s) WITH CAUSE means the termination of the Employment Agreement in accordance with Sections 5.2(b) and 5.3 thereof. (t) WITHOUT CAUSE means any reason other than With Cause. SECTION 9.3 SEVERABILITY. The invalidity or unenforceability of any provision in this Agreement shall not affect the other provision hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. SECTION 9.4 INTERPRETATION. This Agreement shall be interpreted and construed in accordance with the laws of the Commonwealth of Pennsylvania (without reference to such jurisdiction's conflicts of laws statutes or decisions). Venue for any action brought by any of the parties hereto shall be proper only in the federal or state courts sitting in the Eastern District of Pennsylvania or Wilkes-Barre, Pennsylvania. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular, or plural as the identity of the person or persons referred to may require. SECTION 9.5 COUNTERPARTS; EFFECTIVE DATE. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one agreement. The signature of any party to a counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. This Agreement is dated and shall be effective among the parties as of the Effective Date. SECTION 9.6 BINDING EFFECT. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, executors, administrators, and legal representatives. SECTION 9.7 HEADINGS. The headings of sections herein are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. SECTION 9.8 ARBITRATION. Except as otherwise provided herein, in the event of a dispute between the parties arising from or relating to this Agreement, including, but not limited to, construction, interpretation, implementation, or enforcement of this Agreement or the performance or breach of any provision in this Agreement, the parties shall meet and confer in good faith to resolve such dispute. In the event such efforts do not resolve the dispute within fifteen (15) days from the date the dispute arises, either party may demand arbitration administered and conducted in Wilkes-Barre, Pennsylvania, by the American Arbitration Association, before one (1) arbitrator, under its Commercial Arbitration Rules, such arbitration to be final, conclusive, and binding. Judgment on -15- the award rendered by the arbitrator may be entered by any court having proper jurisdiction. This provision shall survive termination of this Agreement. Notwithstanding the foregoing, any party may seek or assert entitlement to injunctive relief or specific performance in court as an initial matter and shall have no prior obligation to establish in arbitration the entitlement to injunctive relief or specific performance. SECTION 9.9 ENTIRE AGREEMENT. The parties hereto agree that all understandings and agreements heretofore made between or among them are merged in this Agreement, which alone fully and completely expresses their agreement with respect to the subject matter hereof. There are no promises, agreements, conditions, understandings, warranties, or representations, oral or written, express or implied, among the parties concerning the subject matter of this Agreement, other than as set forth in this Agreement. -16- IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the Effective Date. WILKES-BARRE IMAGING, L.L.C. ADDRESS FOR NOTICES: BY ITS MANAGER AND MEMBER, 146 Mundy Street INSIGHT HEALTH CORP. Wilkes-Barre, Pennsylvania 18702 By: /s/Steven T. Plochocki ------------------------ Name: Steven T. Plochocki ---------------------- Title: President and CEO --------------------- MEMBERS: ADDRESS FOR NOTICES: Insight Health Corp. By: /s/Steven T. Plochocki 4400 MacArthur Boulevard ------------------------ Suite 800 Name: Steven T. Plochocki Newport Beach, CA 92660 ---------------------- Title: President and CEO --------------------- Roy Assael - --------------------------- Signature ----------------------- ----------------------- ----------------------- -17- IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the Effective Date. WILKES-BARRE IMAGING, L.L.C. ADDRESS FOR NOTICES: By: -------------------------- 146 Mundy Street Name: Wilkes-Barre, Pennsylvania 18702 ------------------------ Title: ----------------------- MEMBERS: ADDRESS FOR NOTICES: InSight Health Corp. By: -------------------------- 4400 MacArthur Boulevard Name: Suite 800 ------------------------ Newport Beach, CA 92660 Title: ----------------------- Roy Assael /s/Roy Assael - ----------------------------- Signature ------------------------- ------------------------- ------------------------- -17- EXHIBIT A WILKES-BARRE IMAGING, LLC'S --------------------------- INITIAL CAPITAL CONTRIBUTION AND INTERESTS ------------------------------------------ I. CAPITAL CONTRIBUTIONS MEMBER'S NAMES CAPITAL CONTRIBUTION(1)(2) -------------- -------------------------- Roy Assael $1,299,781 InSight Health Corp. $12,997,810 II. MEMBERSHIP INTERESTS MEMBER'S NAMES MEMBERSHIP INTERESTS -------------- -------------------- Roy Assael 10% InSight Health Corp. 90% - ---------------- (1) The Members agree that the exact amount of the Capital Contributions shall be changed based upon any adjustments, including post-closing adjustments, to the purchase price pursuant to the Asset Purchase Agreement by and among the Members and US Diagnostic, Inc. (2) These amounts represent the fair market value of the assets contributed by the Members. The assets consist of those assets listed on Schedules 2.1(a), 2.1(b), 2.1(c), and 2.1(g) of the Asset Purchase Agreement referenced above. The Assets will be contributed to the Company concurrently with the closing of the Asset Purchase Agreement. The capital contribution of Assael represents a credit on the purchase price that InSight received with respect to the Asset Purchase Agreement in return for Assael receiving his membership interest in the Company. -18- AMENDMENT NUMBER 1 TO THE OPERATING AGREEMENT BY AND BETWEEN INSIGHT HEALTH CORP. AND ROY ASSAEL This Amendment Number 1 to the Operating Agreement by and between InSight Health Corp. and Roy Assael is made as of the last date of signature below. WHEREAS, InSight Health Corp. ("INSIGHT") and Roy Assael ("ASSAEL") are the only members of Wilkes-Barre Imaging, LLC (the "COMPANY") pursuant to that certain Operating Agreement dated as of May 2, 2000 (the "OPERATING AGREEMENT"); WHEREAS, InSight and Assael desire to amend certain terms of the Operating Agreement, all as set forth herein; NOW THEREFORE, in consideration of the foregoing and the conditions, covenants, and agreements hereinafter set forth and intending to be legally bound, the parties agree as follows: The second sentence of Section 6.4(a) of the Operating Agreement shall be deleted and replaced in its entirety with the following: For purposes of this Agreement, "TRIGGERING EVENT" means (i) the termination of Assael's Employment Agreement by InSight Without Cause (ii) the termination of Assael's Employment Agreement by Assael for Good Cause, (iii) notice by the Company to Assael that it intends to execute a bona fide definitive agreement with a third party (other than Assael or an Affiliate of InSight), which has been negotiated at arms length and in good faith and has a fair market value purchase price, and pursuant to which the Company will sell substantially all of its assets, (iv) notice by InSight to Assael that it intends to execute a bona fide definitive agreement with a third party (other than Assael or an Affiliate of InSight), which has been negotiated at arms length and in good faith and has a fair market value purchase price, and pursuant to which InSight will transfer its Membership Interest to such third party, (v) the termination of Assael's Employment Agreement pursuant to Section 5.2(a) thereof, or (vi) the termination of Assael's Employment Agreement at the end of the initial term, as set forth in Section 5.1 of the Employment Agreement, or at the end of any extension of such term of the Employment Agreement as may be negotiated by the parties. All other sections of the Operating Agreement shall remain in full force and effect. -1- IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the last date of signature below. INSIGHT HEALTH CORP. ROY ASSAEL /s/ Michael A. Boyle /s/ Roy Assael - ---------------------------- ---------------------------- Signature Signature /s/ Michael A. Boyle 8/15/00 - ---------------------------- ---------------------------- Print Name Date EXECUTIVE VICE PRESIDENT - ---------------------------- Office or Title 8/14/00 - ---------------------------- Date - 2 - EX-4.2 6 y55701a1ex4-2.txt SUPPLEMENTAL INDENTURE Exhibit 4.2 SUPPLEMENTAL INDENTURE Supplemental Indenture (this "Supplemental Indenture"), dated as of February 25, 2002, among Wilkes-Barre Imaging, L.L.C. (the "Guaranteeing Subsidiary"), a subsidiary of InSight Health Services Corp. (or its permitted successor), a Delaware corporation (the "Company"), InSight Health Services Holdings Corp., the Subsidiary Guarantors (as defined in the Indenture referred to herein) and State Street Bank and Trust Company, N.A., as trustee under the Indenture referred to below (the "Trustee"). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of October 30, 2001 providing for the issuance of an aggregate principal amount of $225 million of 9 7/8% Senior Subordinated Notes due 2011 (the "Notes"); WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company's obligations under the Notes and the Indenture on the terms and conditions set forth herein (the "Guarantee"); and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guaranteeing Subsidiary and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. Agreement to Guarantee. The Guaranteeing Subsidiary hereby agrees as follows: (a) Along with all other Guarantors, to jointly and severally Guarantee to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Notes or the obligations of the Company hereunder or thereunder, that: (i) the principal of and interest on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, if lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors shall be jointly and severally obligated to pay the same immediately. (b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance that might otherwise constitute a legal or equitable discharge or defense of a guarantor. (c) The following are hereby waived: diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever. (d) This Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes and the Indenture. (e) If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors, or any Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such Holder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. (f) The Guaranteeing Subsidiary shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. (g) As between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six of the Indenture for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article Six of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. (h) Pursuant to Section 10.02 of the Indenture, after giving effect to any maximum amount and any other contingent and fixed liabilities that are relevant under any applicable Bankruptcy or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under Article Ten of the 2 Indenture shall result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent transfer or conveyance. 3. Subordination. The Obligations of the Guaranteeing Subsidiary under its Guarantee pursuant to this Supplemental Indenture shall be junior and subordinated to the Senior Indebtedness of the Guaranteeing Subsidiary on the same basis as the Notes are junior and subordinated to the Senior Indebtedness of the Company. For the purposes of the foregoing sentence, the Trustee and the Holders shall have the right to receive and/or retain payments by the Guaranteeing Subsidiary only at such time as they may receive and/or retain payments in respect of the Notes pursuant to the Indenture, including Article Ten hereof. 4. Execution and Delivery. Each Guaranteeing Subsidiary agrees that the Guarantees shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Guarantee. 5. Guaranteeing Subsidiary May Consolidate, Etc., on Certain Terms. Except as otherwise provided in Section 11.05 of the Indenture, a Subsidiary Guarantor may not consolidate with or merge with or into any other Person or convey, sell, assign, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any other Person (other than the Company or another Subsidiary Guarantor) unless: (i) subject to the provisions of the following paragraph, the Person formed by or surviving such consolidation or merger (if other than such Subsidiary Guarantor) or to which such properties and assets are transferred assumes all of the obligations of such Subsidiary Guarantor under the Indenture and its Guarantee, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee; (ii) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing; and (iii) the Subsidiary Guarantor delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction complies with the requirements of the Indenture. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and reasonably satisfactory in form to the Trustee, of the Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of the Indenture to be performed by a Guarantor, such successor Person shall succeed to and be substituted for a Guarantor with the same effect as if it had been named herein as a Guarantor. 3 Such successor Person thereupon may cause to be signed any or all of the Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Guarantees so issued shall in all respects have the same legal rank and benefit under the Indenture as the Guarantees theretofore and thereafter issued in accordance with the terms of the Indenture as though all of such Guarantees had been issued at the date of execution hereof. 6. Releases. (a) A Subsidiary Guarantor will be deemed automatically and unconditionally released and discharged from all of its obligations under its Guarantee without any further action on the part of the Trustee or any Holder of the Notes upon a sale or other disposition to a Person not an Affiliate of the Company of all of the Capital Stock of, or all or substantially all of the assets of, such Subsidiary Guarantor, by way of merger, consolidation or otherwise, which transaction is carried out in accordance with Section 4.10 of the Indenture; provided that any such termination shall occur (x) only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure any Indebtedness of the Company shall also terminate upon such sale, disposition or release and (y) only if the Trustee is furnished with written notice of such release together with an Officers' Certificate from such Subsidiary Guarantor to the effect that all of the conditions to release in this Section 6 have been satisfied. (b) Any Guarantor not released from its obligations under its Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under the Indenture as provided in Article Eleven of the Indenture. 7. No Recourse Against Others. No director, officer, employee, incorporator or stockholder of the Parent, the Company or any Subsidiary Guarantor, as such shall have any liability for any obligations of the Parent, the Company or the Subsidiary Guarantors under the Notes, the Indenture, the Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes, by accepting a Note, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws. 8. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 9. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 10. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. 4 11. Trustee. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Company. [Remainder of Page Left Intentionally Blank] 5 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: February 25, 2002 WILKES-BARRE IMAGING, L.L.C. By: InSight Health Corp., as the sole member and sole manager of Wilkes-Barre Imaging, L.L.C. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer INSIGHT HEALTH SERVICES CORP. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer INSIGHT HEALTH SERVICES HOLDINGS CORP. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer INSIGHT HEALTH CORP. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer 6 SIGNAL MEDICAL SERVICES, INC. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer OPEN MRI, INC. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer MAXUM HEALTH CORP. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer RADIOSURGERY CENTERS, INC. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer MAXUM HEALTH SERVICES CORP. By: /s/ Steven T. Plochocki ------------------------------------ Name: Steven T. Plochocki Title: President and Chief Executive Officer 7 MRI ASSOCIATES, L.P. By: InSight Health Corp., its General Partner By: /s/ Steven T. Plochocki ---------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: /s/ Steven T. Plochocki ---------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer MAXUM HEALTH SERVICES OF DALLAS, INC. By: /s/ Steven T. Plochocki ---------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer NDDC, INC. By: /s/ Steven T. Plochocki ---------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer DIAGNOSTIC SOLUTIONS CORP. By: /s/ Steven T. Plochocki ---------------------------------------- Name: Steven T. Plochocki Title: President and Chief Executive Officer 8 STATE STREET BANK AND TRUST COMPANY, N.A., AS TRUSTEE By: /s/ Cheryl L. Clarke ---------------------------------------- Name: Cheryl L. Clarke Title: Assistant Secretary 9 EX-5.1 7 y55701a1ex5-1.txt OPINION OF KAYE SCHOLER LLP Exhibit 5.1 March 19, 2002 InSight Health Services Corp. 4400 MacArthur Blvd. Newport Beach, CA 92660 Re: Exchange Offer for up to $225,000,000 9 7/8% Senior Subordinated Notes due 2011 Ladies and Gentlemen: We have acted as counsel to InSight Health Services Holdings Corp. and InSight Health Services Corp. (the "Registrants") in connection with the offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $225,000,000 at maturity of InSight Health Services Corp.'s (the "Company") 9 7/8% Senior Subordinated Notes due 2011 (the "Exchange Notes") for up to a like aggregate principal amount at maturity of the Company's previously issued and outstanding 9 7/8% Senior Subordinated Notes due 2011 (the "Outstanding Notes"), pursuant to a Registration Statement on Form S-4 (Registration No. 333-75984) filed under the Securities Act of 1933, as amended (the "Securities Act"). Such Registration Statement, as amended or supplemented, is hereinafter referred to as the "Registration Statement". The Exchange Notes are to be issued pursuant to the Indenture (the "Indenture"), dated as of October 30, 2001 by and among the Company and State Street Bank and Trust Company, N.A., as the trustee, in exchange for, and in replacement of, the Registrants' Outstanding Notes, of which $225,000,000 in aggregate principal amount is outstanding. In rendering our opinion, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of this opinion (collectively, the "Documents"). InSight Health Services Corp. 2 March 19, 2002 In our examination of the Documents and in rendering the opinion set forth below, we have assumed, without independent investigation (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as certified, photostatic, reproduced or conformed copies of validly existing agreements or other documents, the authenticity of all the latter documents and the legal capacity of all individuals who have executed any of the documents which we examined, (ii) the enforceability of any of the Documents against any party (other than the Registrants), (iii) that the Registrants are each duly incorporated and in good standing under the laws of their respective jurisdictions of incorporation, (iv) that the Registrants have taken all necessary corporate action to authorize the Documents and the transactions provided for in them and that each Document has been duly authorized, executed and delivered by the Registrants, (v) that the execution and delivery by the parties of each Document and the consummation by each party of the transactions contemplated thereby do not violate or result in a breach of or default under the party's certificate or articles of incorporation or by-laws, or any applicable law, (vi) that the Exchange Notes will be issued as described in the Registration Statement, (vii) that the Indenture was duly authorized, executed and delivered by the parties to it, (viii) that the Exchange Notes will be in substantially the form attached to the Indenture and that any information omitted from any such form will be properly added and (ix) that the Exchange Notes will be duly authorized, executed and delivered by the Registrants. Based on the foregoing and subject to the assumptions, exceptions and qualifications set forth in this letter, we are of the opinion that when (i) the Registration Statement becomes effective, (ii) the Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended, and (iii) the Exchange Notes have been duly executed and authenticated in accordance with the provisions of the Indenture and duly delivered to the holders thereof in exchange for the Outstanding Notes, the Exchange Notes will be validly issued and binding obligations of the Registrants. Our opinions expressed above are subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of (i) any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent conveyance, moratorium or other similar law affecting the enforcement of creditors' rights generally, (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and (iii) any laws except the laws of the State of New York. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or InSight Health Services Corp. 3 March 19, 2002 supplement this opinion should the present laws of the State of New York be changed by legislative action, judicial decision or otherwise. This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purposes. Very truly yours, /s/ Kaye Scholer LLP EX-5.2 8 y55701a1ex5-2.txt OPINION OF HUNTON & WILLIAMS Exhibit 5.2 March 19, 2002 InSight Health Corp. Signal Medical Services, Inc. Open MRI, Inc. Maxum Health Corp. Radiosurgery Centers, Inc. Maxum Health Services Corp. MRI Associates, L.P. Maxum Health Services of North Texas, Inc. Maxum Health Services of Dallas, Inc. NDDC, Inc. Diagnostic Solutions Corp. 4400 MacArthur Boulevard Newport Beach, California 92660 INSIGHT HEALTH SERVICES CORP.'S OFFER TO EXCHANGE $225,000,000 SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED $225,000,000 SENIOR SUBORDINATED NOTES DUE 2011 Ladies and Gentlemen: We have acted as special counsel to InSight Health Corp., a Delaware corporation, Signal Medical Services, Inc., a Delaware corporation, Open MRI, Inc., a Delaware corporation, Maxum Health Corp., a Delaware corporation, Radiosurgery Centers, Inc., a Delaware corporation, Maxum Health Services Corp., a Delaware corporation, MRI Associates, L.P., an Indiana limited partnership, Maxum Health Services of North Texas, Inc., a Texas corporation, Maxum Health Services of Dallas, Inc., a Texas corporation, NDDC, Inc., a Texas corporation and Diagnostic Solutions Corp., a Delaware corporation (collectively, the "Subsidiary Guarantors"), each of which is a wholly owned subsidiary of InSight Health Services Corp., a Delaware corporation ("InSight"), in connection with the proposed offer by InSight (the "Exchange Offer") to exchange up to $225,000,000 aggregate principal amount of its 9 7/8% Senior Subordinated Notes Due 2011 (the "Exchange Notes") for a like aggregate principal amount of InSight's privately placed 9 7/8% Senior Subordinated Notes due 2011 (the "Outstanding Notes"). The Exchange Notes will be issued pursuant to an Indenture, dated as of October 30, 2001 (the "Indenture"), among InSight, InSight Health Services Holdings Corp., a Delaware corporation ("Holdings"), the Subsidiary Guarantors and State Street Bank and Trust Company, as trustee. The Exchange Notes will be guaranteed (the "Guarantees") pursuant to the terms of the Indenture by Holdings and the Subsidiary Guarantors. The terms of the Exchange Offer are described in the Registration Statement on Form S-4 (File. No. 333-75984), as amended (the "Registration Statement"), filed by InSight, Holdings and the Subsidiary Guarantors with the Securities and Exchange Commission (the "Commission") for the registration of the Exchange Notes under the Securities Act of 1933, as amended (the "Securities Act"). In connection with the foregoing, we have examined, among other things, the following: a. the Registration Statement; b. the Indenture; c. the form of the Exchange Notes; d. the form of the Guarantees by the Subsidiary Guarantors of the Exchange Notes; and e. the originals (or copies identified to our satisfaction) of such documents and records as we have deemed necessary for purposes of the opinions set forth in this letter. For purposes of the opinions expressed below, we have assumed (i) the authenticity of all documents submitted to us as originals, (ii) the conformity to the originals of all documents submitted as certified or photostatic copies and the authenticity of the originals, (iii) the legal capacity of natural persons, and (iv) the due authorization, execution and delivery of all documents by all parties and the validity and binding effect thereof (other than the validity and binding effect thereof upon the Subsidiary Guarantors). We have also assumed that each of the Subsidiary Guarantors which is a corporation has the corporate power and authority to enter into and perform its obligations under its Guarantee and that MRI Associates, L.P. has the limited partnership power and authority to enter into and perform its obligations under the Guarantee and that neither entering into or performing its Guarantee is in contradiction of the applicable laws of the jurisdiction of formation of the respective Subsidiary Guarantors. We do not purport to express an opinion on any laws other than those of the States of New York, the general corporate law of the State of Delaware, and the United States of America. We advise you that the issues addressed by this opinion may be governed in whole or in part by other laws, and we express no opinion as to whether any relevant difference exists between the laws upon which our opinion is based and any other laws that may actually govern. We note that the enforceability of the Guarantees may be governed in part by the laws of the jurisdictions under which each of the Subsidiary Guarantors is formed. Because we are not admitted to practice in each such jurisdiction, we have assumed for purposes of our opinion that the laws of these jurisdictions with respect to enforceability are not materially different than the laws of the State of New York. This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purpose. Based upon the foregoing and such other information and documents as we have considered necessary for the purposes hereof, we are of the opinion that: When, as and if (i) the Registration Statement has become effective pursuant to the provisions of the Securities Act, (ii) the Indenture has been qualified pursuant to the provisions of the Trust Indenture Act of 1939, as amended, (iii) the Outstanding Notes are validly tendered to InSight in the Exchange Offer, (iv) the Exchange Notes and the Guarantee of each Subsidiary Guarantor are issued pursuant to the Exchange Offer and in the form and containing the terms described in the Registration Statement and the Indenture, (v) the Exchange Notes and each Guarantee of the Subsidiary Guarantors have been executed and, in the case of the Exchange Notes, authenticated, in accordance with the provisions of the Indenture, and (vi) all legally required consents, approvals and authorizations of governmental regulatory authorities have been obtained, the Guarantee of each Subsidiary Guarantor will be the validly issued and binding obligation of each Subsidiary Guarantor. Our opinions expressed above are subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of (i) bankruptcy, insolvency, fraudulent conveyance or transfer laws, preference and equitable subordination laws and principles, reorganization, moratorium or other laws affecting the rights of creditors generally, (ii) general principles of equity, whether considered at law or in equity, and (iii) federal and state securities laws and public policy considerations affecting rights to indemnity or contribution. We hereby consent to the filing of this opinion as Exhibit 5.2 to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category or persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. Very truly yours, /s/ Hunton & Williams HUNTON & WILLIAMS EX-8.1 9 y55701a1ex8-1.txt TAX OPINION OF KAYE SCHOLER LLP Exhibit 8.1 March 19, 2002 Insight Health Services Corp. 4400 MacArthur Boulevard Newport Beach, CA 92660 Gentlemen: We have served as special counsel for Insight Health Services Corp., a Delaware corporation ("Insight") and Insight Health Services Holdings Corp. ("Holdings"), in connection with the issuance by Insight of 9 7/8% Senior Subordinated Notes due 2011, in the aggregate principal amount of $225 million as of October 30, 2001 (the "Initial Notes") and the subsequent offer by Insight (the "Exchange Offer") to exchange all of the Initial Notes for new 9 7/8% Senior Subordinated Notes due 2011, in the aggregate principal amount of $225 million (the "Exchange Notes"). In this capacity, we have participated in the preparation of a registration statement on Form S-4 (the "Registration Statement") filed pursuant to the Securities Act of 1933, as amended (the "Securities Act") including the prospectus relating to the issuance of the Exchange Notes (the "Prospectus"). Unless otherwise defined, capitalized terms referred to herein have the meanings set forth in the Prospectus. All section references, unless otherwise indicated, are to the United States Internal Revenue Code of 1986, as amended (the "Code"). We understand the facts relating to the Exchange Offer to be as follows: On October 30, 2001, Insight completed the private offering of the Initial Notes. In connection with that offering, Insight and certain guarantors entered into a registration rights agreement with the initial purchasers of the Initial Notes pursuant to which Insight agreed, among other things: (i) to file a registration statement with respect to the Exchange Offer within 120 days after the original issue date of the Initial Notes; (ii) to use its reasonable best efforts to cause the Exchange Offer registration statement to be declared effective within 180 days after the original issue date of the Initial Notes, (iii) once the registration statement is declared effective, to offer the Exchange Notes in exchange for the surrender of the Initial Notes; and (iv) to keep the Exchange Offer open for not less than 30 business days after notice of the Exchange Offer is mailed to holders of the Initial Notes. The terms of the Exchange Notes and of the Initial Notes are identical in all material respects, except that the Exchange Notes will be freely transferable by the holders, Insight Health Services Corp. 2 March 19, 2002 except as specifically provided in the Prospectus. For each Initial Note surrendered to Insight pursuant to the Exchange Offer, the holder of such Note will receive an Exchange Note having a principal amount equal to that of surrendered Initial Note. The Exchange Notes will be issued pursuant to the same indenture as governs the Initial Notes. You have requested our opinion regarding certain U.S. federal income tax consequences of the consummation of this Exchange Offer. This opinion is being rendered to you in response to such request. In rendering this opinion, we have relied, with your consent, upon the facts, statements, descriptions and representations set forth in the Prospectus (including the Schedules and Exhibits thereto) and such other documents pertaining to the Exchange Offer as we have deemed necessary or appropriate. In connection with rendering this opinion, we have also assumed (without any independent investigation) that: 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents, and there has been (or will be by the date on which the Exchange Notes are issued pursuant to the Exchange Offer) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof; 2. Any statement made in any of the documents referred to herein as being "to the best of the knowledge" of any person or party, or similarly qualified, is correct without such qualification; and 3. All statements, descriptions and representations contained in any of the documents referred to herein or otherwise made to us are true, correct and complete in all material respects and, at the consummation of the transactions contemplated by the Exchange Offer, will be true, correct and complete and no actions have been (or will be) taken which are inconsistent with such statements, descriptions and representations. Based on our examination of the foregoing items and subject to the assumptions, exceptions, limitations and qualifications set forth herein, it is our opinion that, if the Exchange Offer is consummated in accordance with the Prospectus, the exchange of Initial Notes for Exchange Notes by holders of Initial Notes pursuant to the Exchange Offer will not constitute an "exchange" for U.S. federal income tax purposes because such exchange will not effect a "significant modification" of the Initial Notes within the meaning of U.S. Treasury Regulation 1.1001-3.. This opinion represents and is based upon our best judgment regarding the application of U.S. federal income tax laws arising under the Code, existing judicial decisions, Treasury regulations and published rulings and procedures. Our opinion is not binding upon the Insight Health Services Corp. 3 March 19, 2002 Internal Revenue Service or the courts, and there is no assurance that the Internal Revenue Service will not successfully assert a contrary position. Furthermore, no assurance can be given that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the conclusions stated herein. Nevertheless, we undertake no responsibility to advise you of any new developments in the application or interpretation of the U.S. federal income tax laws. This opinion addresses only the U.S. federal income tax matters relating to the Exchange Offer that are expressly set forth above, and does not address any other federal, state, local or foreign tax consequences that may result from the Exchange Offer or any other transaction (including any transaction undertaken in connection with the Exchange Offer). No opinion is expressed as to any transaction other than the Exchange Offer as described in the Prospectus or to any transaction whatsoever, including the Exchange Offer, if all the transactions described in the Prospectus are not consummated in accordance with the descriptions of them in the Prospectus, or if any of the representations, warranties, statements and assumptions upon which we relied are not true, correct and complete at all relevant times. In the event any one of the representations, warranties, statements or assumptions upon which we have relied to issue this opinion is incorrect, our opinion might be adversely affected and may not be relied upon. This opinion is intended solely for the benefit of Insight, Holdings and exchanging holders of Initial Notes and may not be relied upon by any other person. We hereby consent to the filing of this opinion with the Securities and Exchange Commission (the "Commission") as an exhibit to the Registration Statement and to the use of our name in the Prospectus under the captions "Certain Federal Income Tax Considerations - Exchange Offer" and "Legal Matters." In giving this opinion, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. Very truly yours, /s/ Kaye Scholer LLP EX-10.18 10 y55701a1ex10-18.txt EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.18 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT dated as of June 29, 2001 between InSight Health Services Corp., a Delaware corporation (the "Company"), and Cecilia A. Guastaferro (the "Executive"). InSight Health Services Holdings Corp., a Delaware corporation ("Parent") is a party to this Agreement solely for the purposes of Section 3.07. The Company wishes to employ the Executive, and the Executive wishes to accept such employment, in each case, subject to the terms and conditions hereof. Accordingly, the Company and the Executive hereby agree as follows: I. TERM OF EMPLOYMENT Commencing at the Effective Time (as defined below), the Executive is to be employed by the Company for rolling twelve (12) month periods, whereby the Executive's term of employment is twelve (12) months on a continuing basis, unless earlier terminated in accordance with Article IV below. II. EMPLOYMENT, DUTIES AND ACCEPTANCE SECTION 2.01. EMPLOYMENT BY COMPANY. The Company for itself and its affiliates, employs the Executive for the term of this Agreement to render full-time services as Company's Sr. Vice President, Human Resources and in such capacities as the Board of Directors of the Company (the "Board") and its affiliates may assign and, in connection therewith, to perform such duties as are consistent with the Executive's initial appointment and as the Board shall direct. The Executive agrees to perform such duties as are consistent with the duties normally pertaining to the offices to which she has been elected or appointed, subject always to the direction of the Company's Board. Subject to Section 5.01 hereof, the Executive's expenditure of reasonable amounts of time for personal business, charitable or professional activities will not be deemed a breach of her undertaking to provide full-time services hereunder, provided that such activities do not interfere materially with the Executive's rendering of such services. SECTION 2.02. ACCEPTANCE OF EMPLOYMENT BY THE EXECUTIVE. The Executive accepts such employment and shall render the services required by this Agreement to be rendered by her. The Executive shall also serve on request during all or any part of the term of this Agreement as an officer of the Company and of any of its affiliates without any compensation therefor other than specified in this Agreement. SECTION 2.03. PLACE OF EMPLOYMENT. The Executive's principal place of employment shall be located at 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660. In the event that the principal place of employment of the Executive is relocated to a site that is more than 50 miles from the Executive's principal residence, the Company may require the Executive to relocate her principal residence to within 50 miles of such office. Notwithstanding the foregoing, the Executive acknowledges that the duties to be performed by her hereunder are such that she may be required to travel extensively both throughout the United States and abroad and, in some cases, spend extended periods of time away from the Company's corporate headquarters. III. COMPENSATION SECTION 3.01. SALARY, BONUSES, LIFE INSURANCE. As compensation for all services to be rendered pursuant to this Agreement, the Company shall pay the Executive, and the Executive shall accept, a salary of $135,000.00 per annum, subject to adjustment in accordance with Section 3.02 hereof (as so adjusted, the "Annual Salary"), payable in accordance with the payroll policies of the Company 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 (the "Payroll Policies"). In addition to the Annual Salary, Executive shall be eligible (no less frequently than annually beginning for the fiscal year ending June 30, 2002) for such discretionary bonuses, if any, as awarded by the President and Chief Executive Officer of the Company and approved by the Board. The 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 the Executive payable to such beneficiary or beneficiaries as the Executive may designate in an amount equal to three times the amount of the Annual Salary. SECTION 3.02. ANNUAL REVIEW. Commencing with the first renewal period, if any, of the term of this Agreement and annually thereafter during the term of this Agreement, the Executive's performance shall be reviewed and evaluated by her immediate supervisor and the Annual Salary shall be reviewed by the Board and may be adjusted (but in no event to an amount less than the Annual Salary then in effect) for the then upcoming year, if the Board, in its sole discretion, determines that such adjustment is warranted. SECTION 3.03. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. The Executive shall be entitled during the term of this Agreement, if and to the extent eligible, to participate in any health, hospitalization or disability insurance plan, pension plan or similar benefit plan of the Company, which may be available to senior executives of the 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 the Company for senior executives of the Company generally, the Company shall pay or reimburse the Executive for all reasonable business expenses actually incurred or paid by the Executive during the term of this Agreement in the performance of the Executive of services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as the Company may reasonably require. SECTION 3.05. AUTOMOBILE. The 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. 2 SECTION 3.06. VACATION. The Executive shall be entitled to four (4) weeks of paid vacation per year during the term of this Agreement, which she may accumulate up to eight (8) weeks, to be taken at a time or times which do not unreasonably interfere with her duties hereunder. SECTION 3.07. STOCK OPTIONS. Parent shall grant stock options to Executive, pursuant to the terms of the Stock Option Agreement substantially in the form of Exhibit A, to purchase shares of Parent common stock in an amount to be determined by the President and Chief Executive Officer of the Company and approved by the board of directors of Parent. The stock options granted by Parent to Executive shall be part of the total available pool of options, which shall equal 10% of the fully diluted common stock of Parent as of the Effective Time. The exercise price of the stock options shall be the price per share that subscribing stockholders pay to Parent as of the Effective Time in connection with their subscription of Parent common stock. IV. TERMINATION SECTION 4.01. TERMINATION UPON DEATH. If the Executive dies during the term of this Agreement, this Agreement shall terminate as of the date of her death. SECTION 4.02. TERMINATION UPON DISABILITY. If during the term of this Agreement, the Executive becomes physically or mentally disabled, whether totally or partially, so that she is unable substantially to perform the services required by this Agreement to be rendered by her for (i) a period of three consecutive months or (ii) for shorter periods aggregating three months during any 12-month period, the Company may at any time after the last day of the three consecutive months of disability or the day on which the shorter periods of disability equal an aggregate of three months, by thirty (30) days' written notice to the Executive, terminate this Agreement and the Executive's employment hereunder. Nothing in this Section 4.02 shall be deemed to extend the term of this Agreement or of the Executive's employment hereunder. SECTION 4.03. TERMINATION FOR CAUSE. If the Board determines that the Executive has neglected her duties hereunder, has performed such duties negligently, is guilty of misconduct in connection with performance of her duties hereunder, or has breached in any material respect any affirmative or negative covenant or undertaking hereunder, or if the Executive is convicted of or pleads guilty or no contest to any serious crime or offense, commits any willful act or omission which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries, or fails or refuses to comply with the oral or written policies or directives of the Company's Board or President and Chief Executive Officer of the Company (unless such instructions represent an illegal act) (collectively, hereinafter referred to as "Cause"), the Company may at any time thereafter (i) by written notice to the Executive, terminate the Executive's right to enter the Company's premises, and such termination shall be effective as of the date notice is given and (ii) by thirty (30) days' written notice to the Executive, terminate this Agreement and the term of the Executive's employment hereunder, and the Executive shall have no right to receive any monetary compensation or benefit hereunder in respect of any period after the effective date of such notice. 3 SECTION 4.04. TERMINATION IN DISCRETION OF THE COMPANY. The Company may, at any time, (i) terminate the Executive's right to enter the premises of the Company by giving notice of such termination, and such notice shall be effective as of the date notice is given and (ii) by thirty (30) days' written notice to the Executive terminate this Agreement and the term of the Executive's employment hereunder, and the 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 4.06 hereof. SECTION 4.05. TERMINATION BY THE EXECUTIVE. The Executive shall have the right to terminate this Agreement upon sixty (60) days' written notice to the Company and, upon such termination, the Executive shall not have the right to receive any monetary compensation or benefit hereunder with respect to any period after the date specified in such notice. SECTION 4.06. COMPENSATION ON TERMINATION. (a) If the term of the Executive's employment hereunder is terminated pursuant to Section 4.01 hereof, the Company shall pay to the executors or administrators of the Executive's estate or the Executive's heirs or legatees (as the case may be) all compensation accrued and unpaid up to the date of the Executive's death. (b) If the term of the Executive's employment hereunder is terminated pursuant to Sections 4.02, 4.04 or 4.06(c) hereof, the Executive shall be entitled to receive all compensation accrued and unpaid up to the effective date of termination, plus additional compensation in an amount equal to twelve (12) months of compensation at the Annual Salary rate then in effect, paid in accordance with the Payroll Policies, less, in the case of termination pursuant to said Section 4.02, the amount which the Executive is entitled to receive under the terms of the Company's long-term disability insurance policy for key executives as and if in effect at the time of termination. Any payments made pursuant to this Section 4.06 shall be reduced by such amounts as are required by law to be withheld or deducted. In addition, the Company shall maintain, at the Company's expense, in full force and effect, for the Executive's continued benefit until the earlier of (x) twelve (12) months after the effective date of termination or (y) commencement of the Executive's benefits pursuant to full time employment with a new employer under such employer's standard benefits program, all life insurance, medical, health and accident, and disability plans or programs, in which the Executive was entitled to participate immediately prior to the effective date of termination; provided, that the Executive's continued participation is permissible under the general terms and provisions of such plans or programs and provided further, that the Company shall be entitled to amend or terminate any employee benefit plans which are applicable generally to the Company's employees. In the event that the Executive's participation in any such plan or program is prohibited, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans or programs. (c) Notwithstanding any provision herein to the contrary, if the Executive is terminated by Company without Cause, within twelve (12) months of a Change in Control (as defined herein) which occurs after the Effective Time, the Executive shall be entitled to the payments and benefits set forth in Section 4.06(b). For purposes hereof, a "Change in Control" 4 shall be deemed to have occurred if (i) any person, or any two or more persons acting as a group, and all affiliates of such person or persons (a "Group"), who prior to such time beneficially owned less than 50% of the then outstanding capital stock of the Company or Parent, shall acquire shares of the Company's or Parent's capital stock in one or more transactions or series of transactions,including by merger, and after such transaction or transactions such person or group and affiliates beneficially own 50% or more of the Company's or Parent's outstanding capital stock, or (ii) the Company or Parent shall sell all or substantially all of its assets to any Group which, immediately prior to the time of such transaction, beneficially owned less than 50% of the then outstanding capital stock of the Company or Parent. (d) The compensation rights provided for the Executive in this Section 4.06 shall be the Executive's sole and exclusive remedies in the event of a breach of this Agreement by the Company, and the Executive, the executors or administrators of the Executive's estate or the Executive's heirs or legatees, as the case may be, shall not be entitled to any other compensation, damages or relief. V. CERTAIN COVENANTS OF THE EXECUTIVE SECTION 5.01. COVENANTS AGAINST UNFAIR COMPETITION. The 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") and positron emission tomography ("PET") facilities, fixed-site MRI and PET 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 (the "Company Business"); (ii) the Company Business is national and international in scope; and (iii) the Executive's duties hereunder will bring her into close contact with much confidential information not readily available to the public, including without limitation, corporate, business and financial plans, marketing strategy, the result of the Company's efforts in the areas of product research, development and improvement, plans for future development and other matters. The Executive agrees that her obligations under this Section 5.01 shall be absolute and unconditional. In order, therefore, to induce the Company to enter into this Agreement, the Executive covenants as follows: (a) Non-Compete. During the term of this Agreement and for twelve (12) months after the termination of this Agreement (the "Restricted Period"), the Executive shall not anywhere in the world, directly or indirectly, (i) engage in the Company Business for her own account; (ii) enter the employment of, or render any services to, any person engaged in such activities; and (iii) become interested in any person engaged in the Company Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, employee, trustee, consultant or in any other relationship or capacity; provided, however, that the Executive may own, directly or indirectly, solely as an investment, 5% of securities of any entity which are traded on any national securities exchange if the Executive neither (x) is a controlling person of, or a member of a group which controls, such entity nor (y) owns, directly or indirectly, one or more of any class of securities of such entity. The parties acknowledge that in California and some states 5 post-employment non-compete clauses may be generally unenforceable, but that other states and jurisdictions permit such agreements. (b) Confidential Information. (i) For purposes of this Agreement, "Confidential Information" shall mean (i) all of the Company's financial statements and related financial data and (ii) any other trade secrets, proprietary information or other information relating to the Company Business, or of any customer or supplier of the Company or any of its affiliates, that has not been previously publicly released or widely disseminated to multiple parties in the same or substantially the same form by duly authorized representatives of the Company or any of its affiliates or known by the Executive prior to the commencement of the Executive's employment by the Company. By way of illustration, but not limitation, Confidential Information shall include any and all customer lists (whether or not current), agreements with customers (whether or not currently in effect or expired), standard forms of customer agreements, data concerning customers, data concerning customer service requirements, financial information concerning customers, agreements with equipment manufacturers and other suppliers, trade secrets, processes, ideas, inventions, improvements, know-how, techniques, drawings, designs, original writings, software programs, plans, proposals, marketing and sales plans, financial information concerning the Company and its affiliates, cost or pricing information, blueprints, specifications, promotional ideas, and all other concepts, information or ideas related to the present or potential business of the Company or any of its affiliates. (ii) The Executive agrees that, during and after employment by the Company, without limitation as to duration except as hereinafter expressly provided, she shall keep confidential and not (i) communicate or disclose to any person any Confidential Information, or (ii) use or exploit in any fashion any of such Confidential Information or permit the use or exploitation in any fashion of any such Confidential Information by any other person or entity; provided, however, that (a) the foregoing confidentiality restriction shall not apply in any particular circumstance in which the Executive is required to disclose particular Confidential Information pursuant to governmental process, as indicated in a written opinion of counsel to the Executive reasonably satisfactory to the Company which is delivered to the Company, and (b) the foregoing confidentiality and exploitation restrictions shall not apply to any particular Confidential Information if and to the extent that such information becomes generally known and available to the public otherwise than in connection with a disclosure or communication of such information by the Executive. The Executive acknowledges and agrees that all Confidential Information, and all copies thereof, are the sole and exclusive property of the Company. The Executive agrees that, on the date of her termination of employment, she shall have delivered to the Company all documents and materials in her possession or under her control which constitute Confidential Information, including all copies thereof, and no copies thereof shall be retained by the Executive. (c) Property of the Company. All correspondence, memoranda, notes, lists, records, computer tapes, discs and design and other document and data storage and retrieval 6 materials (and all copies, compilations and summaries thereof), and all other personal property, made or compiled by the Executive, in whole or in part and alone or with others, or in any way coming into her possession concerning the business or other affairs of the Company or any of its affiliates, shall be the property of the Company or any such affiliates, and no copies thereof shall be retained by the Executive after termination thereof for any reason. (d) Disclosure and Assignment of Rights. (i) The Executive shall promptly disclose and assign to the 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 the Executive in and to any and all ideas, inventions, discoveries, secret processes and methods and improvements, together with any and all patents that may be issued thereon in the United States and in all foreign countries, which the Executive may invent, develop or improve, or cause to be invented, developed or improved, during the term of this Agreement or, in the event that the Executive's employment is terminated pursuant to the provisions of Section 4.03 hereof, during the 12-month period commencing on the date of termination, which are (i) conceived and developed during normal working hours, and (ii) which are related to the scope of the Company's Business or are related to any work carried on by the Company or are related to any projects specifically assigned to the Executive. 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) The Executive shall disclose immediately to duly authorized representatives of the Company any ideas, inventions, discoveries, secret processes and methods and improvements covered by the provisions of clause (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 the Company and its affiliates or its nominee(s). (e) No Solicitation of Customers or Employees. As provided above in subparagraph (b)(i), the Executive acknowledges and agrees that the identity and location of the Company's customers and the positions, duties and terms of employment of the Company's and its subsidiaries' employees constitute Confidential Information of the Company. The Executive agrees that during any period that the Executive is receiving compensation from the Company pursuant to Section 4.06 hereof or for a period of twelve (12) months after the Executive's termination of employment, whichever is later, she shall not, directly or indirectly, solicit, entice, divert or otherwise contact or attempt to solicit, entice, divert or otherwise contact any customer or employee of the Company, for any provision of services which constitute Company Business. 7 SECTION 5.02. RIGHTS AND REMEDIES UPON BREACH. If the Executive breaches, or threatens to breach, in any material respect any of the provisions of Section 5.01 hereof (hereinafter referred to as the "Restrictive Covenants"), the Company shall, in addition to all its other rights hereunder and under applicable law and in equity, have the right and remedy, to have the Restrictive Covenants specifically enforced by any court having jurisdiction, including, without limitation, the granting of a preliminary injunction which may be granted without the necessity of proving damages or the posting of a bond or other security, it being acknowledged that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. In addition to and not in lieu of any other remedy that the Company may have pursuant to this Agreement or otherwise, in the event of any breach of any provision of Section 5.01 during the period during which the Executive is entitled to receive payments and benefits pursuant to Section 4.06, such period shall terminate as of the date of such breach and the Executive shall not thereafter be entitled to receive any salary or other payments under this Agreement, including, but not limited to, any stock options granted to the Executive. 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. SECTION 5.04. BLUE-PENCILING. The Company and the Executive agree and acknowledge that the duration, scope and geographic area of the Restrictive Covenants are fair, reasonable and necessary in order to protect the good will and other legitimate interests of the Company, that adequate consideration has been received by the Executive for such obligations, and that these obligations do not prevent the Executive from earning a livelihood. 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. SECTION 5.05. ENFORCEABILITY IN JURISDICTION. Notwithstanding Section 7.08, the parties hereto hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of their duration, geographic scope or otherwise, it is the intention of the parties that such determination not bar or in any way affect the Company's right to the relief provided herein in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants as to breaches of such Restrictive Covenants in such other jurisdiction, such Restrictive Covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. 8 VI. CERTAIN AGREEMENTS SECTION 6.01. CUSTOMERS, SUPPLIERS. The Executive does not have, and at any time during the term of this Agreement shall not have, any employment with or any direct or indirect interest in (as owner, partner, shareholder, employee, director, officer, agent, consultant or otherwise) any customer of or supplier to the Company. SECTION 6.02. CERTAIN ACTIVITIES. The Executive during the term of this Agreement shall not (i) give or agree to give, any gift or similar benefit of more than nominal value to any customer, supplier, or governmental employee or official or any other person who is or may be in a position to assist or hinder the Company in connection with any proposed transaction, which gift or similar benefit, if not given or continued in the future, might adversely affect the business or prospects of the Company, (ii) use any corporate or other funds for unlawful contributions, payments, gifts or entertainment, (iii) make any unlawful expenditures relating to political activity to government officials or others, (iv) establish or maintain any unlawful or unrecorded funds in violation of Section 30A of the Securities Exchange Act of 1934, as amended, and (v) accept or receive any unlawful contributions, payments, gifts, or expenditures. VII. MISCELLANEOUS SECTION 7.01. 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 faxed, or sent by certified, registered or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed, telexed or faxed, or if mailed, two 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 Facsimile No.: (949) 476-0137 (ii) If to Parent, addressed to it at: InSight Health Services Holdings Corp. c/o J.W. Childs Associates, L.P. One Federal Street, 21st Floor Boston, MA 02110 Attention: Edward D. Yun Facsimile No.: (617) 753-1101 with copies to: 9 The Halifax Group, L.L.C. 1133 Connecticut Avenue, N.W., Suite 700 Washington, D.C. 20036 Attention: David Dupree Facsimile No.: (202) 296-7133 Kaye Scholer LLP 425 Park Avenue New York, NY 10022 Attention: Stephen C. Koval, Esq. Facsimile No.: (212) 836-8689 (iii) If to Executive, to the address or facsimile set forth below her signature hereto. Any party hereto may, by notice to the other, change its address for receipt of notices hereunder. SECTION 7.02. 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 7.03. WAIVERS AND AMENDMENTS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by Company, Executive and Parent or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor shall any single or partial exercise 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 7.04. ASSIGNMENT. This Agreement is personal to the Executive, and the Executive's rights and obligations hereunder may not be assigned by the Executive. The 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(es), whether by merger, consolidation or otherwise; or (ii) to any wholly-owned subsidiary of the Company; provided that the Company shall remain liable for all of its obligations under this Agreement. SECTION 7.05. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. SECTION 7.06. 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. 10 SECTION 7.07. GENDER, NUMBER. Unless the context of this Agreement otherwise requires, words of any gender will be deemed to include each other gender and words using the singular or plural number will also include the plural or singular number, respectively. SECTION 7.08. GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, without regard to any conflicts of law principles thereof that would call for the application of the laws of any other jurisdiction. Subject to Section 7.10 below, any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of California, or if it has or can acquire jurisdiction, in the United States District Court for the Southern District of California, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world, whether within or without the State of California. SECTION 7.09. EFFECTIVE DATE. This Agreement shall be effective at the Effective Time (as defined in the Agreement and Plan of Merger, dated as of June 29, 2001, by and among Parent, JWCH Merger Corp. and the Company). Immediately prior to the Effective Time, the Executive's current employment agreement with the Company shall be terminated and be of no further force or effect, and Executive waives any and all rights she may have under such employment agreement, including any payments for severance or in respect of a change of control contained therein. SECTION 7.10. (a) RESOLUTION OF DISPUTES. The Executive and the Company mutually agree and understand that as an inducement for the Company to enter into this Agreement, the Executive and the 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 the Company may have against the Executive or that the Executive may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The only claims that are arbitrable are those that, in the absence of this arbitration provision, would have been justiciable under applicable state or federal law. The claims covered by this arbitration provision, include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination, retaliation or harassment (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except claims under an employee benefit or pension plan that either (i) specifies that its claims procedure shall culminate in an arbitration procedure different from this one, or (ii) is underwritten by a commercial insurer which decides the claims); and claims for violation of any federal, state, or other governmental law, statute, regulation or ordinance, except claims excluded in Section 7.10 (b) below. Except as otherwise provided in this arbitration provision, both the Company and the 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. 11 (b) CLAIMS EXCLUDED FROM ARBITRATION. Claims the Executive may have for workers' compensation or unemployment compensation benefits are not covered by this arbitration provision. Also not covered are claims by the 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 the Executive understands and agrees that the Company may seek and obtain relief from a court of competent jurisdiction. (c) ARBITRATION PROCEDURES. The Executive and the 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. 12 IN WITNESS WHEREOF, the parties have executed this Executive Employment Agreement as of the date first above written. COMPANY INSIGHT HEALTH SERVICES CORP. By: /s/ Steven T. Plochocki -------------------------------- Name:Steven T. Plochocki Title: President & CEO EXECUTIVE /s/ Cecilia A. Guastaferro ------------------------------------ Name: Cecilia A. Guastaferro Address and Facsimile Number: 14811 Alder Lane ------------------------------------ Tustin, CA 92780 ------------------------------------ ------------------------------------ ------------------------------------ INSIGHT HEALTH SERVICES HOLDINGS CORP. (solely for the purpose of Section 3.07) By: /s/ Edward D. Yun -------------------------------- Name:Edward D. Yun Title: President 13 EXHIBIT A STOCK OPTION AGREEMENT 14 STOCK OPTION AGREEMENT AGREEMENT entered into as of the ___ day of ________, 2001 by and between InSight Health Services Holdings Corp., a Delaware corporation (the "Company"), and the undersigned employee (the "Employee") of the Company or one of its subsidiaries. WHEREAS, the Company desires to grant the Employee a nonqualified stock option to acquire shares of the Company's common stock, $0.001 par value per share ("Common Stock"); and WHEREAS, the Employee desires to accept such option subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the Company and the Employee, intending to be legally bound, hereby agree as follows: 1. Grant of Option. As of the Effective Time (as defined in the Agreement and Plan of Merger, dated as of June 29, 2001, by and among the Company, JWCH Merger Corp. and InSight Health Services Corp.) (the "Grant Date"), the Company grants to the Employee a nonqualified stock option (the "Option") to purchase all (or any part) of _____________ shares of Common Stock (the "Shares") on the terms and conditions hereinafter set forth. This Option is not intended to be treated as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Exercise Price. The exercise price ("Exercise Price") for the Shares covered by the Option shall be $18.00* per share. 3. Vesting and Exercisability. Twenty percent (20%) of the total Option set forth in Section 1 shall be available for vesting each fiscal year during the Company's 2002-2006 fiscal years as follows: (A) twenty-five percent (25%) of the number of available Options for each such fiscal year shall vest and become exercisable upon the anniversary of the Grant Date in such fiscal year and (B) seventy-five percent (75%) of the number of available Options for each such fiscal year shall vest and become exercisable upon the Company's attainment of the performance goals set forth on Schedule I attached hereto and incorporated herein. In the event the Employee is employed by the Company or one of its subsidiaries at the time a Change in Control (as defined below) occurs, all of the Options (to the extent not already vested) which are to vest over time pursuant to clause (A) above shall vest immediately prior to the Change in Control. Notwithstanding the foregoing, to the extent any of the Options which may vest pursuant to clause (B) above do not vest in accordance with Schedule I by the eighth (8th) anniversary of the Grant Date, they shall be deemed to vest on such date. - ------------------ * Intended to be the subscription price for all stockholders who subscribe as of the Effective Time. Currently anticipated to be $18.00 per share. 15 4. Term of Options. (a) Each Option shall expire on the tenth anniversary of the Grant Date, but shall be subject to earlier termination as provided in subsections (b) and (c) below. (b) If the Employee is terminated for Cause (as defined in Schedule II hereto) or voluntarily terminates his employment with the Company at any time without Good Reason (as defined in Schedule II), the Option shall terminate on the date of such termination of employment, whether or not then fully vested and exercisable. (c) If the Employee is terminated by the Company without Cause, resigns for Good Reason, dies, or becomes Disabled (as defined in Schedule II) at any time during the term of his employment by the Company, any portion of the Option that is not then fully vested and exercisable shall terminate immediately, provided, however, that the board of directors of the Company (the "Board") shall have the discretion to vest any portion of such Employee's Options that have not yet become eligible to vest, and any such accelerated Options shall be subject to the same terms and conditions as other Options that have vested pursuant to Section 3. Any portion of the Option that is vested and exercisable shall terminate on the 120th day following such termination of employment. 5. Manner of Exercise of Option. (a) The Employee may exercise any Option that is fully vested and exercisable by giving written notice to the Company stating the number of Shares (which shall not be less than 100, unless the total Shares which are vested and exercisable at such time is less than 100) to be purchased and accompanied by payment in full of the Exercise Price for such Shares. Payment shall be either in cash or by a certified or bank cashier's check or checks payable to the Company. At any time when Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, as amended, the Option may also be exercised by means of a "broker cashless exercise" procedure approved in all respects in advance by the Board, in which a broker: (i) transmits the Exercise Price for any Shares to the Company in cash or acceptable cash equivalents, either (1) against the Employee's notice of exercise and the Company's confirmation that it will deliver to the broker stock certificates issued in the name of the broker for at least that number of Shares having a fair market value equal to the Exercise Price therefor, or (2) as the proceeds of a margin loan to the Employee; or (ii) agrees to pay the Exercise Price therefor to the Company in cash or acceptable cash equivalents upon the broker's receipt from the Company of stock certificates issued in the name of the broker for at least that number of Shares having a fair market value equal to the Exercise Price therefor. The Employee's written notice of exercise of the Option pursuant to a "cashless exercise" procedure must include the name and address of the broker involved, a clear description of the procedure, and such other information or undertaking by the broker as the Board shall reasonably require. If payment is to 16 be made in whole or in part in Shares underlying the Option, the Employee shall direct the Company to subtract from the number of Shares underlying the Option, that number of Shares having a fair market value (as determined in good faith by the Board) equal to the purchase price (or portion thereof) to be paid with such underlying Shares. Upon such purchase, delivery of a certificate for paid-up, non-assessable Shares shall be made at the principal office of the Company to the Employee (or the person entitled to exercise the Option pursuant to Section 7), not more than 10 days from the date of receipt of the notice by the Company. (b) The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Option. (c) Notwithstanding Section 5(a) of this Agreement, the Company may delay the issuance of Shares covered by the Option and the delivery of a certificate for such Shares until one of the following conditions is satisfied: (i) the Shares purchased pursuant to the Option are at the time of the issuance of such Shares effectively registered or qualified under applicable federal and state securities laws or (ii) such Shares are exempt from registration and qualification under applicable federal and state securities laws. 6. Administration. This Agreement shall be administered by the Board. The Board shall be authorized to interpret this Agreement and to make all other determinations necessary or advisable for the administration of this Agreement. The determinations of the Board in the administration of this Agreement, as described herein, shall be final and conclusive. The Secretary shall be authorized to implement this Agreement in accordance with its terms and to take such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes thereof. 7. Non-Transferability. The right of the Employee to exercise the Option (as and when vested) shall not be assignable or transferable by the Employee otherwise than by will or the laws of descent and distribution, and such Shares may be purchased during the lifetime of the Employee only by him (or his legal representative in the event that he is Disabled). Any other such transfer shall be null and void and without effect upon any attempted assignment or transfer, except as hereinabove provided, including without limitation any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition contrary to the provisions hereof, or levy of execution, attachment, trustee process or similar process, whether legal or equitable, upon the Option. 8. Representation Letter and Investment Legend. (a) In the event that for any reason the Shares to be issued upon exercise of a vested Option shall not be effectively registered under the Securities Act of 1933, as amended (the "1933 Act"), upon any date on which the Option is exercised, the Employee (or the person exercising the Option pursuant to Section 7) shall give a written 17 representation to the Company in the form attached hereto as Exhibit A, and the Company shall place the legend described on Exhibit A, upon any certificate for the Shares issued by reason of such exercise. (b) The Company shall be under no obligation to qualify Shares or to cause a registration statement or a post-effective amendment to any registration statement to be prepared for the purposes of covering the issue of Shares; provided, that the Company will use its reasonable best efforts to comply with any available exemption from registration and qualification of the Shares under applicable federal and state securities laws. 9. Adjustments upon Changes in Capitalization. (a) In the event that the outstanding shares of the Common Stock of the Company are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividends payable in capital stock, appropriate adjustment shall be made in the number and kind of Shares, and the Exercise Price therefor, as to which the Option, to the extent not theretofore exercised, shall be exercisable. In addition, unless otherwise determined by the Board in its sole discretion, in the case of a Change in Control (as hereinafter defined) of the Company, the purchaser(s) of the Company's assets or stock may, in his, her or its discretion, deliver to the Employee, to the extent that the right to purchase Shares under the Option has vested, the same kind of consideration (net of the Exercise Price for such Shares) that is delivered to the stockholders of the Company as a result of the Change in Control, or the Board may, in its sole determination, cancel the Option, to the extent not theretofore exercised, in exchange for consideration in cash or in kind, which consideration in either case shall be equal in value to the value of those shares of stock or other consideration the Employee would have received had the Option been exercised (to the extent it has vested and not been exercised) and no disposition of the shares acquired upon such exercise been made prior to the Change in Control, less the Exercise Price therefor. Upon receipt of such consideration by the Employee, the Option shall immediately terminate and be of no further force and effect, with respect to both vested and nonvested portions thereof. The value of the stock or other securities the Employee would have received if the Option had been exercised shall be determined in good faith by the Board. In addition, in the case of a Change in Control, the Board may, in its sole discretion, accelerate the vesting of all or any portion of the Option that would remain unvested after the application of the accelerated vesting on Schedule I and Section 3 hereto. A "Change in Control" shall be deemed to have occurred if (i) any person, or any two or more persons acting as a group, and all affiliates of such person or persons (a "Group") who prior to such time beneficially owned less than 50% of the then outstanding capital stock of the Company shall acquire shares of the Company's capital stock in one or more transactions or series of transactions, including by merger, and after such transaction or transactions such person or Group and affiliates beneficially own 50% or more of the Company's outstanding capital stock, or (ii) the Company shall sell all or substantially all of its assets to any 18 Group which, immediately prior to the time of such transaction, beneficially owned less than 50% of the then outstanding capital stock of the Company. (b) Upon dissolution or liquidation of the Company, the Option shall terminate, but the Employee shall have the right, immediately prior to such dissolution or liquidation, to exercise any then vested Options. (c) No fraction of a share of Common Stock shall be purchasable or deliverable upon the exercise of the Option, but in the event any adjustment hereunder of the number of shares covered by the Option shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares. 10. No Special Employment Rights. Nothing contained in this Agreement shall be construed or deemed by any person under any circumstances to bind the Company or any of its subsidiaries to continue the employment of the Employee for the period within which this Option may vest or for any other period. 11. Rights as a Stockholder. The Employee shall have no rights as a stockholder with respect to any Shares which may be purchased upon the vesting of this Option unless and until a certificate or certificates representing such Shares are duly issued and delivered to the Employee. Except as otherwise expressly provided herein, no adjustment shall be made for dividends or other rights for which the record date is prior to the date the stock certificate is issued. 12. Withholding Taxes. The Employee hereby agrees, as a condition to any exercise of the Option, to provide to the Company an amount sufficient to satisfy its obligation to withhold certain federal, state and local taxes arising by reason of such exercise (the "Withholding Amount"), if any, by (a) authorizing the Company to withhold the Withholding Amount from his cash compensation, or (b) remitting the Withholding Amount to the Company in cash; provided that, to the extent that the Withholding Amount is not provided by one or a combination of such methods, the Company may at its election withhold from the Shares delivered upon exercise of the Option that number of Shares having a fair market value (in the good faith judgment of the Board) equal to the Withholding Amount. 13. Execution of Stockholders' Agreement. The Employee acknowledges that he has previously executed and delivered the stockholders agreement by and among the Company and the stockholders of the Company named therein (the "Stockholders Agreement"). The Employee further agrees that this Agreement, the Option and all Shares acquired by him upon exercise of the Option will be subject to the terms and conditions of the Stockholders Agreement, as the same may have been amended or modified in accordance with its terms. 14. Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without regard to any conflicts of law principles thereof that would call for the application of the laws of any other jurisdiction. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Delaware, or if it has or can acquire jurisdiction, in the 19 United States District Court for the District of Delaware, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world, whether within or without the State of Delaware. * * * * * * * * * [Signatures on Following Page] 20 STOCK OPTION AGREEMENT Counterpart Signature Page IN WITNESS WHEREOF, the Company has caused this Agreement to be executed, by its officer thereunto duly authorized, and the Employee has executed this Agreement, all as of the day and year first above written. INSIGHT HEALTH SERVICES EMPLOYEE HOLDINGS CORP. BY: _________________________________________ BY: Name: _________________________________ Name: Address: Title: _________________________________________ _________________________________________ _________________________________________ Telecopier Number: _____________________ Social Security Number: _________________ 21 SCHEDULE I OPTION PERFORMANCE VESTING SCHEDULE (a) For each of the Company's fiscal years ending June 30 in the years 2002 through 2006, the portion of the total Option described in clause (B) of Section 3 of the Agreement shall vest and become exercisable if the Company achieves a return on equity ("ROE") for such year that equals or exceeds the following Base Targets:
Base Target 90% of Base Target ----------- ------------------ 2002 1.11 1.00 2003 2.40 2.16 2004 3.50 3.15 2005 5.00 4.50 2006 6.50 5.85
If the Company achieves more than 90% but less than 100% of the Base Target ROE in any fiscal year, the Options available to vest in that year shall vest in the ratio by which ROE achieved exceeds 90% of Base Target ROE for such fiscal year (i.e., for ROE of 90.5% of Base Target ROE, one-twentieth of the available Options would vest; for ROE of 96%, six-tenths of the available Options would vest). For purposes hereof, ROE for any fiscal year shall be calculated by the following formula: [(5.25 x EBITDA) - D+C]/TE where D = the Company's Consolidated Indebtedness at fiscal year-end (or at time of sale of the Company) C = the Company's Excess Cash at fiscal year-end (or at time of sale of the Company) TE = total equity invested as of the Effective Time (including the net pre-tax value of any options rolled over as of the Effective Time) EBITDA = EBITDA for such fiscal year If TE is increased at any time after the Effective Time and during the Company's fiscal years ending on June 30 in the years 2002 through 2006, the Board, in good faith, shall adjust the Base Targets. The Options available for vesting shall vest, if the Targets are met, upon completion of the audit for the Company and its subsidiaries' consolidated financial statements for such fiscal year. (b) Notwithstanding the foregoing, if in the fiscal year ending June 30, 2006, (1) the percentage of Options available to vest that do vest exceeds (2) the cumulative percentage of Options available to vest in the fiscal years ending June 30 in the years 2002-2005 that did vest in those years, the vesting percentage achieved in fiscal year ending June 30, 2006 shall be SCHEDULE I-1 carried back to the fiscal years ending June 30 in the years 2002-2005 and applied to the Options available to vest in those fiscal years. The number of vested Options for the fiscal years ending on June 30 in the years 2002 through 2005 shall be adjusted to reflect such higher percentage. (c) (1) In the event a Change in Control of the Company occurs before the end of the fiscal year ending June 30, 2006, the Base Target for the year in which the Change in Control occurs and the above formula will be modified as follows: - the Base Target for such year will be adjusted to be an amount determined by adding to the Base Target for the fiscal year immediately prior to the fiscal year in which the Change in Control occurs an amount equal to the product of (i) a fraction the numerator of which is the number of days that elapsed since the first day of the fiscal year in which the Change in Control occurs until the date of the consummation of the Change in Control and the denominator of which is 365 and (ii) the difference between the Base Target for the year in which the Change in Control occurs and the Base Target for the immediately preceding fiscal year. - the formula for determining ROE at the time of the Change in Control will be adjusted by using EBITDA for the 12 full calendar months immediately preceding the date of the Change in Control so that the multiple of EBITDA used will be the greater of 5.25 and the multiple used in determining the Company's enterprise value in the Change in Control. (2) The percentage of Options that vest in accordance with the formula as so modified will then be applied to fiscal years preceding and following the year in which the Change in Control occurs and the number of vested Options shall be adjusted to reflect such percentage; provided that, if the cumulative percentage of Options that vested in the fiscal years preceding the Change in Control exceeds the percentage that vest in the fiscal year of the Change in Control pursuant to the modified formula, the cumulative percentage of Options that vested prior to the Change in Control will instead be applied to the fiscal years that follow the Change in Control. (d) Notwithstanding the foregoing, in the event J.W. Childs Equity Partners II, L.P., Halifax Capital Partners, L.P. and their respective affiliates each receive a net cash return on their total investment in the Company resulting (i) in an internal rate of return of at least 35% on their total investment in the Company and (ii) in an amount of cash equal to at least three times their respective total investment in the Company, then one-third of the total Options described in clause (B) of Section 3 of the Agreement (i.e., 25% of the total Option set forth in Section 1 of the Agreement) shall vest and become exercisable. This vesting provision is not intended to be additive to the preceding provisions, but is intended to be in the alternative. For purposes of this Schedule I, the following terms have the following meanings: "Consolidated Indebtedness" shall mean, as of any date, the aggregate amount outstanding, on a consolidated basis, of (a) all obligations of the Company or its subsidiaries for borrowed money, (b) all obligations of the Company or its subsidiaries evidenced by bonds, debentures, notes or other similar instruments or upon which interest charges are customarily paid, (c) all obligations of the Company or its subsidiaries for the deferred purchase price of property or services, except current accounts payable arising in the ordinary course of business SCHEDULE I-2 and not overdue beyond such period as is commercially reasonable for the Company or its subsidiaries' business, (d) all obligations of the Company or its subsidiaries under conditional sale or other title retention agreements relating to property purchased by such Person and all capitalized lease obligations, (e) all payment obligations of the Company or its subsidiaries on or for currency protection agreements, (f) all obligations of the Company or its subsidiaries as an account party under any letter of credit (excluding those supporting trade payables), (g) all obligations of any third party secured by property or assets of the Company or its subsidiaries (regardless of whether or not such Person is liable for repayment of such obligations) and (h) all guarantees of the Company or its subsidiaries. "EBITDA" shall mean consolidated earnings of the Company and its subsidiaries, including equity in the earnings from non-consolidated subsidiaries, before interest, taxes, depreciation, amortization and the management fees paid to J.W. Childs Associates, L.P. and The Halifax Group, L.L.C. or any of their respective affiliates and after deduction of all operating expenses, minority interest expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied, as reflected in the Company's consolidated financial statements. For purposes of calculating EBITDA, upon the Company making an acquisition or disposition of any assets or business, the Board, in good faith, shall adjust EBITDA for any fiscal year to include or exclude on a pro forma basis, as applicable, the EBITDA for such assets or business for the period of time the assets or business are not owned by the Company for the fiscal year in which the assets or business are acquired or sold. "Excess Cash" shall mean cash in excess of the Company and its subsidiaries' operating needs, in the good faith judgment of the Board. SCHEDULE I-3 SCHEDULE II Definitions Applicable to Stock Option Agreement 1. "Cause," with respect to the Employee, shall have the meaning attributed to it under the executed written employment agreement between the Employee and the Company (or a subsidiary thereof) or, in the absence of such employment agreement, "Cause" shall mean the occurrence of any of the following during the term of the Employee's employment with the Company (or a subsidiary thereof): (a) the Employee has performed his/her duties negligently; (b) the Employee is guilty of misconduct in connection with the performance of the Employee's duties; (c) the Employee has committed any serious crime or offense; (d) the Employee has failed or refused to comply with the oral or written policies or directives of the Board of Directors; or (e) the Employee has breached any provision or covenant contained in this Agreement. 2. "Disabled," with respect to the Employee, shall have the meaning attributed to it under the executed written employment agreement between the Employee and the Company (or a subsidiary thereof) or, in the absence of such employment agreement, the Employee shall be deemed to have become "Disabled" if, during the term of the Employee's employment with the Company (or a subsidiary thereof), the Employee shall become physically or mentally disabled, whether totally or partially, either permanently or so that the Employee, in the good faith judgment of the Board, is unable substantially and competently to perform his duties on behalf of the Company (or a subsidiary thereof) for a period of 90 consecutive days or for 90 days during any six month period during the said term of employment. In order to assist the Board in making that determination, the Employee shall, as reasonably requested by the Board, (i) make himself available for medical examinations by one or more physicians chosen by the Board and (ii) grant to the Board and any such physicians access to all relevant medical information concerning him, arrange to furnish copies of his medical records to the Board and use his best efforts to cause his own physicians to be available to discuss his health with the Board. 3. "Good Reason," with respect to the Employee, shall have the meaning attributed to it under the executed written employment agreement between the Employee and the Company (or a subsidiary thereof) or, in the absence of such employment agreement, "Good Reason" shall be deemed to have occurred if, other than for Cause, any of the following has occurred during the term of the Employee's employment with the Company (or a subsidiary thereof): (a) the Employee's base salary has been reduced, other than in connection with a reduction of executive compensation imposed by the Board in response SCHEDULE II-1 to negative financial results or other adverse circumstances affecting the Company or its subsidiaries; or (b) the Company has reduced or reassigned, in any material respect, the duties of the Employee as an employee of the Company (or a subsidiary thereof) and such event has not been rescinded within 10 business days after the Employee notifies the Company (or a subsidiary thereof) in writing that he objects thereto. 4. "Person" shall mean an individual, corporation, partnership, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof, or any other entity. SCHEDULE 11-3 EXHIBIT A TO STOCK OPTION AGREEMENT Gentlemen: In connection with the purchase by me of ___________________ shares of common stock, $0.001 par value per share, of InSight Health Services Holdings Corp., a Delaware corporation (the "Company") under the nonqualified stock option granted to me pursuant to that certain Stock Option Agreement dated as of June ____, 2001 (the "Option Agreement"), I hereby acknowledge that I have been informed as follows: EXHIBIT A-1 1. The shares of common stock of the Company to be issued to me upon exercise of said option have not been registered under the Securities Act of 1933, as amended (the "Act"), and accordingly, must be held indefinitely unless such shares are subsequently registered under the Act, or an exemption from such registration is available. 2. Routine sales of securities made in reliance upon Rule 144 under the Act can be made only after the holding period and in limited amounts in accordance with the terms and conditions provided by that Rule, and with respect to which that Rule is not applicable, registration or compliance with some other exemption under the Act will be required. 3. The Company is under no obligation to me to register the shares or to comply with any such exemptions under the Act, other than as set forth in the Stockholders' Agreement referenced and defined in paragraph 13 of the Option Agreement (the "Stockholders Agreement"). 4. The availability of Rule 144 is dependent upon adequate current public information with respect to the Company being available and, at the time that I may desire to make a sale pursuant to the Rule, the Company may neither wish nor be able to comply with such requirement. 5. The shares of common stock of the Company to be issued to me upon the exercise of said option are subject to the terms and conditions, including restrictions on transfer, of the Stockholders Agreement. In consideration of the issuance of certificates for the shares to me, I hereby represent and warrant that I am acquiring such shares for my own account for investment, and that I will not sell, pledge, hypothecate or otherwise transfer such shares in the absence of an effective registration statement covering the same, except as permitted by an applicable exemption under the Act. In view of this representation and warranty, I agree that there may be affixed to the certificates for the shares to be issued to me, and to all certificates issued hereafter representing such shares (until in the opinion of counsel, which opinion must be reasonably satisfactory in form and substance to counsel for the Company, it is no longer necessary or required) a legend as follows: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be sold, transferred, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under the Act or an opinion of counsel satisfactory to the Company and its counsel that such registration is not required." "The securities represented by this certificate are subject to the terms and conditions, including restrictions on transfer, of a Stockholders' Agreement among the Company and its stockholders dated as of ____________, as amended from time to time, a copy of which is on file at the principal office of the Company." I further agree that the Company may place a stop order with its transfer agent, prohibiting the transfer of such shares, so long as the legend remains on the certificates representing the shares. I hereby represent and warrant that: My financial situation is such that I can afford to bear the economic risk of holding the shares issued to me upon exercise of said option for an indefinite period of time, I have no need for liquidity with respect to my investment and have adequate means to provide for my current needs and personal contingencies, and can afford to suffer the complete loss of my investment in such shares. (a) I am an "accredited investor" within the meaning of Rule 501 under the Act and I, either alone or with my purchaser representative (as such term is defined in Rule 501 under the Act) have such knowledge and experience in financial and business matters that I am capable of evaluating the merits and risks of my investment in the shares issued to me upon exercise of said option. (b) I have been afforded the opportunity to ask questions of, and to receive answers from, the Company and its representatives concerning the shares issued to me upon exercise of said option and to obtain any additional information I have deemed necessary. (c) I have a high degree of familiarity with the business, operations, financial condition and prospects of the Company. Very truly yours, ------------------------- [Employee] 3 EX-23.1 11 y55701a1ex23-1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP Orange County, California March 19, 2002 EX-25.1 12 y55701a1ex25-1.txt FORM T-1 EXHIBIT 25.1 FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305 (b)(2) [ ] ----------------------- STATE STREET BANK AND TRUST COMPANY, N.A. (Exact name of trustee as specified in its charter) UNITED STATES 13-3191724 (Jurisdiction of incorporation or organization (I.R.S. Employer if not a U.S. national bank) Identification No.) 61 BROADWAY, 15TH FLOOR, NEW YORK, NEW YORK 10006 (Address of principal executive offices) (Zip code) ----------------------- INSIGHT HEALTH SERVICES CORP. (Exact name of obligor as specified in its charter) DELAWARE 33-0702770 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4400 MACARTHUR BLVD., NEWPORT BEACH, CA 92660 (Address of principal executive offices) (Zip code) 2 TABLE OF ADDITIONAL OBLIGORS
STATE OR OTHER JURISDICTION OF INCORPORATION OR I.R.S. EMPLOYER EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER ORGANIZATION IDENTIFICATION NO. - ------------------------------------------------- ------------ ------------------ InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Radiosurgery Centers, Inc. Delaware 33-0522445 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Diagnostic Solutions Corp. Delaware 75-2565249 Wilkes-Barre Imaging, L.L.C. Pennsylvania 52-2238781
The address, including zip code, of the principal executive offices of each of the additional obligors are as follows:
OBLIGOR ADDRESS ZIP CODE - ------- ------- -------- InSight Health Services Holdings Corp. c/o J.W. Childs Associates, L.P. 021999 111 Huntington Avenue, Suite 2900 Boston, Massachusetts InSight Health Corp. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Signal Medical Services, Inc. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Open MRI, Inc. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd.
3
OBLIGOR ADDRESS ZIP CODE - ------- ------- -------- Newport Beach, California
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OBLIGOR ADDRESS ZIP CODE - ------- ------- -------- Maxum Health Corp. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Radiosurgery Centers, Inc. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Maxum Health Services Corp. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California MRI Associates, L.P. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Maxum Health Services of North Texas, Inc. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Maxum Health Services of Dallas, Inc. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California NDDC, Inc. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Diagnostic Solutions Corp. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California Wilkes-Barre Imaging, L.L.C. c/o InSight Health Services Corp. 92660 4400 MacArthur Blvd. Newport Beach, California
5 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 (Title of the indenture securities) 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Office of the Comptroller of the Currency Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Bank and Trust Company. (See Notes). 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. Items 1 through 5 below were filed with and are incorporated by reference to the Form T-1 in Registration Statement No. 333-53759 filed by Columbus McKinnon Corporation effective July 1, 1998: 1. Copy of the articles of association of the trustee. 2. Copy of the certificate of authority of the trustee to commence business. 3. Copy of the authorization of the trustee to exercise corporate trust powers. 6 4. Copy of the existing by-laws of the trustee. 5. The consent of trustee as required by Section 321(b) of the Act. 6. Copy of the latest report of condition of the trustee filed pursuant to law or the requirements of its supervising or examining authority filed as Exhibit A. NOTES In answering any item of this Statement of Eligibility that relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. 7 SIGNATURE Pursuant to the requirements of the Act, the Trustee, State Street Bank and Trust Company, N.A., a corporation organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 22 day of March, 2002. STATE STREET BANK AND TRUST COMPANY, N.A. By: /s/ Cheryl Clarke ___________________________ Name: Cheryl Clarke Title: Assistant Secretary 8 Exhibit A State Street Ban and Trust Company, National Association 61 BROADWAY FFIEC 041 NEW YORK CITY , NY 10006 Consolidated Report of Condition FDIC Certificate Number: 24938 for September 30, 2001 Web Address as of: 11/21/2001 http://www.statestreet.com THE WEB ADDRESS IS AS PROVIDED BY THE INSTITUTION. PLEASE CONTACT THE INSTITUTION DIRECTLY WITH ANY QUESTIONS REGARDING THE DATA OR THE WEB ADDRESS. Information Page | Search Consolidated Report of Condition for Insured Commercial and State - Chartered Savings Banks for September 30, 2001 All Schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC -- Balance Sheet
DOLLAR AMOUNTS IN THOUSANDS ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A) a. Noninterest-bearing balances and currency and coin(1) RCON 0081 19,233 b. Interest-bearing balances(2) RCON 0071 0 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A) RCON 1754 0 b. Available-for-sale securities (from Schedule RC-B, column D) RCON 1773 0 3. Federal funds sold and securities purchased under agreements to resell RCON 1350 0 4. Loans and lease financing receivables (from Schedule RC-C): a. LOANS AND LEASES HELD FOR SALE RCON 5369 0
Exhibit A b. LOANS AND LEASES, NET OF UNEARNED INCOME RCON B528 0 c. LESS: Allowance for loan and lease losses RCON 3123 0 d. LOANS AND LEASES, NET OF UNEARNED INCOME AND ALLOWANCE (item 4.b minus 4.c) RCON B529 0 5. Trading assets (from Schedule RC-D) RCON 3545 0 6. Premises and fixed assets (including capitalized leases) RCON 2145 581 7. Other real estate owned (from Schedule RC-M) RCON 2150 0 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) RCON 2130 0 9. Customers' liability to this bank on acceptances outstanding RCON 2155 0 10. Intangible assets: a. GOODWILL RCON 3163 0 b. OTHER INTANGIBLE ASSETS (from Schedule RC-M) RCON 0426 0 11. Other assets (from Schedule RC-F) RCON 2160 1,441 12. Total assets (sum of items 1 through 11) RCON 2170 21,255 LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) RCON 2200 0 (1) Noninterest-bearing(3) RCON 6631 0 (2) Interest-bearing RCON 6636 0 b. Not applicable 14. Federal funds purchased and securities sold under agreements to repurchase RCON 2800 0 15. Trading liabilities (from Schedule RC-D) RCON 3548 0 16. OTHER BORROWED MONEY (includes mortgage indebtedness and obligations under capitalized leases) (from Schedule RC-M) RCON 3190 0 17. Not applicable 18. Bank's liability on acceptances executed and outstanding RCON 2920 0 19. Subordinated notes and debentures(4) RCON 3200 0 20. Other liabilities (from Schedule RC-G) RCON 2930 7,864
Exhibit A 21. Total liabilities (sum of items 13 through 20) RCON 2948 7,864 22. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES RCON 3000 0 EQUITY CAPITAL 23. Perpetual preferred stock and related surplus RCON 3838 0 24. Common stock RCON 3230 500 25. Surplus (exclude all surplus related to preferred stock) RCON 3839 2,000 26. a. Retained earnings RCON 3632 10,891 b. ACCUMULATED OTHER COMPREHENSIVE INCOME(5) RCON B530 0 27. OTHER EQUITY CAPITAL COMPONENTS(6) RCON A130 0 28. Total equity capital (sum of items 23 through 27) RCON 3210 13,391 29. Total liabilities, minority interest, and equity capital (sum of items 21, 22, and 28) RCON 3300 21,255 Memorandum TO BE REPORTED WITH THE MARCH REPORT OF CONDITION. 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external auditors as of any date during 2000 RCON 6724 N/A
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3 = ATTESTATION ON BANK MANAGEMENT'S ASSERTION ON THE EFFECTIVENESS OF THE BANK'S INTERNAL CONTROL OVER FINANCIAL REPORTING BY A CERTIFIED PUBLIC ACCOUNTING FIRM 4 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 5 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 6 = Review of the bank's financial statements by external auditors 7 = Compilation of the bank's financial statements by external auditors 8 = Other audit procedures (excluding tax preparation work) 9 = No external audit work - --------------------------- 1 Includes cash items in process of collection and unposted debits. 2 Includes time certificates of deposit not held for trading. 3 Includes total demand deposits and noninterest-bearing time and savings deposits. 4 Includes limited-life preferred stock and related surplus. 5 Includes net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, and minimum pension liability adjustments. 6 Includes treasury stock and unearned Employee Stock Ownership Plan shares. EX-99.1 13 y55701a1ex99-1.txt FORM OF LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL TO TENDER FOR EXCHANGE 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011 OF INSIGHT HEALTH SERVICES CORP. ------------------------------------------------------ PURSUANT TO THE PROSPECTUS, DATED , 2002 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [APRIL] , 2002, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OUTSTANDING NOTES (AS DEFINED HEREIN) MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS If you desire to accept the Exchange Offer, this Letter of Transmittal must be completed, signed and submitted to the Exchange Agent at the address set forth below, provided, however, if you hold Outstanding Notes in book-entry form, you must follow the procedures of The Depository Trust Company's Automated Tender Offer Program. STATE STREET BANK AND TRUST COMPANY, N.A. By Hand, Overnight Delivery or Registered/Certified Mail: c/o State Street Bank and Trust Company 2 Avenue de Lafayette Boston, MA 02111 Attention: Ralph Jones By Facsimile: (617) 662-1452 Confirm by Telephone: (617) 662-1548 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. HOLDERS (AS DEFINED HEREIN) WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES FOR THEIR OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OUTSTANDING NOTES TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE. All capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Prospectus. By execution hereof, the undersigned acknowledges receipt of the Prospectus (the "Prospectus"), dated , 2002, of InSight Health Services Corp., a Delaware corporation ("InSight"), which, together with this Letter of Transmittal and the instructions hereto (the "Letter of Transmittal"), constitute InSight's offer (the "Exchange Offer") to exchange $1,000 in principal amount of its Registered 9 7/8% Series B Senior Subordinated Notes due 2011 (the "Exchange Notes") for each $1,000 in principal amount of outstanding 9 7/8% Senior Subordinated Notes due 2011 (the "Outstanding Notes" and, together with the Exchange Notes, the "Notes"), of which $225.0 million aggregate principal amount was outstanding on the date of the Prospectus. The terms of the Exchange Notes are identical in all material respects (including principal amount, interest rate and maturity) to the terms of the Outstanding Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and, therefore, do not bear legends restricting the transfer thereof. InSight reserves the right, at any time or from time to time, to extend the Exchange Offer at its sole discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. InSight shall notify the Holders of the Outstanding Notes of any extension by means of a press release or other public announcement prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter of Transmittal is to be used by Holders of Outstanding Notes if: - a certificate representing Outstanding Notes is to be physically delivered to the Exchange Agent along with this Letter of Transmittal by Holders; or - tender of Outstanding Notes is to be made by the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1 to this Letter of Transmittal. If delivery of the Outstanding Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer -- Procedures for Tendering" section of the Prospectus by any financial institution that is a participant in Book-Entry Transfer Facility whose name appears on a security position listing as the owner of the Outstanding Notes, this Letter of Transmittal need not be manually executed; provided, however, that tenders of Outstanding Notes must be effected by sending electronic instructions to the Book-Entry Transfer Facility through the Book-Entry Transfer Facility's communication system in accordance with the procedures mandated by the Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP"). To tender Outstanding Notes through ATOP, the electronic instructions sent to the Book-Entry Transfer Facility and transmitted by the Book-Entry Transfer Facility to the Exchange Agent must reflect that the participant acknowledges its receipt of and agrees to be bound by this Letter of Transmittal. DELIVERY OF DOCUMENTATION TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The term "Holder" with respect to the Exchange Offer means any person: - in whose name Outstanding Notes are registered on the books of InSight or any other person who has obtained a properly completed bond power, as applicable, from the registered holder; or - whose Outstanding Notes are held of record by the Book-Entry Transfer Facility (or its nominee), whose name appears on a security position listing as the owner of Outstanding Notes (and is a participant in the Book-Entry Transfer Facility) and who desires to deliver such Outstanding Notes by book-entry transfer at the Book-Entry Transfer Facility. ------------------------------------------------------ The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. HOLDERS (OTHER THAN HOLDERS OF OUTSTANDING NOTES IN BOOK-ENTRY FORM) WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OUTSTANDING NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY. HOLDERS OF OUTSTANDING NOTES IN BOOK-ENTRY FORM WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OUTSTANDING NOTES MUST SEND ELECTRONIC INSTRUCTIONS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER FACILITY'S ATOP PROCEDURES, INCLUDING SUCH HOLDERS' ACKNOWLEDGMENT OF ITS RECEIPT OF, AND AGREEMENT TO BE BOUND BY, THIS LETTER OF TRANSMITTAL. 2 Ladies and Gentlemen: The undersigned hereby tenders to InSight the aggregate principal amount of Outstanding Notes indicated in this Letter of Transmittal, upon the terms and subject to the conditions set forth in the Prospectus, dated , 2002 (the "Prospectus"), receipt of which is hereby acknowledged, and in this Letter of Transmittal. Subject to, and effective upon, the acceptance for exchange of the Outstanding Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, InSight all right, title and interest in and to such Outstanding Notes as are being tendered hereby and hereby irrevocably constitutes and appoints the Exchange Agent as its agent and attorney-in-fact with respect to such Outstanding Notes (with full knowledge that the Exchange Agent acts as agent of InSight for the Outstanding Notes and the Exchange Notes), with full power of substitution (such power of attorney being an irrevocable power coupled with an interest), to: - deliver such Outstanding Notes in registered certificated form, or transfer ownership of such Outstanding Notes through book-entry transfer at the Book-Entry Transfer Facility, to or upon the order of InSight, upon receipt by the Exchange Agent, as the undersigned's agent, of the same aggregate principal amount of Exchange Notes; and - present such Outstanding Notes for transfer on the books of InSight and receive, for the account of InSight, all benefits and otherwise exercise, for the account of InSight, all rights of beneficial ownership of the Outstanding Notes tendered hereby in accordance with the terms of the Exchange Offer. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Outstanding Notes tendered hereby and that InSight will acquire good, marketable and unencumbered title thereto, free and clear of all security interests, liens, restrictions, charges, encumbrances, conditional sale agreements or other obligations relating to their sale or transfer, and not subject to any adverse claim when the same are accepted by InSight. The undersigned also represents and warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or InSight to be necessary or desirable to complete the sale, exchange, assignment and transfer of tendered Outstanding Notes. The undersigned also acknowledges that this Exchange Offer is being made based upon InSight's understanding of an interpretation by the staff of the Securities and Exchange Commission (the "SEC") as set forth in non-action letters issued to third parties unrelated to InSight, including Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5, 1991) and Shearman & Sterling (available July 2, 1993) (the "SEC No-Action Letters"), that the Exchange Notes issued in exchange for the Outstanding Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by a Holder (other than a broker-dealer who acquires such Exchange Notes directly from InSight for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or any such Holder that is an "affiliate" of InSight or of any of the guarantors under the indenture relating to the Notes (the "Guarantors") within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such Holder's business and such Holder is not engaged in, and does not intend to engage in, a distribution of such Exchange Notes and has no arrangement with any person to participate in the distribution of such Exchange Notes. The SEC has not, however, considered the Exchange Offer in the context of a no-action letter, and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in the SEC No-Action Letters. The undersigned hereby further represents that: - the Exchange Notes acquired in exchange for Outstanding Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the undersigned, - neither the undersigned nor any such other person has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes and neither the holder of such Outstanding Notes nor any such person is engaging in, or intends to engage in, the distribution of such Exchange Notes, - except as indicated herein, neither the undersigned nor any such other person is an "affiliate" of InSight within the meaning of Rule 405 under the Securities Act or, if such holder or any such other person is an affiliate of 3 InSight, that such holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. The undersigned has read and agrees to all of the terms of the Exchange Offer as described in the Prospectus and herein, and - neither the undersigned nor any such other person is acting on behalf of any person or entity that could not truthfully make these representations. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Outstanding Notes, it represents that the Outstanding Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making or other trading activities (a "Participating Broker-Dealer") and acknowledges that it has not entered into an arrangement or understanding with InSight or any "affiliate" of InSight within the meaning of Rule 405 under the Securities Act to distribute the Exchange Notes to be received in the Exchange Offer and that it will deliver the Prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering the Prospectus, the undersigned or such beneficial owner will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. InSight has agreed that, subject to the provisions of the Registration Rights Agreement, dated as of October 30, 2001, by and among InSight, InSight Health Services Holdings Corp., the Subsidiary Guarantors named therein, Banc of America Securities LLC and First Union Securities, Inc., the Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes acquired by such Participating Broker-Dealer for its own account as a result of market-making or other trading activities, for a period ending 90 days after the Expiration Date or, if earlier, when all such Exchange Notes have been disposed of by such Participating Broker-Dealer. In that regard, each Participating Broker-Dealer by tendering such Outstanding Notes and executing this Letter of Transmittal, agrees that, upon receipt of notice from InSight of the occurrence of any event or the discovery of any fact which makes any statement contained or incorporated by reference in the Prospectus untrue in any material respect or which causes the Prospectus to omit to state a material fact necessary in order to make the statements contained or incorporated by reference therein, in light of the circumstances under which they were made, not misleading, such Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant to the Prospectus until InSight has amended or supplemented the Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to the Participating Broker-Dealer or InSight has given notice that the sale of the Exchange Notes may be resumed, as the case may be. If InSight gives such notice to suspend the sale of the Exchange Notes, it shall extend the 90-day period referred to above during which Participating Broker-Dealers are entitled to use the Prospectus in connection with the resale of Exchange Notes by the number of days during the period from and including the date of the giving of such notice to and including the date when Participating Broker-Dealers shall have received copies of the supplemented or amended Prospectus necessary to permit resales of the Exchange Notes or to and including the date on which InSight has given notice that the sale of Exchange Notes may be resumed, as the case may be. The undersigned will, upon request, execute and deliver any additional documents deemed by InSight or the Exchange Agent to be necessary or desirable to complete the sale, assignment and transfer of the Outstanding Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter of Transmittal and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer -- Withdrawal of Tenders" section of the Prospectus. For purposes of the Exchange Offer, InSight shall be deemed to have accepted validly tendered Outstanding Notes when InSight has given oral or written notice thereof to the Exchange Agent. If any tendered Outstanding Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Outstanding Notes will be returned (except as noted herein with respect to tenders through the Book-Entry Transfer Facility), without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under "Special Issuance Instructions" as promptly as practicable after the Expiration Date. The undersigned understands that tender of the Outstanding Notes pursuant to any one of the procedures described under "The Exchange Offer -- Procedures for Tendering " in the Prospectus and in the instructions hereto 4 will constitute a binding agreement between the undersigned and InSight in accordance with the terms and subject to the conditions of the Exchange Offer. The undersigned recognizes that, under certain circumstances set forth in the Prospectus under "The Exchange Offer -- Conditions," InSight may not be required to accept for exchange any of the Outstanding Notes tendered. Outstanding Notes not accepted for exchange or withdrawn will be returned to the undersigned at the address set forth below unless otherwise indicated herein under "Special Delivery Instructions." Unless otherwise indicated herein under "Special Issuance Instructions," please deliver the Exchange Notes (and, if applicable, substitute certificates representing Outstanding Notes for any Outstanding Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Outstanding Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the Exchange Notes (and, if applicable, substitute certificates representing Outstanding Notes for any Outstanding Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Outstanding Notes." The undersigned recognizes that InSight has no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Outstanding Notes from the name of the registered holder(s) thereof if InSight does not accept for exchange any of the Outstanding Notes so tendered. The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus, this Letter of Transmittal and the accompanying Notice of Guaranteed Delivery (the "Notice of Guaranteed Delivery") may be directed to the Exchange Agent. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OUTSTANDING NOTES" AND SIGNING THIS LETTER OF TRANSMITTAL AND DELIVERING SUCH OUTSTANDING NOTES AND THIS LETTER OF TRANSMITTAL TO THE EXCHANGE AGENT, WILL BE DEEMED TO HAVE TENDERED THE OUTSTANDING NOTES AS SET FORTH IN SUCH BOX. 5 List below the Outstanding Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and principal amounts on a separately executed schedule and affix the schedule to this Letter of Transmittal. Tenders of Outstanding Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof.
- ------------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF OUTSTANDING NOTES TENDERED - ------------------------------------------------------------------------------------------------------------------------- AGGREGATE PRINCIPAL CERTIFICATE AMOUNT NAME(S) AND ADDRESS(ES) NUMBER(S) REPRESENTED BY AGGREGATE PRINCIPAL OF HOLDER(S) (ATTACH SIGNED LIST CERTIFICATE FOR AMOUNT TENDERED (PLEASE FILL IN IF BLANK) IF NECESSARY) OUTSTANDING NOTES (IF LESS THAN ALL)** - ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------- TOTAL PRINCIPAL AMOUNT OF OUTSTANDING NOTES TENDERED - ------------------------------------------------------------------------------------------------------------------------- ** Need not be completed by Holders who wish to tender with respect to all Outstanding Notes listed. See Instruction 3. - -------------------------------------------------------------------------------------------------------------------------
6 USE OF GUARANTEED DELIVERY If Holders desire to tender Outstanding Notes pursuant to the Exchange Offer and (i) certificates representing such Outstanding Notes are not lost but are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Outstanding Notes or other required documents to reach the Exchange Agent on or prior to the Expiration Date or (iii) the procedures for book-entry transfer cannot be completed on a timely basis, such Holders may effect a tender of such Outstanding Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." [ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO THE NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Holder(s) of Outstanding Notes: - ---------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Window Ticket No. (if any): - -------------------------------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: - -------------------------------------------------------------------- - -------------------------------------------------------------------------------- Name of Eligible Institution that Guaranteed Delivery: - ------------------------------------------------------------------ If Delivered by Book-Entry Transfer, Name of Tendering Institution: - -------------------------------------------------------------------------------- The Book-Entry Transfer Facility Book-Entry Account No.: Transaction Code No.: - -------------------------------------------------------------------------------- BROKER-DEALER COPIES OF PROSPECTUS [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO Name: ----------------------------------------------------------------------------- Address: ----------------------------------------------------------------------------- Aggregate Principal Amount of Outstanding Notes so held: 7 FOR USE BY AFFILIATES [ ] CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU ARE TENDERING OUTSTANDING NOTES IS AN AFFILIATE OF THE ISSUER Name: ----------------------------------------------------------------------------- Address: ----------------------------------------------------------------------------- Aggregate Principal Amount of Outstanding Notes so held: $ -------------------------------------------------------- 8 PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS OF OUTSTANDING NOTES REGARDLESS OF WHETHER OUTSTANDING NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH) If a Holder is tendering any Outstanding Notes, this Letter of Transmittal must be signed by the Holder(s) of the Outstanding Notes exactly as the name(s) appear(s) on the certificate(s) for the Outstanding Notes or, if tendered by a participant in The Depository Trust Company, exactly as such participant's name appears on a security position listing as the owner of the Outstanding Notes, or by any person(s) authorized to become Holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, please set forth full title and submit evidence satisfactory to InSight of each such person's authority to so act. See Instruction 4. If the signature appearing below is not of a registered Holder of the Outstanding Notes, then the registered Holder must sign a valid proxy. X Date: - -------------------------------------------------- -------------------------------------------------- X Date: - -------------------------------------------------- -------------------------------------------------- SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY Name(s): Address: - ------------------------------------------------ -------------------------------------------------- --------------------------------------- ----------------------------------------- (PLEASE PRINT) (INCLUDING ZIP CODE) Capacity: ------------------------------------------------- Area Code and Telephone No.: --------- Social Security No.: --------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN SIGNATURE GUARANTEE (SEE INSTRUCTION 3 HEREIN) CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION - -------------------------------------------------------------------------------- (NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES) - -------------------------------------------------------------------------------- (ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA CODE) OF FIRM) - -------------------------------------------------------------------------------- (AUTHORIZED SIGNATURE) - -------------------------------------------------------------------------------- (PRINTED NAME) - -------------------------------------------------------------------------------- (TITLE) Date: - ------------------------ 9 ------------------------------------------------------------ SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6 HEREIN) To be completed ONLY if certificates for Outstanding Notes not exchanged and/or Exchange Notes are to be issued in the name of and sent to someone other than the person or persons whose signature(s) appear(s) on this Letter of Transmittal, or if Outstanding Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Name: ---------------------------------------------------- (PLEASE PRINT) Address: -------------------------------------------------- (PLEASE PRINT) ------------------------------------------------------------ ZIP CODE ------------------------------------------------------------ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (SEE SUBSTITUTE FORM W-9 HEREIN) Credit unexchanged Outstanding Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. ------------------------------------------------------------ (BOOK ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) ------------------------------------------------------------ ------------------------------------------------------------ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6 HEREIN) To be completed ONLY if certificates for Outstanding Notes not exchanged and/or Exchange Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) above on this Letter of Transmittal or to such person or persons at an address other than shown above in the box entitled "Description of Outstanding Notes" on this Letter of Transmittal. Mail Exchange Notes and/or Outstanding Notes to: Name: ----------------------------------------------------- (PLEASE PRINT) Address: -------------------------------------------------- (PLEASE PRINT) ------------------------------------------------------------ ZIP CODE ------------------------------------------------------------ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (SEE SUBSTITUTE FORM W-9 HEREIN) ------------------------------------------------------------ 10 SUBSTITUTE FORM W-9 TO BE COMPLETED BY ALL TENDERING HOLDERS PAYER'S NAME: STATE STREET BANK AND TRUST COMPANY, N.A., AS EXCHANGE AGENT Payee: ------------------------------------- Please check appropriate box: Address: ----------------------------------- [ ] Individual [ ] Corporation - --------------------------------------------- [ ] Partnership [ ] Other
- --------------------------------------------------------------------------------------------------------------------- SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND DATING ------------------------------ BELOW Social Security Number DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE OR ------------------------------ PAYER'S REQUEST FOR TAXPAYER Employer Identification Number IDENTIFICATION NUMBER (TIN) ---------------------------------------------------------------------------------- PART 2--CERTIFICATION--Under Penalties of PART 3-- Perjury, I certify that: AWAITING TIN [ ] (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, (b) I have not been notified by the Internal Revenue Services ("IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding; and (3) I am a U.S. person (including a U.S. resident alien). ---------------------------------------------------------------------------------- CERTIFICATE INSTRUCTIONS--You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). SIGNATURE ------------------------------ DATE ------------------------ - ---------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 30% (SUBJECT TO ADJUSTMENT IN FUTURE YEARS) OF ANY PAYMENTS MADE TO HOLDERS OF EXCHANGE NOTES PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a Taxpayer Identification Number has not been issued to me, and either (a) I have mailed or delivered an application to receive a Taxpayer Identification Number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a Taxpayer Identification Number within 60 days, 30 percent of all reportable payments made to me thereafter will be withheld until I provide a number. - --------------------------------------------------------- --------------------------------------------------------- SIGNATURE DATE 11 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OUTSTANDING NOTES; GUARANTEED DELIVERY PROCEDURES. The certificates for the tendered Outstanding Notes (or a timely confirmation of the book-entry transfer of Outstanding Notes into the Exchange Agent's account at The Book-Entry Transfer Facility of all Outstanding Notes delivered electronically), as well as a properly completed and duly executed copy of this Letter of Transmittal (unless tenders are validly made by book-entry transfer) and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at its address set forth herein prior to 5:00 P.M., New York City time, on the Expiration Date. Outstanding Notes may only be tendered in a principal amount of $1,000 and any integral multiple thereof. Holders of Outstanding Notes whose certificates for Outstanding Notes are not immediately available or who cannot deliver their certificates and all other required documentation to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Outstanding Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures: - such tender must be made through an Eligible Institution (as defined below) and the Holder must sign a Notice of Guaranteed Delivery; - on or prior to the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by InSight (by facsimile transmission (receipt confirmed by telephone and an original delivered by guaranteed overnight courier, mail or hand delivery), setting forth the name and address of the holder of Outstanding Notes, the certificate number(s) of such Outstanding Notes (if applicable) and the amount of Outstanding Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the Expiration Date, this Letter of Transmittal (or a facsimile thereof), together with the certificates for all physically tendered Outstanding Notes in proper form for transfer, or a Book-Entry Confirmation of such Outstanding Notes, and any other documentation required by this Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and - a properly executed Letter of Transmittal (or copy thereof), as well as the certificates for all physically tendered Outstanding Notes in proper form for transfer or a Book-Entry Confirmation of such Outstanding Notes, as the case may be, and all other documentation required by this Letter of Transmittal, must be received by the Exchange Agent within five business days after the Expiration Date. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Outstanding Notes will be determined by InSight in its sole discretion, which determination will be final and binding. InSight reserves the absolute right to reject any and all Outstanding Notes not properly tendered or any Outstanding Notes InSight's acceptance of which would, in the opinion of counsel for InSight, be unlawful. InSight also reserves the right to waive any defects, irregularities or conditions of tender as to particular Outstanding Notes. InSight's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes must be cured within such time as InSight shall determine. Neither InSight, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Outstanding Notes will not be deemed to have been made until such defects or irregularities have been cured or waived and will be returned by the Exchange Agent to the tendering Holders of Outstanding Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date unless the Exchange Offer is extended. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OUTSTANDING NOTES AND ALL OTHER REQUIRED DOCUMENTATION IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY 12 RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT ON OR PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. DO NOT SEND THIS LETTER OF TRANSMITTAL OR ANY OUTSTANDING NOTES TO THE ISSUER. 2. TENDER BY HOLDER. Only a holder or acting Holder of Outstanding Notes may tender such Outstanding Notes in the Exchange Offer. Any beneficial owner of Outstanding Notes who is not the registered holder and who wishes to tender should arrange with such Holder to execute and deliver this Letter of Transmittal on such owner's behalf or must, prior to completing and executing this Letter of Transmittal and delivering such Outstanding Notes, either make appropriate arrangements to register ownership of the Outstanding Notes in such owner's name or obtain a properly completed bond power from the registered Holder. See "The Exchange Offer" section of the Prospectus. 3. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OUTSTANDING NOTES WHO TENDER BY BOOK-ENTRY TRANSFER); WITHDRAWAL RIGHTS. Tenders of Outstanding Notes will be accepted only in the principal amount of $1,000 and integral multiples thereof. If less than all of the Outstanding Notes evidenced by a submitted certificate are to be tendered, the tendering Holder(s) should fill in the aggregate principal amount of Outstanding Notes to be tendered in the box above entitled "Description of Outstanding Notes -- Aggregate Principal Amount Tendered." A reissued certificate representing the balance of nontendered Outstanding Notes will be sent to such tendering Holder, unless otherwise provided in the appropriate box on this Letter of Transmittal, promptly after the Expiration Date. ALL OF THE OUTSTANDING NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED. Any Holder who has tendered Outstanding Notes may withdraw the tender by delivering written notice of withdrawal (which may be sent by facsimile transmission (receipt confirmed by telephone and an original delivered by guaranteed overnight courier), mail or hand delivery) to the Exchange Agent on or prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at its address set forth herein on or prior to the Expiration Date. Any such notice of withdrawal must: - specify the name of the person having tendered the Outstanding Notes to be withdrawn (the "Depositor"), - identify the Outstanding Notes to be withdrawn (including the certificate number or numbers and principal amount of such Outstanding Notes), - be timely received and signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Outstanding Notes were tendered or as otherwise set forth in Instruction 4 below (including any required signature guarantees), or be accompanied by documents of transfer sufficient to have the Trustee (as defined in the Prospectus) register the transfer of such Outstanding Notes pursuant to the terms of the Indenture into the name of the person withdrawing the tender, - contain a statement that the Holder is withdrawing its election to have such Outstanding Notes exchanged, and - specify the name in which any such Outstanding Notes are to be registered, if different from that of the Depositor. If Outstanding Notes have been tendered pursuant to the procedure for book-entry transfer, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Outstanding Notes or otherwise comply with the Book-Entry Transfer Facility's procedures. See "The Exchange Offer -- Withdrawal of Tenders" section of the Prospectus. Withdrawals of tenders of Outstanding Notes may not be rescinded. Outstanding Notes properly withdrawn will not be deemed to have been validly tendered for purposes of the Exchange Offer, and no Exchange Notes will be issued with respect thereto unless the Outstanding Notes so withdrawn are validly retendered. Properly withdrawn 13 Outstanding Notes may be retendered at any subsequent time on or prior to the Expiration Date by following the procedures described in "The Exchange Offer -- Procedures for Tendering" section of the Prospectus. You may retender properly withdrawn Outstanding Notes in this exchange by following the procedures above at any time on or before the Expiration Date. 4. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the Holder of the Outstanding Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates or on a securities position listing without any change whatsoever. If any tendered Outstanding Notes are owned of record by two or more joint owners, all of such owners must sign this Letter of Transmittal. If any tendered Outstanding Notes are registered in different names on several certificates or securities positions listings, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations. The signatures on this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution unless the Outstanding Notes tendered pursuant hereto are tendered (i) by a registered Holder of the Outstanding Notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" in this Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that the signatures in this Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or another "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (collectively, "Eligible Institutions"). If this Letter of Transmittal is signed by a person other than the Holder of any Outstanding Notes listed therein, such Outstanding Notes must be endorsed or accompanied by a properly completed bond power signed by such Holder exactly as the name or names of such Holder or Holders appear(s) on such Outstanding Notes with the signatures on the Outstanding Notes or the bond power guaranteed by an Eligible Institution. If this Letter of Transmittal or any Outstanding Notes or assignments or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by InSight, evidence satisfactory to InSight of their authority to so act must be submitted with this Letter of Transmittal. 5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering Holders of Outstanding Notes should indicate in the applicable box the name and address to which Exchange Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Outstanding Notes not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the Tax Identification Number ("TIN") or Social Security Number of the person named must also be indicated. A Holder of Outstanding Notes tendering Outstanding Notes by book-entry transfer may request that Outstanding Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such Holder may designate hereon. If no such instructions are given, such Outstanding Notes not exchanged will be returned to the name or address of the person signing this Letter of Transmittal or credited to the account listed beneath the box entitled "Description of Outstanding Notes," as the case may be. 6. TAX IDENTIFICATION NUMBER; SUBSTITUTE FORM W-9. Each tendering Holder whose Outstanding Notes are accepted for exchange must provide InSight (as payor) with such Holder's correct TIN on Substitute Form W-9, made a part of this Letter of Transmittal, which, in the case of a tendering Holder who is an individual, is his or her Social Security Number. If InSight is not provided with the current TIN or an adequate basis for an exemption, such tendering Holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to such tendering Holder of Exchange Notes may be subject to backup withholding in an amount equal to 30% (subject to adjustment in future years) of all reportable payments made after the exchange. If withholding results in an overpayment of taxes, a refund may be obtained. 14 Exempt Holders of Outstanding Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the attached Guidelines of Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. To prevent backup withholding, each tendering Holder of Outstanding Notes must provide its correct TIN by completing the Substitute Form W-9 set forth in this Letter of Transmittal, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN) and that: - the Holder is exempt from backup withholding, - the Holder has not been notified by the Internal Revenue Service that such Holder is subject to backup withholding as a result of a failure to report all interest or dividends or - the Internal Revenue Service has notified the Holder that such Holder is no longer subject to backup withholding. If the tendering Holder of Outstanding Notes is a nonresident alien or foreign entity not subject to backup withholding, such Holder must give InSight a completed Form W-8 BEN, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Outstanding Notes are in more than one name or are not in the name of the actual owner, such Holder should consult the W-9 Guidelines for information on which TIN to report. If such Holder does not have a TIN, such Holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 3 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking such box and writing "applied for" on the form means that such Holder has already applied for a TIN or that such Holder intends to apply for one in the near future. If such Holder does not provide its TIN to InSight within 60 days, backup withholding will begin and continue until such Holder furnishes its TIN to InSight. 7. TRANSFER TAXES. InSight will pay all transfer taxes, if any, applicable to the transfer of Outstanding Notes to it or its order pursuant to the Exchange Offer. If, however, Exchange Notes and/or substitute Outstanding Notes not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the Holder of the Outstanding Notes tendered hereby, or if tendered Outstanding Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the transfer of Outstanding Notes to InSight or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder. EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE OUTSTANDING NOTES SPECIFIED IN THIS LETTER OF TRANSMITTAL. 8. WAIVER OF CONDITIONS. InSight reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 9. DETERMINATION OF VALIDITY. InSight will determine, in its sole discretion, all questions as to the form of documents, validity, eligibility (including time of receipt) and acceptance for exchange of any tender of Outstanding Notes, which determination shall be final and binding on all parties. InSight reserves the absolute right to reject any and all tenders determined by it not to be in proper form or the acceptance of which, or exchange for which, may be unlawful. InSight also reserves the absolute right, subject to applicable law, to waive any of the conditions of the Exchange Offer set forth in the Prospectus under the caption "The Exchange Offer -- Conditions" or any conditions or irregularity in any tender of Outstanding Notes of any particular Holder whether or not similar conditions or irregularities are waived in the case of other Holders. InSight's interpretation of the terms and conditions of the Exchange Offer (including this Letter of Transmittal and the instructions hereto) will be final and binding. No tender of Outstanding Notes will be deemed to have been validly made until all irregularities with respect to such tender have been cured or waived. Although InSight intends to notify holders of defects or irregularities with respect to tenders of Outstanding Notes, none of InSight, the Guarantors, any employees, agents, affiliates or assigns of InSight, the Exchange Agent, or any other person shall be 15 under any duty to give notification of any irregularities in tenders or incur any liability for failure to give such notification. 10. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders of Outstanding Notes, by execution of this Letter of Transmittal, shall waive any right to receive notice of the acceptance of their Outstanding Notes for exchange. 11. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES. Any Holder whose Outstanding Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. The Holder will then be instructed as to the steps that must be taken to replace the certificate(s). This Letter of Transmittal and related documents cannot be processed until the Outstanding Notes have been replaced. 12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent, at the address and telephone number indicated above. 13. INADEQUATE SPACE. If the space provided herein is inadequate, the aggregate principal amount of Outstanding Notes being tendered and the certificate number or numbers (if available) should be listed on a separate schedule attached hereto and separately signed by all parties required to sign this Letter of Transmittal. IMPORTANT: TO TENDER IN THE EXCHANGE OFFER, A HOLDER MUST COMPLETE, SIGN AND DATE THIS LETTER OF TRANSMITTAL OR A COPY HEREOF (TOGETHER WITH CERTIFICATES FOR OUTSTANDING NOTES AND ALL OTHER REQUIRED DOCUMENTS) AND HAVE THE SIGNATURES HEREON GUARANTEED IF REQUIRED BY THIS LETTER OF TRANSMITTAL, OR DELIVER A NOTICE OF GUARANTEED DELIVERY, TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE UNLESS, IN THE CASE OF OUTSTANDING NOTES HELD IN BOOK-ENTRY FORM, TENDERS ARE VALIDLY MADE IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER FACILITY'S ATOP PROCEDURES. 16 The Exchange Agent for the Exchange Offer is: STATE STREET BANK AND TRUST COMPANY, N.A. By Hand, Overnight Delivery or Registered/Certified Mail: c/o State Street Bank and Trust Company 2 Avenue de Lafayette Boston, MA 02111 Attention: Ralph Jones By Facsimile: (617) 662-1452 Confirm by Telephone: (617) 662-1548 17 EX-99.2 14 y55701a1ex99-2.txt FORM OF NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY FOR OFFER TO EXCHANGE $225,000,000 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011 OF INSIGHT HEALTH SERVICES CORP. Exchange Agent: STATE STREET BANK AND TRUST COMPANY, N.A. By Hand, Overnight Delivery or Registered/Certified Mail: c/o State Street Bank and Trust Company 2 Avenue de Lafayette Boston, MA 02111 Attention: Ralph Jones By Facsimile: (617) 662-1452 Confirm by Telephone: (617) 662-1548 All capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the prospectus, dated , 2002 (as it may be supplemented or amended from time to time, the "Prospectus"), of InSight Health Services Corp., a Delaware corporation ("InSight"). As set forth in the Prospectus and in the accompanying letter of transmittal and instructions thereto (the "Letter of Transmittal"), registered Holders (as defined below) of outstanding 9 7/8% Senior Subordinated Notes due 2011 (the "Outstanding Notes") of InSight who wish to tender their Outstanding Notes in exchange for a like principal amount of 9 7/8% Series B Senior Subordinated Notes due 2011 (the "Exchange Notes") of InSight which have been registered under the Securities Act of 1933, as amended, and, in each case, whose Outstanding Notes are not immediately available or who cannot deliver their Outstanding Notes, the Letter of Transmittal and any other documents required by the Letter of Transmittal to State Street Bank and Trust Company, N.A. (the "Exchange Agent") on or prior to the Expiration Date (as hereinafter defined), or who cannot complete the procedure for book-entry transfer on a timely basis, may use this Notice of Guaranteed Delivery (this "Notice of Guaranteed Delivery") to tender their Outstanding Notes if (i) such tender is made by or through an Eligible Institution (as defined below) and the Holder signs this Notice of Guaranteed Delivery; (ii) on or prior to the Expiration Date, the Exchange Agent has received from the Holder and the Eligible Institution a written or facsimile copy of a properly completed and duly executed Notice of Guaranteed Delivery setting forth the name and address of the Holder of Outstanding Notes, the certificate number or numbers of such tendered Outstanding Notes and the principal amount of Outstanding Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the date of delivery of this Notice of Guaranteed Delivery, the Letter of Transmittal (or a copy thereof) together with the certificate(s) representing the Outstanding Notes (or timely confirmation of the book-entry transfer of Outstanding Notes into the Exchange Agent's account at the Depository Trust Company ("DTC")) and any other required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or copy thereof), as well as all other documents required by the Letter of Transmittal and the certificate(s) representing all tendered Outstanding Notes in proper form for transfer (or timely confirmation of the book-entry transfer of Outstanding Notes into the Exchange Agent's Account at DTC), is received by the Exchange Agent within five business days after the Expiration Date. Any Holder of Outstanding Notes who wishes to tender Outstanding Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives this Notice of Guaranteed Delivery and Letter of Transmittal prior to 5:00 P.M., New York City time, on the Expiration Date. This Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile transmission (receipt confirmed by telephone and an original delivered by guaranteed overnight delivery) or mail to the Exchange Agent. See "The Exchange Offer -- Procedures for Tendering" section in the Prospectus. Unless the context requires otherwise, (i) the term "Holder" for purposes of this Notice of Guaranteed delivery means: (A) any person in whose name Outstanding Notes are registered on the books of InSight or any other person who has obtained a properly completed bond power from the registered Holder; or (B) any participant in DTC whose Outstanding Notes are held of record by DTC who desires to deliver such Outstanding Notes by book-entry transfer at DTC; and (ii) the term "Eligible Institution" means an eligible guarantor institution that is a member of or participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. THE EXCHANGE OFFER (AS DEFINED BELOW) WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL , 2002, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OUTSTANDING NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. FOR ANY QUESTIONS REGARDING THIS NOTICE OF GUARANTEED DELIVERY OR FOR ANY ADDITIONAL INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT (617) 662-1548. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an Eligible Institution, such signature guarantee must appear in the applicable space provided in the Letter of Transmittal. 2 Ladies and Gentlemen: The undersigned hereby tender(s) to InSight, upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate principal amount of Outstanding Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus and the instructions to the Letter of Transmittal. The undersigned understands that tenders of Outstanding Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Outstanding Notes pursuant to InSight's offer to exchange Exchange Notes for Outstanding Notes pursuant to, and upon the terms and conditions described in, the Prospectus, Letter of Transmittal and instructions thereto (the "Exchange Offer") may not be withdrawn after 5:00 P.M., New York City time, on the Expiration Date. All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assignees, trustees in bankruptcy and other legal representatives of the undersigned. 3 PLEASE COMPLETE AND SIGN - ---------------------------------------------------------------------------------------------------- Signature(s) of Registered Holder(s) or Name(s) of Registered Holder(s): Authorized Signatory: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Principal Amount of Outstanding Notes Address: Tendered: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Certificate No(s). of Outstanding Notes (if Area Code and Tel. No.: available) or Account No. at the Book-Entry Transfer Facility: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Date: -------------------------------------- If Outstanding Notes will be delivered by book-entry transfer at The Depository Trust Company, insert Depository Account No.: -------------------------------------------------- -------------------------------------------------- - ----------------------------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the registered Holder(s) of Outstanding Notes exactly as its (their) name(s) appears on certificate(s) for Outstanding Notes or on a security position listing as the owner of Outstanding Notes, or by person(s) authorized to become registered Holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information: PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Capacity: -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Address(es): -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
DO NOT SEND OUTSTANDING NOTES WITH THIS FORM. OUTSTANDING NOTES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL. 4 GUARANTEE OF DELIVERY (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member of or participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (each of the foregoing, an "Eligible Institution"), hereby (a) represents that each holder of Outstanding Notes on whose behalf this tender is being made "own(s)" the Outstanding Notes covered hereby within the meaning of Rule 14e-4 under the Exchange Act, (b) represents that such tender of Outstanding Notes complies with such Rule 14e-4 and (c) guarantees that, within five business days after the date of delivery of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal, together with certificates representing the Outstanding Notes covered hereby in proper form for transfer (or timely confirmation of the book-entry transfer of Outstanding Notes into the Exchange Agent's account at DTC) and any other required documents will be deposited by the undersigned with the Exchange Agent and such properly completed and executed Letter of Transmittal, as well as all other documents required by the Letter of Transmittal and the certificate(s) representing all tendered Outstanding Notes in proper form for transfer (or timely confirmation of the book-entry transfer of Outstanding Notes into the Exchange Agent's account at DTC) are received by the Exchange Agent within five business days after the Expiration Date. THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND OUTSTANDING NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED. Name of Firm: - -------------------------------------------------------------------------------- Authorized Signature: - -------------------------------------------------------------------------------- Title: - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- (ZIP CODE) Area Code and Telephone No.: -------------------- Date: ---------- , 2002 DO NOT SEND OUTSTANDING NOTES WITH THIS FORM. OUTSTANDING NOTES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL. 5 INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY 1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at its address as set forth herein prior to the Expiration Date. The method of delivery of this Notice of Guaranteed Delivery and any other required documents to the Exchange Agent is at the election and sole risk of the Holder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. As an alternative to delivery by mail, the Holders may wish to consider using an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. For a description of the guaranteed delivery procedures, see Instruction 1 of the related Letter of Transmittal. 2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of Guaranteed Delivery is signed by the registered holder(s) of the Outstanding Notes referred to herein, the signature must correspond with the name(s) written on the face of the Outstanding Notes without alteration, enlargement, or any change whatsoever. If this Notice of Guaranteed Delivery is signed by the Trustee whose name appears on a security position listing as the owner of the Outstanding Notes, the signature must correspond with the name shown on the security position listing as the owner of the Outstanding Notes. If this Notice of Guaranteed Delivery is signed by a person other than the registered Holder(s) of any Outstanding Notes listed or a participant of the Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by appropriate bond powers, signed as the name of the registered Holder(s) appears of the Outstanding Notes or signed as the name of the participant shown on the Book-Entry Transfer Facility's security position listing. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and submit with the Letter of Transmittal evidence satisfactory to InSight of such person's authority to so act. 3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company, or other nominee for assistance concerning the Exchange Offer. 6 EX-99.3 15 y55701a1ex99-3.txt BROKER LETTER OFFER TO EXCHANGE $225,000,000 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011 OF INSIGHT HEALTH SERVICES CORP. THE EXCHANGE OFFER (AS DEFINED HEREIN) WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2002, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OUTSTANDING NOTES (AS DEFINED HEREIN) MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. March , 2002 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We are enclosing herewith the materials listed below relating to the offer (the "Exchange Offer") by InSight Health Services Corp. ("InSight") to exchange its 9 7/8% Series B Senior Subordinated Notes due 2011 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount at maturity of InSight's issued and outstanding 9 7/8% Senior Subordinated Notes due 2011 (the "Outstanding Notes"), upon the terms and subject to the conditions set forth in the enclosed prospectus, dated [April] , 2002 (as the same may be supplemented and amended from time to time, the "Prospectus"), and the related letter of transmittal and instructions thereto (the "Letter of Transmittal"). We are requesting that you contact your clients for whom you hold Outstanding Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Outstanding Notes registered in your name or in the name of your nominee, or who hold Outstanding Notes registered in their own names, we are enclosing the following documents: 1. Prospectus; 2. Letter of Transmittal; 3. Notice of Guaranteed Delivery to be used to accept the Exchange Offer if certificates for Outstanding Notes are not immediately available or time will not permit all required documentation to reach the Exchange Agent (as defined below) or if the procedure for book-entry transfer cannot be completed on a timely basis; 4. Instruction to Registered Holder from Beneficial Owner; 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; 6. Letter which may be sent to your clients for whose account you hold Outstanding Notes registered in your name or in the name of your nominee with space provided for obtaining such clients' instructions with regard to the Exchange Offer; and 7. Letter from InSight to holders of Outstanding Notes. WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [APRIL] , 2002, UNLESS EXTENDED. The Exchange Offer is not conditioned upon any minimum principal amount of Outstanding Notes being tendered. YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE, UNLESS EXTENDED. OUTSTANDING NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS, AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. To participate in the Exchange Offer, a duly executed and properly completed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and any other required documentation should be sent to the Exchange Agent and certificates representing the Exchange Notes should be delivered to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and the Prospectus. If holders of Outstanding Notes wish to tender, but certificates for Outstanding Notes are not immediately available or time will not permit all required documentation to reach the Exchange Agent or if the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected by following the guaranteed delivery procedures described in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures" and in the Letter of Transmittal. InSight will pay all transfer taxes, if any, applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer, except as described in the Prospectus. Any inquiries you may have with respect to the Exchange Offer may be addressed to, and additional copies of the enclosed materials may be obtained from, State Street Bank and Trust Company, N.A., the Exchange Agent for the Outstanding Notes (the "Exchange Agent"), at its address and telephone number set forth in the Letter of Transmittal. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS THE AGENT OF INSIGHT OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE OFFER, OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS EXPRESSLY CONTAINED THEREIN. Very truly yours, InSight Health Services Corp. 2 EX-99.4 16 y55701a1ex99-4.txt CLIENT LETTER OFFER TO EXCHANGE $225,000,000 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011 FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011 OF INSIGHT HEALTH SERVICES CORP. THE EXCHANGE OFFER (AS DEFINED HEREIN) WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2002, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OUTSTANDING NOTES (AS DEFINED HEREIN) MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. March , 2002 To Our Clients: We are enclosing herewith a prospectus, dated , 2002 (as the same may be supplemented and amended from time to time, the "Prospectus"), and the related letter of transmittal and instructions thereto (the "Letter of Transmittal"), relating to the offer (the "Exchange Offer") by InSight Health Services Corp., a Delaware corporation ("InSight"), to exchange its 9 7/8% Series B Senior Subordinated Notes due 2011 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended, for a like principal amount of its outstanding 9 7/8% Senior Subordinated Notes due 2011 (the "Outstanding Notes"), upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal. PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [APRIL] , 2002 UNLESS EXTENDED. THE EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF OUTSTANDING NOTES BEING TENDERED. The materials relating to the Exchange Offer are being forwarded to you as the beneficial owner of Outstanding Notes. We are the holder of record of Outstanding Notes held by us for your account or benefit but not registered in your name. A TENDER OF SUCH OUTSTANDING NOTES CAN BE MADE ONLY BY US AS THE RECORD HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we request instructions as to whether you wish to tender on your behalf any or all of the Outstanding Notes held by us for your account pursuant to the terms and conditions set forth in the enclosed Prospectus and Letter of Transmittal. Please so instruct us by completing, executing and returning to us the Instruction to Registered Holder from Beneficial Owner enclosed herewith. Your instructions should be forwarded to us as promptly as possible in order to permit us to tender the Outstanding Notes on your behalf in accordance with the provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 P.M., New York City time, on the Expiration Date. Any Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration Date. Your attention is directed to the following: 1. The Exchange Offer is for any and all Outstanding Notes. 2. The Exchange Offer is subject to certain conditions set forth in the Prospectus in the section captioned "The Exchange Offer -- Conditions." 3. InSight will pay all transfer taxes, if any, applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer, except as described in the Prospectus. If you wish to have us tender your Outstanding Notes, please so instruct us by completing, executing and returning to us the Instruction to Registered Holder from Beneficial Owner enclosed herewith. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OUTSTANDING NOTES. Very truly yours, 2 -----END PRIVACY-ENHANCED MESSAGE-----