-----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, RIgDO4pMrHQSTRjT8Xe6m79b6AULHSV914dJ3/dXZo17aXi4kfTpBx0G3kG7R8oh mhz/oYQRk+GqurGKmoWF3A== 0001047469-97-000740.txt : 19971015 0001047469-97-000740.hdr.sgml : 19971015 ACCESSION NUMBER: 0001047469-97-000740 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NASD 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: 10-K SEC ACT: SEC FILE NUMBER: 333-02935 FILM NUMBER: 97695449 BUSINESS ADDRESS: STREET 1: 4440 VON KARMAN AVENUE STE 320 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7144760733 MAIL ADDRESS: STREET 1: 4440 VON KARMAN AVE., STE 320 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-28622 INSIGHT HEALTH SERVICES CORP. (Exact name of Registrant as specified in its charter) DELAWARE 33-0702770 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) No.) 4400 MACARTHUR BLVD., SUITE 800, NEWPORT BEACH, CA 92660 (Address of principal executive offices) (Zip Code) (714) 476-0733 (Registrant's telephone number including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of the Registrant's knowledge, in definitive proxy or informative statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _______ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 1997 (based on the closing price on the NASDAQ Small Cap Market on that date) was $14,452,668. The number of shares outstanding of the Registrant's Common Stock as of September 30, 1997 was 2,714,725. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the next Annual Meeting of Stockholders of the Registrant are incorporated herein by reference in Part III. Certain exhibits are incorporated herein by reference as set forth in Item 14(a)(3), Exhibits, in Part IV. 1 PART I ITEM 1. BUSINESS MERGER InSight Health Services Corp. ("InSight" or the "Company") is a Delaware corporation formed on February 23, 1996 in connection with the Agreement and Plan of Merger, dated as of February 26, 1996 (the "Merger Agreement"), among American Health Services Corp., a Delaware corporation ("AHS"), Maxum Health Corp., a Delaware corporation ("MHC" or "Maxum"), InSight and two wholly owned subsidiaries of InSight, AHSC Acquisition Company, a Delaware corporation ("AHSC Acquisition"), and MXHC Acquisition Company, a Delaware corporation ("MXHC Acquisition"). Each of AHS and MHC were publicly held providers of diagnostic imaging, treatment and related management services. Pursuant to the terms of the Merger Agreement, (i) AHSC Acquisition merged with and into AHS and MXHC Acquisition merged with and into Maxum (collectively, the "Merger"), (ii) each outstanding share of common stock, par value $.03 per share, of AHS ("AHS Common Stock") was converted into the right to receive one-tenth of a share of common stock, par value $.001 per share, of InSight ("InSight Common Stock"), (iii) each outstanding share of Series B Senior Convertible Preferred Stock, par value $.03 per share, of AHS ("AHS Series B Preferred Stock") which was convertible into 100 shares of AHS Common Stock was converted into the right to receive 10 shares of InSight Common Stock, (iv) each outstanding share of Series C Preferred Stock, par value $.03 per share, of AHS (the "AHS Series C Preferred Stock"), which was issued immediately prior to the consummation of the Merger, was converted into the right to receive 1.25088 shares of Series A Preferred Stock, par value $.001 per share, of InSight (the "InSight Series A Preferred Stock"), (v) each outstanding share of common stock, par value $.01 per share, of Maxum ("Maxum Common Stock") was converted into the right to receive .598 of a share of InSight Common Stock, (vi) each outstanding share of Series B Preferred Stock, par value $.01 per share, of Maxum (the "Maxum Series B Preferred Stock"), which was issued immediately prior to the consummation of the Merger, was converted into the right to receive 83.392 shares of InSight Series A Preferred Stock, and (vii) each outstanding option, warrant or other right to purchase AHS Common Stock and Maxum Common Stock was converted into the right to acquire, on the same terms and conditions, shares of InSight Common Stock, with the number of shares and exercise price applicable to such option, warrant or other right adjusted based on the applicable exchange ratio for the underlying AHS Common Stock or Maxum Common Stock. On June 25, 1996, the stockholders of both MHC and AHS approved the Merger. On June 26, 1996, MHC and AHS became wholly owned subsidiaries of InSight, and the stockholders of MHC and AHS became stockholders of InSight. MHC and AHS were organized in 1989 and 1982, respectively. On September 13, 1996, AHS changed its name to InSight Health Corp. ("IHC"). The principal executive offices of InSight are located at 4400 MacArthur Blvd., Suite 800, Newport Beach, California 92660, and its telephone number is (714) 476-0733. RECAPITALIZATION On October 14, 1997, InSight consummated a recapitalization ("Recapitalization") pursuant to which (a) certain investors affiliated with TC Group, LLC and its affiliates (collectively, "Carlyle"), a private merchant bank headquartered in Washington, D.C., made a cash investment of $25 million in the Company and received therefor (i) 25,000 shares of newly issued InSight Convertible Preferred Stock, Series B, par value $0.001 per share ("Series B Preferred Stock"), initially convertible, at the option of the holders thereof, in the aggregate into 2,985,075 shares of InSight Common Stock, and (ii) warrants (the "Carlyle Warrants") to purchase up to 250,000 shares of InSight Common Stock at the current exercise price of $10.00 per share; (b) General Electric Company ("GE") (i) surrendered its rights with respect to its supplemental service fee (see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," below) in exchange for (A) the issuance of 7,000 shares of newly issued InSight Convertible Preferred Stock, Series C, par value $0.001 per share ("Series C Preferred Stock"), initially convertible, at the option of the holders thereof, in the aggregate into 835,821 shares of InSight Common Stock, and (B) warrants (the "GE Warrants") to purchase up to 250,000 shares of InSight Common Stock at the current exercise price of $10.00 per share, and (ii) agreed to exchange all of its InSight Convertible Preferred Stock, Series A, on the business day (the "Second Closing") after all waiting periods with respect to GE's filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, have expired or been terminated, for an additional 20,953 shares of Series C Preferred Stock, initially convertible, at the option of the holders thereof, in the aggregate into 2,501,760 shares of InSight Common Stock; and (c) the Company executed a Credit Agreement with NationsBank, 2 N.A. pursuant to which NationsBank, as agent, committed to provide a total of $125 million in senior secured credit, including a $50 million acquisition facility, upon the satisfaction of certain customary conditions (the "Bank Financing"). Pursuant to the terms of the Recapitalization, the number of directors comprising the Company's Board of Directors (the "Board") is currently fixed at nine. Six directors (the "Common Stock Directors") are to be elected by the common stockholders, one of whom (the "Joint Director") is to be proposed by Carlyle and GE and approved by a majority of the Board in its sole discretion. Of the three remaining directors, two are to be elected by the holders of the Series B Preferred Stock and one is to be elected by the holders of the Series C Preferred Stock, subject to increase and decrease in certain circumstances. Presently, the Board of Directors of the Company consists of seven directors, five of whom are Common Stock Directors and two of whom are Preferred Stock Directors elected by Carlyle. GE has informed the Company of its intention to wait until the Second Closing to elect its Preferred Stock Director. The vacancy created for the Joint Director has not been filled. CENTERS IN OPERATION InSight provides diagnostic imaging, treatment and related management services in 26 states throughout the United States. InSight's services are provided through a network of 35 mobile magnetic resonance imaging ("MRI") facilities ("Mobile Facilities"), 28 fixed-site MRI facilities ("Fixed Facilities"), ten multi-modality imaging centers ("Centers"), two Leksell Stereotactic Gamma Unit treatment centers ("Gamma Knife"), and one radiation oncology center. An additional radiation oncology center is operated by the Company as part of one of its Centers. The Company's operations are located throughout the United States, with a substantial presence in California, primarily Los Angeles county, and northern Texas, primarily the Dallas-Ft. Worth metroplex. At its Centers, InSight offers other services in addition to MRI including diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear medicine, nuclear cardiology, computed tomography ("CT") and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services and training/applications, marketing, radiology management services, patient scheduling, utilization review and billing and collection services. DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY During approximately the last 20 years, there has been a major effort undertaken by the medical and scientific communities to develop cost-effective diagnostic imaging technologies and to minimize the risks associated with the application of such technologies. The major categories of diagnostic imaging systems currently offered in the medical marketplace are conventional x-ray, CT scanners, digital ultrasound systems, computer-based nuclear gamma cameras, radiography/fluoroscopy systems and MRI systems, each of which (other than conventional x-ray) represents the marriage of computer technology and various medical imaging modalities. Patients exposed to x-rays and to gamma rays employed in nuclear medicine receive potentially harmful ionizing radiation. Much of the thrust of product development during the period has been to reduce the hazards associated with conventional x-ray and nuclear medicine techniques and to develop new, virtually harmless imaging technologies such as ultrasound and MRI. X-RAY X-ray is the most common energy source used in imaging the body and is now employed in the three following imaging modalities: (i) conventional x-ray systems, the oldest method of imaging, are typically used to image bones and contrast-enhanced vasculature and organs and constitute the largest number of installed systems; (ii) CT scanners utilize computers to produce cross-sectional images of particular organs or areas of the body; and (iii) digital x-ray systems add computer image processing capability to conventional x-ray systems. ULTRASOUND Ultrasound systems emit, detect and process high frequency sound waves to generate images of soft tissues and internal body organs. The sound waves used in ultrasound do not involve ionizing radiation and are not known to cause any harmful effects to the patient. NUCLEAR MEDICINE Nuclear medicine gamma cameras, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals injected or inhaled into the body, are used to provide information about organ function as opposed to anatomical structure. MRI TECHNOLOGY InSight believes that the introduction of MRI technology into the health care marketplace marked a significant advance in diagnostic medicine. Magnetic resonance is a technique that utilizes low energy radiowaves to manipulate protons (usually hydrogen) in the body. MRI systems place patients in a magnetic field. Once in the magnetic field, the protons in a patient's body will tend to align with the magnetic field. Radio frequency ("RF") waves, produced by a radio antenna coil which surrounds the body part to be imaged, are "pulsed" 3 against the magnetic field. The RF energy is then turned off, and the protons are observed for different types of behavior, movement or "relaxation." Different tissues have different relaxation times, depending on the amount of hydrogen or water in each proton. The data on each proton's behavior is collected digitally by the system's computer and then reconstructed into cross-sectional images in three dimensional planes of orientation. The resulting image reproduces soft tissue anatomy (as found in the brain, spinal cord and interior ligaments of body joints such as the knee) with superior clarity, not available by any other currently existing imaging modality. A typical MRI examination takes from 30 to 90 minutes. MRI systems are typically priced in the range of $0.9 million to $2 million each, depending upon the system configuration, magnet design and field strength. There are no known hazards to the general population from magnetic and RF fields of the intensity to which a patient is exposed in a clinical MRI system. Equipment literature nonetheless recommends that, until further information is available, pregnant women should be scanned only under limited circumstances. Furthermore, MRI magnets may disrupt the operation of cardiac pacemakers and may react with ferrous clips utilized in various surgical procedures, so that individuals with such devices may be excluded from examination with MRI systems, and access to the area surrounding the MRI facility may also be controlled to avoid these possible hazards. Additionally, some MRI examinations require injection of a paramagnetic contrast material. Although it is extremely unusual, some patients may develop a significant adverse reaction to this contrast material; however, chances of fatalities as a result of such reaction are remote. Because the signals used to produce magnetic resonance images contain both chemical and structural information, InSight believes this technique has greater potential for many important diagnostic applications than any other imaging technology currently in use. While existing MRI systems demonstrate excellent portrayals of anatomical structures within the human body, of even greater significance is the fact that MRI is also sensitive to subtle differences between tissues. Thus, MRI offers not only the opportunity for highly effective classical diagnosis, but also the potential for future monitoring of chemical processes within the body. Recent technological advances in software and gradient coil technology for MRI systems have allowed equipment with lower magnetic field strength and open architecture design to offer significantly improved image quality. These systems use permanent electromagnetic technology rather than superconductivity magnets, substantially lowering both siting and service costs. The open design allows for studies not normally possible in conventional MRI systems, including claustrophobic patients, extremely large patients (from 300 to 400 pounds) and for musculoskeletal exams which require the patient to move or flex, such as kinematic knee studies. Manufacturers are marketing these open MRI systems at costs below most state Certificate of Need ("CON") requirements. The reduced equipment costs, combined with lower siting and service expense, may make MRI technology feasible at some rural hospitals and other new market locations where patient volume and reimbursement do not financially justify the expense of a conventional MRI system. Open MRI systems are priced in the range of $0.6 million to $1 million. CT CT technology consists of a doughnut-shaped gantry structure into which a patient, resting on a remotely controlled couch assembly, is positioned to scan the anatomical region of interest. The scanning process is performed by the rotation of a high output x-ray tube around the patient. The x-ray tube emits a thin fan-shaped beam of x-rays that passes through the patient and is absorbed by an array of x-ray detectors located on the opposite side of the patient from the x-ray tube. The detected x-rays are then converted into digital measurements of x-ray intensity directly proportional to the density of the portion of the patient through which the beam passes. These digital measurements of x-ray intensity are then processed by a specialized image reconstruction computer system into a cross-sectional image of the anatomical region of interest. The patient is then indexed on the couch and another scan performed and then another, creating a "stack" of cross-sectional images constituting the complete diagnostic imaging procedure. Typical scanning times for a single cross-sectional image are in the one second to six second range. A complete CT examination takes from 15 minutes to 45 minutes, depending on the complexity of the examination and number of individual cross-sectional images required. The current selling prices of CT systems fall in the range of $0.3 million to $1.5 million depending upon the specific performance characteristics of the systems. Based on the fact that CT systems have been commercially marketed for approximately 20 years, InSight believes that CT is a relatively mature technology and, therefore, not subject to significant risk of obsolescence. 4 Certain CT examinations require the injection of an iodine-based contrast material, allowing for better visualization of the anatomy. Although it is very unusual, some patients may develop a significant adverse reaction to this contrast material. Fatalities as a result of such reaction have occurred but are rare. In an effort to scan only appropriate patients, all patients are required to answer a questionnaire which helps to identify those patients who may suffer an adverse reaction to this contrast material. GAMMA KNIFE The Leksell Stereotactic Gamma Unit is a state-of-the-art radiosurgical device used to treat intracranial neoplasma and vascular anomalies which are inaccessible or unsuitable for conventional invasive surgery. The Gamma Knife was designed to provide neurosurgeons and radiation therapists with the ability to perform radiosurgery, using high energy gamma rays, instead of conventional invasive techniques (open surgery), thereby generally eliminating the risk of infection and intracerebral bleeding. The Gamma Knife delivers a single high dose of ionizing radiation emanating from 201 Cobalt 60 sources positioned about a hemispherical, precision machined cavity. Each individual beam is focused on a common target producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient's skull. The mechanical precision of the Gamma Knife at the target site is 1/10 of one millimeter (0.1 mm), making the Gamma Knife an ideal treatment device for treating small or medium-sized lesions in critical locations within the brain. However, based upon the type, size and/or location of such lesions, not all patients are candidates for radiosurgery. The mechanical precision of the Gamma Knife is coupled with an extremely sharp fall-off in the radiation intensity surrounding the target, resulting in a highly localized treatment effect, sparing surrounding tissue. The Gamma Knife treatment requires no open surgical intervention, no lengthy hospital stay and no risk of post-surgical bleeding or infection. When compared to the average length of stay and costs associated with conventional surgery, the Gamma Knife greatly reduces the cost of neurosurgical treatment. Typical treatment time is approximately 10 to 15 minutes per area of interest ("isocenter"). A key feature of the Gamma Knife is its ability to perform treatments that require multiple isocenters. In addition, other applications for the Gamma Knife are currently being developed. Investigative work is being conducted to treat patients for chronic pain and motion disorders such as Parkinson's disease, epilepsy and trigeminal neuralgia. These new applications represent a significant new market for the Gamma Knife upon clinical acceptance. The current selling price of a Gamma Knife system is approximately $3 million. STRATEGY AND MARKETING InSight believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through consolidation. InSight's primary objective is to provide diagnostic imaging, treatment and related management services to hospitals, physicians and their patients. The Company does not engage in the practice of medicine. The strategy of InSight is focused on five interrelated initiatives: (i) the consolidation of the highly fragmented, diagnostic imaging industry through the acquisition of organizations which either strategically fit into its regional networking strategy or provide significant cost savings through the consolidation of duplicative infrastructures, (ii) development of a radiology co-source product where InSight will provide management services for radiology departments within hospitals, (iii) development of regional networks of radiology providers and physicians designed to provide the highest quality and most cost-effective unit of diagnostic information to the broadest population in a given market, (iv) development of a network of open MRI systems to protect InSight's existing high field MRI market and to expand in markets in which InSight does not have a presence and (v) new business initiatives focused on broadening its range of services to managed care organizations, hospitals and physician management companies to include radiology management services; information management services; billing and collections; technologist services and training applications; marketing; equipment rental and continued evaluation of opportunities with emerging technologies. InSight believes that long-term viability is contingent upon its ability to successfully participate in this industry consolidation. In fiscal 1997, InSight completed three acquisitions of Centers and Mobile Facilities and in the first quarter of fiscal 1998, InSight completed one acquisition of a Center and entered into a definitive agreement for the purchase of another Center, subject to the satisfaction of certain conditions. Also, in fiscal 1997, an open MRI system was installed and became operational at one of the Company's Fixed Facilities and a second open MRI system was installed at one of the Company's Centers, subject to the issuance of a CON. The CON has been received and InSight expects the open MRI system to become operational in the second quarter of 1998. In addition, in the first quarter of 1998, InSight entered into two joint venture arrangements for the development of two open MRI Centers. 5 The foregoing acquisitions and developments have been financed by GE. Upon the effectiveness of the Bank Financing, the Company believes it will be well positioned to pursue additional acquisition and development opportunities. Certain statements contained in this report are forward-looking statements that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include the following: availability of financing; limitations and delays in reimbursement by third-party payors; contract renewals and financial stability of customers; technology changes; governmental regulation; conditions within the health care environment; adverse utilization trends for certain diagnostic imaging procedures; aggressive competition; general economic factors; InSight's inability to carry out its business strategy due to rising purchase prices of imaging centers and companies; and the risk factors listed from time to time in InSight's filings with the Securities and Exchange Commission. GOVERNMENT REGULATION The health care industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretation of existing laws can have a material effect on permissible activities of InSight, 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 InSight currently operates regulate various aspects of the Company's business. Failure to comply with these laws could adversely affect InSight's ability to receive reimbursement for its services and subject the Company and its officers to penalties. Some states require hospitals and certain other health care facilities to obtain a CON prior to the acquisition of major medical equipment such as an MRI or Gamma Knife system. InSight believes that it will not be required to obtain CONs in most of the states in which it intends to operate, since most states no longer require non-hospital providers to obtain CONs and those states that do offer exemptions for which the Company may qualify; however, in those states where a CON is required, InSight has complied or will comply with such requirements. Beginning in late 1983, prospective payment regulations became effective under the federal Medicare program. The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and others considered disabled. Providers of service are paid by the federal government in accordance with regulations promulgated by the United States Department of Health and Human Services and accept said payment, with nominal co-insurance amounts required to be paid by the service recipient, as payment in full. In general, these regulations provide for a specific overall fee which hospitals may charge for inpatient treatment services based upon the diagnosis of the patient. Because InSight mainly provides services to patients on an outpatient basis, the prospective payment regulations do not materially affect the Company's business. Although outpatient services are presently exempt from prospective payment reimbursement, Congress has instructed the Prospective Payment Assessment Commission to study alternative methods for reimbursing hospitals for outpatient services, including prospective payment methods, and the Medicare program has adopted fee scales for some diagnostic services. Such congressional activity reflects industry-wide cost containment pressures which InSight believes will affect all health care providers for the foreseeable future. Private health insurance programs generally have authorized the payment for diagnostic imaging and Gamma Knife procedures on satisfactory terms and the Health Care Financing Administration ("HCFA") has authorized reimbursement under the federal Medicare program for all diagnostic imaging and Gamma Knife services currently being provided by the Company. However, if Medicare reimbursement is reduced, InSight believes that private health insurance programs will also reduce reimbursement in response to reductions in government reimbursement which could have an adverse impact on the Company's business. The Medicaid program is a combined federal and state program providing coverage for low income persons. The specific services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program. Changes in Medicaid program reimbursement are not expected to have a material adverse impact on the Company's business. InSight is subject to state and federal laws prohibiting payments for patient referrals and regulating reimbursement procedures and practices under Medicare, Medicaid and other governmental health care programs. The Medicare and Medicaid Patient and Program Protection Act of 1987 ("1987 Act") prohibits financial arrangements designed to induce patient referrals to providers of services which are paid for by Medicare or Medicaid. Courts have, to date, interpreted these laws to apply to a broad range of financial relationships. Several states also have statutes prohibiting arrangements with health care providers which, while similar in many respects to the 1987 Act, vary from state to state, are often vague and have infrequently been interpreted by courts or regulatory agencies. Due to the potentially broad proscriptions 6 contained in these federal and state laws, there can be no assurance that all of InSight's business practices would be construed to comply with these laws in all respects. However, in the situations where InSight contracts with health care providers who may be in a position to refer patients to the Company's operations, the Company exercises care in an effort to structure its activities and arrangements to comply with applicable federal and state laws. InSight maintains an internal regulatory compliance review program and retains special counsel, as necessary, to monitor compliance with such laws and regulations. Under current Medicare policy, imaging centers may generally participate in the Medicare program as either medical groups or, subject to the discretion of individual Medicare carriers, Independent Physiological Laboratories ("IPLs"). The IPL is a loosely defined Medicare provider category that is not specifically authorized to provide imaging services. Accordingly, certain carriers permit IPLs to provide imaging services and others do not. In the past, InSight has preferred, to the extent possible, to operate its imaging centers for Medicare purposes as IPLs. InSight believes that the designation of its imaging centers as IPLs gives it greater operational control than it would have if its imaging centers were operated under the medical group model, where InSight would function as a "manager". On June 18, 1997, in response to the lack of designation for imaging services, HCFA published proposed regulations which, among other things, would establish a new category of Medicare provider referred to as an Independent Diagnostic Treatment Facility ("IDTF"). The proposed IDTF regulations contemplate an effective date of January 1, 1998, although InSight's management believes that the effective date could be July 1, 1998. If these regulations are implemented, it appears that imaging centers will have the option to participate in the Medicare program as either (i) IDTFs or (ii) medical groups. InSight has evaluated the proposed IDTF regulations for the purpose of assessing their potential impact on InSight's operations. Although InSight believes that the impact of the IDTF regulations is likely to be positive overall, InSight had a number of concerns and submitted comments to HCFA regarding those concerns. InSight currently anticipates converting its imaging centers to IDTFs once that category is available; however, if some of the IDTF qualifications and obligations, outlined in the proposed IDTF regulations are unmodified, InSight believes that IDTFs may be at a substantial competitive disadvantage with those imaging centers operated as medical groups. Accordingly, InSight may consider converting some or all of its existing centers into the medical group model, with InSight functioning as a "manager" of the radiology group. This conversion will require the cooperation of the radiology groups associated with InSight's imaging centers. The U.S. Food and Drug Administration ("FDA") has issued the requisite premarket approval for all of the MRI, CT and Gamma Knife systems utilized by InSight. The Company does not believe that any further FDA approval is required in connection with equipment currently in operation or proposed to be operated. The radiologists with whom InSight may enter into agreements to provide professional services are subject to licensing and related regulations by the states. As a result, the Company requires its radiologists to have and maintain appropriate licensure. InSight does not believe that such laws and regulations will either prohibit or require licensure approval of its business operations, although no assurances can be made that such laws and regulations will not be interpreted to extend such prohibitions or requirements to InSight's operations. MANAGED CARE Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs") attempt to control the cost of health care services. InSight believes that the development and expansion of HMOs, PPOs and other managed care organizations will have a negative impact on utilization of InSight services in certain markets and/or affect the revenue per procedure which the Company can collect, since they will exert greater control over patients' access to diagnostic imaging services, the selection of the provider of such services and the reimbursement thereof. InSight also expects that the excess capacity of equipment in the United States may negatively impact operations because of the competition among health care providers for contracts with all types of managed care organizations. As a result of such competition, the length of term of any contracts which InSight may obtain and the payment to the Company for such services may also be negatively impacted. InSight nonetheless believes that as long as it is able to negotiate provider agreements with the managed care companies and other payors to provide productive and cost-efficient services with measurable outcomes, InSight's business as a whole should not be negatively impacted. See "Customers and Fees". 7 LIABILITY INSURANCE InSight does not provide medical services, although it has obtained professional liability insurance as well as general liability insurance. In addition, the radiologists or other health care professionals with whom the Company contracts are required by such contracts to carry adequate medical malpractice insurance. InSight believes that its insurance is adequate for its business of providing diagnostic imaging, treatment and related management services. COMPETITION The health care industry in general, and the market for diagnostic imaging services in particular, are highly competitive. InSight's operations must compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies, that own and operate imaging equipment. InSight will continue to encounter substantial competition from hospitals and independent organizations. 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. In the past, however, the reluctance of hospitals to purchase imaging and treatment equipment encouraged the entry of start-up ventures and more established business operations into the diagnostic and treatment services business. As a result, there is significant excess capacity in the diagnostic imaging business in the United States which negatively affects utilization and reimbursement. Many of these competitors have substantially greater resources than InSight; however, the Company competes principally on the basis of its reputation for productive and cost-effective quality services. CUSTOMERS AND FEES InSight's revenues are primarily generated from contract services and patient services. Contract services revenues are generally earned from services billed to a hospital or other health care provider which include: (i) fee-for-service arrangements in which revenues are based upon a contractual rate per procedure, (ii) equipment rental in which revenues are generally based upon a fixed monthly rental, and (iii) management fees. Contract services revenues are primarily earned through Mobile Facilities and certain Fixed Facilities. Patient services revenues are services billed directly to patients or third party payors (generally managed care organizations and commercial insurance carriers), and are primarily earned through Centers and certain Fixed Facilities. InSight's operations are principally dependent on its ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). Managed care contracting has become very competitive and reimbursement schedules are nearing Medicare reimbursement levels. A decline in referrals and/or reimbursement rates would adversely affect InSight's revenues and profits. See "Managed Care". InSight's contract services revenues, primarily earned by its Mobile Facilities, represent approximately 51% of total revenues. Each year approximately one-quarter to one-third of the contract services agreements are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past where agreements have not been renewed, the Company has been able to obtain replacement customer accounts; however, it is not always possible to obtain replacement accounts and some replacement accounts have been smaller than the lost account. The non-renewal of a single customer agreement would not have a material impact on InSight's contract services revenues; however, non-renewal of several agreements could have a material impact on contract services revenues. In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some customer accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, InSight's contract services revenues would be adversely affected. 8 No single source accounts for more than 10% of InSight's revenues. The Company has six individual contracts with the county of Los Angeles (the "County") covering six separate sites. In the aggregate, these sites earn revenues which represent approximately 10% of InSight's annual revenues. From time to time, the County has experienced financial difficulties. If such difficulties caused the County to curtail or terminate the Company's services, the Company's business would be adversely affected. SUPPLY OF DIAGNOSTIC IMAGING AND GAMMA KNIFE SYSTEMS InSight continues to evaluate the mix of its MRI equipment in response to changes in technology and to the surplus capacity in the marketplace. The overall technological competitiveness of InSight's equipment continues to improve through upgrades, disposal and/or trade-in of older equipment and the purchase or execution of leases for new equipment. Several substantial companies are presently engaged in the manufacture of MRI (including open MRI), CT and other diagnostic imaging equipment, including GE Medical Systems, Hitachi Medical Systems, Picker International, Philips Medical Systems, Siemens Medical Systems, Inc. and Toshiba Medical Systems. InSight maintains good working relationships with many of the major manufacturers to better ensure an adequacy of supply as well as access to those types of diagnostic imaging systems which appear most appropriate for the specific diagnostic or treatment center to be established. Currently only one company, Elekta Instruments, Inc., a subsidiary of AB Elekta headquartered in Stockholm, Sweden ("Elekta"), is engaged in the business of manufacturing the Gamma Knife. EMPLOYEES As of September 15, 1997, InSight had approximately 544 full-time and 80 part-time employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes its employee relations to be satisfactory. ITEM 2. PROPERTIES The following table includes the primary properties utilized by InSight as of September 15, 1997:
APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ---------------- ----------- -------- OWNED: Berwyn Magnetic Resonance Center 3,800 Berwyn, Illinois Northern Indiana Oncology Center 3,500 Valparaiso, Indiana Garfield Imaging Center 4,500 Monterey Park, California LAC/USC Imaging Sciences Center 8,500 Los Angeles, California Diagnostic Outpatient Center 13,800 Hobart, Indiana Harbor/UCLA Diagnostic Imaging Center 15,000 Torrance, California LEASED: InSight Corporate Headquarters 12,300 Newport Beach, California Maxum Diagnostic Center - Forest Lane 14,100 Dallas, Texas Maxum Diagnostic Center - Eighth Avenue 10,000 Ft. Worth, Texas Maxum Diagnostic Center - Preston Road 5,800 Dallas/Plano, Texas Ocean Medical Imaging Center 8,700 Tom's River, New Jersey Northwest Magnetic Imaging Center 2,400 Seattle, Washington Northwest Gamma Knife Center 3,400 Seattle, Washington Washington Magnetic Resonance Center 4,100 Whittier, California Open MRI of Hayward 6,400 Hayward, California Central Maine Imaging Center 7,250 Lewiston, Maine Training/Applications/Fleet Services 20,000 Winston-Salem, North Carolina Chattanooga Outpatient Center 14,700 Chattanooga, Tennessee Broad Street Imaging Center 12,700 Columbus, Ohio
9 ITEM 3. LEGAL PROCEEDINGS InSight is engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of its business and has insurance policies covering such potential insurable losses where such coverage is cost-effective. InSight believes that the outcome of any such lawsuits will not have a material adverse impact on the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of fiscal 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS InSight's Common Stock began trading on the national over-the-counter market and quoted on the NASDAQ Small Cap Market under the symbol "IHSC" on July 17, 1996. The following table sets forth the high and low prices as reported by NASDAQ for InSight Common Stock for the quarters indicated: QUARTER ENDED LOW HIGH ------------------ ----- ----- September 30, 1996 4 3/4 7 5/8 December 31, 1996 4 3/4 7 March 31, 1997 4 1/4 6 June 30, 1997 4 4 3/4 The prices (rounded to the nearest 1/8 or nearest 1/32 where applicable) represent quotations between dealers without adjustment for mark-up, markdown or commission, and may not necessarily represent actual transactions. The Company has never paid a cash dividend on its Common Stock and does not expect to do so in the foreseeable future. The Company's loan agreements with its primary lender contain restrictions on its ability to pay dividends on its Common Stock. As of September 30, 1997, the Company's records indicate that there were in excess of 2,500 beneficial holders of the Common Stock and approximately 535 stockholders of record. The following is a list of securities sold by the Company during the period covered by this report on Form 10-K which, pursuant to the exemption provided under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), were not registered under the Securities Act: On August 10, 1996, the Company issued to the former holders of IHC Series B Preferred Stock, in consideration for certain agreements in connection with the Merger, warrants to purchase an aggregate of 50,000 shares of InSight Common Stock at an exercise price of $5.64 per share. The warrants are fully vested and exercisable at any time up to August 9, 2001. On August 14, 1996, the Company issued to Shattuck Hammond Partners, Inc. ("SHP"), an investment banking firm in which a director of the Company, Grant R. Chamberlain, is a vice president, a warrant to purchase 35,000 shares of InSight Common Stock at an exercise price of $5.50 per share. The warrant was issued as partial consideration for SHP's agreement to provide general strategic advisory and investment banking services during the 18-month period commencing July 1, 1996 and ending December 31, 1997. The warrant vests cumulatively on a monthly basis over the term of such agreement. 10 On March 11, 1997, the Company issued to Anthony J. LeVecchio, a former director of Maxum, a warrant to purchase 15,000 shares of InSight Common Stock at an exercise price of $5.50 per share. The warrant was issued in partial consideration for Mr. LeVecchio's agreement to provide general strategic and business development activities commencing April 1, 1997, for a one year period. The warrant vests cumulatively at the rate of 5,000 shares on the first, second and third anniversary dates of such agreement. ITEM 6. SELECTED FINANCIAL DATA On June 26, 1996, pursuant to the Merger Agreement each of MHC and IHC became a wholly owned subsidiary of InSight. The Merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. MHC has been treated as the acquirer for accounting purposes, based upon relative revenues, book values and other factors. The selected consolidated financial data presented as of and for the year ended June 30, 1997, the six months ended June 30, 1996 and 1995 (unaudited), and for the years ended December 31, 1995, 1994, 1993 and 1992 has been derived from the Company's audited consolidated financial statements and should be read in conjunction with such consolidated financial statements and related notes as of and for the year ended June 30, 1997, the six months ended June 30, 1996 and for the years ended December 31, 1995 and 1994 and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this report. (Amounts in thousands, except shares and per share data)
SIX MONTHS ENDED YEAR ENDED ----------------------- YEARS ENDED DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, ---------------------------------------------- 1997 1996(1) 1995(1) (4) 1995 (1) 1994 (1) 1993 (1) 1992 (1) ---------- ---------- ----------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues $ 93,063 $ 26,460 $ 24,434 $ 50,609 $ 45,868 $ 45,075 $ 45,135 Costs of operations (2) 80,337 27,420 22,986 48,778 45,439 47,456 45,329 ---------- ---------- ----------- ---------- ---------- ---------- ---------- Gross profit (loss) 12,726 (960) 1,448 1,831 429 (2,381) (194) Corporate operating expenses 7,431 2,127 1,915 3,372 4,040 4,344 6,747 ---------- ---------- ----------- ---------- ---------- ---------- ---------- Income (loss) from company operations 5,295 (3,087) (467) (1,541) (3,611) (6,725) (6,941) Equity in earnings from unconsolidated partnerships 468 138 136 348 834 685 1,020 ---------- ---------- ----------- ---------- ---------- ---------- ---------- Operating income (loss) 5,763 (2,949) (331) (1,193) (2,777) (6,040) (5,921) Interest expense, net (4,055 ) (1,144) (648) (1,626) (1,206) (1,773) (2,391) Provision for securities litigation settlement - - - (1,500) - - - Gain on sale of partnership interests - - - - 4,957 - - Provision for income taxes (427 ) (65) - - (160) - - ---------- ---------- ----------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary item 1,281 (4,158) (979) (4,319) 814 (7,813) (8,312) Extraordinary item - 3,179 - - 3,342 1,036 - ---------- ---------- ----------- ---------- ---------- ---------- ---------- Net income (loss) $ 1,281 $ (979) $ (979) $ (4,319) $ 4,156 $ (6,777) $ (8,312) ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item (3) $ 0.24 $ (2.99) $ (0.73) $ (3.21) $ 0.58 $ (4.49) $ (4.89) ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- Net income (loss) (3) $ 0.24 $ (0.70) $ (0.73) $ (3.21) $ 2.96 $ (3.89) $ (4.89) ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding (3) 5,440,315 1,389,271 1,333,169 1,344,832 1,402,435 1,741,846 1,698,602 AT JUNE 30, AT DECEMBER 31, ---------------------- ---------------------------------------------- 1997 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Working capital (deficit) $(5,740 ) $(1,167) $(2,228) $1,587 $(8,594) $(14,607) Property and equipment, net 34,488 29,852 12,386 5,272 9,791 18,772 Intangible assets 33,272 16,965 4,047 1,194 1,263 2,513 Total assets 98,322 70,386 28,306 22,592 23,566 38,043 Total long-term liabilities 59,205 39,839 19,723 9,575 7,967 8,368 Stockholders' equity (deficit) 6,685 5,404 (4,005) 300 (3,857) 2,502
(1) The selected consolidated financial data represents historical data of MHC only. (2) Includes a (net credit) provision for prior restructuring costs of $(0.5) million and $7.5 million in 1993 and 1992, respectively. (3) Amounts are computed on a pro forma basis as if the reset of par value of Maxum Common Stock and related conversion into InSight Common Stock had occurred on January 1, 1992. (4) Unaudited. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with Item 1. "Business", and Item 8. "Financial Statements and Supplementary Data", included elsewhere in this report. ACQUISITIONS InSight believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through consolidation. The strategy of InSight will be focused on five interrelated initiatives: (i) consolidation of the highly fragmented diagnostic imaging industry through acquisition of organizations which either strategically fit into its regional networking strategy or provide significant cost savings; (ii) development of a radiology co-source product where InSight will provide management services for radiology departments within hospitals, (iii) development of regional networks of radiology providers and physicians designed to provide the highest quality and most cost-effective unit of diagnostic information to the broadest population in a given market, (iv) development of a network of open MRI systems and (v) new business initiatives focused on broadening its range of services to managed care organizations, hospitals and physician management companies to include radiology management services; information management services; unbundling of current core services such as billing and collections, technician training and staffing, and asset management and continued evaluation of opportunities with emerging technologies. InSight believes that long-term viability is contingent upon its ability to successfully participate in this industry consolidation. InSight views the Merger of MHC and IHC as reflective of this consolidation. As part of its consolidation strategy, InSight completed three acquisitions during fiscal 1997 and one in the first quarter of fiscal 1998 as follows: In September 1996, InSight completed the acquisition of a Fixed Facility in Hayward, California. The transaction included the purchase of certain assets, primarily diagnostic equipment. The purchase price of approximately $2.8 million was financed by GE. In May 1997, InSight acquired certain assets, primarily Mobile Facilities, in Maine and New Hampshire, and assumed certain equipment related liabilities. The purchase price of approximately $6.8 million and an additional $0.4 million for working capital requirements were financed by GE. In June 1997, InSight completed the acquisition of a Center in Chattanooga, Tennessee. The transaction included the purchase of certain assets, primarily diagnostic equipment, and the assumption of certain equipment related liabilities. The purchase price of approximately $9.0 million was financed by GE. In July 1997, InSight completed the acquisition of a Center in Columbus, Ohio. As part of this transaction, InSight also has a majority ownership in the development of a new Center in Dublin, Ohio. The transactions included the purchase of certain assets, primarily diagnostic equipment, and the assumption of certain equipment related liabilities. The purchase price of approximately $5.5 million and approximately $0.5 million for the Center under development were financed by GE. In July 1997, InSight entered into a definitive agreement to acquire a Center in Murfreesboro, Tennessee, subject to the satisfaction of certain conditions. GE has agreed to finance the purchase price of approximately $2.7 million; however, the Bank Financing may be used to finance the purchase price. Upon the consummation of the Bank Financing, which InSight expects to occur by early November 1997, InSight will have at its disposal an acquisition facility in the amount of $50 million, which may be increased under certain circumstances to $75 million. InSight believes this facility will enhance its ability to participate in the industry consolidation. 12 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES InSight operates in a capital intensive, high fixed cost industry that requires significant amounts of working capital to fund operations, particularly the initial start-up and development expenses of new operations and yet is constantly under external pressure to contain costs and reduce prices. Revenues and cash flows have been adversely affected by an increased collection cycle, competitive pressures and major restructurings within the health care industry. This adverse effect on revenues and cash flow is expected to continue, especially in the mobile diagnostic imaging business. Management believes that InSight's long-term viability and success is contingent upon its ability to successfully execute its five interrelated strategic initiatives. InSight continues to pursue acquisition opportunities. InSight believes that the expansion of its business through acquisitions is a key factor in achieving and maintaining profitability. Generally, acquisition opportunities are aimed at increasing revenues and profits, and maximizing utilization of existing capacity. Incremental operating profit resulting from future acquisitions will vary depending on geographic location, whether facilities are Mobile versus Fixed, the range of services provided and the Company's ability to integrate the acquired businesses into its existing infrastructure. Since the Merger, InSight has completed four acquisitions and entered into a definitive agreement with respect to an additional acquisition, as discussed above. As noted above (see Item 1. "Business-Recapitalization"), the Company consummated the Recapitalization on October 14, 1997 pursuant to which (a) the Company issued to Carlyle 25,000 shares of Series B Preferred Stock having a liquidation preference of $1,000 per share and warrants to purchase 250,000 shares of InSight Common Stock at the current exercise price of $10.00 per share, generating net proceeds to the Company (after related transaction costs of approximately $2.0 million) of approximately $23.0 million; (b) the Company issued to GE 7,000 shares of Series C Preferred Stock, with a liquidation preference of $1,000 per share, in consideration of the termination of GE's right to receive supplemental service fee payments equal to 14% of InSight's pre-tax income, (for which the Company will record a non-recurring expense of approximately $6.7 million in the second quarter of fiscal 1998), and agreed to issue to GE an additional 20,953 shares of Series C Preferred Stock at the Second Closing in exchange for all of GE's shares of Series A Preferred Stock; and (c) the Company executed a Credit Agreement with NationsBank which, subject to the satisfaction of certain customary conditions, is expected to be consummated by early November and includes (i) a $50 million term loan facility consisting of a $20 million tranche with increasing amortization over a five year period and a $30 million tranche principally repayable in years 6 and 7, (ii) a $25 million revolving working capital facility with a five-year maturity, and (iii) a $50 million acquisition facility, which may be increased by up to an additional $25 million upon the satisfaction of certain conditions, including commitments from participating lenders. The net proceeds from the Carlyle investment will be used to refinance a portion of the outstanding GE indebtedness (approximately $23 million). At the initial funding of the Bank Financing, all of the term loan facility is expected to be drawn down to refinance all of the remaining GE indebtedness (approximately $47 million) and approximately $10 million of the revolving facility is expected to be drawn down for working capital purposes. If the Bank Financing is not consummated for any reason, the Company would be required to seek alternate financing. In such event, there can be no assurance that such financing would be available on acceptable terms. InSight's operations are principally dependent on its ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). Managed care contracting has become very competitive and reimbursement schedules are nearing Medicare reimbursement levels. A decline in referrals and/or reimbursement rates would adversely affect the Company's revenues and profits. In connection with the Merger, certain financial accommodations with MHC's and IHC's primary creditor, GE, became effective in June 1996. The financial accommodations with GE have restricted InSight's ability to raise capital, incur additional debt, enter into additional leases for equipment, complete acquisitions, or enter into other corporate transactions without first obtaining a waiver or consent from GE. The GE indebtedness is expected to be repaid in full from the proceeds of the Carlyle investment and the Bank Financing. The terms of the Series B Preferred Stock and the Series C Preferred Stock, as well as the Bank Financing, contain similar restrictions on InSight's ability to act without first obtaining a waiver or consent from Carlyle, GE and NationsBank. 13 Working capital decreased to a deficit of approximately $5.7 million at June 30, 1997 from a deficit of approximately $1.2 million at June 30, 1996. This increase in deficit of approximately $4.5 million is primarily due to the current portion of additional debt incurred as a result of the Company's acquisition strategy discussed above and principal payments on long-term debt, offset by net income before depreciation and amortization. GE loaned the Company approximately $25.0 million to complete the acquisitions and has agreed to loan the Company approximately $2.7 million to complete the acquisition in Murfreesboro, Tennessee discussed above. Notwithstanding the above, the Company believes that its current cash balances and cash flows from operations, will be sufficient to finance its current operations through June 30, 1998. Cash and cash equivalents increased to approximately $7.1 million at June 30, 1997 from approximately $6.8 million at June 30, 1996. This increase of approximately $0.3 million resulted primarily from (i) cash provided by operating activities of approximately $7.3 million and (ii) long-term borrowings of approximately $33.7 million, offset by (i) the acquisition of Centers and Mobile Facilities (approximately $18.6 million), (ii) purchases of property and equipment (approximately $7.1 million), and (iii) payments on debt and capital lease obligations (approximately $11.0 million). The Company has committed to purchase, at an aggregate cost of approximately $4.0 million, three MRI systems for delivery during the quarter ending December 31, 1998. The Company has obtained commitments to finance the purchase or lease of such equipment; however, the Bank Financing may be used to finance the purchase of such equipment. In addition, the Company has committed to purchase or lease from GE, at an aggregate cost of approximately $20 million, including siting costs, 20 open MRI systems for delivery and installation over the next two years. The Company may purchase, lease or upgrade other MRI systems as opportunities arise to place new equipment into service when new contract services agreements are signed, existing agreements are renewed, acquisitions are completed, or new imaging centers are developed in accordance with the Company's strategic initiatives. In February 1996, MHC and the other parties in a class action securities lawsuit reached a settlement. On July 29, 1996, following final court approval, MHC and the other parties collectively paid to the plaintiffs in the class action the balance of the agreed upon settlement amount. In anticipation of this settlement, MHC recorded a charge of $1.5 million in 1995 and as part of the Merger borrowed approximately $1.9 million from GE to finance the settlement. RESULTS OF OPERATIONS BECAUSE THE MERGER WAS ACCOUNTED FOR USING THE PURCHASE METHOD OF ACCOUNTING AND MHC WAS TREATED AS THE ACQUIROR, THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS THE HISTORICAL FINANCIAL DATA OF THE COMPANY (REFLECTING THE COMBINED OPERATIONS OF IHC AND MHC) FOR THE YEAR ENDED JUNE 30, 1997 AND THE HISTORICAL FINANCIAL DATA OF MHC ONLY FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994. YEAR ENDED JUNE 30, 1997 AND SIX MONTHS ENDED JUNE 30, 1996 REVENUES: Revenues increased approximately $66.6 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase in revenues was due primarily to additional IHC revenues as a result of the Merger (approximately $38.7 million), increases in revenues due to the acquisitions discussed above (approximately $2.0 million) and an increase in contract services, patient services and other revenues at MHC (approximately $25.9 million). The increase of $25.9 million in MHC revenues was primarily due to a year of results for 1997 compared to the six month period in 1996. Compared to 1996 on an annualized basis, MHC revenues decreased by approximately $0.5 million, or approximately 1%. Contract services revenues increased approximately $27.8 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. This increase was due primarily to additional IHC revenues as a result of the Merger (approximately $7.8 million), an increase in revenues due to the acquisitions discussed above (approximately $0.2 million) and an increase in MHC revenues of approximately $19.8 million. The increase of $19.8 million was primarily due to a year of results for 1997 compared to a six month period in 1996. Compared to 1996 on an annualized basis, MHC revenues decreased approximately $0.2 million, or 0.5%. This decrease was due to reductions in reimbursement (approximately 6%) from customers, primarily hospitals, offset by increased utilization (approximately 30%). 14 InSight's contract services revenues, primarily earned by its Mobile Facilities, represent approximately 51% of total revenues. Each year approximately one-quarter to one-third of the contract services agreements are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past where agreements have not been renewed, the Company has been able to obtain replacement customer accounts; however, it is not always possible to obtain replacement accounts and some replacement accounts have been smaller than the lost account. The non-renewal of a single customer agreement would not have a material impact on InSight's contract services revenues; however, non-renewal of several agreements could have a material impact on contract services revenues. In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some customer accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, InSight's contract services revenues would be adversely affected. Patient services revenues increased approximately $36.9 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase in revenues was due primarily to additional IHC revenues as a result of the Merger (approximately $30.5 million), increased revenues due to the acquisitions discussed above (approximately $1.8 million), and an increase in MHC revenues of approximately $4.6 million. The increase in MHC revenues of $4.6 million was primarily due to a year of results for 1997 compared to a six month period in 1996. Compared to 1996 on an annualized basis, MHC revenues decreased approximately $1.3 million, or 11%. This decrease was due to continued declines in reimbursement (approximately 5%) from third party payors and the closure of a Fixed Facility in June 1996, offset by increased utilization (approximately 20%). No single source accounts for more than 10% of InSight's revenues. The Company has six individual contracts with the county of Los Angeles ("County") covering six separate sites. In the aggregate, these sites earn revenues which represent approximately 10% of the Company's annual revenues. From time to time, the County has experienced financial difficulties. If such difficulties caused the County to curtail or terminate the Company's services, the Company's business would be adversely affected. Management believes that any future increases in revenues can only be achieved by higher utilization and not by increases in procedure prices since reimbursement is declining; however, excess capacity of diagnostic imaging equipment, increased competition, and the expansion of managed care may impact utilization and make it difficult for the Company to achieve revenue increases in the future, absent the execution of provider agreements with managed care companies and other payors, and the execution of the Company's strategic initiatives. COSTS OF OPERATIONS: Costs of operations increased approximately $52.9 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. This increase was due primarily to additional IHC costs as a result of the Merger (approximately $29.8 million), an increase in costs due to the acquisitions discussed above (approximately $1.5 million), and an increase in costs at MHC of approximately $21.6 million. The increase of $21.6 million at MHC was primarily due to a year of results for 1997 compared to a six month period in 1996. Compared to 1996 on an annualized basis, MHC costs decreased approximately $5.8 million, or 11%. This decrease was due to a reduction in costs of services, provision for doubtful accounts, and equipment leases and depreciation and amortization. Costs of services, including the provision for doubtful accounts, increased approximately $35.6 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase in costs was due primarily to additional IHC costs as a result of the Merger (approximately $20.8 million), an increase in costs due to the acquisitions discussed above (approximately $1.2 million) and an increase in costs at MHC (approximately $13.6 million). The increase in costs at MHC was due primarily to a year of results for 1997 compared to a six month period in 1996. Compared to 1996 on an annualized basis, MHC costs decreased approximately $2.9 million. This decrease was due to (i) reduced costs in service supplies and equipment maintenance and (ii) one time charges in 1996 related to the closure of two Centers and the early return of four Mobile Facilities. 15 Equipment leases and depreciation and amortization increased approximately $17.4 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase was due primarily to additional IHC costs as a result of the Merger (approximately $9.2 million), increased costs due to the acquisitions discussed above (approximately $0.3 million) and an increase in costs at MHC (approximately $7.9 million). The increase at MHC of $7.9 million was primarily due to a year of results for 1997 compared to a six month period in 1996. Compared to 1996 on an annualized basis, MHC costs decreased approximately $0.8 million. This decrease was due to a write down of approximately $1.5 million of intangibles in 1996 which did not occur in 1997. Under the terms of the amended equipment maintenance service agreement with GE, GE was entitled to receive a supplemental service fee equal to 14% of pretax income, subject to certain adjustments. During the year ended June 30, 1997, the Company recorded a provision of approximately $0.3 million in connection with this agreement. The Company's future obligations under this agreement were terminated as part of the Recapitalization. As mentioned above, the Company will record a non-recurring expense of $6.7 million in the second quarter of fiscal 1998 in connection with the termination of this agreement. GROSS PROFIT: Gross profit increased approximately $13.7 million during the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase was due primarily to additional gross profit from IHC as a result of the Merger (approximately $8.9 million), an increase due to the acquisitions discussed above (approximately $0.5 million), and an increase at MHC (approximately $4.3 million). CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately $5.3 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase was partially related to maintaining duplicate staffing during the transition phase of the Merger and to additional consulting and legal costs associated with the Company's acquisition activities. The Company has achieved annualized cost savings (approximately $1.0 million) compared to the historical combined costs of MHC and IHC, primarily as a result of elimination of duplicate facilities including corporate headquarters, and synergies in staff and functional areas. INTEREST EXPENSE, NET: Interest expense, net increased approximately $2.9 million for the year ended June 30, 1997, compared to the six months ended June 30, 1996. The increase was due primarily to (i) additional debt assumed as a result of the Merger (approximately $3.3 million) and (ii) additional debt related to the acquisitions discussed above (approximately $0.3 million), offset by reduced interest as a result of (i) amortization of the deferred gain on the debt restructure with GE (approximately $1.0 million) and (ii) amortization of long-term debt. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT: In connection with the Merger, MHC recorded an extraordinary gain on debt extinguishment of approximately $3.2 million in 1996. There was no similar gain in 1997. INCOME (LOSS) PER COMMON SHARE: Net income per common share was $0.24 for the year ended June 30, 1997, compared to a net loss per common share before extraordinary item of $(2.99) for the six months ended June 30, 1996. The improvement in income per common share is the result of (i) increased gross profit, and (ii) an increase in earnings from unconsolidated partnerships, offset by (i) increased corporate operating expenses, and (ii) increased interest expense. SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED) REVENUES: Revenues increased $2.0 million, or approximately 8 percent, during the six months ended June 30, 1996, compared with the same period in 1995. The increase in revenues was due primarily to the acquisition of certain customer contracts in April 1995, the acquisition of certain Centers in October 1995 and increases in volumes on certain contracts serviced by Mobile and Fixed Facilities. These increases were offset by decreases in reimbursement rates from third party payors. COSTS OF OPERATIONS: Costs of operations increased $4.4 million, or approximately 19 percent, during the six months ended June 30, 1996, compared with the same period in 1995. This increase was primarily due to (i) the write down of approximately $1.5 million of goodwill and other intangibles related to two of MHC's Centers; (ii) an increase in cost of services of $2.3 million and (iii) an increase in depreciation of $0.7 million offset by a decrease in the provision for doubtful accounts of $0.4 million. 16 Costs of services increased $2.3 million during the six months ended June 30, 1996, compared with the same period in 1995. The increase was due primarily to (i) certain one-time charges relating to operating strategies associated with the Merger which include provisions for the closure of two Centers, the write down of a Mobile Facility and the estimated costs and termination fees for the early return of four Mobile Facilities; (ii) increased costs associated with the acquisitions discussed above; and (iii) higher costs associated with the increase in patient services revenues which include personnel costs, facility costs, service supplies and professional fees. The provision for doubtful accounts decreased $0.4 million during the six months ended June 30, 1996, compared with the same period in 1995. This decrease is primarily attributable to a $0.3 million charge recorded in June 1995. A similar charge was not recorded in 1996. Depreciation increased $0.7 million during the six months ended June 30, 1996, compared with the same period in 1995. This increase was due primarily to capital leases entered into, acquisitions completed, and leasehold improvements incurred at several of MHC's Fixed Facilities subsequent to June 30, 1995. GROSS PROFIT: Gross profit decreased $2.4 million during the six months ended June 30, 1996, compared with the same period in 1995. This decrease was primarily attributable to the increase in costs of services discussed above. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased $0.2 million during the six months ended June 30, 1996, compared with the same period in 1995. This increase was due primarily to a provision in June 1996 of $0.6 million for termination benefits and facility costs in connection with the reduction in the duplicative administrative infrastructure as a result of the Merger. INTEREST EXPENSE, NET: Interest expense, net increased $0.5 million during the six months ended June 30, 1996, compared with the same period in 1995. This increase was due primarily to debt financed in 1995 in connection with acquisitions and the financing of certain operating expenses. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT: In connection with the Merger, MHC recorded an extinguishment of $9.0 million of long-term obligations owed to GE in June 1996. The extraordinary gain represents the excess of the carrying value of the debt obligations settled over the sum of the fair value of the Maxum Series B Preferred Stock issued in exchange for such debt extinguishment and the sum of future interest payable on all remaining obligations owed to GE. In accordance with the provisions of troubled debt accounting, a portion of the extraordinary gain, equal to the sum of the current and long-term portions of future interest payable on all remaining GE debt was deferred and will be reduced by future interest payments over the terms of the respective debt instruments. YEARS ENDED DECEMBER 31, 1995 AND 1994 REVENUES: Revenues increased $4.7 million, or approximately 10%, in 1995 compared to 1994. The increase in revenues was related primarily to acquisitions. This increase was partially offset by the continued decline in reimbursement rates and a decrease in other revenues in 1995 compared to 1994. An increase in fee-for-service revenues of $5.0 million in 1995 compared to 1994 was attributable to: (i) the award of an exclusive capitated managed care contract in December 1994, under which MHC's fees were paid directly by the managed care organization and were earned on a per-member-per-month basis; and (ii) the acquisition of certain customer contracts in the first half of 1995. Other fee-for-service revenues and equipment rental revenues (derived primarily from Mobile Facilities) decreased $1.8 million, compared to 1994, due to expiration of hospital service contracts and third party equipment leases. Management fees decreased $0.6 million in 1995, compared to 1994, due primarily to the sale or termination of certain partnerships in late 1994. Approximately 58% of the $2.4 million increase in patient services revenues was due to increased patient services revenues associated with acquisitions during 1995. Approximately 25% of the increase is attributable to a contract awarded in the third quarter of 1994 to provide radiology and management services at an outpatient Fixed Facility for a hospital customer. The remainder of the increase was due primarily to increases in procedure volumes at MHC's other Centers, offset by continued declines in reimbursement rates. 17 Other revenues decreased during 1995 compared to 1994, due primarily to the sale of MHC's technical services division in June 1994. COSTS OF OPERATIONS: Costs of operations increased $3.3 million, or approximately 7%, in 1995 compared to 1994. Costs of services in 1995 was reduced by $0.8 million related to sales/use tax refunds. These refunds represent taxes paid in prior years attributable to certain mobile diagnostic imaging equipment, and were received due to a determination by the taxing authority having reached a determination that the mobile equipment was subject to motor vehicle tax rather than sales/use tax. Occupancy expense (which includes operating costs of facilities leased or subcontracted by MHC) increased $0.8 million, or approximately 88%, in 1995 compared to 1994. This increase was due primarily to subcontracting costs incurred related to the capitated managed care contract that was awarded in December 1994. Professional fees increased $0.7 million, or approximately 41%, in 1995 compared to 1994, due primarily to the increase in patient services revenues and to costs incurred related to the capitated managed care contract discussed above. In addition to the net impact of the sales/use tax refund, occupancy expense and professional fees discussed above, all other components of costs of services experienced a net increase of $2.2 million in 1995 compared to 1994, due primarily to the variable costs associated with the increase in revenues resulting primarily from acquisitions in 1995 discussed above. The provision for doubtful accounts increased $0.5 million, or approximately 48%, in 1995 compared to 1994, due primarily to the increase in patient services revenues and a shift in the payor mix in MHC's Centers related to the penetration of managed care. This change in payor mix had an unfavorable impact on reimbursement rates realized by the Centers and resulted in an increase in bad debt expense in 1995 associated with unreimbursed amounts which were not subsequently collectible from patients. Depreciation decreased $0.2 million, or approximately 6%, in 1995 compared to 1994. This decrease was due primarily to a purchase and sale- leaseback transaction (in connection with MHC's settlement with a significant creditor in June 1994) which resulted in reductions in net book values of certain Mobile Facilities. GROSS PROFIT: Gross profit increased $1.4 million in 1995 compared to 1994. The increase was primarily attributable to higher profit margins from the absorption of excess capacity associated with acquisitions completed in 1995 and the capitated managed care contract awarded in December 1994. CORPORATE OPERATING EXPENSES: Corporate operating expenses decreased approximately $0.7 million, or approximately 17%, in 1995 compared to 1994. This decrease was due primarily to reductions in legal costs and insurance premiums. EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS: Equity in earnings of unconsolidated partnerships decreased $0.5 million, or approximately 58%, in 1995 compared to 1994, due to the sale of certain partnerships in late 1994 discussed below. INTEREST EXPENSE, NET: Interest expense, net increased $0.4 million, or approximately 35%, in 1995 compared to 1994. This increase was due primarily to (i) the addition of several capital leases of diagnostic imaging equipment; (ii) debt obligations incurred as a result of the acquisitions during 1995; and (iii) interest on operating expenses financed during late 1994 and in 1995. PROVISION FOR SECURITIES LITIGATION SETTLEMENT: In anticipation of the MHC settlement of two class-action lawsuits originally filed in 1993, MHC recorded a charge of $1.5 million in the fourth quarter of 1995. GAIN ON SALE OF PARTNERSHIP INTERESTS: In December 1994, MHC sold its interests in three lithotripsy partnerships for approximately $5.0 million in cash which resulted in a pretax gain of approximately $5.0 million. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENTS: During 1994, MHC settled its outstanding debt and lease obligations owed to a significant creditor and two smaller creditors which resulted in a net extraordinary gain of approximately $3.3 million. 18 INFLATION Inflation in recent years has not had a significant impact on MHC's or IHC's business, and is not expected to adversely affect the Company in the near future. NEW PRONOUNCEMENTS In fiscal 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation". As permitted under the standard, the Company continued to account for employee stock options in accordance with APB Opinion No. 25 and made necessary pro forma disclosures mandated by SFAS No. 123. The adoption of this standard had no impact on the Company's results of operations. In fiscal 1998, the Company will be required to adopt SFAS No. 129, "Disclosure of Information about Capital Structure", which continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. The adoption of this standard will have no effect on the Company's results of operations. The Financial Accounting Standards Board ("FASB") has issued SFAS No. 128, "Earnings per Share ("EPS")". This standard is effective for both interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed in the same way as fully diluted EPS, except that the calculation now uses the average share price for the reporting period to compute dilution from options under the treasury stock method. Management believes that adoption of this standard will not have a significant impact on earnings per share. In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." FASB Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company believes that adoption of these standards will not have a material impact on the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements for the Year Ended June 30, 1997, for the Six Months Ended June 30,1996 and for the Years Ended December 31, 1995 and 1994 PAGE NUMBER ----------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 22 CONSOLIDATED BALANCE SHEETS 23-24 CONSOLIDATED STATEMENTS OF OPERATIONS 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 26 CONSOLIDATED STATEMENTS OF CASH FLOWS 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28-42 SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 49 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To InSight Health Services Corp.: We have audited the accompanying consolidated balance sheets of INSIGHT HEALTH SERVICES CORP. (a Delaware corporation) and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended June 30, 1997 and for the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InSight Health Services Corp. and subsidiaries as of June 30, 1997 and 1996, and results of their operations and their cash flows for the year ended June 30, 1997 and for the six months ended June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California October 14, 1997 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Maxum Health Corp.: We have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows of Maxum Health Corp. and Subsidiaries (MHC) for each of the two years in the period ended December 31, 1995. Our audits also included the related financial statement schedule of valuation and qualifying accounts. These financial statements and schedule are the responsibility of MHC's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of MHC's operations and its cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statements schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that MHC will continue as a going concern. As discussed in Note 3 to the financial statements, MHC is experiencing difficulty in generating sufficient cash flow to meet its obligations and sustain its operations. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Notes 1 and 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Dallas, Texas March 1, 1996 22 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
June 30, June 30, 1997 1996 ------------ ------------- ASSETS - ------- CURRENT ASSETS: Cash and cash equivalents $ 7,135 $ 6,864 Trade accounts receivable, net 15,645 12,916 Other receivables, net 358 973 Other current assets 1,554 1,708 --------- ---------- Total current assets 24,692 22,461 --------- ---------- PROPERTY AND EQUIPMENT: Vehicles 968 978 Land, building and leasehold improvements 9,589 8,602 Computer and office equipment 3,855 3,638 Diagnostic and related equipment 28,193 18,113 Equipment and vehicles under capital leases 8,086 10,479 --------- ---------- 50,691 41,810 Less: Accumulated depreciation and amortization 16,203 11,958 --------- ---------- Property and equipment, net 34,488 29,852 --------- ---------- INVESTMENT IN PARTNERSHIPS 402 359 --------- ---------- OTHER ASSETS 5,468 749 --------- ---------- INTANGIBLE ASSETS, net 33,272 16,965 --------- ---------- $ 98,322 $ 70,386 --------- ---------- --------- ----------
The accompanying notes are an integral part of these consolidated balance sheets. 23 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data)
June 30, June 30, 1997 1996 ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment and other notes $ 11,901 $ 6,585 Current portion of capital lease obligations 3,561 2,638 Accrued equipment related costs 2,882 3,249 Accounts payable and other accrued expenses 8,822 8,328 Accrued payroll and related costs 2,521 1,775 Current portion of deferred gain on debt restructure 745 1,053 ---------- ---------- Total current liabilities 30,432 23,628 ---------- ---------- LONG-TERM LIABILITIES: Equipment and other notes, less current portion 54,421 31,653 Capital lease obligations, less current portion 3,312 3,988 Accrued securities litigation settlement - 1,900 Deferred gain on debt restructure, less current portion 728 1,467 Other long-term liabilities 744 831 ---------- ---------- Total long-term liabilities 59,205 39,839 ---------- ---------- COMMITMENTS (Note 8) MINORITY INTEREST 2,000 1,515 ---------- ---------- STOCKHOLDERS' EQUITY: Convertible Series A preferred stock, $.001 par value, 3,500,000 shares authorized; 2,501,760 outstanding at June 30, 1997 and 1996, respectively, stated at 6,750 6,750 Common stock, $.001 par value, 25,000,000 shares authorized, 2,714,725 and 2,710,240 shares outstanding at June 30, 1997 and 1996, respectively 3 3 Additional paid-in capital 23,100 23,100 Accumulated deficit (23,168) (24,449) ---------- ---------- Total stockholders' equity 6,685 5,404 ---------- ---------- $ 98,322 $ 70,386 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated balance sheets. 24 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data)
Six Year Ended Months Ended Year Ended Year Ended June 30, June 30, December 31, December 31, 1997 1996 1995 1994 ------------ -------------- ------------- -------------- REVENUES: Contract services $ 47,827 $ 20,045 $ 38,976 $ 36,393 Patient services 42,706 5,853 10,605 8,228 Other 2,530 562 1,028 1,247 ----------- ----------- ---------- ---------- Total revenues 93,063 26,460 50,609 45,868 ----------- ----------- ---------- ---------- COSTS OF OPERATIONS: Costs of services 50,564 15,899 28,772 26,067 Provision for doubtful accounts 1,506 617 1,669 1,124 Equipment leases 18,396 6,957 14,464 14,581 Depreciation and amortization 9,871 3,947 3,873 3,667 ----------- ----------- ---------- ---------- Total costs of operations 80,337 27,420 48,778 45,439 ----------- ----------- ---------- ---------- GROSS PROFIT (LOSS) 12,726 (960) 1,831 429 CORPORATE OPERATING EXPENSES 7,431 2,127 3,372 4,040 ----------- ----------- ---------- ---------- INCOME (LOSS) FROM COMPANY OPERATIONS 5,295 (3,087) (1,541) (3,611) EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIP 468 138 348 834 ----------- ----------- ---------- ---------- OPERATING INCOME (LOSS) 5,763 (2,949) (1,193) (2,777) OTHER INCOME (EXPENSE): Interest expense, net (4,055) (1,144) (1,626) (1,206) Provision for securities litigation settlement - - (1,500) - Gain on sale of partnership interests - - - 4,957 ----------- ----------- ---------- ---------- (4,055) (1,144) (3,126) 3,751 ----------- ----------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 1,708 (4,093) (4,319) 974 PROVISION FOR INCOME TAXES 427 65 - 160 ----------- ----------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,281 (4,158) (4,319) 814 EXTRAORDINARY ITEM - Net gain on debt extinguishment - 3,179 - 3,342 ----------- ----------- ---------- ---------- NET INCOME (LOSS) $ 1,281 $ (979) $ (4,319) $ 4,156 ----------- ----------- ---------- ---------- INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item $ 0.24 $ (2.99) $ (3.21) $ 0.58 ----------- ----------- ---------- ---------- Net income (loss) $ 0.24 $ (0.70) $ (3.21) $ 2.96 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- Weighted average number of common shares outstanding 5,440,315 1,389,271 1,344,832 1,402,435 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 25 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands, except share data)
Preferred Stock Common Stock -------------------- --------------------------------------- Shares Amount Shares Amount Warrant -------- -------- ----------- ---------- --------- BALANCE AT DECEMBER 31, 1993 - $ - 2,949,488 $ 29 $ 7 Stock issued under employee purchase plan - - 3,927 - - Surrender of 132,750 shares of treasury stock in settlement of stockholder note receivable - - - - - Net income - - - - - --------- --------- -------- ------- -------- BALANCE AT DECEMBER 31, 1994 - - 2,953,415 29 7 Stock issued under employee purchase plan - - 51,640 1 - Net loss - - - - - --------- --------- -------- ------- -------- BALANCE AT DECEMBER 31, 1995 - - 3,005,055 30 7 Issuance of Series A Preferred Stock and cancellation of common stock warrant 1,250,880 3,375 - - (7) Acquisition of IHC 1,250,880 3,375 1,349,908 1 - Retirement of MHC's treasury stock - - - - - Reset the par value of InSight common stock issued in exchange for MHC'S common stock - - (1,644,723) (28) - Net loss - - - - - --------- --------- ---------- ------- -------- BALANCE AT JUNE 30, 1996 2,501,760 6,750 2,710,240 3 - Stock options exercised - - 4,485 - - Net income - - - - - --------- --------- -- -------- ------- -------- BALANCE AT JUNE 30, 1997 2,501,760 $ 6,750 2,714,725 $ 3 $ - --------- --------- -------- ------- -------- --------- --------- -------- ------- -------- Additional Stockholder Paid-In Accumulated Note Treasury Capital Deficit Receivable Stock Total ----------- ---------------- ------------ ----------- ---------- BALANCE AT DECEMBER 31, 1993 $ 19,679 $ (23,307) $ (110) $ (155) $(3,857) Stock issued under employee purchase plan 1 - - - 1 Surrender of 132,750 shares of treasury stock in settlement of stockholder note receivable - - 110 (110) - Net income - 4,156 - - 4,156 --------- --------- -------- ------- -------- BALANCE AT DECEMBER 31, 1994 19,680 (19,151) - (265) 300 Stock issued under employee purchase plan 13 - - - 14 Net loss - (4,319) - - (4,319) --------- --------- -------- ------- -------- BALANCE AT DECEMBER 31, 1995 19,693 (23,470) - (265) (4,005) Issuance of Series A Preferred Stock and cancellation of common stock warrant - - - - 3,368 Acquisition of IHC 3,644 - - - 7,020 Retirement of MHC's treasury stock (265) - - 265 - Reset the par value of InSight common stock issued in exchange for MHC'S common stock 28 - - - - Net loss - (979) - - (979) --------- --------- -------- ------- -------- BALANCE AT JUNE 30, 1996 23,100 (24,449) - - 5,404 Stock options exercised - - - - - Net income - 1,281 - - 1,281 --------- --------- -------- ------- -------- BALANCE AT JUNE 30, 1997 $ 23,100 $ (23,168) $ - $ - $ 6,685 --------- --------- -------- -------- -------- --------- --------- -------- -------- --------
26 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Six Year Ended Months Ended Year Ended Year Ended June 30, June 30, December 31, December 31, 1997 1996 1995 1994 ------------ -------------- ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ 1,281 $ (979) $ (4,319) $ 4,156 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 9,871 4,022 4,060 3,913 Amortization of deferred gain on debt restructure (1,047) - - - Gain on disposal of assets (113) (133) (35) (112) Provision for securities litigation settlement - - 1,500 - Gain on sale of partnership interests - - - (4,957) Operating expenses financed by issuance of debt - 1,015 2,330 2,672 Extraordinary gain on debt extinguishments - (3,179) - (3,342) Cash provided by (used in) changes in operating assets and liabilities: Payments for restructure costs - - - (700) Receivables (1,664) (174) (524) (38) Other current assets 157 (851) (110) 782 Accounts payable and other current liabilities (1,143) 975 (1,089) 1,088 --------- --------- ---------- ---------- Net cash provided by operating activities 7,342 696 1,813 3,462 --------- --------- ---------- ---------- INVESTING ACTIVITIES: Cash acquired in acquisition of IHC - 5,489 - - Acquisition of Centers and Mobile Facilities (18,566) - (1,855) (510) Acquisition of customer contracts and intangibles - - (2,108) - Proceeds from sales of assets 347 369 745 1,358 Proceeds from sale of partnership interests - - - 5,007 Additions to property and equipment (7,102) (960) (548) (349) (Increase) decrease in other assets (4,937) 195 190 582 --------- --------- ---------- ---------- Net cash provided by (used in) investing activities (30,258) 5,093 (3,576) 6,088 --------- --------- ---------- ---------- FINANCING ACTIVITIES: Principal payments of debt and capital lease obligations (11,026) (2,302) (6,020) (4,752) Proceeds from issuance of debt 33,728 1,507 2,689 268 Net repayments on revolving note payable - - - (250) Other 485 - 14 1 --------- --------- ---------- ---------- Net cash provided by (used in) financing activities 23,187 (795) (3,317) (4,733) --------- --------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 271 4,994 (5,080) 4,817 Cash, beginning of period 6,864 1,870 6,950 2,133 --------- --------- ---------- ---------- Cash, end of period $ 7,135 $ 6,864 $ 1,870 $ 6,950 --------- --------- ---------- ---------- --------- --------- ---------- ---------- SUPPLEMENTAL INFORMATION (Note 13)
The accompanying notes are an integral part of these consolidated financial statements. 27 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. MERGER InSight Health Services Corp. (InSight or the Company) is a Delaware corporation formed on February 23, 1996 in connection with the Agreement and Plan of Merger, dated as of February 26, 1996 (Merger Agreement), among American Health Services Corp., a Delaware corporation (AHS), Maxum Health Corp., a Delaware corporation (MHC or Maxum), InSight and two wholly owned subsidiaries of InSight, AHSC Acquisition Company, a Delaware corporation (AHSC Acquisition), and MXHC Acquisition Company, a Delaware corporation (MXHC Acquisition). Pursuant to the terms of the Merger Agreement, (i) AHSC Acquisition merged with and into AHS and MXHC Acquisition merged with and into Maxum (collectively, the Merger), (ii) each outstanding share of common stock, par value $.03 per share, of AHS (AHS Common Stock) was converted into the right to receive one-tenth of a share of common stock, par value $.001 per share, of InSight (InSight Common Stock), (iii) each outstanding share of Series B Senior Convertible Preferred Stock, par value $.03 per share, of AHS (AHS Series B Preferred Stock) which was convertible into 100 shares of AHS Common Stock was converted into the right to receive 10 shares of InSight Common Stock, (iv) each outstanding share of Series C Preferred Stock, par value $.03 per share, of AHS (AHS Series C Preferred Stock), which was issued immediately prior to the consummation of the Merger, was converted into the right to receive 1.25088 shares of Series A Preferred Stock, par value $.001 per share, of InSight (InSight Series A Preferred Stock), (v) each outstanding share of common stock, par value $.01 per share, of Maxum (Maxum Common Stock) was converted into the right to receive .598 of a share of InSight Common Stock, (vi) each outstanding share of Series B Preferred Stock, par value $.01 per share, of Maxum (Maxum Series B Preferred Stock), which was issued immediately prior to the consummation of the Merger, was converted into the right to receive 83.392 shares of InSight Series A Preferred Stock, and (vii) each outstanding option, warrant or other right to purchase AHS Common Stock and Maxum Common Stock was converted into the right to acquire, on the same terms and conditions, shares of InSight Common Stock, with the number of shares and exercise price applicable to such option, warrant or other right adjusted based on the applicable exchange ratio for the underlying AHS Common Stock or Maxum Common Stock. Concurrent with the consummation of the Merger, AHS and MHC completed a debt restructuring with General Electric Company (GE), the primary creditor of MHC and AHS. This restructuring resulted in the reduction of certain debt and operating lease obligations and cancellation of certain stock warrants of MHC and AHS in exchange for, among other things, the issuance to GE, immediately prior to the consummation of the Merger, of Maxum Series B Preferred Stock and AHS Series C Preferred Stock. In connection with this restructuring, MHC recorded the extinguishment of $9.0 million of long-term debt obligations and an extraordinary gain representing the difference in the carrying value ($9.0 million) of the debt obligations settled over the fair value ($3.4 million) of the Maxum Series B Preferred Stock issued to GE. In accordance with the provisions of troubled debt accounting, a portion of the extraordinary gain, equal to the sum of the current and long-term portions of future interest payable on all remaining GE debt and capital lease obligations of $1.0 million and $1.5 million, respectively, was deferred and will be reduced by future interest payments over the terms of the respective debt instruments. At the effective time of the Merger, MHC Series B Preferred Stock and AHS Series C Preferred Stock issued to GE was converted into the right to receive such number of shares of InSight Series A Preferred Stock that is convertible into such number of shares of InSight Common Stock representing approximately 48% of InSight Common Stock outstanding at the effective time of the Merger (after giving effect to such conversion). Under an amended equipment maintenance service agreement, GE will also be entitled to receive certain supplemental service fee payments based on future pretax income of InSight. On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC). The Merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. MHC is treated as the acquiror for accounting purposes, based upon the relative revenues, book values and other factors. The Consolidated Financial Statements presented herein for the six months ended June 30, 1996 and for the years ended December 31, 1995 and 1994, respectively, represent the operating results of MHC only. 28 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. NATURE OF BUSINESS The Company provides diagnostic imaging, treatment and related services to hospitals, physicians and their patients through its imaging network in 26 states throughout the United States, with a substantial presence in California, primarily Los Angeles County, and northern Texas, primarily the Dallas/Ft. Worth metroplex. The Company's services are provided through a network of 35 mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 28 fixed-site MRI facilities (Fixed Facilities), 10 multi-modality imaging centers (Centers), two Leksell Stereotactic Gamma Unit treatment centers (Gamma Knife), and one radiation oncology center. An additional radiation oncology center is operated by the Company as a part of one of its Centers. b. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of InSight and its wholly owned subsidiaries, MHC and IHC (Note 1). The Company's investment interests in partnerships (the Partnerships) are accounted for under the equity method of accounting for ownership of 50 percent or less when the Company does not exercise significant control over the operations of the Partnership and does not have primary responsibility for the Partnership's long-term debt. The Company's consolidated financial statements include two Partnerships which have been accounted for under the equity method (Note 12). At June 30, 1997 and 1996, respectively, the Company has consolidated two 50 percent owned Partnerships and one less than 50 percent owned limited liability company. Since the Company controls the operations of these 50 percent or less owned entities and is primarily responsible for the associated long-term debt, management believes that consolidation of these entities is the most meaningful financial statement presentation (Note 12). Significant intercompany balances have been eliminated. c. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. d. REVENUE RECOGNITION Revenues from contract services (primarily Mobile Facilities) and from patient services (primarily Centers) are recognized when services are provided. Patient services revenues are presented net of related contractual adjustments. Equipment rental revenues, management fees and other revenues are recognized over the applicable contract period. Revenues collected in advance are recorded as unearned revenue. e. CASH EQUIVALENTS Cash equivalents are generally composed of highly liquid investments with original maturities of three months or less, such as certificates of deposit and commercial paper. f. PROPERTY AND EQUIPMENT Property and equipment are depreciated and amortized on the straight-line method using the following estimated useful lives: Vehicles 3 to 8 years Buildings 7 to 19 years Leasehold improvements Term of lease Computer and office equipment 3 to 5 years Diagnostic and related equipment 5 to 8 years Equipment and vehicles under capital leases Term of lease 29 The Company capitalizes expenditures for improvements and major renewals. Maintenance, repairs and minor replacements are charged to operations as incurred. When assets are sold or otherwise disposed of, the cost and related reserves are removed from the accounts and any resulting gain or loss is included in the results of operations. g. INTANGIBLE ASSETS The Company assesses the recoverability of its intangible assets (including goodwill) by determining whether the intangible asset balance can be recovered over the remaining amortization period through projected nondiscounted future cash flows. If projected future cash flows indicate that the unamortized intangible asset balances will not be recovered, an adjustment is made to reduce the net intangible asset to an amount consistent with projected future cash flows discounted at the Company's incremental borrowing rate. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. The Company has classified as goodwill the cost in excess of fair value of the net assets acquired in purchase transactions. Intangible assets are amortized on the straight-line basis over the following periods (See Note 6): Goodwill 6 to 20 years Non-compete agreements 5 to 7 years Certificates of need 6 years h. INCOME TAXES The Company accounts for income taxes using the liability method in accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires the asset and liability method of accounting for income taxes. i. INCOME (LOSS) PER COMMON SHARE The number of shares used in computing income (loss) per common share is equal to the weighted average number of common and common equivalent shares outstanding during the respective period, adjusted retroactively for the conversion of Maxum Common Stock into InSight Common Stock as a result of the Merger. Common stock equivalents relating to options, warrants and convertible preferred stock are excluded for all periods prior to June 30, 1997 because they are antidilutive. j. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of financial instruments are estimated using available market information and other valuation methodologies. The fair value of the Company's financial instruments is estimated to approximate the related book value, unless otherwise indicated. k. NEW PRONOUNCEMENTS In fiscal 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock Based Compensation". As permitted under the standard, the Company continued to account for employee stock options in accordance with APB Opinion No. 25 and made necessary pro forma disclosures mandated by SFAS No. 123. The adoption of this standard had no impact on the Company's results of operations. In fiscal 1998, the Company will be required to adopt SFAS No. 129, "Disclosure of Information about Capital Structure", which continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. The adoption of this standard will have no effect on the Company's results of operations. The Financial Accounting Standards Board (FASB) has issued SFAS No. 128, "Earnings per Share (EPS)". This standard is effective for both interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is 30 computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed in the same way as fully diluted EPS, except that the calculation now uses the average share price for the reporting period to compute dilution from options under the treasury stock method. Management believes that adoption of this standard will not have a significant impact on earnings per share. In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." FASB Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company believes that adoption of these standards will not have a material impact on the Company. l. RECLASSIFICATIONS Reclassifications have been made to certain 1996, 1995 and 1994 amounts to conform to the 1997 presentation. 3. PRIOR RESTRUCTURE OF MHC'S OPERATIONS AND FINANCIAL OBLIGATIONS As of December 31, 1995, MHC did not have the resources to support its existing debt service and lease requirements and an obligation to settle pending securities litigation. The accompanying 1995 and 1994 financial statements were prepared on a going concern basis, and accordingly did not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities had MHC been unable to continue as a going concern. In June 1996, the financial accommodation transactions with GE were closed and the Merger was consummated (Note 1). 4. ACQUISITIONS In June 1996, InSight, MHC and IHC completed the Merger (Note 1). The Merger was accounted for under the purchase method with MHC being treated as the acquiror for accounting purposes. In September 1996, InSight purchased certain assets of a Fixed Facility in California for approximately $2.8 million in cash. In May 1997, InSight purchased certain assets, primarily Mobile Facilities in Maine and New Hampshire. InSight paid approximately $6.8 million in cash and assumed certain equipment related liabilities of approximately $1.9 million. In June 1997, InSight purchased certain assets of a Center in Tennessee. InSight paid approximately $9.0 million in cash and assumed certain equipment related liabilities of approximately $1.9 million. In May 1997, the Company entered into a definitive agreement to purchase certain assets of a Center in Ohio. As part of the definitive agreement, the Company deposited approximately $5.5 million into an escrow account. At June 30, 1997 this deposit is included in other assets. 31 These acquisitions were accounted for under the purchase method. Accordingly, the results of related operations have been included in the consolidated financial statements since the applicable acquisition dates. The pro forma effects of these acquisitions, as if they had occurred as of January 1, 1996, are summarized as follows (amounts in thousands): Six Months Year Ended Ended June 30, 1997 June 30, 1996 ------------- ------------- (Unaudited) Revenues $104,370 $50,092 Expenses 102,285 54,286 -------- ------- Income (loss) before extraordinary item 2,085 (4,194) Extraordinary item - 3,179 -------- ------- Net income (loss) $ 2,085 $(1,015) -------- ------- -------- ------- Income (loss) per share before extraordinary item $ 0.38 $ (1.55) -------- ------- -------- ------- Net income (loss) per share $ 0.38 $ (0.37) -------- ------- -------- ------- The pro forma results for 1997 and 1996 include $0.8 million and $0.7 million of amortization of intangibles, respectively, and $1.7 million and $0.8 million of interest expense, respectively, related to these acquisitions. The pro forma results in 1996 do not include the interest and lease savings resulting from the Merger. 5. TRADE RECEIVABLES Trade receivables are comprised of the following (amounts in thousands): June 30, ------------------ 1997 1996 ------- ------- Trade receivables $26,271 $23,004 Less: Allowances for doubtful accounts and contractual adjustments 7,491 7,808 Allowances for professional fees 3,135 2,280 ------- ------- Net trade receivables $15,645 $12,916 ------- ------- ------- ------- Net trade receivables arise from revenue generated by: Patient services $ 9,199 $ 7,362 Contract services 5,431 4,693 Other 1,015 861 ------- ------- Net trade receivables $15,645 $12,916 ------- ------- ------- ------- Receivables related to patient services revenues are due primarily from managed care organizations, patients' private insurance companies and government payors. Receivables arising from contract service revenues are due primarily from hospitals. The allowance for doubtful accounts and contractual adjustments include management's estimate of the amounts expected to be written off on specific accounts and for write offs on other as yet unidentified accounts included in accounts receivable. In estimating the write offs and adjustments on specific accounts, management relies on a combination of in-house analysis and a review of contractual payment rates from private health insurance programs or under the federal Medicare program. In estimating the allowance for unidentified write offs and adjustments, management relies on historical experience. The amounts the Company will ultimately realize could differ materially in the near term from the amounts assumed in arriving at the allowance for doubtful accounts and contractual adjustments in the financial statements at June 30, 1997. 32 The Company reserves a contractually agreed upon percentage at several of its Centers, averaging 20 percent of the accounts receivable balance from patients, for payments to radiologists for interpreting the results of the diagnostic imaging procedures. Payments to radiologists are only due when amounts are received. At that time, the balance is transferred from the allowance account to a professional fees payable account. 6. INTANGIBLE ASSETS Intangible assets consist of the following (amounts in thousands): June 30, ------------------ 1997 1996 ------- ------- Intangible assets $35,290 $17,861 Less: Accumulated amortization 2,018 896 ------- ------- $33,272 $16,965 ------- ------- ------- ------- Goodwill $32,804 $16,382 Non-compete agreements 175 245 Customer service contracts - 113 Certificates of need 125 158 Other 168 67 ------- ------- $33,272 $16,965 ------- ------- ------- ------- In connection with the Company's acquisitions in 1997 and the Merger in 1996 (Note 1), the Company recorded $17.6 million and $13.6 million of intangible assets, respectively. Projected future cash flows for two of MHC's Centers at June 30, 1996 indicated that the unamortized goodwill of $1.4 million and the unamortized deferred organizational costs of $0.1 million related to these two Centers were not recoverable. Therefore, in accordance with the Company's policy, the intangible assets related to these Centers were written down during the six months ended June 30, 1996. Amortization of intangible assets was $1.4 million, $1.9 million (including the $1.5 million discussed above), $0.6 million and $0.2 million for the year ended June 30, 1997, for the six months ended June 30, 1996 and for the years ended December 31, 1995, and 1994, respectively. 33 7. EQUIPMENT AND OTHER NOTES PAYABLE Equipment and other notes payable consists of the following (amounts in thousands): June 30, ------------------ 1997 1996 ------- ------- Notes payable to GE, bearing interest at rates which range from 9.16 percent to 12.5 percent, maturing at various dates through August 2004. The notes are secured by substantially all of the Company's assets. $62,329 $36,072 Notes payable to banks and third parties bearing interest rates which range from 8.13 percent to 11 percent, maturing at various dates through September 2000. The notes are primarily secured by certain buildings and diagnostic equipment. 3,993 2,166 ------- ------- Total equipment and other notes payable 66,322 38,238 Less: Current portion 11,901 6,585 ------- ------- Long-term equipment and other notes payable $54,421 $31,653 ------- ------- ------- ------- Scheduled maturities of equipment and other notes payable at June 30, 1997, are as follows (amounts in thousands): 1998 $11,901 1999 13,574 2000 12,472 2001 8,095 2002 6,840 Thereafter 13,440 ------- $66,322 ------- ------- The terms of the notes payable to GE include certain restrictive covenants which, among others, limit capital expenditures and restrict payment of dividends. As of June 30, 1997, the Company was in compliance with these covenants. Interest paid, including amounts deferred as part of the debt restructuring, on debt related to GE for the year ended June 30, 1997, for the six months ended June 30, 1996 and the years ended December 31, 1995 and 1994, was $4.0 million, $0.8 million, $1.0 million and $0.6 million, respectively. 8. LEASE OBLIGATIONS AND COMMITMENTS The Company is leasing diagnostic equipment, certain other equipment and its office facilities under various capital and operating leases. Future minimum scheduled rental payments required under these noncancelable leases at June 30, 1997, are as follows (amounts in thousands): Capital Operating ------- --------- 1998 $4,107 $16,148 1999 2,258 11,282 2000 1,256 5,831 2001 98 3,346 2002 - 1,230 Thereafter - 2,062 ------- --------- Total minimum lease payments 7,719 $39,899 --------- --------- Less: Amounts representing interest 846 ------- Present value of capital lease obligations 6,873 Less: Current portion 3,561 ------- Long term capital lease obligations $3,312 ------- ------- As of June 30, 1997, a substantial amount of equipment leased by the Company is subject to contingent rental adjustments dependent on certain operational factors through 1999. The Company's future operating and capital lease obligations to GE were approximately $24.8 million and $2.6 million, respectively. 34 Rental expense for diagnostic equipment and other equipment for the year ended June 30, 1997, for the six months ended June 30, 1996 and for the years ended December 31, 1995 and 1994, was $18.3 million, $7.0 million, $14.5 million and $14.6 million, respectively. These amounts include contingent rental expense of $0.3 million, $0.2 million, $0.5 million and $0.8 million for the year ended June 30, 1997, for the six months ended June 30, 1996 and for the years ended December 31, 1995 and 1994, respectively. The Company occupies office facilities under lease agreements expiring through June 2007. Rental expense for these facilities for the year ended June 30, 1997, for the six months ended June 30, 1996 and for the years ended December 31, 1995 and 1994, was $1.9 million, $0.3 million, $0.6 million and $0.6 million, respectively. Under the terms of the amended equipment service agreement with GE (Note 1), GE is entitled to receive a supplemental service fee equal to 14% of pretax income, subject to certain adjustments. During the year ended June 30, 1997 the Company recorded a provision of approximately $0.3 million in connection with this agreement. InSight is engaged, from time to time, in the defense of lawsuits arising out of the ordinary course and conduct of its business and has insurance policies covering such potential insurable losses where such coverage is cost-effective. InSight believes that the outcome of any such lawsuits will not have a material adverse impact on InSight's business. 9. CAPITAL STOCK WARRANTS - During 1997, InSight issued warrants to purchase 50,000 shares of its common stock at an exercise price of $5.64 per share to the previous preferred stockholders of IHC. InSight also issued a warrant to purchase 35,000 shares of its common stock at an exercise price of $5.50 per share to an investment banking firm. InSight also issued a warrant to purchase 15,000 shares of its common stock at an exercise price of $5.50 per share to a consultant. In connection with the Merger, InSight assumed a warrant to purchase 20,000 shares of its common stock at an exercise price of $2.50 per share issued to the estate of Cal Kovens, a former director of IHC. STOCK OPTIONS - The Company has two stock option plans which provide for the granting of incentive and nonstatutory stock options to key employees, independent contractors and non-employee directors. Incentive stock options must have an exercise price of at least the fair market value of its common stock on the grant date. Options become vested cumulatively over various periods up to four years from the grant date, are exercisable in whole or in installments, and expire five or ten years from the grant date. In addition, MHC has a stock option plan and IHC has two stock option plans which provided for the granting of incentive or nonstatutory stock options to key employees, non-employee directors and independent contractors. Pursuant to the Merger, the Company assumed all of MHC's and IHC's outstanding options at June 26, 1996. No shares are available for future grants under the MHC and IHC plans. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. SFAS No. 123 was issued in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of SFAS No. 123 is optional, however pro forma disclosures as if the Company had adopted the cost recognition method are required. Had compensation cost for stock options awarded under this plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have reflected the following pro forma amounts: June 30, ------------------------- 1997 1996 ---------- ------------ Net Income (Loss): As Reported $1,281,000 $ (979,000) Pro Forma 966,000 (1,055,000) Primary EPS: As Reported 0.24 (0.70) Pro Forma 0.18 (0.76) 35 The Company may grant options for up to 446,433 shares under one plan and 158,000 shares under the second plan. A summary of the status of the Company's two stock option plans at June 30, 1997 and 1996 and changes during the periods then ended is presented below:
Year Ended Six Months Ended June 30, 1997 June 30, 1996 ------------------------- -------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------ ---------------- ------ ----------------- Outstanding at beginning of period 369,918 $ 2.37 204,068 $3.04 Granted 233,000 6.19 195,850 S3.23 Exercised 4,485 2.50 30,000 0.25 Forfeited - - - - Expired 25,000 13.85 - - ------- ------ ------- ----- Outstanding at end of period 573,433 $ 3.98 369,918 $3.15 ------- ------ ------- ----- ------- ------ ------- ----- Exercisable at end of period 296,416 $ 2.12 263,378 $4.25 ------- ------ ------- ----- ------- ------ ------- ----- Weighted average fair value of options granted $ 5.04 $2.61
272,230 of the options outstanding at June 30, 1997 have exercise prices of $0.10 to $2.50, a weighted average exercise price of $0.86 and a weighted average remaining contractual life of 6.35 years. 255,430 of these options are exercisable. 58,000 of the options outstanding at June 30, 1997 have exercise prices of $3.75 to $5.50, a weighted average exercise price of $5.25 and a weighted average remaining contractual life of 8.98 years. 16,200 of these options are exercisable. 223,000 of the options outstanding at June 30, 1997 have exercise prices of $6.25 to $7.00, a weighted average exercise price of $6.30 and a weighted average remaining contractual life of 9.25 years. 4,583 of these options are exercisable. 20,203 of the options outstanding at June 30, 1997 have exercise prices of $15.64 to $16.20, a weighted average exercise price of $15.80 and a weighted average remaining contractual life of 4.19 years. 20,203 of these options are exercisable. The fair value of each option grant is estimated on the date of grant using the Black Scholles pricing model with the following assumptions used for the grants in fiscal periods 1997 and 1996; weighted average risk-free interest rate of 7.02 percent and 6.75 percent; expected dividend yields of 0.00 percent; and a weighted average contractual life of 8.08 and 9.29 years, respectively. 10. INCOME TAXES The provision for income taxes for the year ended June 30, 1997 was computed using effective tax rates calculated as follows: Federal statutory tax rate 34.0% State income taxes, net of federal benefit 1.2 Permanent items, including goodwill, non-deductible merger costs 41.8 Utilization of deferred tax assets (52.0) ----- Net effective tax rate 25.0% ----- ----- 36 The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statements and tax bases of assets and liabilities. The provision for income taxes for the year ended June 30, 1997 consisted of the following (amounts in thousands): Current provision Federal $ 1,268 State 47 -------- 1,315 -------- Deferred taxes arising from temporary differences: State income taxes (31) Accrued expenses (629) Deferred gain on debt restructure (368) Reserves 31 Other 109 -------- (888) -------- Total provision $ 427 -------- -------- The components of the Company's deferred tax asset as of June 30, 1997 and 1996, respectively, which arise due to timing differences between financial and tax reporting and net operating loss (NOL) carryforwards are as follows: June 30, ----------------------- 1997 1996 ---------- ---------- Reserves $ 1,714 $ 1,683 Accrued expenses (not currently deductible) 604 1,233 Deferred gain on debt restructure 519 887 Depreciation and amortization (139) 77 Other 550 157 NOL carryforwards 15,748 15,601 Valuation allowances (18,996) (19,638) --------- ---------- $ - $ - --------- ---------- --------- ---------- As of June 30, 1997, the Company had NOL carryforwards of approximately $38.5 million, expiring in 2004 through 2010. As a result of the Merger, there will be a substantial limitation on the use of these NOL carryforwards. A valuation allowance is provided against the deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The Company has established a valuation allowance for the deferred tax allowance for the deferred tax asset as, in management's best estimate, it is not likely to be realized in the near term. 11. RETIREMENT SAVINGS PLANS The Company has a 401(k) profit sharing plan (Company Plan), which is available to all eligible employees, pursuant to which the Company matches a percentage of employee contributions to the Company Plan. Company contributions of $335,000 were made for the year ended June 30, 1997. The Company, through MHC, had a 401(k) profit sharing plan (MHC Plan) for all MHC employees, pursuant to which MHC matched a percentage of employee contributions to the Plan and made additional contributions on behalf of the employees at the discretion of its Board of Directors. Contributions of $50,000, $100,000 and $62,000 were made during the six months ended June 30, 1996 and the years ended December 31, 1995 and 1994, respectively. MHC contributions of $12,000 in 1994 were funded with forfeitures. The Company, through IHC, had a 401(k) profit sharing plan (IHC Plan) for all IHC employees, pursuant to which IHC matched a percentage of employee contributions to the IHC Plan. In 1997, the Company combined the MHC Plan and the IHC Plan into the Company Plan. 37 12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS The Company, through MHC, has direct ownership in two Partnerships at June 30, 1997, both of which operate Centers. In June 1996, the MHC closed one of the Centers and is currently in the process of dissolving the Partnership. MHC owns 43.75% and 50% of these Partnerships, serves as the managing general partner and provides certain management services under agreements expiring in 2007. These Partnerships are accounted for under the equity method since the Company does not exercise significant control over the operations of these Partnerships or does not have primary responsibility for the Partnership's long-term debt. Set forth below is certain financial data of these Partnerships (amounts in thousands): June 30, ---------------------------- 1997 1996 ---------- ---------- Combined Financial Position: Current assets: Cash $ 444 $ 549 Trade receivables, less allowances 729 721 Other 21 31 Property and equipment, net 143 442 ---------- ---------- Total assets 1,337 1,743 Current liabilities (141) (358) Due to MHC (49) (269) Long-term liabilities (40) (226) ---------- ---------- Net assets $ 1,107 $ 890 ---------- ---------- ---------- ---------- Set forth below are the combined operating results of the Partnerships and the Company's equity in earnings of the Partnerships (amounts in thousands):
Six Year Ended Months Ended Years Ended June 30, June 30, December 31, ------------------------ 1997 1996 1995 1994 ---------- ------------ ---------- ---------- Operating Results: Net revenues $ 4,353 $ 2,346 $ 4,455 $ 13,456 Expenses 3,284 2,002 3,636 9,217 --------- --------- -------- --------- Net income $ 1,069 $ 344 $ 819 $ 4,239 --------- --------- -------- --------- --------- --------- -------- --------- Equity in Earnings: Share of net income of Partnerships $ 468 $ 138 $ 348 $ 876 Minority interest - - - (42) --------- --------- -------- --------- Equity in earnings of Partnerships $ 468 $ 138 $ 348 $ 834 --------- --------- -------- --------- --------- --------- -------- ---------
REVENUES OF THE PARTNERSHIPS are recognized when services are provided to patients at established billing rates or at the amount realizable under agreements with third party payors, with the provision for contractual adjustments deducted to report net patient services revenues. The Partnerships' patient receivables are generally reimbursed by managed care organizations, and/or patient's private insurance companies, with the remainder of the patient receivables reimbursed by health care plans and government payors. 38 LEASE COMMITMENTS OF THE PARTNERSHIPS exist under various operating leases for equipment and office space. Future minimum lease payments for the Partnerships' noncancelable leases as of June 30, 1997, are as follows (amounts in thousands): OPERATING --------- 1998 $ 570 1999 142 ------ $ 712 ------ ------ The Company, through IHC, has direct ownership in two Partnerships and one limited liability company, all of which operate Centers. IHC owns 50% of each of the Partnerships and 35% of the limited liability company. Since the Company controls the operations and is primarily responsible for the associated long-term debt, the Centers have been included in the Company's consolidated balance sheet at June 30, 1997 and 1996. Set forth below is the summarized combined financial data of the Company's 50% or less owned and controlled entities which are consolidated (amounts in thousands): Year Ended June 30, 1997 ---------- Condensed Combined Statement of Operations Data: Net revenues $ 7,106 Expenses 5,151 Provision for center profit distribution 1,019 -------- Net income $ 936 -------- -------- June 30, ----------------------- 1997 1996 ----------- ---------- Condensed Combined Balance Sheet Data: Current assets $ 2,596 $ 2,327 Total assets 4,288 3,955 Current liabilities 727 1,019 Long-term debt 424 416 Minority interest equity 1,702 1,391 In December 1994, MHC sold the common stock of three wholly owned subsidiaries, whose primary operations were equity interests of approximately 20% in each of three Partnerships that provided lithotripsy services, for approximately $5.0 million in cash. MHC's investment in and share of earnings of these Partnerships had been reported in MHC's financial statements using the equity method of accounting. This transaction resulted in a pretax gain of approximately $5.0 million in 1994. In addition, two other Partnerships which provided services through mobile MRI and CT facilities were terminated in 1994. MHC leased equipment to certain Partnerships under direct financing leases and operating leases, and arranged for equipment maintenance services. In connection with providing these and other services, MHC received management fees related to certain Partnerships. Revenues related to these Partnership activities included in MHC's financial statements for the year ended December 31, 1994 were $1.3 million. Substantially all of these revenues relate to Partnerships that were sold or terminated in 1994. At June 30, 1996, the Company had a receivable of $0.3 million related to certain lease and operating expenses of the two existing Partnerships that are accounted for under the equity method of accounting. 39 13. SUPPLEMENTAL CASH FLOW INFORMATION The following is provided as supplemental information to the consolidated statements of cash flows (amounts in thousands):
Six Years Ended Year Ended Months Ended December 31, June 30, June 30, ------------------------ 1997 1996 1995 1994 ---------- -------------- ---------- ---------- Interest paid $ 5,114 $ 1,011 $ 1,411 $ 879 Equipment additions under capital leases 1,779 238 8,117 2,779 Prepaid insurance premiums financed - 208 555 430 Debt and accrued interest extinguished with issuance of preferred stock - (9,066) - - Deferred and accrued interest gain on debt restructure - 2,519 - - Preferred stock issued - 3,375 - - Cancellation of common stock warrant - (7) - -
14. SUBSEQUENT EVENT On October 14, 1997, InSight consummated a recapitalization (Recapitalization) pursuant to which (a) certain investors affiliated with TC Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank headquartered in Washington, D.C., made a cash investment of $25 million in the Company and received therefor (i) 25,000 shares of newly issued Convertible Preferred Stock, Series B, par value $0.001 per share (Series B Preferred Stock), initially convertible, at the option of the holders thereof, in the aggregate into 2,985,075 shares of common stock, and (ii) warrants (Carlyle Warrants) to purchase up to 250,000 shares of common stock at the current exercise price of $10.00 per share; (b) General Electric Company (GE) (i) surrendered its rights under the amended equipment service agreement to receive supplemental service fee payments equal to 14% of pretax income (see Note 8, above) in exchange for (i) the issuance of 7,000 shares of newly issued Convertible Preferred Stock, Series C, par value $0.001 per share (Series C Preferred Stock) initially convertible, at the option of the holders thereof, in the aggregate into 835,821 shares of common stock, and (ii) warrants (the GE Warrants) to purchase up to 250,000 shares of common stock at the current exercise price of $10.00 per share, (for which the Company will record a non-recurring expense of approximately $6.7 million in the second quarter of fiscal 1998), and (ii) agreed to exchange all of its InSight Series A Preferred Stock, on the business day (Second Closing) after all waiting periods with respect to GE's filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, have expired or been terminated, for an additional 20,953 shares of Series C Preferred Stock, initially convertible, at the option of the holders thereof, in the aggregate into 2,501,760 shares of common stock; and (c) the Company executed a Credit Agreement with NationsBank, N.A. pursuant to which NationsBank, as agent, committed to provide, subject to the satisfaction of customary conditions, a total of $125 million in senior secured credit, including (i) a $50 million term loan facility consisting of a $20 million tranche with increasing amortization over a five year period and a $30 million tranche principally repayable in years 6 and 7, (ii) a $25 million revolving working capital facility with a five-year maturity, and (iii) a $50 million acquisition facility, which may be increased by up to an additional $25 million upon the satisfaction of certain conditions, including commitments from participating lenders (Bank Financing). The terms of the Series B Preferred Stock and the Series C Preferred Stock (collectively, Preferred Stock) are substantially the same. The Preferred Stock has a liquidation preference of $1,000 per share. It will participate in any dividends paid with respect to the common stock. There is no mandatory or optional redemption provision for the Preferred Stock. The Series B Preferred Stock is initially convertible, at the option of the holders thereof, into 2,985,075 shares of common stock, and the Series C Preferred Stock will, as of the Second Closing, be initially convertible, at the option of the holders thereof, into 3,337,581 shares of common stock, in each case at an initial conversion price of $8.375 per share. For so long as Carlyle and its affiliates own at least 33% of the Series B Preferred Stock or GE and its affiliates own at least 33% of the Series C Preferred Stock, respectively, the approval of at least 67% of the holders of such series of Preferred Stock is required before the Company may take certain actions including, but not limited to, amending its certificate of incorporation or bylaws, changing the number of directors or the manner in which directors are selected, incurring indebtedness in excess of $15 million in any fiscal year, issuing certain equity securities below the then current market price or the then applicable conversion price, acquiring equity interests or assets of entities for consideration equal to or greater than $15 million, and engaging in 40 mergers for consideration equal to or greater than $15 million. The Preferred Stock will vote with the common stock on an as-if-converted basis on all matters except the election of directors, subject to an aggregate maximum Preferred Stock percentage of 37% of all votes entitled to be cast on such matters. Assuming the conversion of all of the Series B Preferred Stock into common stock and the exercise of all of the Carlyle Warrants, Carlyle would own approximately 31% of the common stock of the Company, on a fully diluted basis. Assuming the conversion of all of the Series C Preferred Stock after the Second Closing and the exercise of the GE Warrants, GE would own approximately 34% of the common stock of the Company, on a fully diluted basis. Pursuant to the terms of the Recapitalization, the number of directors comprising the Company's Board of Directors (the Board) is currently fixed at nine. Six directors (Common Stock Directors) are to be elected by the common stockholders, one of whom (Joint Director) is to be proposed by Carlyle and GE and approved by a majority of the Board in its sole discretion. Of the three remaining directors (Preferred Stock Directors), two are to be elected by the holders of the Series B Preferred Stock and one is to be elected by the holders of the Series C Preferred Stock, in each case acting by written consent and without a meeting of the common stockholders. As long as Carlyle and certain affiliates thereof own an aggregate of at least 50% of the Series B Preferred Stock, the holders of the Series B Preferred Stock will have the right to elect two Preferred Stock Directors and as long as Carlyle and certain affiliates thereof own an aggregate of at least 25% of such stock, such holders will have the right to elect one Preferred Stock Director. As long as GE and its affiliates own an aggregate of at least 25% of the Series C Preferred Stock it will have the right to elect one Preferred Stock Director. If any such ownership percentage falls below the applicable threshold, the Preferred Stock Director(s) formerly entitled to be elected by Carlyle or GE, as the case may be, will thereafter be elected by the common stockholders. At any time after the first anniversary of the initial funding of the Bank Financing, all of the Series B Preferred Stock and the Series C Preferred Stock may be converted into a newly created Convertible Preferred Stock, Series D, par value $0.001 per share (Series D Preferred Stock). The Series D Preferred Stock allows the number of directors to be automatically increased to a number which would permit each of Carlyle and GE, by filling the newly created vacancies, to achieve representation on the Board proportionate to their respective common stock ownership percentages on an as-if-converted basis but would limit such representation to less than two thirds of the Board of Directors for a certain period of time. The Series D Preferred Stock has a liquidation preference of $0.001 per share but no mandatory or optional redemption provision. It will participate in any dividends paid with respect to the common stock and will be convertible into 6,322,660 shares of common stock. Presently, the Board consists of seven directors, five of whom are Common Stock Directors and two of whom are Preferred Stock Directors. GE intends to wait until the Second Closing to elect its Preferred Stock Director. The vacancy created for the Joint Director has not yet been filled. Holders of the Preferred Stock also have a right of first offer with respect to future sales in certain transactions or proposed transactions not involving a public offering by the Company of its common stock or securities convertible into common stock. Holders of the Preferred Stock are also entitled to certain demand and "piggyback" registration rights. 41 Set forth below is an unaudited pro forma condensed consolidated balance sheet as of June 30, 1997, as if the transaction described above had occurred on June 30, 1997 (amounts in thousands): Pro Forma ----------------------------- As Reported Adjustments Total ------------ ------------- ------------- (unaudited) Current assets $ 24,692 $ 1,477 $ 26,169 Property and equipment, net 34,488 - 34,488 Investment in partnerships 402 - 402 Other assets 5,468 3,100 8,568 Intangible assets 33,272 - 33,272 --------- ----------- ---------- $ 98,322 $ 4,577 $ 102,899 --------- ----------- ---------- --------- ----------- ---------- Current liabilities $ 30,432 $ (10,054) $ 20,378 Long-term liabilities 59,205 (9,276) 49,929 Minority interest 2,000 - 2,000 Stockholders' equity 6,685 23,907 30,592 --------- ----------- ---------- $ 98,322 $ 4,577 $ 102,899 --------- ----------- ---------- --------- ----------- ---------- The unaudited pro forma condensed consolidated balance sheet as of June 30, 1997 gives effect to the issuance of $25 million of Series B Preferred Stock and the draw down of the $50 million term loan Bank Financing, which was used to repay approximately $70 million in outstanding notes payable and to pay approximately $5 million in transaction costs. 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14 (a) (1). FINANCIAL STATEMENTS Included in Part II of this report: Report of Independent Public Accountants Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements ITEM 14 (a) (2). FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants Schedule IX - Valuation and Qualifying Accounts All other schedules have been omitted because they are either not required or not applicable, or the information is presented in the consolidated financial statements or notes thereto. ITEM 14 (a) (3). EXHIBITS EXHIBIT NUMBER DESCRIPTION AND REFERENCES *2.1 Agreement and Plan of Merger dated as of February 26, 1996, by and among InSight, AHS, AHSC Acquisition Company, MHC and MXHC Acquisition Company, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *2.2 Asset Purchase and Liabilities Assumption Agreement dated as of January 3, 1997, by and among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. *2.3 Amendment No. 1 to Asset Purchase and Liabilities Assumption Agreement dated as of May 30, 1997, by and among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. 43 *2.4 Asset Purchase and Liabilities Assumption Agreement dated as of June 20, 1997, by and between InSight Health Corp. and Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient Center), previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed July 14, 1997. *3.1 Certificate of Incorporation of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. 3.2 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B, of InSight, filed herewith. 3.3 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C, of InSight, filed herewith. 3.4 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D, of InSight, filed herewith. 3.5 Amended and Restated Bylaws of InSight, filed herewith. *10.1 Master Debt Restructuring Agreement by and among General Electric Company acting through GE Medical Systems, General Electric Capital Corporation, InSight, AHS and MHC (without schedules and exhibits) previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.2 Registration Rights Agreement by and between General Electric Company acting through GE Medical Systems and InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.3 Master Service Agreement Addendum by and among General Electric Company acting through GE Medical Systems, InSight, AHS and MHC, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.4 InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.5 InSight's 1996 Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.6 Form of Indemnification Agreement between InSight and each of its directors and executive officers, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration Statement No. 333-02935), filed April 29, 1996. *10.8 Agreements and form of warrants with holders of Series B Preferred Stock of AHS, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.9 AHS 1987 Stock Option Plan, previously filed and incorporated herein by reference from Post-Effective Amendment No. 4 on Form S-1 to AHS's Registration Statement (Registration No. 33-00088), filed September 5, 1985. 44 *10.10 AHS 1989 Stock Incentive Plan, previously filed and incorporated herein by reference from AHS's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, filed April 15, 1991. *10.11 AHS 1992 Option and Incentive Plan, previously filed and incorporated herein by reference from AHS's Registration Statement on Form S-8 (Registration No. 33-51532), filed September 1, 1992. *10.12 MHC 1989 Stock Option Plan, Amended and Restated as of October 28, 1993, previously filed and incorporated herein by reference from MHC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. *10.13 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated March 28, 1996, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.14 Executive Employment Agreement between InSight and E. Larry Atkins dated as of February 25, 1996, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.15 Executive Employment Agreement between InSight and Glenn P. Cato dated as of May 1, 1996, previously filed and incorporated herein by reference from the Company's Amendment No. 1 to the Registration Statement on Form S-4 (Registration No. 333- 02935), filed May 9, 1996. *10.16 Form of Executive Employment Agreement between InSight and various officers of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.17 Nonqualified Stock Option Agreement, dated August 17, 1994, between MHC and Leonard H. Habas, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six months ended June 30, 1996. *10.18 Nonqualified Stock Option Agreement, dated August 17, 1994, between MHC and Ronald G. Pantello, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K for the six months ended June 30, 1996. 10.19 Warrant Certificate No. S-1 dated August 14, 1996 in the name of Shattuck Hammond Partners, Inc., filed herewith. 10.20 Warrant Certificate No. L-1 dated March 11, 1997 in the name of Anthony J. LeVecchio, filed herewith. 10.21 Form of Stock Option Agreement between InSight and non-employee directors of InSight relating to InSight's 1996 Directors' Stock Option Plan, filed herewith. 10.22 Form of Stock Option Agreement between InSight and employees of InSight relating to InSight's 1996 Employee Stock Option Plan, filed herewith. 21 Subsidiaries of InSight, filed herewith. * Previously filed. 45 ITEM 14(b). REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on June 19, 1997, under Item 2 thereof, reporting the acquisition of Maine Imaging Consortium. ITEM 14(c). The Exhibits described above in Item 14(a)(3) are attached hereto or incorporated by reference herein, as noted. ITEM 14(d). Not applicable. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSIGHT HEALTH SERVICES CORP. By /S/ E. LARRY ATKINS ------------------------------ E. Larry Atkins, President and Chief Executive Officer Date: October 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ---------- ------- ------ /s/ E. LARRY ATKINS Director, President and October 14, 1997 - -------------------------- Chief Executive Officer E. Larry Atkins (Principal Executive Officer) /s/ THOMAS V. CROAL Executive Vice President and October 14, 1997 - -------------------------- Chief Financial Officer Thomas V. Croal (Principal Accounting Officer) /s/ GRANT R. CHAMBERLAIN Director October 14, 1997 - -------------------------- Grant R. Chamberlain /s/ DAVID W. DUPREE Director October 14, 1997 - -------------------------- David W. Dupree /s/ FRANK E. EGGER Director October 14, 1997 - -------------------------- Frank E. Egger /s/ LEONARD H. HABAS Director October 14, 1997 - -------------------------- Leonard H. Habas /s/ RONALD G. PANTELLO Director October 14, 1997 - -------------------------- Ronald G. Pantello /s/ GLENN A. YOUNGKIN Director October 14, 1997 - -------------------------- Glenn A. Youngkin
47 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To InSight Health Services Corp.: We have audited, in accordance with generally accepted auditing standards, the financial statements for INSIGHT HEALTH SERVICES CORP. included in this Form 10-K and have issued our report thereon dated October 14, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Orange County, California October 14, 1997 48 SCHEDULE IX VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (amounts in thousands)
Balance at Charges to Balance at Beginning of Cost and End of Period Expenses Other Period ------------ ----------- --------------- ------------- December 31, 1994: Allowance for doubtful accounts $ 1,664 $ 1,124 $ (1,233)(A) $ 1,555 Allowance for contractual adjustments 1,030 2,692 (2,384)(A) 1,338 Inventory reserve 830 - (830)(B) - ---------- --------- ---------- ----------- Total $ 3,524 $ 3,816 $ (4,447) $ 2,893 ---------- --------- ---------- ----------- ---------- --------- ---------- ----------- December 31, 1995: Allowance for doubtful accounts $ 1,555 $ 1,669 $ (1,489)(A) $ 1,735 Allowance for contractual adjustments 1,338 4,512 (4,302)(A) 1,548 ---------- --------- ---------- ----------- Total $ 2,893 $ 6,181 $ (5,791) $ 3,283 ---------- --------- ---------- ----------- ---------- --------- ---------- ----------- June 30, 1996: Allowance for doubtful accounts $ 1,735 $ 617 $ (63)(A)(C) $ 2,289 Allowance for contractual adjustments 1,548 3,440 531 (A)(C) 5,519 ---------- --------- ---------- ----------- Total $ 3,283 $ 4,057 $ 468 $ 7,808 ---------- --------- ---------- ----------- ---------- --------- ---------- ----------- June 30, 1997: Allowance for doubtful accounts $ 2,289 $ 1,506 $ (1,453)(A) $ 2,342 Allowance for contractual adjustments 5,519 17,483 (17,853)(A) 5,149 ---------- --------- ---------- ----------- Total $ 7,808 $18,989 $(19,306) $ 7,491 ---------- --------- ---------- ----------- ---------- --------- ---------- -----------
(A) Write offs of uncollectable accounts. (B) MHC sold all inventory on hand in 1994. (C) In connection with the Merger, MHC acquired the valuation and qualifying accounts related to IHC. 49 EX-3.2 2 EXHIBIT 3.2 INSIGHT HEALTH SERVICES CORP. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF CONVERTIBLE PREFERRED STOCK, SERIES B (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware.) InSight Health Services Corp., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the certificate of incorporation of the Company, as amended, the Board unanimously adopted the following resolutions on October 14, 1997 authorizing the issuance of the Series B Convertible Preferred Stock of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the Certificate of Incorporation or Bylaws of the Company: RESOLVED, that pursuant to authority vested in the Board by the Certificate of Incorporation, the Board does hereby establish a series of preferred stock of the Company from the Company's authorized class of 3,500,000 shares of $.001 par value preferred shares, such series to consist of 25,000 shares, and does hereby fix and state the voting rights, designation, powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as follows: SECTION 1. DESIGNATION. The Preferred Stock created and authorized hereby shall be designated as the "Convertible Preferred Stock, Series B" (hereinafter called the "SERIES B PREFERRED STOCK"). The number of shares of Series B Preferred Stock shall be 25,000 and no more. SECTION 2. RANK. The Series B Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank senior to all classes of Common Equity of the Company, and to each other class or series of Capital Stock of the Company (except for the Convertible Preferred Stock, Series A (hereinafter called the "SERIES A PREFERRED STOCK")) the terms of which do not expressly provide that it ranks senior to or on a parity with the Series B Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to with the Common Equity of the Company as "JUNIOR SECURITIES"). The Series B Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank on a parity with any class or series of Capital Stock hereafter created which expressly provides that it ranks on a parity with the Series B Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (shares of such a class or series, together with shares of the Series A Preferred Stock, shares of the Convertible Preferred Stock, Series C (the "SERIES C PREFERRED STOCK"), and shares of the Convertible Preferred Stock, Series D (the "SERIES D PREFERRED STOCK") are, collectively, the "PARITY SECURITIES"); provided that any purported Parity Securities that were not created, authorized or issued in accordance with Section 11 hereof shall be deemed to be Junior Securities and not Parity Securities. The Series B Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank junior to each class or series of Capital Stock hereafter issued in accordance with Section 11 hereof and which expressly provides that it ranks senior to the Series B Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up and dissolution of the Company ("SENIOR SECURITIES"). Any purported Supervoting Securities that were not created, authorized or issued in accordance with Section 11 hereof shall be deemed for all purposes related to voting rights to be identical to Common Stock, including, without limitation, as to voting rights with respect to the election of directors and all other matters submitted to a vote of stockholders. SECTION 3. DIVIDENDS. (a) The Company may (when, as and if declared by the Board of Directors of the Company) declare and pay dividends, out of the entire assets and funds of the Company legally available therefor to the holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the common stock, $.001 par value per share, of the Company (the "COMMON STOCK") ratably based on the number of shares of Common Stock held by each such Holder (assuming full conversion of all such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock into Common Stock); PROVIDED, HOWEVER, that no dividend whatsoever shall be paid, and no distribution shall be made, on any Common Stock unless and until each holder of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock shall have been paid in full its respective pro rata portion of such dividend. (b) Holders of shares of the Series B Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof in preference to and in priority over any dividends upon any of the Junior Securities, except for the Common Stock. (c) Holders of shares of the Series B Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof on a pro rata basis with respect to any dividends upon any Parity Securities. SECTION 4. LIQUIDATION PREFERENCE. (a) Upon any Liquidating Event with respect to the Company, the Holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, $1,000 per share of Series B Preferred Stock (the "LIQUIDATION PREFERENCE"), plus an amount in cash equal to any declared but unpaid dividends thereon, before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, Common Stock. Except as provided in the preceding sentence, holders of shares of Series B Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the 2 Company. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series B Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts which would be payable on such distribution if the amount to which the holders of outstanding shares of Series B Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. (b) "LIQUIDATING EVENT" shall mean, with respect to any Person, any of the following events: (i) the commencement by such Person of a voluntary case under the bankruptcy laws of the United States, as now or hereafter in effect, or the commencement of an involuntary case against such Person with respect to which the petition shall not be controverted within 15 days, or be dismissed within 60 days, after commencement thereof; (ii) the appointment of a custodian for, or the taking charge by a custodian of, all or substantially all of the property of such Person; (iii) the commencement by such Person of any proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to such Person; (iv) the commencement against such Person of any proceeding set forth in the preceding clause (iii), which is not controverted within 10 days thereof and dismissed within 60 days after the commencement thereof; (v) the adjudication of such Person insolvent or bankrupt, or the adoption by such Person of a plan of liquidation; (vi) the occurrence of any Change of Control with respect to such Person or (vii) the filing of a certificate of dissolution in respect of the Company with the Secretary of State of the State of Delaware; in any of cases (i) through (vi) above, in a single transaction or series of related transactions. SECTION 5. TYPE A CONVERSION (a) Each holder of Series B Preferred Stock shall have the right, at its option, at any time, to convert, subject to the terms and provisions of this Section 5, all, but not less than all, of its Series B Preferred Stock then outstanding into such number of fully paid and non-assessable shares of Common Stock as results from dividing (i) the sum of (A) the aggregate Liquidation Preference of all shares of Series B Preferred Stock to be converted plus (B) any declared but unpaid dividends on such shares, by (ii) the applicable Conversion Price on the Conversion Date. In addition, and without limiting the right to conversion in whole set forth above, substantially contemporaneously with any Partial Conversion Event, each holder of Series B Preferred Stock shall have the right, at its option, to convert (which conversion, if such option is exercised, shall be deemed to occur on such Partial Conversion Event), subject to the terms and provisions of this Section 5, all or any part of its Series B Preferred Stock then outstanding into such number of fully paid and non-assessable shares of Common Stock as results from dividing (i) the sum of (A) the aggregate Liquidation Preference of all shares of Series B Preferred Stock to be converted plus (B) any declared but unpaid dividends on such shares, by (ii) the applicable Conversion Price (as defined below) on the Conversion Date. The person or persons entitled to receive the shares of Common Stock upon conversion of such shares of Series B Preferred Stock shall be treated for all purposes as having become the record holder or holders of such shares of Common Stock on the Conversion Date and such conversion shall be at the Conversion Price in effect at such time. 3 (b) In order to convert all or any portion of its outstanding Series B Preferred Stock into shares of Common Stock pursuant to this Section 5, the holder of such Series B Preferred Stock shall deliver certificates representing the shares of Series B Preferred Stock to be converted to the Company at its principal office, together with written notice that it elects to convert those shares of Series B Preferred Stock into shares of Common Stock in accordance with the provisions of this Section 5. Such notice shall specify the number of shares of Series B Preferred Stock to be converted and the name or names in which the holder wishes the certificates for shares of Common Stock to be registered. (c) Upon any Type A Conversion, pursuant to this Section 5 and Section 5 of the certificate of designation of Series C Preferred Stock, of all of the outstanding shares of Series B Preferred Stock and Series C Preferred Stock, the Company shall immediately file a certificate with the Secretary of State of the State of Delaware, pursuant to Section 151(g) of the Delaware General Corporation Law, setting forth a resolution or resolutions adopted by the Board of Directors of the Company that none of the authorized shares of Series D Preferred Stock are outstanding and that none will be issued subject to the Series D Certificate of Designation. SECTION 6. TYPE B CONVERSION (a) The right to conversion set forth in this Section 6 shall be in addition to, and not in lieu of, the conversion rights set forth in Section 5. (b) At any time on or after the Type B Trigger Date, the Majority Holders may elect to deliver an irrevocable Type B Conversion notice (the "TYPE B CONVERSION NOTICE") to the Company; PROVIDED, HOWEVER, that no such Type B Conversion Notice shall be effective unless substantially contemporaneously with the delivery of such Type B Conversion Notice, Majority Holders of the Series C Preferred Stock shall deliver a Type B Conversion Notice (as defined in the Certificate of Designation relating to the Series C Preferred Stock) to the Company. The date of delivery to the Company of a Type B Conversion Notice shall be denominated herein a "TYPE B EVENT DATE" or a "CONVERSION DATE". Upon receipt of a Type B Conversion Notice, the Company shall as soon as practicable deliver a copy of such Type B Conversion Notice to each holder of Series B Preferred Stock and each holder of Series C Preferred Stock. (c) On the Type B Event Date, each share of Series B Preferred Stock then outstanding shall automatically be converted into such number of fully paid and non-assessable shares of Series D Preferred Stock as results from dividing (i) the sum of (A) the aggregate Liquidation Preference of such share of Series B Preferred Stock plus (B) any declared but unpaid dividends on such share, by (ii) the product of ten (10) times the applicable Conversion Price on the Conversion Date. The person or persons entitled to receive the shares of Series D Preferred Stock upon conversion of such shares of Series B Preferred Stock shall be treated for all purposes (including without limitation voting rights) as having become the record holder or holders of such shares of Series D Preferred Stock on the Type B Event Date, whether or not such person or persons deliver its certificates for shares of Series B Preferred Stock to the Company on the Type B Event Date. 4 (d) As soon as practicable after the Type B Event Date, each holder of Series B Preferred Stock shall deliver its certificates for shares of Series B Preferred Stock to the Company at its principal office. Except as provided in this Certificate of Designation, all rights with respect to such Series B Preferred Stock shall terminate on the Type B Event Date, and on such Type B Event Date the holders of the shares of Series D Preferred Stock into which the shares of Series B Preferred Stock were converted shall have all of the rights accorded to holders of the Company's Series D Preferred Stock. (e) The rights of holders of shares of Series B Preferred Stock pursuant to this Section 6 shall not be transferable, except to an Initial Purchaser Affiliate. SECTION 7. GENERAL PROVISIONS RELATING TO CONVERSION The following provisions shall be applicable to any conversion pursuant to either Section 5 or Section 6 hereof. (a) As promptly as practicable after the surrender as hereinabove provided of certificates representing shares of Series B Preferred Stock converted or to be converted into shares of Common Stock or Series D Preferred Stock, the Company shall deliver or cause to be delivered to the holder, or the holder's designee, certificates representing the number of fully paid and non-assessable shares of Common Stock or Series D Preferred Stock into which the shares of Series B Preferred Stock are converted (including any adjustment pursuant to Section 8(b) below) and, if less than the entire number of shares of Series B Preferred Stock represented by the certificate or certificates surrendered is to be converted, a new certificate for the number of shares of Series B Preferred Stock not so converted. So long as any shares of Series B Preferred Stock remain outstanding, the Company shall not close its Common Stock transfer books. The issuance of certificates representing shares of Common Stock or Series D Preferred Stock issued upon the conversion of shares of Series B Preferred Stock shall be made without charge to the holder of Series B Preferred Stock for any tax in respect of the issuance of such certificates (other than any transfer, withholding or other tax if the shares of Common Stock or Series D Preferred Stock are to be registered in a name different from that of the registered holder of Series B Preferred Stock). (b) No fractional shares of Common Stock or scrip representing fractional shares of Common Stock or Series D Preferred Stock shall be issued upon any conversion of any shares of Series B Preferred Stock, and the number of shares of Common Stock or Series D Preferred Stock to be issued shall be rounded up to a whole share. (c) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock and preferred stock, par value $.001 per share, solely for the purpose of effecting the conversion of shares of Series B Preferred Stock and the Series C Preferred Stock and the issuance of Common Stock in respect of the Warrants and the GE Warrants, the full number of whole shares of Common Stock and Series D Preferred Stock then deliverable upon the conversion of all shares of Series B Preferred Stock and Series C Preferred Stock then outstanding and the issuance of Common Stock in respect of the Warrants and the GE Warrants. The Company shall take at all times such corporate action as shall be necessary in 5 order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock or Series D Preferred Stock upon the conversion of shares of Series B Preferred Stock in accordance with the provisions of Section 5 and Section 6, the conversion of shares of Series C Preferred Stock and the issuance of Common Stock in respect of the Warrants and the GE Warrants. If at any time the number of authorized but unissued shares of Common Stock or Series D Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the conversion of all then outstanding shares of Series C Preferred Stock and the issuance of Common Stock in respect of the Warrants and the GE Warrants, in addition to such other remedies as shall be available to the holders of the Series B Preferred Stock, the Company shall forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock or Series D Preferred Stock to such numbers of shares as shall be sufficient for such purpose, including but not limited to promptly calling and holding a meeting of the Company's stockholders, at which the Company's stockholders shall vote on a proposed amendment to the Certificate of Incorporation that would so increase the number of authorized shares of Common Stock or preferred stock, par value $.001 per share, as appropriate, a favorable vote for which amendment shall have been recommended to the Company's stockholders by the Board of Directors, pursuant to a duly and validly adopted resolution of the Board of Directors setting forth the amendment proposed and declaring its advisability, all in accordance with Section 242 of the Delaware General Corporation Law; and, in case of an increase in the number of authorized shares, of such preferred stock, the Board of Directors shall promptly cause to become effective a certificate of increase pursuant to Section 151 of the Delaware General Corporation Law. (d) If any shares of Common Stock or Series D Preferred Stock to be reserved for the purpose of conversion of Series B Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange, NASD Inc., Nasdaq or other regulatory body under any federal or state law, federal or state regulation, rule of NASD Inc., Nasdaq or otherwise, before such shares may be validly issued or delivered upon conversion, the Company shall, in good faith and as expeditiously as practicable, endeavor to secure such registration, listing or approval, as the case may be. (e) All shares of Common Stock or Series D Preferred Stock that may be issued upon conversion of the Series B Preferred Stock shall upon issuance by the Company be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. (f) In the event of any taking by the Company of a record of the holders of any class of Capital Stock for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of Capital Stock or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series B Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 6 (g) The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Section 7 and Sections 5, 6 and 8 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the shares of Series B Preferred Stock against impairment of any kind. SECTION 8. CONVERSION PRICE. (a) As used herein, the "Conversion Price" shall initially be $8.375 per share of Common Stock, subject to adjustment as set forth below. In order to prevent the dilution of the rights granted hereunder, the Conversion Price shall be subject to adjustment from time to time as provided in this Section 8. (b) If and whenever the Company issues or sells or, in accordance with Section 8(c), is deemed to have issued or sold, any share of Common Equity without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to such issuance or sale, the Conversion Price in effect immediately prior to such time shall immediately be reduced to the price determined by dividing (i) an amount equal to the sum of (A) the number of shares of Common Equity outstanding immediately prior to such issuance multiplied by the Conversion Price in effect immediately prior to such issuance, and (B) the consideration, if any, received by the Company upon such issuance, by (ii) the total number of shares of Common Equity outstanding immediately after such issuance. Notwithstanding the foregoing, there shall be no adjustment to the Conversion Price with respect to (i) the granting of stock options to employees of the Company authorized but not granted as of the Initial Issue Date for an aggregate of up to 300,000 shares of Common Equity (as such number of shares is equitably adjusted for subsequent stock splits reclassifications, stock combinations, stock dividends and recapitalizations), or (ii) the issuance upon exercise of up to 300,000 shares of Common Equity (as such number of shares is equitably adjusted for subsequent stock splits, stock combinations, stock dividends and recapitalizations) in connection with the stock options described in clause (i) of this sentence. (c) For purposes of determining the adjusted Conversion Price under Section 8(b) above, the following shall be applicable: (1) CONSIDERATION. If any Common Equity, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the cash amount received by the Company therefor (which, in the case of any public offering of such securities for cash, shall not be reduced for any underwriters discount, and in no event shall be reduced by the amount of any reasonable expenses actually paid by the Company in connection therewith). In case any Common Equity, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by 7 the Company shall be the fair market value of such consideration. In case any Common Equity, Options or Convertible Securities are issued to the owners of the other constituent entity in connection with any merger in which the Company or any Subsidiary of the Company is a constituent entity, the amount of consideration for such Common Equity, Options or Convertible Securities shall be deemed to be the fair market value of such portion of the net assets and business of such other constituent entity as is fairly attributable to such Common Equity, Options or Convertible Securities, as the case may be. The fair market value of any consideration other than cash shall be determined jointly by the Company and the Majority Holders. If such parties are unable to reach agreement within a reasonable period of time, such fair market value shall be determined by an appraiser jointly selected by the Company and the Majority Holders. If such parties are unable to reach agreement within a reasonable period of time, such fair market value shall be determined by an appraiser reasonably selected by the Company and reasonably approved by the Majority Holders. The determination of such appraiser shall be final and binding on the Company and the holders of the shares of Series B Preferred Stock, and the fees and expenses of such appraiser shall be paid by the Company, unless the fair market value determined by such appraiser is less than five percent (5%) above the value proposed in writing by the Company and rejected by the Majority Holders prior to the selection of such appraiser, in which event the fees and expenses of such appraiser shall be for the account of the holders of the then outstanding shares of Series B Preferred Stock (on a pro rata basis). (2) OPTIONS AND CONVERTIBLE SECURITIES. In the case of the granting or sale of any Option or Convertible Security (whether or not at the time convertible, exercisable or exchangeable): (A) the aggregate maximum number of shares of Common Equity deliverable, directly or indirectly, upon exercise of any Option shall be deemed to have been issued at the time such Option was granted and for a consideration equal to the (i) consideration (determined in the manner provided in subsection (1) above), if any, received by the Company upon the issuance of such Option plus (ii) the minimum purchase price provided in such Option for the Common Equity covered thereby, up to an amount equal to the Conversion Price in effect at the time such Option was granted; (B) the aggregate maximum number of shares of Common Equity deliverable upon conversion of or in exchange for any such Convertible Security, or upon the exercise of any Option to purchase or acquire any Convertible Security and the subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such Convertible Security was issued or such Option was issued and for a consideration equal to the consideration, if any, received by the Company for any such Convertible Security and any related Option, plus the additional consideration (determined in the manner provided in subsection (1) 8 above), if any, to be received by the Company upon the conversion or exchange of such Convertible Security, or upon the exercise of any related Option to purchase or acquire any Convertible Security and the subsequent conversion or exchange thereof; (C) on any change in the number of shares of Common Equity deliverable, directly or indirectly, upon conversion, exercise or exchange of any such Option or Convertible Security or any change in the consideration to be received by the Company upon such exercise, conversion or exchange, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price as then in effect shall forthwith be readjusted to such Conversion Price as would have been obtained had an adjustment been made upon the issuance of such Option or Convertible Security upon the basis of such change; (D) if the Conversion Price shall have been adjusted upon the issuance of any such Option or Convertible Security, no further adjustment of the Conversion Price shall be made for the actual issuance of Common Equity upon any exercise, conversion, or exchange thereof; provided, however, that none of the events set forth in Section 8(c)(2)(A) through 8(c)(2)(D), inclusive, shall result in any increase in the Conversion Price. (3) INTEGRATED TRANSACTION. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options shall be deemed to have been issued without consideration. (4) TREASURY SHARES. The number of shares of Common Equity outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held shall be considered an issuance or sale of Common Equity. (5) RECORD DATE. If the Company takes a record of the holders of Common Equity for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Equity, Options or in Convertible Securities or (B) to subscribe for or purchase Common Equity, Options or Convertible Securities, then such record date shall be deemed to be the date of the issuance or sale of the shares of Common Equity deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) If the Company at any time subdivides (by any stock split, stock dividend, reclassification, recapitalization or otherwise) one or more classes of its outstanding shares of Common Equity into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced. If the Company at any time combines 9 (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (e) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, in each case which is effected in such a way that the holders of Common Equity are entitled to receive (either directly or upon subsequent liquidation) stock, securities, cash, debt instruments or assets with respect to or in exchange for Common Equity is referred to herein as a "CORPORATE CHANGE." In case of any Corporate Change, each share of Series B Preferred Stock then outstanding will become convertible only into the kind and amount of securities, cash and other property receivable upon such Corporate Change by the holder of the number of shares of Common Stock into which such share of Series B Preferred Stock was convertible immediately prior thereto (assuming such holder of Common Stock failed to exercise any rights of election). The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument the obligation to deliver to the holders of shares of Series B Preferred Stock such shares of stock, securities, cash, debt instruments or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. (f) If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the shares of Series B Preferred Stock; provided that no such adjustment shall increase the Conversion Price obtainable as otherwise determined pursuant to this Section 8. (g) If the Company declares or pays a dividend upon the Common Equity payable otherwise than out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "LIQUIDATING DIVIDEND"), then the Company shall pay to each holder of a share of Series B Preferred Stock at the time of payment thereof the Liquidating Dividend which would have been paid to such holder on the Common Stock such holder would have owned had such holder fully exercised its right to convert the shares of Series B Preferred Stock into shares of Common Stock immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Common Equity entitled to such dividends are to be determined; provided, however, that if a Liquidating Dividend would involve the declaration or payment as a dividend of at least the lesser of (i) twenty percent (20%) of the Company's assets and (ii) Five Million Dollars ($5,000,000), then such Liquidating Dividend shall, at the option of the Majority Holders, be deemed to be a Liquidating Event and the rights of the holders of the shares of Series B Preferred Stock upon such Liquidating Event shall be governed by Section 4 hereof. 10 (h) Any transaction approved by the unanimous vote of the Acquisitions Committee or the unanimous vote of the Board pursuant to Section 10(c)(4) hereof shall not result in any adjustment to the Conversion Price in effect as of the closing of such transaction. SECTION 9. NO REDEMPTION. The shares of Series B Preferred Stock shall not be subject to mandatory redemption by the Company. 11 SECTION 10. VOTING RIGHTS AND RELATED PROVISIONS. (a) The Holders of shares of the Series B Preferred Stock will have the right to vote with the holders of Common Stock and the holders of the Series C Preferred Stock with respect to all matters submitted to a shareholder vote, except for the election of directors, which will be governed by Section 10(b) below. Each Holder of Series B Preferred Stock will have one vote for every share of Common Stock into which each share of Series B Preferred Stock is convertible pursuant to Sections 5 and 7 hereof as of the record date for such vote; provided, however, that the aggregate number of votes under this Section 10(a), when combined with the aggregate number of votes attributable to the holders of the Series C Preferred Stock pursuant to Section 10(a) of the Certificate of Designation with respect to the Series C Preferred Stock, with respect to any given matter submitted to a shareholder vote, shall not exceed 37% of the total number of votes eligible to be cast with respect to such matter (the "AGGREGATE VOTING LIMITATION"). In order to effectuate the Aggregate Voting Limitation, the eligible votes allocable to each holder of shares of Series B Preferred Stock and Series C Preferred Stock shall be reduced, on a pro rata basis based on the percentage of aggregate Series B Preferred Stock and Series C Preferred Stock liquidation preference attributable to the shares owned by such holder, to the highest whole number consistent with the Aggregate Voting Limitation. Any shares of Series B Preferred Stock or Series C Preferred Stock held by the Company or any Subsidiary of the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum or in calculating any percentage of shares under this Section 10. (b) The provisions set forth in this Section 10(b) shall govern the rights of the holders of the Series B Preferred Stock to elect directors of the Company: (1) SERIES B DIRECTORS; JOINT DIRECTOR. (A) The number of directors of the Company shall be as from time to time fixed by, or determined in the manner provided in, the Certificate of Incorporation and the Bylaws of the Company (subject, in all respects, to the protective provisions contained in Section 11 hereof). Prior to a Type B Event Date, the number of directors shall be no less than eight (8) nor more than nine (9), of which one member shall be the Joint Director. Two of such directors shall be designated as "SERIES B DIRECTORS" and shall be elected by the Majority Holders and one such director shall be designated as "Joint Director" and shall be an Independent director nominated by the Majority Holders of the Series B Preferred Stock and the Majority Holders of the Series C Preferred Stock, approved by the Board of Directors in its sole discretion. Unless a Type B Conversion Notice has been given, one Series B Director shall automatically be removed if the aggregate liquidation preference with respect to the Series B Preferred Stock owned by the Initial Purchaser and the Initial Purchaser Affiliates, taken as a whole, falls below 50% but is no less than 25% of the total liquidation preference of the shares of Series B Preferred Stock outstanding on the Initial Issue Date. Unless a Type B Conversion Notice has been given, both Series B Directors shall automatically be removed if the aggregate liquidation preference with respect to the Series B Preferred Stock owned by the Initial Purchaser and the Initial Purchaser Affiliates, taken as a whole, falls below 12 25% of the total liquidation preference of the shares of Series B Preferred Stock outstanding on the Initial Issue Date. Prior to a Type B Event Date, the Majority Holders shall have the exclusive right to remove such Series B Director or Series B Directors without cause at any time and to designate another person or persons as the Series B Director or Series B Directors. (B) The Preferred Stock Directors shall be divided into three (3) classes as nearly equal in number as possible, with the term of office of the first Preferred Stock Director to be nominated and elected by the holders of the Series B Preferred Stock, at their option at any time after the initial issuance of the shares of Series B Preferred Stock, to expire at the annual meeting of stockholders held in 1998, the term of office of the second Preferred Stock Director to be nominated and elected by the holders of the Series B Preferred Stock upon initial issuance of the shares of Series B Preferred Stock to expire at the annual meeting of stockholders held in 2000, the term of office of the Preferred Stock Director to be nominated and elected by the holders of the Series C Preferred Stock upon initial issuance of the shares of Series C Preferred Stock to expire at the annual meeting of stockholders held in 1999, and the term of office of the Joint Director to expire at the annual meeting of stockholders for 1997. At each annual meeting of stockholders after such initial classification and election, directors elected to succeed those directors whose terms expire at such annual meeting shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. (C) Upon a Type B Event Date, any Series B Director already serving as a member of the Board shall continue to serve in such position until the expiration of his term and the election of his successor or until his earlier death, removal, resignation or retirement. After a Type B Event Date, the Joint Director and the Series B Director or Directors shall be subject to removal only for cause and only by the affirmative vote of eighty percent (80%) of the combined voting power of the outstanding shares of the Corporation entitled to vote. The Preferred Stock Directors and the Joint Director shall not be removed without cause otherwise than as described in this Section 10(b)(1). (D) After a Type B Event Date, the Board of Directors shall comprise: (i) one Joint Director, until the expiration of his term, as provided herein; (ii) three Preferred Stock Directors, until the expiration of their respective terms, after which time such positions previously elected by holders of the series of Preferred Stock that gave the Type B Conversion Notice shall be subject to election by holders of shares of Series D Preferred Stock, subject to the limitations contained in the Series D Certificate of Designation; (iii) not less than four (4) nor more than five (5) additional directors elected by holders of shares of Common Equity and Series D Preferred Stock, subject to the limitations contained in the Series D Certificate of Designation; and (iv) such number of other directors (the "Conversion Directors") elected following a Type B Event Date by the holders of shares of Series D Preferred Stock as is determined pursuant to the Series D Certificate of Designation. 13 (2) With respect to filling the vacancy on the Board of Directors with the initial Joint Director, the holders of shares of Series B Preferred Stock and Series C Preferred Stock shall give written notice to the Secretary of the Company of the identity of the person nominated by such holders. Such written notice shall be executed, manually, or by photocopy or facsimile, in any number of counterparts, by the Majority Holders of the Series B Preferred Stock and by the Majority Holders of the Series C Preferred Stock. The person so nominated shall be "independent," which means that such person shall not be a director, officer, or employee or affiliate (as defined in Section 203(c) of the Delaware General Corporation Law) of any of the holders of Series B Preferred Stock or Series C Preferred Stock or the Company. Upon receipt of such written notice, the Board of Directors shall have ten (10) business days in which to approve or disapprove such nominee. If the Board of Directors approves such nominee, such nominee shall immediately fill such vacancy. If the Board of Directors disapproves such nominee, the Secretary of the Company shall immediately give written notice thereof to all of the holders of shares of Series B Preferred Stock and Series C Preferred Stock. If such a written notice from the Secretary has not been received by such holders twelve (12) business days after the receipt by the Company of such written notice of nomination, then the Board of Directors shall be conclusively deemed to have approved such nominee and such nominee shall immediately fill such vacancy. If such written notice from the Secretary has been so received within such twelve (12) business days, such holders may nominate another independent person by written notice to the Secretary, subject to the same approval process as hereinabove provided. Such process of nomination and approval or disapproval shall continue until an independent person is nominated who is approved or deemed to be approved by the Board of Directors. No nominations for such director shall be made or received other than as described in this Section 10(b)(2). (3) With respect to the nomination and election of succeeding Joint Directors, the holders of shares of Series B Preferred Stock and Series C Preferred Stock shall give timely written notice to the Secretary of the Company of the identity of the person nominated by such holders. Such written notice shall be executed, manually, or by photocopy or facsimile, in any number of counterparts, by the Majority Holders of the Series B Preferred Stock and by the Majority Holders of the Series C Preferred Stock. Such written notice shall be timely if received at the principal executive office of the Company not less than 60 days nor more than 120 days before the meeting of shareholders at which such director is to be elected. The person so nominated shall be "independent," which means that such person shall not be a director, officer, employee or affiliate (as defined in Section 203(c) of the Delaware General Corporation Law) of any of the holders of Series B Preferred Stock or Series C Preferred Stock or the Company. Upon receipt of such written notice, the Board of Directors shall have ten (10) business days in which to approve or disapprove such nominee. If the Board of Directors disapproves such nominee, the Secretary of the Company shall immediately give written notice thereof to all of the holders of shares of Series B Preferred Stock and Series C Preferred Stock. If such a written notice from the Secretary has not been received by such holders twelve (12) business days after the receipt by the Company of such written 14 notice of nomination, then the Board of Directors shall be conclusively deemed to have approved such nominee. If such written notice from the Secretary has been so received within such twelve (12) business days, such holders may nominate another independent person by written notice to the Secretary, subject to the same approval process as hereinabove provided. Such process of nomination and approval or disapproval shall continue until an independent person is nominated who is approved or deemed to be approved by the Board of Directors. No nominations for such director shall be made or received other than as described in this Section 10(b)(3). Election of such person shall be by the holders of shares of the Company's Common Stock. (4) Prior to a Type B Event Date, a vacancy of a Preferred Stock Director position shall be filled only by a majority vote of or written consent of holders of a majority of the then outstanding shares of the series of Preferred Stock that elected the director whose death, resignation, retirement, disqualification or removal from office caused the vacancy. Prior to a Type B Event Date, a vacancy of the position of Joint Director shall be filled only by the Board of Directors, following nomination by holders of a majority of the then outstanding shares of Series B Preferred Stock and holders of a majority of the then outstanding shares of the Series C Preferred Stock, pursuant to the procedure described in Section 10(b)(2). Directors chosen pursuant to any of the foregoing provisions shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires and until their successors are duly elected and have qualified or until their earlier resignation or removal. If holders of shares of Series B Preferred Stock shall, pursuant to the certificate of incorporation, cease to have the right to elect two Preferred Stock Directors but still shall have the right to elect one Preferred Stock Director, then holders of a majority of the then outstanding shares of Series B Preferred Stock shall promptly designate by written notice to the Company one of the two Preferred Stock Directors elected by holders of shares of Series B Preferred Stock as the director to be retained, and the other such director shall be deemed to have resigned immediately upon receipt by the Company of such written notice. If holders of shares of Series B Preferred Stock shall, pursuant to the certificate of incorporation, but not as a result of a Type B Conversion, cease to have the right to elect any Preferred Stock Directors, then the two directors elected by holders of shares of Series B Preferred Stock shall be deemed to have resigned immediately upon such cessation. Upon the occurrence of any such deemed resignation referred to in the immediately preceding two sentences, the directorship previously held by the director deemed to have resigned shall automatically become a vacancy to be filled by the Board of Directors. (5) Shares of Series B Preferred Stock shall be deemed to be shares "entitled to vote" or "entitled to vote in the election of directors" for purposes of the provisions of the Certificate of Incorporation that employ such terms, and, for purposes of such provisions at any time, each outstanding share of Series B Preferred Stock shall count as such number of shares of Common Stock into which such share of Series B Preferred Stock is then convertible pursuant to Sections 5 and 7 hereof (subject to the percentage 15 limitation set forth in Section 10(a) hereof as such percentage limitation would otherwise apply pursuant to such Section). (c) Immediately following the initial issuance of shares of Series B Preferred Stock, the Board of Directors shall appoint the following committees of the Board of Directors with the respective duties, membership and voting requirements stated below. After such appointment and until a Type B Event Date, the following matters shall be deemed approved by the Board of Directors only upon receiving the affirmative vote of a majority of the Board of Directors and a majority of the directors elected by the holders of the Series B Preferred Stock and the Series C Preferred Stock: (A) a decision to eliminate or discharge the Audit Committee, Compensation Committee, Executive Committee or the Acquisitions Committee, as described more fully below (such committees are the "Committees"), (B) a decision to reduce, narrow, attenuate or otherwise weaken the delegation of powers by the Board of Directors to any of the Committees, unless such reduction, narrowing, attenuation or other weakening is the transfer of delegated powers from the Compensation Committee or the Acquisitions Committee to the Executive Committee, (C) a decision to change the number of members of any Committee, the identity of the persons or entities entitled to select each of the members of any Committee, the size of the required vote for approval by any Committee and the size of the required vote of the Board of Directors necessary to approve actions that failed to obtain the required approval vote on the appropriate Committee; and (D) a decision to create any new committee. If the holders of the Series B Preferred Stock shall cease to have the right to nominate and elect any director at all, otherwise than as a result of the conversion of their shares of Series B Preferred Stock in a Type B Conversion, then such holders shall no longer have the right to select any member of any of the committees set forth below and the member or members of such committees selected by such holders shall automatically cease to be a member or members of such committees. (1) COMPENSATION COMMITTEE. The Compensation Committee shall consist of three (3) members, at least one (1) of whom shall be selected jointly by the Series B Directors and director elected by holders of the Series C Preferred Stock (the "SERIES C DIRECTOR"), and who shall be a director. An affirmative vote of at least two (2) members of the Compensation Committee shall be required for approval of matters considered by the Compensation Committee. The Compensation Committee shall ensure that the representative on the Compensation Committee nominated by the Series B Directors and the Series C Director receive adequate notice of and an opportunity to participate in any meetings of the Compensation Committee; (2) AUDIT COMMITTEE. The Audit Committee shall consist of three (3) directors, including as many Independent directors as are available, not to exceed three (3). An affirmative vote of at least two (2) members of the Audit Committee shall be required for approval of matters considered by the Audit Committee. (3) EXECUTIVE COMMITTEE. The Executive Committee shall consist of four (4) members, one (1) of whom shall be selected by the Series B Directors (and shall be a Series B Director), one (1) of whom shall be the Series C Director 16 and two (2) of whom shall be selected by the Board of Directors. The members selected by the Series B Directors and the Series C Director may be removed only by the Series B Directors and the Series C Director, respectively. The Executive Committee shall, in addition to the customary duties of an executive committee, have the right to approve any financing activity, including but not limited to the Capital Budget Plan. An affirmative vote of at least three (3) members of the Executive Committee shall be required for approval of any matters considered by the Executive Committee. Each financing activity not approved by the Executive Committee may be referred to the Board of Directors for approval, which approval shall require a Supermajority Vote; and (4) ACQUISITIONS COMMITTEE. The Acquisitions Committee shall consist of four (4) members, one (1) of whom shall be selected by the Series B Directors (and shall be a Series B Director), one (1) of whom shall be the Series C Director, and two (2) of whom shall be selected by the Board of Directors (and shall be directors). The Acquisitions Committee shall have the right to approve any transaction of the types described in Section 11(n), (o), (p) and (q) with respect to which transaction the aggregate consideration payable in connection with such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is less than $15 million. A unanimous vote of the Acquisitions Committee shall be required for approval of any matters considered by the Acquisitions Committee. Except as described in Section 10(d)(5) below, each matter considered but not unanimously approved by the Acquisitions Committee may be referred to the Board of Directors for approval, which approval shall require a majority vote of the Board of Directors. (5) CERTAIN TRANSACTIONS. The unanimous approval of the Acquisitions Committee or the unanimous approval of the Board of Directors shall be required before the Company or any of its Subsidiaries engage in a transaction of the types described in Section 11(n), (o) (which, only for purposes of this clause, shall also apply to Capital Expenditures made by the Company in the ordinary course of business), (p) and (q), in which transaction: (A) the aggregate consideration payable in connection with such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is less than $15 million; and (B) the Company is to issue its Common Equity at an implicit or explicit price of less than $8.375 per share. Such implicit price shall be determined in an appraisal approved unanimously by the Acquisitions Committee or unanimously by the Board of Directors, such appraisal to be performed by an independent appraiser selected unanimously by the Acquisitions Committee or unanimously by the Board of Directors. (d) Prior to a Type B Event Date, the following matters shall be deemed approved by the Board of Directors only upon a Supermajority Vote in respect of any such matter: 17 (1) Approving the annual Capital Budget Plan; and (2) Approving the Company entering into any financing activity not approved by the Executive Committee. (e) The bylaws of the Company may be altered, amended, or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular or special meeting of the stockholders or the Board of Directors, but only if such alteration, amendment, repeal, or adoption has been approved: (1) in case of adoption by the Board of Directors prior to the First Meeting following a Type B Event Date, by a majority of the Preferred Stock Directors and either (A) a majority of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does not increase the number of directors) or (B) by at least 80% of the members of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does increase the number of directors); (2) in case of adoption by the stockholders at any meeting of stockholders (other than the First Meeting following a Type B Event Date) with a record date on or prior to a Type B Event Date, by holders of at least eighty percent (80%) of the outstanding shares of the Corporation entitled to vote in the election of directors, voting as one class, and by holders of a majority of the shares, outstanding as of such record date, of whichever (or both) of Series B Preferred Stock and Series C Preferred Stock continued (as of such record date) to have the right under the certificate of incorporation to elect one or more Preferred Stock Directors. (f) If a Type B Event Date occurs prior to October 14, 1999, then the following provisions shall apply: (1) From such Type B Event Date until the second subsequent annual stockholders meeting of the Company after such Type B Event Date, none of the following actions or transactions shall be effected by the Company or approved by the Company as a stockholder of any Subsidiary of the Company, and neither the Initial Purchaser nor any Initial Purchaser Affiliates shall engage in, or be a party to, any of the following actions or transactions involving the Company or any Subsidiary of the Company, if, as of the record date for the determination of the stockholders entitled to vote thereon, or consent thereto, any other Person which obtained its equity interest in the Company as a result of a transfer of securities from the Initial Purchaser or any Initial Purchaser Affiliate beneficially owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of the Company entitled to vote: (A) any merger or consolidation of the Company or any of its Subsidiaries with or into such other Person; 18 (B) any sale, lease, exchange or other disposition of all or any substantial part of the assets of the Company or any of its Subsidiaries to such other Person; (C) the issuance or delivery of any voting securities of the Company or any of its Subsidiaries to such other Person in exchange for cash, other assets or securities, or a combination thereof; or (D) any dissolution or liquidation of the Company; PROVIDED, HOWEVER, that such prohibition shall not apply with respect to any such action or transaction approved by (I) the affirmative vote of not less than eighty percent (80%) of the outstanding shares of the Company entitled to vote or (II) at least two-thirds (2/3) of the directors of the Company (which must include either (i) the Joint Director, if either (x) such Joint Director served in such position as of the Type B Event Date, or (y) such Joint Director has been approved by a majority of the directors who were Common Stock Directors as of the Type B Event Date, or (ii) at least one director who was a Common Stock Director prior to the Type B Event Date, unless neither the Joint Director, nor any of such Common Stock Directors continue to serve on the Board of Directors at such time). For purposes of this Section 10(f), a Person shall be deemed to own or control, directly or indirectly, any outstanding shares of stock of the Company (A) which it has the right to acquire pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise, or (B) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (A) above), by any other corporation, person or other entity (x) with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of stock of the Company or (y) which is its "affiliate" or "associate," as those terms are defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (2) No transfer of Series C Preferred Stock may be made by the Initial Purchaser or any Initial Purchaser Affiliate (other than a transfer permitted under Rule 144 under the Securities Act or a transfer pursuant to a registered offering under registration rights from the Company) unless prior thereto, the transferee in such transfer shall have agreed to be bound by the terms of Section 10(f)(1). SECTION 11. PROTECTIVE PROVISIONS. Without limiting the provisions of any other Series of Preferred Stock, for so long as the Initial Purchaser and the Initial Purchaser Affiliates, taken as a whole, owns or own at least 33% in total liquidation preference, taken as a whole, of the outstanding shares of Series B Preferred Stock, the Company shall not take, and shall cause its Subsidiaries not to take, any of the following actions without the affirmative vote of holders of at least sixty-seven percent (67%) of the shares of the Series B Preferred Stock then outstanding: 19 (a) alter, change or amend (by merger or otherwise) any of (i) the rights, preferences and privileges of the Series B Preferred Stock or any other class of Capital Stock, or (ii) the terms or provisions of any Option or Convertible Security; (b) enter into any transaction or event that could result in a Special Corporate Event with respect to the Company or any Subsidiary; (c) initiate any Liquidating Event with respect to the Company or any Subsidiary; (d) amend, restate, alter, modify or repeal (by merger or otherwise) the Certificate of Incorporation or the Amended Bylaws of the Company, including, without limitation, amendment, restating, modifying or repealing (by merger or otherwise) any certificate of designation or preferences (as in effect from time to time) relating to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock, including, without limitation, the filing by the Company of a certificate with the Secretary of State of the State of Delaware, pursuant to Section 151(g) of the Delaware General Corporation Law, setting forth a resolution or resolutions adopted by the Board of Directors of the Company that none of the authorized shares of Series D Preferred Stock are outstanding and that none will be issued subject to the Series D Certificate of Designation; (e) amend, restate, alter, modify or repeal (by merger or otherwise) or permit any Subsidiary to amend, restate, alter, modify or repeal (by merger or otherwise) the certificate of incorporation, other organizational documents, or bylaws of any Subsidiary in any material respect; (f) change the number of directors of the Company to a number less than eight (8) or more than nine (9) or the manner in which the directors are selected, as provided in the Certificate of Incorporation, Amended Bylaws, Series B Preferred Stock Certificate of Designation, Series C Preferred Stock Certificate of Designation and Series D Preferred Stock Certificate of Designation; (g) incur any Indebtedness, in the aggregate with respect to the Company and its Subsidiaries, in excess of $15 million in any Fiscal Year; PROVIDED, HOWEVER, that this provision shall not apply to draw-downs under any credit facility as to which a credit agreement had been executed and delivered on or prior to the Initial Issue Date; (h) become a party to Operating Leases during any Fiscal Year with respect to which the present value of all payments due during the term of such Operating Leases in the aggregate (determined using a discount rate of 10%) exceed $15 million; (i) create, authorize or issue any shares of Series B Preferred Stock or any class or series of Senior Securities, Parity Securities or Supervoting Securities or shares of any such class or series; 20 (j) reclassify any authorized stock of the Company into Series B Preferred Stock or any class or series of Senior Securities, Parity Securities, Supervoting Securities or shares of such class or series; (k) increase or decrease the authorized number of shares of Series B Preferred Stock or any class or series of Senior Securities or Parity Securities or shares of any such class or series; (l) issue any equity security below either the then current Market Price (without deduction for any underwriters' discount) or the then-applicable Conversion Price other than for (A) management stock options currently authorized and available for grant for not more than Three Hundred Thousand (300,000) shares of Common Stock in the aggregate, in which senior management of the Company shall not participate, (B) management stock options exercisable at not less than the then-applicable Conversion Price per share of Common Stock issued after October 14, 1997, exercisable for not more than Five Hundred Thousand (500,000) shares of Common Stock in the aggregate, in which only certain members of senior management of the Company shall participate, and (C) the Common Stock underlying such management stock options and other stock options outstanding as of October 14, 1997; (m) declare or pay any dividend or make any distribution (including without limitation by way of redemption, purchase or other acquisition) with respect to shares of Capital Stock or any securities convertible into, or exercisable, redeemable or exchangeable for, any share of Capital Stock (including without limitation any Option or Convertible Security) directly or indirectly, whether in cash, obligations or shares of the Company or other property; (n) acquire, in one or a series of related transactions, any equity ownership interest or interests of any Person, where the aggregate consideration payable in connection with such acquisition (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is equal to or greater than $15 million; (o) acquire any asset or assets of any Person in any transaction or transactions, where the aggregate consideration payable in connection with any single such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration), whether such transaction is effected in a single transaction or series of related transactions, is greater than $15 million; PROVIDED, HOWEVER, that this provision shall not apply to Capital Expenditures made by the Company in the Ordinary Course of Business; (p) merge or consolidate with any Person, or permit any other Person to merge into it, where (i) the stockholders of the Company immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold securities possessing more than 50% of both the total voting power of and the beneficial ownership interests in the surviving entity of such merger or consolidation and (ii) the equity holders of the subject Person immediately prior to the consummation of such transaction shall receive (directly or indirectly) aggregate consideration payable in connection with such 21 transaction (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) equal to or greater than $15 million, (q) cause or permit any Subsidiary to merge or consolidate with any Person (other than the Company or a wholly-owned Subsidiary of the Company), or cause or permit any other Person to merge into it, where: (i) the stockholders of such Subsidiary immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold securities possessing more than 50% of both the total voting power of and the beneficial ownership interests in the surviving entity of such merger or consolidation and (ii) the equity holders of the subject Person immediately prior to the consummation of such transaction shall receive (directly or indirectly) aggregate consideration payable in connection with such transaction (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) equal to or greater than $15 million; (r) substantially and materially engage in, either through acquisition or internal development, any business other than the business of providing diagnostic services to the healthcare industry; (s) make or permit any of its Subsidiaries to make Capital Expenditures any fiscal year in excess, in the aggregate, of two percent (2%) above the approved Capital Budget Plan for such fiscal year of the Company unless such expenditure is approved by the Executive Committee of the Board of Directors or a Supermajority Vote of the Board of Directors of the Company; (t) (i) sell, transfer, convey, lease or dispose of, outside the Ordinary Course of Business, any assets or properties of the Company or any Subsidiary, whether now or hereafter acquired, in any transaction or transactions, if (X) the aggregate consideration payable in connection with any single such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration), is greater than $5 million or (Y) the aggregate consideration payable in connection with all such transactions (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration), consummated after the Initial Issue Date, taken as a whole, is or would become as a result of such transaction greater than $20 million; (ii) undergo or cause or permit any Subsidiary to undergo a reorganization or recapitalization; (iii) merge or consolidate with any Person, or permit any other Person to merge into it, where the stockholders of the Company immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold securities possessing 50% or less of either the total voting power of or the beneficial ownership interests in the surviving entity of such merger or consolidation; (iv) cause or permit any Subsidiary to merge or consolidate with any other Person (other than the Company or a wholly-owned Subsidiary of the Company), or cause or permit any other Person to merge into such Subsidiary, where the stockholders of such Subsidiary immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of 22 such merger or consolidation, hold 50% or less of either the total voting power of or the beneficial ownership interests in the surviving entity of such merger or consolidation if (X) the value of the assets of such Subsidiary is greater than $5 million or (Y) the aggregate value of the assets of all such Subsidiaries with respect to all such mergers or consolidations consummated after the Initial Issue Date, taken as a whole and including such transaction, is or would become as a result of such transaction greater than $20 million; (u) permit any Subsidiary of the Company to issue or sell any share of Capital Stock, Option or Convertible Security; PROVIDED, HOWEVER, that the Company may form a new Subsidiary not all of the equity securities of which need be owned directly or indirectly by the Company (a "PARTIAL SUBSIDIARY"), but only if (i) at the time of creation of such Partial Subsidiary, such Partial Subsidiary is designated as such in a written notice to the holders of the shares of Series B Preferred Stock, and, (ii) cumulatively through time no more than $5,000 of assets (in the aggregate) are transferred to such Partial Subsidiary by the Company or any other Subsidiary, and (iii) no liabilities of such Partial Subsidiary are ever assumed or guaranteed by the Company or any other Subsidiary; or (v) issue any share of Series D Preferred Stock, otherwise than pursuant to a Type B Conversion. The rights provided to holders of shares of Series B Preferred Stock in this Section 11 shall be in addition to and not in lieu of the other rights and protections granted to the holders of the shares of Series B Preferred Stock hereunder. SECTION 12. REISSUANCE OF SERIES B PREFERRED STOCK. Shares of Series B Preferred Stock that have been issued and reacquired or converted in any manner, including shares purchased, redeemed, exchanged, or converted into shares of Common Equity, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that such shares may not in any event be reissued as Series B Preferred Stock. SECTION 13. BUSINESS DAY. If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. SECTION 14. CERTAIN NOTIFICATION OBLIGATIONS. The Company will notify the Initial Purchaser of each subsequent sale or disposition of any assets or properties of either the Company or any Subsidiary (other than in the Ordinary Course of Business) once the aggregate consideration payable in connection with all such sales or dispositions for the Company and its Subsidiaries outside the Ordinary Course of Business 23 (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) exceeds $10,000,000 in any fiscal year. SECTION 15. PREEMPTIVE RIGHTS (a) Subject to the terms and conditions specified in this Section 15, the Company hereby grants to each holder of shares of Series B Preferred Stock a right of first offer with respect to future sales in any transaction or proposed transaction not involving a public offering by the Company of its shares of Common Equity or any securities convertible or exchangeable, directly or indirectly, into Common Equity (collectively, "PREEMPTIVE SECURITIES"). Preemptive Securities shall include, without limitation, all shares of Common Stock and all Convertible Securities. (b) Each time the Company proposes to offer any Preemptive Securities in a transaction not involving a public offering of such Preemptive Securities, the Company shall first make an offering of such Preemptive Securities to each holder of shares of Series B Preferred Stock in accordance with the following provisions: (1) The Company shall deliver a notice by certified mail (the "PREEMPTIVE NOTICE") to each holder of shares of Series B Preferred Stock stating (i) its bona fide intention to offer Preemptive Securities, (ii) the number of such Preemptive Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Preemptive Securities. In addition, the Preemptive Notice will contain all other information which would be provided to prospective purchasers with respect to the proposed offering. (2) With respect to any Type A Offering of Preemptive Securities, by written notification given by each holder of shares of Series B Preferred Stock within 15 Business Days from the date of the Preemptive Notice, each holder may elect to purchase or obtain, at the price and on the terms specified in the Preemptive Notice, up to that portion of such Preemptive Securities which equals the proportion that the number of shares of Common Stock issuable upon conversion of the shares of Series B Preferred Stock then held by such holder bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities, including without limitation the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock). (3) With respect to any Type B Offering of Preemptive Securities, by written notification given by each holder of shares of Series B Preferred Stock within 15 Business Days from the date of the Preemptive Notice, each holder may elect to purchase or obtain, at the price and on the terms specified in the Preemptive Notice, up to that portion of such Preemptive Securities which equals the proportion that the number of shares of Common Stock issuable upon conversion of the shares of Series B Preferred Stock then held by such holder bears to the number of shares of Common Stock of the Company into which the outstanding shares of Series B Preferred Stock and the outstanding shares of Series B Preferred Stock are then convertible. 24 (4) If any of the holders of Series B Preferred Stock decline to exercise any right of refusal with respect to any offering to such holders of Series B Preferred Stock of any Preemptive Securities, such holders (the "DECLINING SERIES B HOLDERS") shall give written notification of such election to decline to exercise such rights to the Company within 15 Business Days from the date of the Preemptive Notice. Within 3 Business Days thereafter, the Company shall give written notification (the "DECLINED PREEMPTIVE SECURITIES NOTICE") to each holder of Series B Preferred Stock of the following: (i) the total number of shares of Preemptive Securities which the Declining Series B Holders declined to purchase (collectively, the "DECLINED PREEMPTIVE SECURITIES"), and (ii) the price and terms specified in the Preemptive Notice relating to such Declined Preemptive Securities. (5) By written notification given by each holder of shares of Series B Preferred Stock within 3 Business Days from the date of the Declined Preemptive Securities Notice, each holder of Series B Preferred Stock may elect to purchase or obtain, at the price and on the terms specified by the Company for such sale of such Preemptive Securities, such Declined Preemptive Securities at the price and on the terms specified in the Preemptive Notice; PROVIDED, HOWEVER, that if the total number of Declined Preemptive Securities so elected to be purchased by such holders of Series B Preferred Stock pursuant hereto (collectively, the "ELECTING HOLDERS") exceeds the total number of Declined Preemptive Securities, each such Electing Holder shall purchase, and the Company shall sell to such Electing Holder, that portion of the total number of Declined Preemptive Securities which equals the proportion that the number of shares of Common Stock issuable upon conversion of the shares of Series B Preferred Stock then held by such holder bears to the number of shares of Common Stock of the Company into which the outstanding shares of all Electing Holders are then convertible. (6) If all Preemptive Securities referred to in any Preemptive Notice are not elected to be obtained as provided in Section 15(b)(2) or 15(b)(3), or Section 15(b)(4) or 15(b)(5), as applicable, the Company may, at any time after the latest date set forth above for the exercise of the right to purchase any such Preemptive Securities by any holder of Series B Preferred Stock (the "PREEMPTIVE RIGHT EXPIRATION DATE") to the date sixty (60) days from the Preemptive Right Expiration Date offer the remaining unsubscribed portion of such Preemptive Securities to any Person or Persons at a price equal to the price specified in the relevant Preemptive Notice. If the Company does not enter into an agreement for the sale of the Preemptive Securities within sixty (60) days after the Preemptive Right Expiration Date, or if such agreement is not consummated within ninety (90) days of the Preemptive Right Expiration Date, the right provided under this Section 15 shall be deemed to be revived and such Preemptive Securities shall not be offered unless first reoffered to each holder of shares of Series B Preferred Stock in accordance herewith. (7) The rights set forth in this Section 15 shall not be applicable to the issuance or sale of shares of Common Stock pursuant to Options approved by the Board 25 to officers, directors and employees of the Company for the primary purpose of soliciting or retaining their employment or services. SECTION 16. DEFINITIONS. As used in this Certificate, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of a majority or more of the voting securities of a Person shall be deemed to be control. "AMENDED BYLAWS" means the Amended and Restated Bylaws of the Company, as in effect from time to time. "AGGREGATE VOTING LIMITATION" has the meaning set forth in Section 10(a). "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company. "BUSINESS DAY" means any day other than a Legal Holiday. "CAPITAL BUDGET PLAN" means, for each fiscal year of the Company, the plan of the Company for making Capital Expenditures for such fiscal year which has been approved for such fiscal year by either the Executive Committee or a Supermajority Vote of the Board of Directors of the Company. "CAPITAL EXPENDITURES" means, for any period, expenditures made by the Company or any of its Subsidiaries to acquire or construct fixed assets, plant and Fixtures and Equipment (including additions, improvements, upgrades and replacements, but excluding repairs) during such period calculated in accordance with GAAP. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a 26 Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CERTIFICATE OF INCORPORATION" means the certificate of incorporation (as defined in Section 104 of the Delaware General Corporation Law) of the Company in effect on the date hereof, including, without limitation, the Series A, Series B, Series C and the Series D Certificates of Designation. "CHANGE OF CONTROL" with respect to a Person shall be deemed to have occurred (i) at such time as any person (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934) at any time shall directly or indirectly acquire more than 40% in outstanding voting power of such Person, (ii) at such time as during any one year period, individuals who at the beginning of such period constitute such Person's Board of Directors or other governing body cease to constitute at least a majority of such board or governing body (provided, however, that a change in directors upon a Type B Event Date shall not be deemed to cause a Change in Control pursuant to this clause (ii)), (iii) upon consummation of a merger or consolidation of such Person into or with another Person in which the shareholders of the subject Person immediately prior to the consummation of such transaction shall own less than Fifty Percent (50%) of the voting securities of the surviving Person (or the parent corporation of the surviving Person where the surviving Person is wholly-owned by the parent corporation) immediately following the consummation of such transaction or (iv) the sale, transfer or lease of all or substantially all of the assets of such Person, in any of cases (i), (ii), (iii) or (iv) in a single transaction or series of related transactions; PROVIDED, that no Change of Control hereunder with respect to the Company shall be deemed to occur solely by reason of (x) the ownership by the Initial Purchaser or any Affiliate thereof or the Majority Holders of the Series C Preferred Stock or any Affiliate thereof of any Capital Stock of the Company or (y) the conversion of shares of Series C Preferred Stock into either Series D Preferred Stock (and any change in the Board of Directors incident thereto) or Common Stock, or (z) the conversion of shares of Series D Preferred Stock into Common Stock. "COMMITTEES" has the meaning set forth in Section 10(e). "COMMON EQUITY" means all shares now or hereafter authorized of any class of common stock of the Company (including the Common Stock) and any other stock of the Company, however designated, authorized after the date hereof, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. "COMMON STOCK" has the meaning set forth in Section 3(a). "COMMON STOCK DIRECTOR" means, for any period prior to any Type B Event Date, any director other than the Joint Director or a director elected by the holders of the Series B Preferred Stock or the Series C Preferred Stock. "COMPANY" means InSight Health Services Corp., a Delaware corporation. 27 "CONVERSION DATE" means (i) in the event of a Type A Conversion, the date set forth in Section 5(a) (in the event of a partial conversion relating to a Partial Conversion Event) or Section 5(b) (in the event of any other conversion pursuant to Section 5), and (ii) in the event of a Type B Conversion, the date of receipt by the Company of the relevant Type B Conversion Notice. "CONVERSION DIRECTORS" has the meaning set forth in Section 10. "CONVERSION PRICE" has the meaning set forth in Section 8. "CONVERTIBLE SECURITY" means any stock or securities, directly or indirectly, convertible into or exchangeable for Common Equity, including without limitation any exchangeable debt securities. "CORPORATE CHANGE" has the meaning set forth in Section 8(e). "CREDIT FACILITY" means a credit facility to which the Company is a party with NationsBank, N.A. "DECLINED PREEMPTIVE SECURITIES" has the meaning set forth in Section 15(b)(4). "DECLINED PREEMPTIVE SECURITIES NOTICE" has the meaning set forth in Section 15(b)(4). "DECLINING SERIES B HOLDERS" has the meaning set forth in Section 15(b)(4). "ELECTING HOLDERS" has the meaning set forth in Section 15(b)(5). "ENCUMBRANCE" means any claim, lien, pledge, option, charge, easement, security interest, right-of-way, encumbrance or other right of third parties, and, with respect to any securities, any agreements, understandings or restrictions affecting the voting rights or other incidents of record or beneficial ownership pertaining to such securities. "FIRST MEETING" means the meeting of the newly constituted Board of Directors to be held two calendar days after a Type B Event Date, at the principal offices of the Corporation. "FISCAL YEAR" means each year ending June 30, or any other fiscal year as approved by the Board of Directors. "FIXTURES AND EQUIPMENT" means all of the furniture, fixtures, furnishings, machinery, equipment and other tangible assets owned by the Company or any Subsidiary that are material to the conduct of their businesses as currently conducted. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect as of the Initial Issue Date. 28 "INDEBTEDNESS" means, as to any Person without duplication, (a) all items which, in accordance with GAAP, would be included as a liability on the balance sheet of such Person and its Subsidiaries (including any obligation of such Person to the issuer of any letter of credit for reimbursement in respect of any drafts drawn under such letter of credit), excluding obligations in respect of deferred taxes and deferred employee compensation and benefits, and anything in the nature of capital stock, surplus capital and retained earnings; (b) the amount available for drawing under all letters of credit issued for the account of such Person; (c) Capital Lease Obligations of such Person; and (d) all obligations of other Persons that such Person has guaranteed, including, without limitation, all obligations of such Person consisting of recourse liabilities with respect to accounts receivable sold or otherwise disposed of by such Person; provided, however, that the term Indebtedness shall not include trade accounts payable (other than for borrowed money) arising in, and accrued expenses incurred in, the ordinary course of business of such Person, provided the same are not more than sixty (60) days overdue or are being contested in good faith. "INDEPENDENT" means any Person who is not an officer or employee of the Company or any Subsidiary or other Affiliate of the Company or otherwise paid any compensation or remuneration by the Company or any Subsidiary or other Affiliate of the Company other than director's fees. "INITIAL ISSUE DATE" means October 14, 1997. "INITIAL PURCHASER" shall mean the Persons to whom shares of Series B Preferred Stock are initially issued by the Company. "INITIAL PURCHASER AFFILIATE" means the Initial Purchaser, the general partner of any Initial Purchaser, and any investor in any Initial Purchaser or in the general partner of any Initial Purchaser, in any case, as of the date hereof. "JOINT DIRECTOR" has the meaning set forth in Section 10(b)(4). "JUNIOR SECURITIES" has the meaning set forth in Section 2. "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "LIEN" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "LIQUIDATING DIVIDEND" has the meaning set forth in Section 8(g). "LIQUIDATING EVENT" has the meaning set forth in Section 4(b). 29 "LIQUIDATION PREFERENCE" has the meaning set forth in Section 4(a). "MAJORITY HOLDERS," at any time, and with respect to any class or series of Capital Stock of the Company, means holders of a majority of the shares of such class or series then outstanding. If the term is used without reference to a particular class or series of Capital Stock of the Company, it means Majority Holders of the Series B Preferred Stock. "MARKET PRICE" means as to any security the average of the closing prices of any such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in Nasdaq as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in Nasdaq, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of twenty-one (21) Business Days consisting of the day as of which "Market Price" is being determined and the twenty (20) consecutive Business Days prior to such day; provided that if such security is listed on any domestic securities exchange the term "Business Days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in Nasdaq or the domestic over-the- counter market, the "Market Price" shall be the fair value thereof determined by the Company and approved by the Majority Holders; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Majority Holders. The determination of such appraiser shall be final and binding on the Company and holders of the shares of Series B Preferred Stock, and the fees and expenses of such appraiser shall be paid by the Company. "OPERATING LEASE" shall mean any lease with respect to which the obligations of the lessee thereunder are, at the time any determination thereof is to be made, not required to be capitalized on the lessee's balance sheet in accordance with GAAP. "OPTION" shall mean any rights or options to subscribe for or purchase Common Equity or Convertible Securities. "ORDINARY COURSE OF BUSINESS" shall mean the ordinary course of business for a company engaged in the business of providing diagnostic services to the healthcare industry as so provided by the Company as of the Initial Issue Date; provided, that all sales by the Company or any Subsidiary, as the case may be, of inventory and sales of Fixtures and Equipment no longer used or useful in such business shall be deemed to be in the Ordinary Course of Business. "PARITY SECURITIES" has the meaning set forth in Section 2. "PARTIAL CONVERSION EVENT" means (i) the consummation of the sale by any holder of its shares of Series B Preferred Stock to a third party at any time approved by the Board, (ii) the 30 consummation of a public offering of the Common Stock at any time and (iii) at any time following April 14, 1999, the consummation of a private sale of Common Stock. "PARTIAL SUBSIDIARY" has the meaning set forth in Section 11(u). "PERSON" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "PREEMPTIVE NOTICE" has the meaning set forth in Section 15(b). "PREEMPTIVE RIGHT EXPIRATION DATE" has the meaning set forth in Section 15(b)(6). "PREEMPTIVE SECURITIES" has the meaning set forth in Section 15(a). "PREFERRED STOCK DIRECTORS" means the Series B Directors and the Series C Director. "SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement dated as of October 14, 1997 between the Company and the Initial Purchaser. "SENIOR SECURITIES" has the meaning set forth in Section 2. "SERIES A PREFERRED STOCK" has the meaning set forth in Section 2. "SERIES B DIRECTOR" has the meaning set forth in Section 10. "SERIES B PREFERRED STOCK" has the meaning set forth in Section 1. "SERIES C DIRECTOR" has the meaning set forth in Section 10. "SERIES C PREFERRED STOCK" has the meaning set forth in Section 2. "SERIES D PREFERRED STOCK" has the meaning set forth in Section 2. "SPECIAL CORPORATE EVENT" with respect to a Person shall be deemed to have occurred (i) at such time as any person (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934) at any time shall directly or indirectly acquire more than 20% in outstanding voting power of such Person, (ii) at such time as during any one year period, individuals who at the beginning of such period constitute such Person's Board of Directors or other governing body cease to constitute at least a majority of such board or governing body (provided, however, that a change in directors upon a Type B Event Date shall not be deemed to cause a Special Corporate Event pursuant to this clause (ii)), (iii) upon consummation of a merger or consolidation of such Person into or with another Person in which the shareholders of the subject Person immediately prior to the consummation of such transaction shall own less than Fifty Percent (50%) of the voting securities of the surviving Person (or the parent corporation of the surviving Person where the surviving Person is wholly-owned by the parent corporation) immediately following the 31 consummation of such transaction or (iv) the sale, transfer or lease of all or substantially all of the assets of such Person, in any of cases (i), (ii), (iii) or (iv) in a single transaction or series of related transactions; provided, that no Special Corporate Event hereunder with respect to the Company shall be deemed to occur solely by reason of the ownership by the Initial Purchaser or any Affiliate thereof or the Majority Holders of the Series C Preferred Stock or any Affiliate thereof of any Capital Stock of the Company. "SUBSIDIARY" means, with respect to any Person, (a) any corporation of which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned or controlled by such Person, by one or more Subsidiaries of such Person or by such Person and one or more of its Subsidiaries, or (b) any corporate or non-corporate entity in which such Person, one or more Subsidiaries of such Person, or such person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has an ownership interest and one hundred percent (100%) of the revenue of which is included in the consolidated financial reports of such Person consistent with GAAP. "SUPERMAJORITY VOTE" means the affirmative vote of six (6) directors of the Company with respect to the matter subject to such vote. "SUPERVOTING SECURITIES" means any class or series of the Company's Capital Stock the holders of which have the right to cast more than one vote per share and/or have the right to elect one or more members of the Board of Directors, voting as a class or series. "TYPE A CONVERSION" means a conversion of shares of Series B Preferred Stock into shares of Common Stock pursuant to Section 5 hereof. "TYPE A OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by the Company of Preemptive Securities in which the proposed sale price reflects a price per share of Common Stock at or above the higher of (i) the Market Price per share of Common Stock, determined as of the date of the Preemptive Notice relating to such offering and (ii) $8.375 per share of Common Stock. "TYPE B CONVERSION" means a conversion of shares of Series B Preferred Stock into shares of Series D Preferred Stock pursuant to Section 6 hereof. "TYPE B CONVERSION NOTICE" has the meaning set forth in Section 6(b). "TYPE B EVENT DATE" has the meaning set forth in Section 6(b). "TYPE B OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by the Company of Preemptive Securities in which the proposed sale price reflects a price per share of Common Stock below the higher of (i) the Market Price per share of Common Stock, determined 32 as of the date of the Preemptive Notice relating to such offering and (ii) $8.375 per share of Common Stock. "TYPE B TRIGGER DATE" means the date one year after the initial borrowing of funds under the Credit Facility. 33 IN WITNESS WHEREOF, InSight Health Services Corp. has caused this Certificate to be executed by its Executive Vice President and Secretary this 14th day of October, 1997. INSIGHT HEALTH SERVICES CORP. By: /s/ Thomas V. Croal ---------------------------------- Name: Thomas V. Croal Office: Executive Vice President and Secretary 34 EX-3.3 3 EXHIBIT 3.3 INSIGHT HEALTH SERVICES CORP. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF CONVERTIBLE PREFERRED STOCK, SERIES C (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware.) InSight Health Services Corp., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the certificate of incorporation of the Company, as amended, the Board unanimously adopted the following resolutions on October 14, 1997 authorizing the issuance of the Series C Convertible Preferred Stock of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the certificate of incorporation or bylaws of the Company: RESOLVED, that pursuant to authority vested in the Board by the Certificate of Incorporation, the Board does hereby establish a series of preferred stock of the Company from the Company's authorized class of 3,500,000 shares of $.001 par value preferred shares, such series to consist of 27,953 shares, and does hereby fix and state the voting rights, designation, powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as follows: SECTION 1. DESIGNATION. The Preferred Stock created and authorized hereby shall be designated as the "Convertible Preferred Stock, Series C" (hereinafter called the "SERIES C PREFERRED STOCK"). The number of shares of Series C Preferred Stock shall be 27,953 and no more. SECTION 2. RANK. The Series C Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank senior to all classes of Common Equity of the Company, and to each other class or series of Capital Stock of the Company (except for the Convertible Preferred Stock, Series A (hereinafter called the "SERIES A PREFERRED STOCK")) the terms of which do not expressly provide that it ranks senior to or on a parity with the Series C Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to with the Common Equity of the Company as "JUNIOR SECURITIES"). The Series C Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank on a parity with any class or series of Capital Stock hereafter created which expressly provides that it ranks on a parity with the Series C Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (shares of such a class or series, together with shares of the Series A Preferred Stock, shares of the Convertible Preferred Stock, Series B (the "SERIES B PREFERRED STOCK"), and shares of the Convertible Preferred Stock, Series D (the "SERIES D PREFERRED STOCK") are, collectively, the "Parity Securities"); provided that any purported Parity Securities that were not created, authorized or issued in accordance with Section 11 hereof shall be deemed to be Junior Securities and not Parity Securities. The Series C Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank junior to each class or series of Capital Stock hereafter issued in accordance with Section 11 hereof and which expressly provides that it ranks senior to the Series C Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up and dissolution of the Company ("SENIOR SECURITIES"). Any purported Supervoting Securities that were not created, authorized or issued in accordance with Section 11 hereof shall be deemed for all purposes related to voting rights to be identical to Common Stock, including, without limitation, as to voting rights with respect to the election of directors and all other matters submitted to a vote of stockholders. SECTION 3. DIVIDENDS. (a) The Company may (when, as and if declared by the Board of Directors of the Company) declare and pay dividends, out of the entire assets and funds of the Company legally available therefor, to the holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the common stock, $.001 par value per share, of the Company (the "COMMON STOCK") ratably based on the number of shares of Common Stock held by each such Holder (assuming full conversion of all such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock into Common Stock); PROVIDED, HOWEVER, that no dividend whatsoever shall be paid, and no distribution shall be made, on any Common Stock unless and until each holder of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall have been paid in full its respective pro rata portion of such dividend. (b) Holders of shares of the Series C Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof in preference to and in priority over any dividends upon any of the Junior Securities, except for the Common Stock. (c) Holders of shares of the Series C Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof on a pro rata basis with respect to any dividends upon any Parity Securities. SECTION 4. LIQUIDATION PREFERENCE. (a) Upon any Liquidating Event with respect to the Company, the Holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, $1,000 per share of Series C Preferred Stock (the "LIQUIDATION PREFERENCE"), plus an amount in cash equal to any declared but unpaid dividends thereon, before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, Common Stock. Except as provided in the preceding sentence, holders of shares of Series C Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the 2 Company. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series C Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts which would be payable on such distribution if the amount to which the holders of outstanding shares of Series C Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. (b) "LIQUIDATING EVENT" shall mean, with respect to any Person, any of the following events: (i) the commencement by such Person of a voluntary case under the bankruptcy laws of the United States, as now or hereafter in effect, or the commencement of an involuntary case against such Person with respect to which the petition shall not be controverted within 15 days, or be dismissed within 60 days, after commencement thereof; (ii) the appointment of a custodian for, or the taking charge by a custodian of, all or substantially all of the property of such Person; (iii) the commencement by such Person of any proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to such Person; (iv) the commencement against such Person of any proceeding set forth in the preceding clause (iii), which is not controverted within 10 days thereof and dismissed within 60 days after the commencement thereof; (v) the adjudication of such Person insolvent or bankrupt, or the adoption by such Person of a plan of liquidation; (vi) the occurrence of any Change of Control with respect to such Person or (vii) the filing of a certificate of dissolution in respect of the Company with the Secretary of State of the State of Delaware; in any of cases (i) through (vi) above, in a single transaction or series of related transactions. SECTION 5. TYPE A CONVERSION (a) Each holder of Series C Preferred Stock shall have the right, at its option, at any time, to convert, subject to the terms and provisions of this Section 5, all, but not less than all, of its Series C Preferred Stock then outstanding into such number of fully paid and non-assessable shares of Common Stock as results from dividing (i) the sum of (A) the aggregate Liquidation Preference of all shares of Series C Preferred Stock to be converted plus (B) any declared but unpaid dividends on such shares, by (ii) the applicable Conversion Price on the Conversion Date. In addition, and without limiting the right to conversion in whole set forth above, substantially contemporaneously with any Partial Conversion Event, each holder of Series C Preferred Stock shall have the right, at its option, to convert (which conversion, if such option is exercised, shall be deemed to occur on such Partial Conversion Event), subject to the terms and provisions of this Section 5, all or any part of its Series C Preferred Stock then outstanding into such number of fully paid and non-assessable shares of Common Stock as results from dividing (i) the sum of (A) the aggregate Liquidation Preference of all shares of Series C Preferred Stock to be converted plus (B) any declared but unpaid dividends on such shares, by (ii) the applicable Conversion Price (as defined below) on the Conversion Date. The person or persons entitled to receive the shares of Common Stock upon conversion of such shares of Series C Preferred Stock shall be treated for all purposes as having become the record holder or holders of such shares of Common Stock on the Conversion Date and such conversion shall be at the Conversion Price in effect at such time. 3 (b) In order to convert all or any portion of its outstanding Series C Preferred Stock into shares of Common Stock pursuant to this Section 5, the holder of such Series C Preferred Stock shall deliver certificates representing the shares of Series C Preferred Stock to be converted to the Company at its principal office, together with written notice that it elects to convert those shares of Series C Preferred Stock into shares of Common Stock in accordance with the provisions of this Section 5. Such notice shall specify the number of shares of Series C Preferred Stock to be converted and the name or names in which the holder wishes the certificates for shares of Common Stock to be registered. (c) Upon any Type A Conversion, pursuant to this Section 5 and Section 5 of the certificate of designation of Series B Preferred Stock, of all of the outstanding shares of Series B Preferred Stock and Series C Preferred Stock, the Company shall immediately file a certificate with the Secretary of State of the State of Delaware, pursuant to Section 151(g) of the Delaware General Corporation Law, setting forth a resolution or resolutions adopted by the Board of Directors of the Company that none of the authorized shares of Series D Preferred Stock are outstanding and that none will be issued subject to the Series D Certificate of Designation. SECTION 6. TYPE B CONVERSION (a) The right to conversion set forth in this Section 6 shall be in addition to, and not in lieu of, the conversion rights set forth in Section 5. (b) At any time on or after the Type B Trigger Date, the Majority Holders may elect to deliver an irrevocable Type B Conversion notice (the "TYPE B CONVERSION NOTICE") to the Company; PROVIDED, HOWEVER, that no such Type B Conversion Notice shall be effective unless substantially contemporaneously with the delivery of such Type B Conversion Notice, Majority Holders of the Series B Preferred Stock shall deliver a Type B Conversion Notice (as defined in the Certificate of Designation relating to the Series B Preferred Stock) to the Company. The date of delivery to the Company of a Type B Conversion Notice shall be denominated herein a "TYPE B EVENT DATE" or a "CONVERSION DATE". Upon receipt of a Type B Conversion Notice, the Company shall as soon as practicable deliver a copy of such Type B Conversion Notice to each holder of Series C Preferred Stock and each holder of Series B Preferred Stock. (c) On the Type B Event Date, each share of Series C Preferred Stock then outstanding shall automatically be converted into such number of fully paid and non-assessable shares of Series D Preferred Stock as results from dividing (i) the sum of (A) the aggregate Liquidation Preference of such share of Series C Preferred Stock plus (B) any declared but unpaid dividends on such share, by (ii) the product of ten (10) times the applicable Conversion Price on the Conversion Date. The person or persons entitled to receive the shares of Series D Preferred Stock upon conversion of such shares of Series C Preferred Stock shall be treated for all purposes (including without limitation voting rights) as having become the record holder or holders of such shares of Series D Preferred Stock on the Type B Event Date, whether or not such person or persons deliver its certificates for shares of Series C Preferred Stock to the Company on the Type B Event Date. 4 (d) As soon as practicable after the Type B Event Date, each holder of Series C Preferred Stock shall deliver its certificates for shares of Series C Preferred Stock to the Company at its principal office. Except as provided in this Certificate of Designation, all rights with respect to such Series C Preferred Stock shall terminate on the Type B Event Date, and on such Type B Event Date the holders of the shares of Series D Preferred Stock into which the shares of Series C Preferred Stock were converted shall have all of the rights accorded to holders of the Company's Series D Preferred Stock. (e) The rights of holders of shares of Series C Preferred Stock pursuant to this Section 6 shall not be transferable, except to an Affiliate as of the Initial Issue Date of the holder. SECTION 7. GENERAL PROVISIONS RELATING TO CONVERSION The following provisions shall be applicable to any conversion pursuant to either Section 5 or Section 6 hereof. (a) As promptly as practicable after the surrender as hereinabove provided of certificates representing shares of Series C Preferred Stock converted or to be converted into shares of Common Stock or Series D Preferred Stock, the Company shall deliver or cause to be delivered to the holder, or the holder's designee, certificates representing the number of fully paid and non-assessable shares of Common Stock or Series D Preferred Stock into which the shares of Series C Preferred Stock are converted (including any adjustment pursuant to Section 8(b) below) and, if less than the entire number of shares of Series C Preferred Stock represented by the certificate or certificates surrendered is to be converted, a new certificate for the number of shares of Series C Preferred Stock not so converted. So long as any shares of Series C Preferred Stock remain outstanding, the Company shall not close its Common Stock transfer books. The issuance of certificates representing shares of Common Stock or Series D Preferred Stock issued upon the conversion of shares of Series C Preferred Stock shall be made without charge to the holder of Series C Preferred Stock for any tax in respect of the issuance of such certificates (other than any transfer, withholding or other tax if the shares of Common Stock or Series D Preferred Stock are to be registered in a name different from that of the registered holder of Series C Preferred Stock). (b) No fractional shares of Common Stock or scrip representing fractional shares of Common Stock or Series D Preferred Stock shall be issued upon any conversion of any shares of Series C Preferred Stock, and the number of shares of Common Stock or Series D Preferred Stock to be issued shall be rounded up to a whole share. (c) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock and preferred stock, par value $.001 per share, solely for the purpose of effecting the conversion of shares of Series C Preferred Stock and Series B Preferred Stock and the issuance of Common Stock in respect of the Warrants and the Carlyle Warrants, the full number of whole shares of Common Stock and Series D Preferred Stock then deliverable upon the conversion of all shares of Series B Preferred Stock and Series C Preferred Stock then outstanding and the issuance of Common Stock in respect of the Warrants and the Carlyle Warrants. The Company shall take at all times such corporate action as shall be 5 necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock or Series D Preferred Stock upon the conversion of shares of Series B Preferred Stock and Series C Preferred Stock in accordance with the provisions of Section 5 and Section 6, and the issuance of Common Stock in respect of the Warrants and the Carlyle Warrants. If at any time the number of authorized but unissued shares of Common Stock or Series D Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock and the Series C Preferred Stock and the issuance of Common Stock in respect of the Warrants and the GE Warrants, in addition to such other remedies as shall be available to the holders of the Series C Preferred Stock, the Company shall forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock and Series D Preferred Stock to such numbers of shares as shall be sufficient for such purpose, including but not limited to promptly calling and holding a meeting of the Company's stockholders, at which the Company's stockholders shall vote on a proposed amendment to the Certificate of Incorporation that would so increase the number of authorized shares of Common Stock or preferred stock, par value $.001 per share, as appropriate, a favorable vote for which amendment shall have been recommended to the Company's stockholders by the Board of Directors, pursuant to a duly and validly adopted resolution of the Board of Directors setting forth the amendment proposed and declaring its advisability, all in accordance with Section 242 of the Delaware General Corporation Law; and, in case of an increase in the number of authorized shares of such preferred stock, the Board of Directors shall promptly cause to become effective a certificate of increase pursuant to Section 151 of the Delaware General Corporation Law. (d) If any shares of Common Stock or Series D Preferred Stock to be reserved for the purpose of conversion of Series C Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange, NASD Inc., Nasdaq or other regulatory body under any federal or state law, federal or state regulation, rule of NASD Inc., Nasdaq or otherwise, before such shares may be validly issued or delivered upon conversion, the Company shall, in good faith and as expeditiously as practicable, endeavor to secure such registration, listing or approval, as the case may be. (e) All shares of Common Stock or Series D Preferred Stock that may be issued upon conversion of the Series C Preferred Stock shall upon issuance by the Company be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. (f) In the event of any taking by the Company of a record of the holders of any class of Capital Stock for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of Capital Stock or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series C Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 6 (g) The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Section 7 and Sections 5, 6 and 8 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the shares of Series C Preferred Stock against impairment of any kind. SECTION 8. CONVERSION PRICE. (a) As used herein, the "Conversion Price" shall initially be $8.375 per share of Common Stock, subject to adjustment as set forth below. In order to prevent the dilution of the rights granted hereunder, the Conversion Price shall be subject to adjustment from time to time as provided in this Section 8. (b) If and whenever the Company issues or sells or, in accordance with Section 8(c), is deemed to have issued or sold, any share of Common Equity without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to such issuance or sale, the Conversion Price in effect immediately prior to such time shall immediately be reduced to the price determined by dividing (i) an amount equal to the sum of (A) the number of shares of Common Equity outstanding immediately prior to such issuance multiplied by the Conversion Price in effect immediately prior to such issuance, and (B) the consideration, if any, received by the Company upon such issuance, by (ii) the total number of shares of Common Equity outstanding immediately after such issuance. Notwithstanding the foregoing, there shall be no adjustment to the Conversion Price with respect to (i) the granting of stock options to employees of the Company authorized but not granted as of the Initial Issue Date for an aggregate of up to 300,000 shares of Common Equity (as such number of shares is equitably adjusted for subsequent stock splits, reclassifications, stock combinations, stock dividends and recapitalizations), or (ii) the issuance upon exercise of up to 300,000 shares of Common Equity (as such number of shares is equitably adjusted for subsequent stock splits, stock combinations, stock dividends and recapitalizations) in connection with the stock options described in clause (i) of this sentence. (c) For purposes of determining the adjusted Conversion Price under Section 8(b) above, the following shall be applicable: (1) CONSIDERATION. If any Common Equity, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the cash amount received by the Company therefor (which, in the case of any public offering of such securities for cash, shall not be reduced for any underwriters discount, and in no event shall be reduced by the amount of any reasonable expenses actually paid by the Company in connection therewith). In case any Common Equity, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by 7 the Company shall be the fair market value of such consideration. In case any Common Equity, Options or Convertible Securities are issued to the owners of the other constituent entity in connection with any merger in which the Company or any Subsidiary of the Company is a constituent entity, the amount of consideration for such Common Equity, Options or Convertible Securities shall be deemed to be the fair market value of such portion of the net assets and business of such other constituent entity as is fairly attributable to such Common Equity, Options or Convertible Securities, as the case may be. The fair market value of any consideration other than cash shall be determined jointly by the Company and the Majority Holders. If such parties are unable to reach agreement within a reasonable period of time, such fair market value shall be determined by an appraiser jointly selected by the Company and the Majority Holders. If such parties are unable to reach agreement within a reasonable period of time, such fair market value shall be determined by an appraiser reasonably selected by the Company and reasonably approved by the Majority Holders. The determination of such appraiser shall be final and binding on the Company and the holders of the shares of Series C Preferred Stock, and the fees and expenses of such appraiser shall be paid by the Company, unless the fair market value determined by such appraiser is less than five percent (5%) above the value proposed in writing by the Company and rejected by the Majority Holders prior to the selection of such appraiser, in which event the fees and expenses of such appraiser shall be for the account of the holders of the then outstanding shares of Series C Preferred Stock (on a pro rata basis). (2) OPTIONS AND CONVERTIBLE SECURITIES. In the case of the granting or sale of any Option or Convertible Security (whether or not at the time convertible, exercisable or exchangeable): (A) the aggregate maximum number of shares of Common Equity deliverable, directly or indirectly, upon exercise of any Option shall be deemed to have been issued at the time such Option was granted and for a consideration equal to the (i) consideration (determined in the manner provided in subsection (1) above), if any, received by the Company upon the issuance of such Option plus (ii) the minimum purchase price provided in such Option for the Common Equity covered thereby, up to an amount equal to the Conversion Price in effect at the time such Option was granted; (B) the aggregate maximum number of shares of Common Equity deliverable upon conversion of or in exchange for any such Convertible Security, or upon the exercise of any Option to purchase or acquire any Convertible Security and the subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such Convertible Security was issued or such Option was issued and for a consideration equal to the consideration, if any, received by the Company for any such Convertible Security and any related Option, plus the additional consideration (determined in the manner provided in subsection (1) 8 above), if any, to be received by the Company upon the conversion or exchange of such Convertible Security, or upon the exercise of any related Option to purchase or acquire any Convertible Security and the subsequent conversion or exchange thereof; (C) on any change in the number of shares of Common Equity deliverable, directly or indirectly, upon conversion, exercise or exchange of any such Option or Convertible Security or any change in the consideration to be received by the Company upon such exercise, conversion or exchange, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price as then in effect shall forthwith be readjusted to such Conversion Price as would have been obtained had an adjustment been made upon the issuance of such Option or Convertible Security upon the basis of such change; (D) if the Conversion Price shall have been adjusted upon the issuance of any such Option or Convertible Security, no further adjustment of the Conversion Price shall be made for the actual issuance of Common Equity upon any exercise, conversion, or exchange thereof; provided, however, that none of the events set forth in Section 8(c)(2)(A) through 8(c)(2)(D), inclusive, shall result in any increase in the Conversion Price. (3) INTEGRATED TRANSACTION. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options shall be deemed to have been issued without consideration. (4) TREASURY SHARES. The number of shares of Common Equity outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held shall be considered an issuance or sale of Common Equity. (5) RECORD DATE. If the Company takes a record of the holders of Common Equity for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Equity, Options or in Convertible Securities or (B) to subscribe for or purchase Common Equity, Options or Convertible Securities, then such record date shall be deemed to be the date of the issuance or sale of the shares of Common Equity deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) If the Company at any time subdivides (by any stock split, stock dividend, reclassification, recapitalization or otherwise) one or more classes of its outstanding shares of Common Equity into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced. If the Company at any time combines 9 (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (e) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, in each case which is effected in such a way that the holders of Common Equity are entitled to receive (either directly or upon subsequent liquidation) stock, securities, cash, debt instruments or assets with respect to or in exchange for Common Equity is referred to herein as a "CORPORATE CHANGE." In case of any Corporate Change, each share of Series C Preferred Stock then outstanding will become convertible only into the kind and amount of securities, cash and other property receivable upon such Corporate Change by the holder of the number of shares of Common Stock into which such share of Series C Preferred Stock was convertible immediately prior thereto (assuming such holder of Common Stock failed to exercise any rights of election). The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument the obligation to deliver to the holders of shares of Series C Preferred Stock such shares of stock, securities, cash, debt instruments or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. (f) If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the shares of Series C Preferred Stock; provided that no such adjustment shall increase the Conversion Price obtainable as otherwise determined pursuant to this Section 8. (g) If the Company declares or pays a dividend upon the Common Equity payable otherwise than out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "LIQUIDATING DIVIDEND"), then the Company shall pay to each holder of a share of Series C Preferred Stock at the time of payment thereof the Liquidating Dividend which would have been paid to such holder on the Common Stock such holder would have owned had such holder fully exercised its right to convert the shares of Series C Preferred Stock into shares of Common Stock immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Common Equity entitled to such dividends are to be determined; provided, however, that if a Liquidating Dividend would involve the declaration or payment as a dividend of at least the lesser of (i) twenty percent (20%) of the Company's assets and (ii) Five Million Dollars ($5,000,000), then such Liquidating Dividend shall, at the option of the Majority Holders, be deemed to be a Liquidating Event and the rights of the holders of the shares of Series C Preferred Stock upon such Liquidating Event shall be governed by Section 4 hereof. 10 (h) Any transaction approved by the unanimous vote of the Acquisitions Committee or the unanimous vote of the Board pursuant to Section 10(c)(4) hereof shall not result in any adjustment to the Conversion Price in effect as of the closing of such transaction. SECTION 9. NO REDEMPTION. The shares of Series C Preferred Stock shall not be subject to mandatory redemption by the Company. SECTION 10. VOTING RIGHTS AND RELATED PROVISIONS. (a) The Holders of shares of the Series C Preferred Stock will have the right to vote with the holders of Common Stock and the holders of the Series B Preferred Stock with respect to all matters submitted to a shareholder vote, except for the election of directors, which will be governed by Section 10(b) below. Each Holder of Series C Preferred Stock will have one vote for every share of Common Stock into which each share of Series C Preferred Stock is convertible pursuant to Sections 5 and 7 hereof as of the record date for such vote; provided, however, that the aggregate number of votes under this Section 10(a), when combined with the aggregate number of votes attributable to the holders of the Series B Preferred Stock pursuant to Section 10(a) of the Certificate of Designation with respect to the Series C Preferred Stock, with respect to any given matter submitted to a shareholder vote, shall not exceed 37% of the total number of votes eligible to be cast with respect to such matter (the "AGGREGATE VOTING LIMITATION"). In order to effectuate the Aggregate Voting Limitation, the eligible votes allocable to each holder of shares of Series B Preferred Stock and Series C Preferred Stock shall be reduced, on a pro rata basis based on the percentage of aggregate Series B Preferred Stock and Series C Preferred Stock liquidation preference attributable to the shares owned by such holder, to the highest whole number consistent with the Aggregate Voting Limitation. Any shares of Series B Preferred Stock or Series C Preferred Stock held by the Company or any Subsidiary of the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum or in calculating any percentage of shares under this Section 10. (b) The provisions set forth in this Section 10(b) shall govern the rights of the holders of the Series C Preferred Stock to elect directors of the Company: (1) SERIES C DIRECTOR; JOINT DIRECTOR. (A) The number of directors of the Company shall be as from time to time fixed by, or determined in the manner provided in, the Certificate of Incorporation and the Bylaws of the Company (subject, in all respects, to the protective provisions contained in Section 11 hereof). Prior to a Type B Event Date, the number of directors shall be no less than eight (8) nor more than nine (9), of which one member shall be the Joint Director. One such director shall be designated as "SERIES C DIRECTOR" and shall be elected by the Majority Holders and one such director shall be designated as "JOINT DIRECTOR" and shall be an Independent director nominated by the Majority Holders of the Series B Preferred Stock and the Majority Holders of the Series C Preferred Stock, 11 approved by the Board of Directors in its sole discretion. Unless a Type B Conversion Notice has been given, the Series C Director shall automatically be removed if the aggregate liquidation preference with respect to the Series C Preferred Stock owned by the Initial Purchaser and any Affiliate as of the Initial Issue Date of the Initial Purchaser, taken as a whole, falls below 25% of the total liquidation preference of the shares of Series C Preferred Stock and shares of Series A Preferred Stock outstanding on the Initial Issue Date. Prior to a Type B Event Date, the Majority Holders shall have the exclusive right to remove such Series C Director without cause at any time and to designate another person as the Series C Director. (B) The Preferred Stock Directors shall be divided into three (3) classes as nearly equal in number as possible, with the term of office of the first Preferred Stock Director to be nominated and elected by the holders of the Series B Preferred Stock, at their option at any time after the initial issuance of the shares of Series B Preferred Stock, to expire at the annual meeting of stockholders held in 1998, the term of office of the second Preferred Stock Director to be nominated and elected by the holders of the Series B Preferred Stock upon initial issuance of the shares of Series B Preferred Stock to expire at the annual meeting of stockholders held in 2000, the term of office of the Preferred Stock Director to be nominated and elected by the holders of the Series C Preferred Stock upon initial issuance of the shares of Series C Preferred Stock to expire at the annual meeting of stockholders held in 1999, and the term of office of the Joint Director to expire at the annual meeting of stockholders held in 1997. At each annual meeting of stockholders after such initial classification and election, directors elected to succeed those directors whose terms expire at such annual meeting shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. (C) Upon a Type B Event Date, any Series C Director already serving as a member of the Board shall continue to serve in such position until the expiration of his term and the election of his successor or until his earlier death, removal, resignation or retirement. After a Type B Event Date, the Joint Director and the Series C Director shall be subject to removal only for cause and only by the affirmative vote of eighty percent (80%) of the combined voting power of the outstanding shares of the Corporation entitled to vote. The Preferred Stock Directors and the Joint Director shall not be removed without cause otherwise than as described in this Section 10(b)(1). (D) After a Type B Event Date, the Board of Directors shall comprise: (i) one Joint Director, until the expiration of his term, as provided herein; (ii) three Preferred Stock Directors, until the expiration of their respective terms, after which time such positions previously elected by holders of the series of Preferred Stock that gave the Type B Conversion Notice shall be subject to election by holders of shares of Series D Preferred Stock, subject to the limitations contained in the Series D Certificate of Designation; (iii) not less than four (4) nor more than five (5) additional directors elected by holders of shares of Common Equity and Series D Preferred Stock, subject to the limitations contained in the Series D Certificate of Designation; and (iv) such number of other directors (the "CONVERSION DIRECTORS") elected following a Type B Event Date by 12 the holders of shares of Series D Preferred Stock as is determined pursuant to the Series D Certificate of Designation. (2) With respect to filling the vacancy on the Board of Directors with respect to the initial Joint Director, the holders of shares of Series B Preferred Stock and Series C Preferred Stock shall give written notice to the Secretary of the Company of the identity of the person nominated by such holders. Such written notice shall be executed, manually, or by photocopy or facsimile, in any number of counterparts, by the Majority Holders of the Series B Preferred Stock and by the Majority Holders of the Series C Preferred Stock. The person so nominated shall be "independent," which means that such person shall not be a director, officer, or employee or affiliate (as defined in Section 203(c) of the Delaware General Corporation Law) of any of the holders of Series B Preferred Stock or Series C Preferred Stock or of the Company. Upon receipt of such written notice, the Board of Directors shall have ten (10) business days in which to approve or disapprove such nominee. If the Board of Directors approves such nominee, such nominee shall immediately fill such vacancy. If the Board of Directors disapproves such nominee, the Secretary of the Company shall immediately give written notice thereof to all of the holders of shares of Series B Preferred Stock and Series C Preferred Stock. If such a written notice from the Secretary has not been received by such holders twelve (12) business days after the receipt by the Company of such written notice of nomination, then the Board of Directors shall be conclusively deemed to have approved such nominee and such nominee shall immediately fill such vacancy. If such written notice from the Secretary has been so received within such twelve (12) business days, such holders may nominate another independent person by written notice to the Secretary, subject to the same approval process as hereinabove provided. Such process of nomination and approval or disapproval shall continue until an independent person is nominated who is approved or deemed to be approved by the Board of Directors. No nominations for such director shall be made or received other than as described in this Section 10(b)(2). (3) With respect to the nomination and election of succeeding Joint Directors, the holders of shares of Series B Preferred Stock and Series C Preferred Stock shall give timely written notice to the Secretary of the Company of the identity of the person nominated by such holders. Such written notice shall be executed, manually, or by photocopy or facsimile, in any number of counterparts, by the Majority Holders of the Series B Preferred Stock and by the Majority Holders of the Series C Preferred Stock. Such written notice shall be timely if received at the principal executive office of the Company not less than 60 days nor more than 120 days before the meeting of shareholders at which such director is to be elected. The person so nominated shall be "independent," which means that such person shall not be a director, officer, employee or affiliate (as defined in Section 203(c) of the Delaware General Corporation Law) of any of the holders of Series B Preferred Stock or Series C Preferred Stock or the Company. Upon receipt of such written notice, the Board of Directors shall have ten (10) business days in which to approve or disapprove such nominee. If the Board of Directors disapproves such nominee, the Secretary of the Company shall immediately give written 13 notice thereof to all of the holders of shares of Series B Preferred Stock and Series C Preferred Stock. If such a written notice from the Secretary has not been received by such holders twelve (12) business days after the receipt by the Company of such written notice of nomination, then the Board of Directors shall be conclusively deemed to have approved such nominee. If such written notice from the Secretary has been so received within such twelve (12) business days, such holders may nominate another independent person by written notice to the Secretary, subject to the same approval process as hereinabove provided. Such process of nomination and approval or disapproval shall continue until an independent person is nominated who is approved or deemed to be approved by the Board of Directors. No nominations for such director shall be made or received other than as described in this Section 10(b)(3). Election of such person shall be by the holders of shares of the Company's Common Stock. (4) Prior to a Type B Event Date, a vacancy of a Preferred Stock Director position shall be filled only by a majority vote of or written consent of holders of a majority of the then outstanding shares of the series of Preferred Stock that elected the director whose death, resignation, retirement, disqualification or removal from office caused the vacancy. Prior to a Type B Event Date, a vacancy of the position of Joint Director shall be filled only by the Board of Directors, following nomination by holders of a majority of the then outstanding shares of Series B Preferred Stock and holders of a majority of the then outstanding shares of the Series C Preferred Stock, pursuant to the procedure described in Section 10(b)(2). Directors chosen pursuant to any of the foregoing provisions shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires and until their successors are duly elected and have qualified or until their earlier resignation or removal. If holders of shares of Series C Preferred Stock shall, pursuant to the Certificate of Incorporation, but not as a result of a Type B Conversion, cease to have the right to elect any Preferred Stock Directors, then the director elected by holders of shares of Series C Preferred Stock shall be deemed to have resigned immediately upon such cessation. Upon the occurrence of any such deemed resignation referred to in the immediately preceding two sentences, the directorship previously held by the director deemed to have resigned shall automatically become a vacancy to be filled by the Board of Directors. (5) Shares of Series C Preferred Stock shall be deemed to be shares "entitled to vote" or entitled to vote in the election of directors for purposes of the provisions of the Certificate of Incorporation that employ such terms, and, for purposes of such provisions at any time, each outstanding share of Series C Preferred Stock shall count as such number of shares of Common Stock into which such share of Series C Preferred Stock is then convertible pursuant to Sections 5 and 7 hereof (subject to the percentage limitation set forth in Section 10(a) hereof as such percentage limitation would otherwise apply pursuant to such Section 10(a)). (c) Immediately following the initial issuance of shares of Series B Preferred Stock, the Board of Directors shall appoint the following committees of the Board of Directors with the 14 respective duties, membership and voting requirements stated below. After such appointment and until a Type B Event Date, the following matters shall be deemed approved by the Board of Directors only upon receiving the affirmative vote of a majority of the Board of Directors and a majority of the directors elected by the holders of the Series B Preferred Stock and the Series C Preferred Stock: (A) a decision to eliminate or discharge the Audit Committee, Compensation Committee, Executive Committee or the Acquisitions Committee, as described more fully below (such committees are the "COMMITTEES"), (B) a decision to reduce, narrow, attenuate or otherwise weaken the delegation of powers by the Board of Directors to any of the Committees, unless such reduction, narrowing, attenuation or other weakening is the transfer of delegated powers from the Compensation Committee or the Acquisitions Committee to the Executive Committee, (C) a decision to change the number of members of any Committee, the identity of the persons or entities entitled to select each of the members of any Committee, the size of the required vote for approval by any Committee and the size of the required vote of the Board of Directors necessary to approve actions that failed to obtain the required approval vote on the appropriate Committee; and (D) a decision to create any new committee. If the holders of the Series C Preferred Stock shall cease to have the right to nominate and elect any director at all, otherwise than as a result of the conversion of their shares of Series C Preferred Stock in a Type B Conversion, then such holders shall no longer have the right to select any member of any of the committees set forth below and the member or members of such committees selected by such holders shall automatically cease to be a member or members of such committees. (1) COMPENSATION COMMITTEE. The Compensation Committee shall consist of three (3) members, at least one (1) of whom shall be selected jointly by the Series C Director and directors elected by holders of the Series B Preferred Stock (the "SERIES B DIRECTORS"), and who shall be a director. An affirmative vote of at least two (2) members of the Compensation Committee shall be required for approval of matters considered by the Compensation Committee. The Compensation Committee shall ensure that the representative on the Compensation Committee nominated by the Series B Directors and the Series C Director receive adequate notice of and an opportunity to participate in any meetings of the Compensation Committee; (2) AUDIT COMMITTEE. The Audit Committee shall consist of three (3) directors, including as many Independent directors as are available, not to exceed three (3). An affirmative vote of at least two (2) members of the Audit Committee shall be required for approval of matters considered by the Audit Committee. (3) EXECUTIVE COMMITTEE. The Executive Committee shall consist of four (4) members, one (1) of whom shall be the Series C Director, one (1) of whom shall be selected by the Series B Directors (and shall be a Series B Director) and two (2) of whom shall be selected by the Board of Directors (and shall be directors). The members selected by the Series B Directors and the Series C Director may be removed only by the Series B Directors and the Series C Director, respectively. The Executive Committee shall, in addition to the customary duties of an executive committee, have the right to approve any 15 financing activity, including but not limited to the Capital Budget Plan. An affirmative vote of at least three (3) members of the Executive Committee shall be required for approval of any matters considered by the Executive Committee. Each financing activity not approved by the Executive Committee may be referred to the Board of Directors for approval, which approval shall require a Supermajority Vote; and (4) ACQUISITIONS COMMITTEE. The Acquisitions Committee shall consist of four (4) members, one (1) of whom shall be the Series C Director, one (1) of whom shall be selected by the Series B Directors (and shall be a Series B Director), and two (2) of whom shall be selected by the Board of Directors (and shall be directors). The Acquisitions Committee shall have the right to approve any transaction of the types described in Section 11(n), (o), (p) and (q) with respect to which transaction the aggregate consideration payable in connection with such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is less than $15 million. A unanimous vote of the Acquisitions Committee shall be required for approval of any matters considered by the Acquisitions Committee. Except as described in Section 10(d)(5) below, each matter considered but not unanimously approved by the Acquisitions Committee may be referred to the Board of Directors for approval, which approval shall require a majority vote of the Board of Directors. (5) CERTAIN TRANSACTIONS. The unanimous approval of the Acquisitions Committee or the unanimous approval of the Board of Directors shall be required before the Company or any of its Subsidiaries engage in a transaction of the types described in Section 11(n), (o) (which, only for purposes of this clause, shall also apply to Capital Expenditures made by the Company in the ordinary course of business), (p) and (q), in which transaction: (A) the aggregate consideration payable in connection with such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is less than $15 million; and (B) the Company is to issue its Common Equity at an implicit or explicit price of less than $8.375 per share. Such implicit price shall be determined in an appraisal approved unanimously by the Acquisitions Committee or unanimously by the Board of Directors, such appraisal to be performed by an independent appraiser selected unanimously by the Acquisitions Committee or unanimously by the Board of Directors. (d) Prior to a Type B Event Date, the following matters shall be deemed approved by the Board of Directors only upon a Supermajority Vote in respect of any such matter: (A) Approving the annual Capital Budget Plan; and 16 (B) Approving the Company entering into any financing activity not approved by the Executive Committee. (e) The bylaws of the Company may be altered, amended, or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular or special meeting of the stockholders or the Board of Directors, but only if such alteration, amendment, repeal, or adoption has been approved: (1) in case of adoption by the Board of Directors prior to the First Meeting following a Type B Event Date, by a majority of the Preferred Stock Directors and either (A) a majority of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does not increase the number of directors) or (B) by at least 80% of the members of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does increase the number of directors); (2) in case of adoption by the stockholders at any meeting of stockholders (other than the First Meeting following a Type B Event Date) with a record date on or prior to a Type B Event Date, by holders of at least eighty percent (80%) of the outstanding shares of the Corporation entitled to vote in the election of directors, voting as one class, and by holders of a majority of the shares, outstanding as of such record date, of whichever (or both) of Series B Preferred Stock and Series C Preferred Stock continued (as of such record date) to have the right under the certificate of incorporation to elect one or more Preferred Stock Directors. (f) If a Type B Event Date occurs prior to October 14, 1999, then the following provisions shall apply: (1) From such Type B Event Date until the second subsequent annual stockholders meeting of the Company after such Type B Event Date, none of the following actions or transactions shall be effected by the Company or approved by the Company as a stockholder of any Subsidiary of the Company, and neither the Initial Purchaser nor any other holder of shares of Series D Preferred Stock (other than a holder pursuant to either a transfer permitted under Rule 144 under the Securities Act of 1933, as amended or a transfer pursuant to a registered offering under registration rights from the Company) shall engage in, or be a party to, any of the following actions or transactions involving the Company or any Subsidiary of the Company, if, as of the record date for the determination of the stockholders entitled to vote thereon, or consent thereto, any other Person which obtained its equity interest in the Company as a result of a transfer of securities from the Initial Purchaser or any other Person referred to in clauses (A) through (D) of this sentence beneficially owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of the Company entitled to vote: (A) any merger or consolidation of the Company or any of its Subsidiaries with or into such other Person; 17 (B) any sale, lease, exchange or other disposition of all or any substantial part of the assets of the Company or any of its Subsidiaries to such other Person; (C) the issuance or delivery of any voting securities of the Company or any of its Subsidiaries to such other Person in exchange for cash, other assets or securities, or a combination thereof; or (D) any dissolution or liquidation of the Company; PROVIDED, HOWEVER, that such prohibition shall not apply with respect to any such action or transaction approved by (I) the affirmative vote of not less than eighty percent (80%) of the outstanding shares of the Company entitled to vote or (II) at least two-thirds (2/3) of the directors of the Company (which must include either (i) the Joint Director, if either (x) such Joint Director served in such position as of the Type B Event Date, or (y) such Joint Director has been approved by a majority of the directors who were Common Stock Directors as of the Type B Event Date, or (ii) at least one director who was a Common Stock Director prior to the Type B Event Date, unless neither the Joint Director, nor any of such Common Stock Directors continue to serve on the Board of Directors at such time). For purposes of this Section 10(f), a Person shall be deemed to own or control, directly or indirectly, any outstanding shares of stock of the Company (A) which it has the right to acquire pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise, or (B) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (A) above), by any other corporation, person or other entity (x) with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of stock of the Company or (y) which is its "affiliate" or "associate," as those terms are defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (2) No transfer of Series C Preferred Stock may be made by the Initial Purchaser or any Affiliate of the Initial Purchaser (other than a transfer permitted under Rule 144 under the Securities Act or a transfer pursuant to a registered offering under registration rights from the Company) unless prior thereto, the transferee in such transfer shall have entered into an agreement in form and substance reasonably satisfactory to the Company, agreeing to be bound by the terms of Section 10(f)(1). (g) The Majority Holders shall have the right to appoint one (1) observer (who may be, but shall not be required to be, an employee of the Initial Purchaser) to attend each meeting of the Board of Directors of the Company and each meeting of any committee of the Board of Directors (the "Board Observer") The Board Observer shall be entitled to a copy of all written materials (including Board meeting agendas and background materials) distributed to each member of the Board of Directors of the Company as and when so distributed. SECTION 11. PROTECTIVE PROVISIONS. 18 Without limiting the provisions of any other Series of Preferred Stock, for so long as the Initial Purchaser and any Affiliate as of the Initial Date of the Initial Purchaser, taken as a whole, owns or own at least 33% in total liquidation preference, taken as a whole, of the outstanding shares of Series C Preferred Stock and the outstanding shares of Series A Preferred Stock, the Company shall not take, and shall cause its Subsidiaries not to take, any of the following actions without the affirmative vote of holders of at least sixty-seven percent (67%) of the shares of the Series C Preferred Stock then outstanding: (a) alter, change or amend (by merger or otherwise) any of (i) the rights, preferences and privileges of the Series C Preferred Stock or any other class of Capital Stock, or (ii) the terms or provisions of any Option or Convertible Security; (b) enter into any transaction or event that could result in a Special Corporate Event with respect to the Company or any Subsidiary; (c) initiate any Liquidating Event with respect to the Company or any Subsidiary; (d) amend, restate, alter, modify or repeal (by merger or otherwise) the Certificate of Incorporation or the Amended Bylaws of the Company, including, without limitation, amendment, restating, modifying or repealing (by merger or otherwise) any certificate of designation or preferences (as in effect from time to time) relating to the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock, including, without limitation, the filing by the Company of a certificate with the Secretary of State of the State of Delaware, pursuant to Section 151(g) of the Delaware General Corporation Law, setting forth a resolution or resolutions adopted by the Board of Directors of the Company that none of the authorized shares of Series D Preferred Stock are outstanding and that none will be issued subject to the Series D Certificate of Designation; (e) amend, restate, alter, modify or repeal (by merger or otherwise) or permit any Subsidiary to amend, restate, alter, modify or repeal (by merger or otherwise) the certificate of incorporation, other organizational documents, or bylaws of any Subsidiary in any material respect; (f) change the number of directors of the Company to a number less than eight (8) or more than nine (9) or the manner in which the directors are selected, as provided in the Certificate of Incorporation, Amended Bylaws, Series B Preferred Stock Certificate of Designation, Series C Preferred Stock Certificate of Designation and Series D Preferred Stock Certificate of Designation; (g) incur any Indebtedness, in the aggregate with respect to the Company and its Subsidiaries, in excess of $15 million in any Fiscal Year; PROVIDED, HOWEVER, that this provision shall not apply to draw-downs under any credit facility as to which a credit agreement had been executed and delivered on or prior to the Initial Issue Date; 19 (h) become a party to Operating Leases during any Fiscal Year with respect to which the present value of all payments due during the term of such Operating Leases in the aggregate (determined using a discount rate of 10%) exceed $15 million; (i) create, authorize or issue any shares of Series C Preferred Stock or any class or series of Senior Securities, Parity Securities or Supervoting Securities or shares of any such class or series; (j) reclassify any authorized stock of the Company into Series C Preferred Stock or any class or series of Senior Securities, Parity Securities, Supervoting Securities or shares of such class or series; (k) increase or decrease the authorized number of shares of Series C Preferred Stock or any class or series of Senior Securities or Parity Securities or shares of any such class or series; (l) issue any equity security below either the then current Market Price (without deduction for any underwriters' discount) or the then-applicable Conversion Price other than for (A) management stock options currently authorized and available for grant for not more than Three Hundred Thousand (300,000) shares of Common Stock in the aggregate, in which senior management of the Company shall not participate, (B) management stock options exercisable at not less than the then-applicable Conversion Price per share of Common Stock issued after October 14, 1997, exercisable for not more than Five Hundred Thousand (500,000) shares of Common Stock in the aggregate, in which only certain members of senior management of the Company shall participate, and (C) the Common Stock underlying such management stock options and other stock options outstanding as of October 14, 1997; (m) declare or pay any dividend or make any distribution (including without limitation by way of redemption, purchase or other acquisition) with respect to shares of Capital Stock or any securities convertible into, or exercisable, redeemable or exchangeable for, any share of Capital Stock (including without limitation any Option or Convertible Security) directly or indirectly, whether in cash, obligations or shares of the Company or other property; (n) acquire, in one or a series of related transactions, any equity ownership interest or interests of any Person, where the aggregate consideration payable in connection with such acquisition (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is equal to or greater than $15 million; (o) acquire any asset or assets of any Person in any transaction or transactions, where the aggregate consideration payable in connection with any single such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration), whether such transaction is effected in a single transaction or a series of related transactions, is greater than $15 million; PROVIDED, HOWEVER, that this provision shall not apply to Capital Expenditures made by the Company in the Ordinary Course of Business; 20 (p) merge or consolidate with any Person, or permit any other Person to merge into it, where (i) the stockholders of the Company immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold securities possessing more than 50% of either the total voting power of and the beneficial ownership interests in the surviving entity of such merger or consolidation and (ii) the equity holders of the subject Person immediately prior to the consummation of such transaction shall receive (directly or indirectly) aggregate consideration payable in connection with such transaction (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) equal to or greater than $15 million, (q) cause or permit any Subsidiary to merge or consolidate with any Person (other than the Company or a wholly-owned Subsidiary of the Company), or cause or permit any other Person to merge into it, where: (i) the stockholders of such Subsidiary immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold securities possessing more than 50% of both the total voting power of and the beneficial ownership interests in the surviving entity of such merger or consolidation and (ii) the equity holders of the subject Person immediately prior to the consummation of such transaction shall receive (directly or indirectly) aggregate consideration payable in connection with such transaction (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) equal to or greater than $15 million; (r) substantially and materially engage in, either through acquisition or internal development, any business other than the business of providing diagnostic services to the healthcare industry; (s) make or permit any of its Subsidiaries to make Capital Expenditures any fiscal year in excess, in the aggregate, of two percent (2%) above the approved Capital Budget Plan for such fiscal year of the Company unless such expenditure is approved by the Executive Committee of the Board of Directors or a Supermajority Vote of the Board of Directors of the Company; (t) (i) sell, transfer, convey, lease or dispose of, outside the Ordinary Course of Business, any assets or properties of the Company or any Subsidiary, whether now or hereafter acquired, in any transaction or transactions, if (X) the aggregate consideration payable in connection with any single such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration), is greater than $5 million or (Y) the aggregate consideration payable in connection with all such transactions (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration), consummated after the Initial Issue Date, taken as a whole, is or would become as a result of such transaction greater than $20 million; (ii) undergo or cause or permit any Subsidiary to undergo a reorganization or recapitalization; (iii) merge or consolidate with any Person, or permit any other Person to merge into it, where the stockholders of the Company immediately prior to the consummation of such 21 merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold securities possessing 50% or less of either the total voting power of or the beneficial ownership interests in the surviving entity of such merger or consolidation; or (iv) cause or permit any Subsidiary to merge or consolidate with any other Person (other than the Company or a wholly-owned Subsidiary of the Company), or cause or permit any other Person to merge into such Subsidiary, where the stockholders of such Subsidiary immediately prior to the consummation of such merger or consolidation shall, immediately after the consummation of such merger or consolidation, hold 50% or less of either the total voting power of or the beneficial ownership interests in the surviving entity of such merger or consolidation, if (X) the value of the assets of such Subsidiary is greater than $5 million or (Y) the aggregate value of the assets of all such Subsidiaries with respect to all such mergers or consolidations consummated after the Initial Issue Date, taken as a whole, and including such transaction, is greater than $20 million; (u) permit any Subsidiary of the Company to issue or sell any share of Capital Stock, Option or Convertible Security; PROVIDED, HOWEVER, that the Company may form a new Subsidiary not all of the equity securities of which need be owned directly or indirectly by the Company (a "PARTIAL SUBSIDIARY"), but only if (i) at the time of creation of such Partial Subsidiary, such Partial Subsidiary is designated as such in a written notice to the holders of the shares of Series C Preferred Stock, and, (ii) cumulatively through time no more than $5,000 of assets (in the aggregate) are transferred to such Partial Subsidiary by the Company or any other Subsidiary, and (iii) no liabilities of such Partial Subsidiary are ever assumed or guaranteed by the Company or any other Subsidiary; or (v) issue any share of Series D Preferred Stock, otherwise than pursuant to a Type B Conversion. The rights provided to holders of shares of Series C Preferred Stock in this Section 11 shall be in addition to and not in lieu of the other rights and protections granted to the holders of the shares of Series C Preferred Stock hereunder. SECTION 12. REISSUANCE OF SERIES C PREFERRED STOCK. Shares of Series C Preferred Stock that have been issued and reacquired or converted in any manner, including shares purchased, redeemed, exchanged, or converted into shares of Common Equity, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that such shares may not in any event be reissued as Series C Preferred Stock. SECTION 13. BUSINESS DAY. If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. 22 SECTION 14. CERTAIN NOTIFICATION OBLIGATIONS. The Company will notify the Initial Purchaser of each subsequent sale or disposition of any assets or properties of either the Company or any Subsidiary (other than in the Ordinary Course of Business) once the aggregate consideration payable in connection with all such sales or dispositions for the Company and its Subsidiaries outside the Ordinary Course of Business (including without limitation cash consideration, the fair market value of any securities and the net present value of any deferred consideration) exceeds $10,000,000 in any fiscal year. SECTION 15. PREEMPTIVE RIGHTS (a) Subject to the terms and conditions specified in this Section 15, the Company hereby grants to each holder of shares of Series C Preferred Stock a right of first offer with respect to future sales in any transaction or proposed transaction not involving a public offering by the Company of its shares of Common Equity or any securities convertible or exchangeable, directly or indirectly, into Common Equity (collectively, "PREEMPTIVE SECURITIES"). Preemptive Securities shall include, without limitation, all shares of Common Stock and all Convertible Securities. (b) Each time the Company proposes to offer any Preemptive Securities in a transaction not involving a public offering of such Preemptive Securities, the Company shall first make an offering of such Preemptive Securities to each holder of shares of Series C Preferred Stock in accordance with the following provisions: (1) The Company shall deliver a notice by certified mail (the "PREEMPTIVE NOTICE") to each holder of shares of Series C Preferred Stock stating (i) its bona fide intention to offer Preemptive Securities, (ii) the number of such Preemptive Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Preemptive Securities. In addition, the Preemptive Notice will contain all other information which would be provided to prospective purchasers with respect to the proposed offering. (2) With respect to any Type A Offering of Preemptive Securities, by written notification given by each holder of shares of Series C Preferred Stock within 15 Business Days from the date of the Preemptive Notice, each holder may elect to purchase or obtain, at the price and on the terms specified in the Preemptive Notice, up to that portion of such Preemptive Securities which equals the proportion that the number of shares of Common Stock issuable upon conversion of the shares of Series C Preferred Stock then held by such holder bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion of all convertible securities, including without limitation the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock). (3) With respect to any Type B Offering of Preemptive Securities, by written notification given by each holder of shares of Series C Preferred Stock within 15 Business Days from the date of the Preemptive Notice, each holder may elect to purchase 23 or obtain, at the price and on the terms specified in the Preemptive Notice, up to that portion of such Preemptive Securities which equals the proportion that the number of shares of Common Stock issuable upon conversion of the shares of Series C Preferred Stock then held by such holder bears to the number of shares of Common Stock of the Company into which the outstanding shares of Series B Preferred Stock and the outstanding shares of Series C Preferred Stock are then convertible. (4) If any of the holders of Series B Preferred Stock decline to exercise any right of refusal with respect to any offering to such holders of Series B Preferred Stock of any Preemptive Securities, such holders (the "DECLINING SERIES B HOLDERS") shall give written notification of such election to decline to exercise such rights to the Company within 15 Business Days from the date of the Preemptive Notice. Within 3 Business Days thereafter, the Company shall give written notification (the "DECLINED PREEMPTIVE SECURITIES NOTICE") to each holder of Series C Preferred Stock of the following: (i) the total number of shares of Preemptive Securities which the Declining Series C Holders declined to purchase (collectively, the "DECLINED PREEMPTIVE SECURITIES"), and (ii) the price and terms specified in the Preemptive Notice relating to such Declined Preemptive Securities. (5) By written notification given by each holder of shares of Series C Preferred Stock within 3 Business Days from the date of the Declined Preemptive Securities Notice, each holder of Series C Preferred Stock may elect to purchase or obtain, at the price and on the terms specified by the Company for such sale of such Preemptive Securities, such Declined Preemptive Securities at the price and on the terms specified in the Preemptive Notice; PROVIDED, HOWEVER, that if the total number of Declined Preemptive Securities so elected to be purchased by such holders of Series C Preferred Stock pursuant hereto (collectively, the "ELECTING HOLDERS") exceeds the total number of Declined Preemptive Securities, each such Electing Holder shall purchase, and the Company shall sell to such Electing Holder, that portion of the total number of Declined Preemptive Securities which equals the proportion that the number of shares of Common Stock issuable upon conversion of the shares of Series C Preferred Stock then held by such holder bears to the number of shares of Common Stock of the Company into which the outstanding shares of all Electing Holders are then convertible. (6) If all Preemptive Securities referred to in any Preemptive Notice are not elected to be obtained as provided in Section 15(b)(2) or 15(b)(3), or Section 15(b)(4) or 15(b)(5), as applicable, the Company may, at any time after the latest date set forth above for the exercise of the right to purchase any such Preemptive Securities by any holder of Series C Preferred Stock (the "PREEMPTIVE RIGHT EXPIRATION DATE") to the date sixty (60) days from the Preemptive Right Expiration Date offer the remaining unsubscribed portion of such Preemptive Securities to any Person or Persons at a price equal to the price specified in the relevant Preemptive Notice. If the Company does not enter into an agreement for the sale of the Preemptive Securities within sixty (60) days after the Preemptive Right Expiration Date, or if such agreement is not consummated within ninety (90) days of the Preemptive Right Expiration Date, the right provided under this 24 Section 15 shall be deemed to be revived and such Preemptive Securities shall not be offered unless first reoffered to each holder of shares of Series C Preferred Stock in accordance herewith. (7) The rights set forth in this Section 15 shall not be applicable to the issuance or sale of shares of Common Stock pursuant to Options approved by the Board to officers, directors and employees of the Company for the primary purpose of soliciting or retaining their employment or services. SECTION 16. DEFINITIONS. As used in this Certificate, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of a majority or more of the voting securities of a Person shall be deemed to be control. "AMENDED BYLAWS" means the Amended and Restated Bylaws of the Company, as in effect from time to time. "AGGREGATE VOTING LIMITATION" has the meaning set forth in Section 10(a). "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company. "BOARD OBSERVER" has the meaning set forth in Section 10(g). "BUSINESS DAY" means any day other than a Legal Holiday. "CAPITAL BUDGET PLAN" means, for each fiscal year of the Company, the plan of the Company for making Capital Expenditures for such fiscal year which has been approved for such fiscal year by either the Executive Committee or a Supermajority Vote of the Board of Directors of the Company. "CAPITAL EXPENDITURES" means, for any period, expenditures made by the Company or any of its Subsidiaries to acquire or construct fixed assets, plant and Fixtures and Equipment (including additions, improvements, upgrades and replacements, but excluding repairs) during such period calculated in accordance with GAAP. 25 "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CERTIFICATE OF INCORPORATION" means the certificate of incorporation (as defined in Section 104 of the Delaware General Corporation Law) of the Company in effect on the date hereof, including, without limitation, the Series A, Series B, Series C and Series D Certificates of Designation. "CHANGE OF CONTROL" with respect to a Person shall be deemed to have occurred (i) at such time as any person (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) at any time shall directly or indirectly acquire more than 40% in outstanding voting power of such Person, (ii) at such time as during any one year period, individuals who at the beginning of such period constitute such Person's Board of Directors or other governing body cease to constitute at least a majority of such board or governing body (provided, however, that a change in directors upon a Type B Event Date shall not be deemed to cause a Change in Control pursuant to this clause (ii)), (iii) upon consummation of a merger or consolidation of such Person into or with another Person in which the shareholders of the subject Person immediately prior to the consummation of such transaction shall own less than Fifty Percent (50%) of the voting securities of the surviving Person (or the parent corporation of the surviving Person where the surviving Person is wholly-owned by the parent corporation) immediately following the consummation of such transaction or (iv) the sale, transfer or lease of all or substantially all of the assets of such Person, in any of cases (i), (ii), (iii) or (iv) in a single transaction or series of related transactions; PROVIDED, that no Change of Control hereunder with respect to the Company shall be deemed to occur solely by reason of (x) the ownership by the Initial Purchaser or any Affiliate thereof or the Majority Holders of the Series C Preferred Stock or any Affiliate thereof of any Capital Stock of the Company or (y) the conversion of shares of Series C Preferred Stock into either Series D Preferred Stock (and any change in the Board of Directors incident thereto) or Common Stock, or (z) the conversion of shares of Series D Preferred Stock into Common Stock. "COMMITTEES" has the meaning set forth in Section 10(e). "COMMON EQUITY" means all shares now or hereafter authorized of any class of common stock of the Company (including the Common Stock) and any other stock of the Company, however designated, authorized after the date hereof, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. 26 "COMMON STOCK" has the meaning set forth in Section 3(a). "COMMON STOCK DIRECTOR" means, for any period prior to any Type B Event Date, any director other than the Joint Director or a director elected by the holders of the Series B Preferred Stock or the Series C Preferred Stock. "COMPANY" means InSight Health Services Corp., a Delaware corporation. "CONVERSION DATE" means (i) in the event of a Type A Conversion, the date set forth in Section 5(a) (in the event of a partial conversion relating to a Partial Conversion Event) or Section 5(b) (in the event of any other conversion pursuant to Section 5), and (ii) in the event of a Type B Conversion, the date of receipt by the Company of the relevant Type B Conversion Notice. "CONVERSION DIRECTORS" has the meaning set forth in Section 10. "CONVERSION PRICE" has the meaning set forth in Section 8. "CONVERTIBLE SECURITY" means any stock or securities, directly or indirectly, convertible into or exchangeable for Common Equity, including without limitation any exchangeable debt securities. "CORPORATE CHANGE" has the meaning set forth in Section 8(e). "CREDIT FACILITY" means a credit facility to which the Company is a party with NationsBank, N.A. "DECLINED PREEMPTIVE SECURITIES" has the meaning set forth in Section 15(b)(4). "DECLINED PREEMPTIVE SECURITIES NOTICE" has the meaning set forth in Section 15(b)(4). "DECLINING SERIES B HOLDERS" has the meaning set forth in Section 15(b)(4). "ELECTING HOLDERS" has the meaning set forth in Section 15(b)(5). "ENCUMBRANCE" means any claim, lien, pledge, option, charge, easement, security interest, right-of-way, encumbrance or other right of third parties, and, with respect to any securities, any agreements, understandings or restrictions affecting the voting rights or other incidents of record or beneficial ownership pertaining to such securities. "FIRST MEETING" means the meeting of the newly constituted Board of Directors to be held two calendar days after a Type B Event Date, at the principal offices of the Corporation. "FISCAL YEAR" means each year ending June 30, or any other fiscal year as approved by the Board of Directors. 27 "FIXTURES AND EQUIPMENT" means all of the furniture, fixtures, furnishings, machinery, equipment and other tangible assets owned by the Company or any Subsidiary that are material to the conduct of their businesses as currently conducted. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect as of the Initial Issue Date. "INDEBTEDNESS" means, as to any Person without duplication, (a) all items which, in accordance with GAAP, would be included as a liability on the balance sheet of such Person and its Subsidiaries (including any obligation of such Person to the issuer of any letter of credit for reimbursement in respect of any drafts drawn under such letter of credit), excluding obligations in respect of deferred taxes and deferred employee compensation and benefits, and anything in the nature of capital stock, surplus capital and retained earnings; (b) the amount available for drawing under all letters of credit issued for the account of such Person; (c) Capital Lease Obligations of such Person; and (d) all obligations of other Persons that such Person has guaranteed, including, without limitation, all obligations of such Person consisting of recourse liabilities with respect to accounts receivable sold or otherwise disposed of by such Person; provided, however, that the term Indebtedness shall not include trade accounts payable (other than for borrowed money) arising in, and accrued expenses incurred in, the ordinary course of business of such Person, provided the same are not more than sixty (60) days overdue or are being contested in good faith. "INDEPENDENT" means any Person who is not an officer or employee of the Company or any Subsidiary or other Affiliate of the Company or otherwise paid any compensation or remuneration by the Company or any Subsidiary or other Affiliate of the Company other than director's fees. "INITIAL ISSUE DATE" means October 14, 1997. "INITIAL PURCHASER" shall mean the Person to whom shares of Series C Preferred Stock are initially issued by the Company. "JOINT DIRECTOR" has the meaning set forth in Section 10(b)(4). "JUNIOR SECURITIES" has the meaning set forth in Section 2. "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 28 "LIEN" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "LIQUIDATING DIVIDEND" has the meaning set forth in Section 8(g). "LIQUIDATING EVENT" has the meaning set forth in Section 4(b). "LIQUIDATION PREFERENCE" has the meaning set forth in Section 4(a). "MAJORITY HOLDERS," at any time, and with respect to any class or series of Capital Stock of the Company, means holders of a majority of the shares of such class or series then outstanding. If the term is used without reference to a particular class or series of Capital Stock of the Company, it means Majority Holders of the Series C Preferred Stock. "MARKET PRICE" means as to any security the average of the closing prices of any such security's sales on all domestic securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in Nasdaq as of 4:00 P.M., New York time, on such day, or, if on any day such security is not quoted in Nasdaq, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of twenty-one (21) Business Days consisting of the day as of which "Market Price" is being determined and the twenty (20) consecutive Business Days prior to such day; provided that if such security is listed on any domestic securities exchange the term "Business Days" as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted in Nasdaq or the domestic over-the-counter market, the "Market Price" shall be the fair value thereof determined by the Company and approved by the Majority Holders; provided that if such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Company and the Majority Holders. The determination of such appraiser shall be final and binding on the Company and holders of the shares of Series C Preferred Stock, and the fees and expenses of such appraiser shall be paid by the Company. "OPERATING LEASE" shall mean any lease with respect to which the obligations of the lessee thereunder are, at the time any determination thereof is to be made, not required to be capitalized on the lessee's balance sheet in accordance with GAAP. "OPTION" shall mean any rights or options to subscribe for or purchase Common Equity or Convertible Securities. "ORDINARY COURSE OF BUSINESS" shall mean the ordinary course of business for a company engaged in the business of providing diagnostic services to the healthcare industry as so provided by the Company as of the Initial Issue Date; provided, that all sales by the Company or any 29 Subsidiary, as the case may be, of inventory and sales of Fixtures and Equipment no longer used or useful in such business shall be deemed to be in the Ordinary Course of Business. "PARITY SECURITIES" has the meaning set forth in Section 2. "PARTIAL CONVERSION EVENT" means (i) the consummation of the sale by any holder of its shares of Series C Preferred Stock to a third party at any time approved by the Board, (ii) the consummation of a public offering of the Common Stock at any time and (iii) at any time following April 14, 1999, the consummation of a private sale of Common Stock. "PARTIAL SUBSIDIARY" has the meaning set forth in Section 11(u). "PERSON" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "PREEMPTIVE NOTICE" has the meaning set forth in Section 15(b). "PREEMPTIVE RIGHT EXPIRATION DATE" has the meaning set forth in Section 15(b)(6). "PREEMPTIVE SECURITIES" has the meaning set forth in Section 15(a). "PREFERRED STOCK DIRECTORS" means the Series B Director and the Series C Directors. "SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement dated as of October 14, 1997 between the Company and the Initial Purchaser. "SENIOR SECURITIES" has the meaning set forth in Section 2. "SERIES A PREFERRED STOCK" has the meaning set forth in Section 2. "SERIES B DIRECTOR" has the meaning set forth in Section 10. "SERIES B PREFERRED STOCK" has the meaning set forth in Section 1. "SERIES C DIRECTOR" has the meaning set forth in Section 10. "SERIES C PREFERRED STOCK" has the meaning set forth in Section 2. "SERIES D PREFERRED STOCK" has the meaning set forth in Section 2. "SPECIAL CORPORATE EVENT" with respect to a Person shall be deemed to have occurred (i) at such time as any person (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934) at any time shall directly or indirectly acquire more than 20% in outstanding voting power of such Person, (ii) at such time as during any one year period, individuals who at the beginning of such period constitute such Person's Board of Directors or other governing body cease to 30 constitute at least a majority of such board or governing body (provided, however, that a change in directors upon a Type B Event Date shall not be deemed to cause a Special Corporate Event pursuant to this clause (ii)), (iii) upon consummation of a merger or consolidation of such Person into or with another Person in which the shareholders of the subject Person immediately prior to the consummation of such transaction shall own less than Fifty Percent (50%) of the voting securities of the surviving Person (or the parent corporation of the surviving Person where the surviving Person is wholly-owned by the parent corporation) immediately following the consummation of such transaction or (iv) the sale, transfer or lease of all or substantially all of the assets of such Person, in any of cases (i), (ii), (iii) or (iv) in a single transaction or series of related transactions; provided, that no Special Corporate Event hereunder with respect to the Company shall be deemed to occur solely by reason of the ownership by the Initial Purchaser or any Affiliate thereof or the Majority Holders of the Series C Preferred Stock or any Affiliate thereof of any Capital Stock of the Company. "SUBSIDIARY" means, with respect to any Person, (a) any corporation of which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned or controlled by such Person, by one or more Subsidiaries of such Person or by such Person and one or more of its Subsidiaries, or (b) any corporate or non-corporate entity in which such Person, one or more Subsidiaries of such Person, or such person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has an ownership interest and one hundred percent (100%) of the revenue of which is included in the consolidated financial reports of such Person consistent with GAAP. "SUPERMAJORITY VOTE" means the affirmative vote of six (6) directors of the Company with respect to the matter subject to such vote. "SUPERVOTING SECURITIES" means any class or series of the Company's Capital Stock the holders of which have the right to cast more than one vote per share and/or have the right to elect one or more members of the Board of Directors, voting as a class or series. "TYPE A CONVERSION" means a conversion of shares of Series C Preferred Stock into shares of Common Stock pursuant to Section 5 hereof. "TYPE A OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by the Company of Preemptive Securities in which the proposed sale price reflects a price per share of Common Stock at or above the higher of (i) the Market Price per share of Common Stock, determined as of the date of the Preemptive Notice relating to such offering and (ii) $8.375 per share of Common Stock. "TYPE B CONVERSION" means a conversion of shares of Series C Preferred Stock into shares of Series D Preferred Stock pursuant to Section 6 hereof. "TYPE B CONVERSION NOTICE" has the meaning set forth in Section 6(b). 31 "TYPE B EVENT DATE" has the meaning set forth in Section 6(b). "TYPE B OFFERING OF PREEMPTIVE SECURITIES" means any proposed offering by the Company of Preemptive Securities in which the proposed sale price reflects a price per share of Common Stock below the higher of (i) the Market Price per share of Common Stock, determined as of the date of the Preemptive Notice relating to such offering and (ii) $8.375 per share of Common Stock. "TYPE B TRIGGER DATE" means the date one year after the initial borrowing of funds under the Credit Facility. IN WITNESS WHEREOF, InSight Health Services Corp. has caused this Certificate to be executed by its Executive Vice President and Secretary this 14th day of October, 1997. INSIGHT HEALTH SERVICES CORP. By: /s/ Thomas V. Croal ---------------------------------- Name: Thomas V. Croal Office: Executive Vice President and Secretary 32 EX-3.4 4 EXHIBIT 3.4 INSIGHT HEALTH SERVICES CORP. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF CONVERTIBLE PREFERRED STOCK, SERIES D (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware.) InSight Health Services Corp., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the certificate of incorporation of the Company, as amended, the Board unanimously adopted the following resolutions on October 14, 1997 authorizing the issuance of the Series D Convertible Preferred Stock of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the certificate of incorporation or bylaws of the Company: RESOLVED, that pursuant to authority vested in the Board by the Certificate of Incorporation, the Board does hereby establish a series of preferred stock of the Company from the Company's authorized class of 3,500,000 shares of $.001 par value preferred shares, such series to consist of 632,266 shares, and does hereby fix and state the voting rights, designation, powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as follows: SECTION 1. DESIGNATION. The Preferred Stock created and authorized hereby shall be designated as the "Convertible Preferred Stock, Series D" (hereinafter called the "SERIES D PREFERRED STOCK"). The number of shares of Series D Preferred Stock shall be 632,266 and no more, provided, however, that the Board of Directors of the Company may increase the number of shares of Series D Preferred Stock pursuant to Section 151(g) of the Delaware General Corporation Law, but only in accordance with the provisions of Section 7(c) of the Series B Certificate of Designation and Section 7(c) of the Series C Certificate of Designation. SECTION 2. RANK. The Series D Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank senior to all classes of Common Equity of the Company, and to each other class or series of Capital Stock of the Company (except for the Convertible Preferred Stock, Series A (hereinafter called the "SERIES A PREFERRED STOCK")) the terms of which do not expressly provide that it ranks senior to or on a parity with the Series D Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to with the Common Equity of the Company as "JUNIOR SECURITIES"). The Series D Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank on a parity with any class or series of Capital Stock hereafter created which expressly provides that it ranks on a parity with the Series D Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (shares of such a class or series, together with shares of the Series A Preferred Stock, shares of the Convertible Preferred Stock, Series B (the "SERIES B PREFERRED STOCK"), and shares of the Convertible Preferred Stock, Series C (the "SERIES C PREFERRED STOCK") are, collectively, the "PARITY SECURITIES"). The Series D Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank junior to each class or series of Capital Stock hereafter issued in accordance with Section 10 hereof and which expressly provides that it ranks senior to the Series D Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up and dissolution of the Company ("SENIOR SECURITIES"). Any purported Supervoting Securities that were not created, authorized or issued in accordance with Section 10 hereof shall be deemed for all purposes related to voting rights to be identical to Common Stock, including, without limitation, as to voting rights with respect to the election of directors and all other matters submitted to a vote of stockholders. SECTION 3. DIVIDENDS. (a) The Company may (when, as and if declared by the Board of Directors of the Company) declare and pay dividends, out of the entire assets and funds of the Company legally available therefor, to the holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the common stock, $.001 par value per share, of the Company (the "COMMON STOCK") ratably based on the number of shares of Common Stock held by each such Holder (assuming full conversion of all such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock into Common Stock). (b) Holders of shares of the Series D Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof in preference to and in priority over any dividends upon any of the Junior Securities, except for the Common Stock. (c) Holders of shares of the Series D Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof on a pro rata basis with respect to any dividends upon any Parity Securities. SECTION 4. LIQUIDATION PREFERENCE. (a) Upon any Liquidating Event with respect to the Company, the Holders of shares of Series D Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, $.001 per share of Series D Preferred Stock (the "LIQUIDATION PREFERENCE"), plus an amount in cash equal to any declared but unpaid dividends thereon, before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, Common Stock. In addition, holders of shares of Series D Preferred Stock shall be entitled to receive any distribution in the event of liquidation, dissolution or winding up of the affairs of the Company pari passu with shares of Common Stock, on a pro rata basis (assuming full conversion of all shares of Series D Preferred Stock into Common Stock). If the assets of the Company are not sufficient to pay in full the 2 liquidation payments payable to the holders of outstanding shares of the Series D Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts which would be payable on such distribution if the amount to which the holders of outstanding shares of Series D Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. (b) "LIQUIDATING EVENT" shall mean, with respect to any Person, any of the following events: (i) the commencement by such Person of a voluntary case under the bankruptcy laws of the United States, as now or hereafter in effect, or the commencement of an involuntary case against such Person with respect to which the petition shall not be controverted within 15 days, or be dismissed within 60 days, after commencement thereof; (ii) the appointment of a custodian for, or the taking charge by a custodian of, all or substantially all of the property of such Person; (iii) the commencement by such Person of any proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to such Person; (iv) the commencement against such Person of any proceeding set forth in the preceding clause (iii), which is not controverted within 10 days thereof and dismissed within 60 days after the commencement thereof; (v) the adjudication of such Person insolvent or bankrupt, or the adoption by such Person of a plan of liquidation; (vi) the occurrence of any Change of Control with respect to such Person or (vii) the filing of a certificate of dissolution in respect of the Company with the Secretary of State of the State of Delaware; in any of cases (i) through (vi) above, in a single transaction or series of related transactions. SECTION 5. CONVERSION (a) Each holder of Series D Preferred Stock shall have the right, at its option, to convert, subject to the terms and provisions of this Section 5, all or any part of its Series D Preferred Stock then outstanding into such number of fully paid and non-assessable shares of Common Stock as results from multiplying the number of shares of Series D Preferred Stock to be converted by the Conversion Multiple. The person or persons entitled to receive the shares of Common Stock upon conversion of such shares of Series D Preferred Stock shall be treated for all purposes as having become the record holder or holders of such shares of Common Stock on the date such holder or holders deliver certificates representing the shares of Series D Preferred Stock to be converted to the Company as set forth in Section 5(b) below (the "CONVERSION DATE"). (b) In order to convert all or any portion of its outstanding Series D Preferred Stock into shares of Common Stock, the holder of such Series D Preferred Stock shall deliver certificates representing the shares of Series D Preferred Stock to be converted to the Company at its principal office, together with written notice that it elects to convert those shares of Series D Preferred Stock into shares of Common Stock in accordance with the provisions of this Section 5. Such notice shall specify the number of shares of Series D Preferred Stock to be converted and the name or names in which the holder wishes the certificates for shares of Common Stock to be registered. 3 SECTION 6. GENERAL PROVISIONS RELATING TO CONVERSION The following provisions shall be applicable to any conversion pursuant to Section 5 hereof. (a) As promptly as practicable after the surrender as hereinabove provided of certificates representing shares of Series D Preferred Stock converted or to be converted into shares of Common Stock, the Company shall deliver or cause to be delivered to the holder, or the holder's designee, certificates representing the number of fully paid and non-assessable shares of Common Stock into which the shares of Series D Preferred Stock are converted, and, if less than the entire number of shares of Series D Preferred Stock represented by the certificate or certificates surrendered is to be converted, a new certificate for the number of shares of Series D Preferred Stock not so converted. So long as any shares of Series D Preferred Stock remain outstanding, the Company shall not close its Common Stock transfer books. The issuance of certificates representing shares of Common Stock issued upon the conversion of shares of Series D Preferred Stock shall be made without charge to the holder of Series D Preferred Stock for any tax in respect of the issuance of such certificates (other than any transfer, withholding or other tax if the shares of Common Stock are to be registered in a name different from that of the registered holder of Series D Preferred Stock). (b) No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issued upon any conversion of any shares of Series D Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded up to a whole share. (c) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of shares of Series D Preferred Stock and the exercise of the Warrants and the GE Warrants, the full number of whole shares of Common Stock then deliverable upon the conversion of all shares of Series D Preferred Stock then outstanding and the issuance of Common Stock in respect of the Warrants and the GE Warrants. The Company shall take at all times such corporate action as shall be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the conversion of shares of Series D Preferred Stock and the exercise of the then outstanding Warrants and GE Warrants. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series D Preferred Stock and the exercise of all the then outstanding Warrants and GE Warrants, in addition to such other remedies as shall be available to the holders of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, the Company shall forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such numbers of shares as shall be sufficient for such purpose, including but not limited to promptly calling and holding a meeting of the Company's stockholders, at which the Company's stockholders shall vote on a proposed amendment to the Certificate of Incorporation that would so increase the number of authorized shares of Common Stock, a favorable vote for which amendment shall have been recommended to the Company's stockholders by the Board of Directors, pursuant to a duly and validly adopted resolution of the Board of Directors setting forth the amendment proposed and 4 declaring its advisability, all in accordance with Section 242 of the Delaware General Corporation Law. (d) If any shares of Common Stock to be reserved for the purpose of conversion of Series D Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange, NASD, Inc., Nasdaq or other regulatory body under any federal or state law, federal or state regulation, rule of NASD, Inc., Nasdaq or otherwise, before such shares may be validly issued or delivered upon conversion, the Company shall, in good faith and as expeditiously as practicable, endeavor to secure such registration, listing or approval, as the case may be. (e) All shares of Common Stock that may be issued upon conversion of the Series D Preferred Stock shall upon issuance by the Company be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. (f) In the event of any taking by the Company of a record of the holders of any class of Capital Stock for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of Capital Stock or any other securities or property, or to receive any other right, the Company shall mail to each holder of Series D Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (g) The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Section 6 and Sections 5 and 7 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the shares of Series D Preferred Stock against impairment of any kind. SECTION 7. CONVERSION MULTIPLE. (a) As used herein, the "CONVERSION MULTIPLE" shall initially be ten (10), subject to adjustment as set forth below. (b) If the Company at any time subdivides (by any stock split, stock dividend, reclassification, recapitalization or otherwise) one or more classes or series of its outstanding shares of Common Equity into a greater number of shares, the Conversion Multiple in effect immediately prior to such subdivision shall be proportionately increased. If the Company at any time combines (by reverse stock split or otherwise) one or more classes or series of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Multiple in effect immediately prior to such combination shall be proportionately decreased. 5 (c) Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, in each case which is effected in such a way that the holders of Common Equity are entitled to receive (either directly or upon subsequent liquidation) stock, securities, cash, debt instruments or assets with respect to or in exchange for Common Equity is referred to herein as a "CORPORATE CHANGE." In case of any Corporate Change, each share of Series D Preferred Stock then outstanding will become convertible only into the kind and amount of securities, cash and other property receivable upon such Corporate Change by the holder of the number of shares of Common Stock into which such share of Series D Preferred Stock was convertible immediately prior thereto (assuming such holder of Common Stock failed to exercise any rights of election). The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from such consolidation or merger or the entity purchasing such assets assumes by written instrument the obligation to deliver to the holders of shares of Series D Preferred Stock such shares of stock, securities, cash, debt instruments or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. (d) If any event occurs of the type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions, then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Multiple so as to protect the rights of the holders of the shares of Series D Preferred Stock; provided that no such adjustment shall decrease the Conversion Multiple obtainable as otherwise determined pursuant to this Section 7. (e) If the Company declares or pays a dividend upon the Common Equity payable otherwise than out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "LIQUIDATING DIVIDEND"), then the Company shall pay to each holder of a share of Series D Preferred Stock at the time of payment thereof the Liquidating Dividend which would have been paid to such holder on the Common Stock such holder would have owned had such holder fully exercised its right to convert the shares of Series D Preferred Stock into shares of Common Stock immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Common Equity entitled to such dividends are to be determined. SECTION 8. NO REDEMPTION. The shares of Series D Preferred Stock shall not be subject to mandatory redemption by the Company. SECTION 9. VOTING RIGHTS AND RELATED PROVISIONS. (a) Shares of Series D Preferred Stock (i) shall only be issuable to holders of shares of Series B Preferred Stock and Series C Preferred Stock and (ii) shall only be issuable upon the terms and conditions set forth in the Series B Certificate of Designation and Series C Certificate of Designation. The holders of shares of the Series D Preferred Stock shall have the right to vote with the holders of Common Stock with respect to all matters submitted to a shareholder vote (except for the election of directors, which will be governed by Sections 9(b) through 9(f) 6 below), with each share of Series D Preferred Stock having the number of votes equal to the number of shares of Common Stock into which such share of Series D Preferred Stock then is convertible. (b) Upon a Type B Event Date, without any action on the part of the Company or the Board, the number of members of the Board shall be increased automatically by the smallest whole number that will result in at least the Type B Percentage (but less than 66 2/3%) of the members of the Board being Series D Directors. Immediately following such Type B Event Date, the holders of Series D Preferred Stock shall have the right to elect all of such number of new directors (the "CONVERSION DIRECTORS"), such election to occur pursuant to the Series D Selection Procedure. The Conversion Directors shall immediately upon such election become members of the Board of Directors as Series D Directors. The term of the Conversion Directors shall run until the third annual meeting of stockholders following the Type B Event Date. "SERIES D DIRECTORS" shall mean, collectively, any Preferred Stock Directors and any Conversion Directors. After a Type B Event Date and until the expiration of the terms of office of directors serving as members of the board of directors immediately prior to the second annual meeting of stockholders following a Type B Event Date, the board of directors shall comprise: (i) one Joint Director; (ii) three Preferred Stock Directors; (iii) not less than four (4) nor more than five (5) additional directors elected by holders of shares of Common Equity and (iv) the Conversion Directors. At and after the second annual meeting of stockholders after the Type B Event Date, upon expiration of the term of any director, such position shall be subject to election by holders of shares of Common Stock and Series D Preferred Stock, voting as a class, with each share of Series D Preferred Stock having the number of votes equal to the number of shares of Common Stock into which such share of Series D Preferred Stock then is convertible; the directors so elected shall not be designated as to series or class of Capital Stock. Upon the expiration of the terms of the Conversion Directors, their successors shall be classified into three (3) classes as nearly equal in number as possible, with appropriate terms of office. (c) Immediately following a Type B Event Date, any Preferred Stock Director already serving as a member of the Board shall continue to serve in such position until the expiration of his term and the election and qualification of a successor, or until his earlier death, resignation or retirement. Any vacancy, for any reason, in the position of a Series D Director prior to the second annual meeting of stockholders after a Type B Event Date, shall be filled by majority vote of the Series D Directors then serving. Until the second annual meeting following a Type B Event Date, election of Series D Directors to succeed those whose terms expire prior to such second annual meeting shall be solely by holders of the Series D Preferred Stock, and shall follow the Series D Selection Procedure. A Series D Director may be removed, with or without cause, by the holders of Series D Preferred Stock, in compliance with the requirements of Section 141(k)(2) of the Delaware General Corporation Law. A Series D Director shall not be removed, with or without cause, otherwise than as described in this Section 9(c). (d) Until the second annual meeting after the Type B Event Date, upon expiration of the term of the Joint Director, such position shall be subject to nomination, approval by the board of directors and election by the holders of Common Stock in the same fashion as provided in the Series B and C Certificates of Designation for the period before a Type B Event Date, except that 7 until the second annual meeting after the Type B Event Date, such nomination shall be by holders of a majority of the then outstanding shares of Series D Preferred Stock. Until the second annual meeting after the Type B Event Date, any vacancy in the position of Joint Director shall be filled in the same fashion as provided in the Series B and C Certificates of Designation for the period before a Type B Event Date. (e) Until the second annual meeting after the Type B Event Date, upon expiration of the term of any director who is neither a Series D Director nor the Joint Director, such position shall be subject to election by holders of shares of Common Stock only. (f) Shares of Series D Preferred Stock shall be deemed to be shares "entitled to vote" or entitled to vote in the election of directors" for purposes of the provisions of the Certificate of Incorporation that employ such terms, and, for purposes of such provisions at any time, each outstanding share of Series D Preferred Stock shall count as such number of shares of Common Stock into which such share of Series D Preferred Stock is then convertible pursuant to Sections 5 and 6 hereof. (g) If a Type B Event Date occurs prior to October 14, 1999, then the following provisions shall apply: (1) From such Type B Event Date until the second subsequent annual stockholders meeting of the Company after such Type B Event Date, none of the following actions or transactions shall be effected by the Company or approved by the Company as a stockholder of any Subsidiary of the Company, and neither the Initial Purchaser nor any other holder of shares of Series D Preferred Stock (other than a holder pursuant to either a transfer permitted under Rule 144 under the Securities Act of 1933, as amended, or a transfer pursuant to a registered offer under registration rights from the Company) shall engage in, or be a party to, any of the following actions or transactions involving the Company or any Subsidiary of the Company, if, as of the record date for the determination of the stockholders entitled to vote thereon, or consent thereto, any other Person which obtained its equity interest in the Company as a result of a transfer of securities from the Initial Purchaser or any other Person referred to in clauses (A) through (D) of this sentence beneficially owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of the Company entitled to vote: (A) any merger or consolidation of the Company or any of its Subsidiaries with or into such other Person; (B) any sale, lease, exchange or other disposition of all or any substantial part of the assets of the Company or any of its Subsidiaries to such other Person; (C) the issuance or delivery of any voting securities of the Company or any of its Subsidiaries to such other Person in exchange for cash, other assets or securities, or a combination thereof; or 8 (D) any dissolution or liquidation of the Company; PROVIDED, HOWEVER, that such prohibition shall not apply with respect to any such action or transaction approved by (I) the affirmative vote of not less than eighty percent (80%) of the outstanding shares of the Company entitled to vote or (II) at least two-thirds (2/3) of the directors of the Company (which must include either (i) the Joint Director, if either (x) such Joint Director served in such position as of the Type B Event Date of (y) such Joint Director has been approved by a majority of the directors who were Common Stock Directors as of the Type B Event Date or (ii) at least one director who was a Common Stock Director prior to the Type B Event Date, unless neither the Joint Director, nor any of such Common Stock Directors continue to serve on the Board of Directors at such time). For purposes of this Section 9(g) a Person shall be deemed to own or control, directly or indirectly, any outstanding shares of stock of the Company (A) which it has the right to acquire pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise, or (B) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (A) above), by any other corporation, person or other entity (x) with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of stock of the Company or (y) which is its "affiliate" or "associate" as those terms are defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. No transfer of Series D Preferred Stock may be made by a Person who obtained shares of Series D Preferred Stock upon conversion of Series B Preferred Stock or Series C Preferred Stock, unless prior thereto, the transferee in such transfer shall have entered into an agreement in form and substance reasonably satisfactory to the Company, agreeing to be bound by the terms of this Section 9(g). Notwithstanding anything to the contrary contained in this Section 9(g), such Person shall not need any approval by any directors, the Board of Directors or any stockholders under this Section 9 in order to transfer, sell or assign any of its Series D Conversion Shares in any of the following transactions (i) a transfer to an Initial Purchaser Affiliate (as defined in the Series B Certificate of Designation) or an Affiliate of the Initial Purchaser (as defined in the Series C Certificate of Designation, in either case as of the Initial Issue Date, (provided that prior to any such transfer such Initial Purchaser Affiliate or such Affiliate of the Initial Purchaser shall have delivered to the Company its written agreement to be bound by the terms of this Section 9(g); (ii) a transfer permitted under Rule 144 under the Securities Act of 1933, as amended; or (iii) a transfer pursuant to a registered offering under registration rights from the Company. SECTION 10. PROTECTIVE PROVISIONS. Without limiting the provisions of any other Series of Preferred Stock, the Company shall not take, and shall cause its Subsidiaries not to take, any of the following actions without the affirmative vote of holders of at least sixty-seven percent (67%) of the shares of the Series D Preferred Stock then outstanding: 9 (a) create, authorize or issue any shares of Series D Preferred Stock or any class or series of Supervoting Securities or shares of any such class or series; (b) reclassify any authorized stock of the Company into Series D Preferred Stock or any class or series of Supervoting Securities or shares of such class or series; (c) increase or decrease the authorized number of shares of Series D Preferred Stock or any class or series of Supervoting Securities or shares of any such class or series. The rights provided to holders of shares of Series D Preferred Stock in this Section 10 shall be in addition to and not in lieu of the other rights and protections granted to the holders of the shares of Series D Preferred Stock hereunder. SECTION 11. REISSUANCE OF SERIES D PREFERRED STOCK. Shares of Series D Preferred Stock that have been issued and reacquired or converted in any manner, including shares purchased, redeemed, exchanged, or converted into shares of Common Equity, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that such shares may not in any event be reissued as Series D Preferred Stock. SECTION 12. BUSINESS DAY. If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. SECTION 13. DEFINITIONS. As used in this Certificate, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of a majority or more of the voting securities of a Person shall be deemed to be control. "AMENDED BYLAWS" means the Amended and Restated Bylaws of the Company, as in effect from time to time. 10 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company. "BUSINESS DAY" means any day other than a Legal Holiday. "CAPITAL STOCK" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CERTIFICATE OF INCORPORATION" means the certificate of incorporation (as defined in Section 104 of the Delaware General Corporation Law) of the Company in effect on the date hereof, including, without limitation, the Series A, Series B, Series C and Series D Certificates of Designation. "CHANGE OF CONTROL" with respect to a Person shall be deemed to have occurred (i) at such time as any person (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934) at any time shall directly or indirectly acquire more than 40% in outstanding voting power of such Person, (ii) at such time as during any one year period, individuals who at the beginning of such period constitute such Person's board of directors or other governing body cease to constitute at least a majority of such board or governing body (provided, however, that a change in directors upon a Type B Event Date shall not be deemed to cause a Change in Control pursuant to this clause (ii)), (iii) upon consummation of a merger or consolidation of such Person into or with another Person in which the shareholders of the subject Person immediately prior to the consummation of such transaction shall own less than Fifty Percent (50%) of the voting securities of the surviving Person (or the parent corporation of the surviving Person where the surviving Person is wholly-owned by the parent corporation) immediately following the consummation of such transaction or (iv) the sale, transfer or lease of all or substantially all of the assets of such Person, in any of cases (i), (ii), (iii) or (iv) in a single transaction or series of related transactions; PROVIDED, that no Change of Control hereunder with respect to the Company shall be deemed to occur solely by reason of (x) the ownership by the Majority Holders of the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or any Affiliate thereof of any Capital Stock of the Company or (y) the conversion of shares of Series D Preferred Stock into Common Stock. "COMMON EQUITY" means all shares now or hereafter authorized of any class of common stock of the Company (including the Common Stock) and any other stock of the Company, however designated, authorized after the date hereof, which has the right (subject always to prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. "COMMON STOCK" has the meaning set forth in Section 3(a). 11 "COMMON STOCK DIRECTOR" means, for any period prior to any Type B Event Date, any director other than the Joint Director or a director elected by the holders of the Series B Preferred Stock or the Series C Preferred Stock. "COMPANY" means InSight Health Services Corp., a Delaware corporation. "CONVERSION DATE" has the meaning set forth in Section 5(a). "CONVERSION MULTIPLE" has the meaning set forth in Section 7(a). "CONVERSION DIRECTORS" has the meaning set forth in Section 9(b). "CORPORATE CHANGE" has the meaning set forth in Section 7(c). "FISCAL YEAR" means each year ending June 30, or any other fiscal year as approved by the Board of Directors. "INITIAL ISSUE DATE" means October 14, 1997. "INITIAL PURCHASER" means the Initial Purchasers of the Series B Preferred Stock and the Series C Preferred Stock (as defined in the respective Certificates of Designation). "JOINT DIRECTOR" has the meaning set forth in the Series B Certificate of Designation and the Series C Certificate of Designation. "JUNIOR SECURITIES" has the meaning set forth in Section 2. "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "LIQUIDATING DIVIDEND" has the meaning set forth in Section 7(e). "LIQUIDATING EVENT" has the meaning set forth in Section 4(b). "LIQUIDATION PREFERENCE" has the meaning set forth in Section 4(a). "MAJORITY HOLDERS," at any time, and with respect to any class or series of Capital Stock of the Company, means holders of a majority of the shares of such class or series then outstanding. If the term is used without reference to a particular class or series of Capital Stock of the Company, it means Majority Holders of the Series D Preferred Stock. "PARITY SECURITIES" has the meaning set forth in Section 2. 12 "PERSON" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "PREFERRED STOCK DIRECTORS" means the Series B Directors and the Series C Director. "SENIOR SECURITIES" has the meaning set forth in Section 2. "SERIES A CERTIFICATE OF DESIGNATION" means the Certificate of Designation, Preferences and Rights of the Series A Preferred Stock. "SERIES A PREFERRED STOCK" has the meaning set forth in Section 2. "SERIES B CERTIFICATE OF DESIGNATION" means the Certificate of Designation, Preferences and Rights of the Series B Preferred Stock. "SERIES B DIRECTOR" has the meaning set forth in the Series B Certificate of Designation. "SERIES B PREFERRED STOCK" has the meaning set forth in Section 1. "SERIES C CERTIFICATE OF DESIGNATION" means the Certificate of Designation, Preferences and Rights of the Series C Preferred Stock. "SERIES C DIRECTOR" has the meaning set forth in the Series C Certificate of Designation. "SERIES C PREFERRED STOCK" has the meaning set forth in Section 2. "SERIES D CERTIFICATE OF DESIGNATION" means this document. "SERIES D DIRECTOR" has the meaning set forth in Section 9(b). "SERIES D PREFERRED STOCK" has the meaning set forth in Section 1. "SERIES D SELECTION PROCEDURE" shall mean selection of the Series D Directors by the holders of the shares of Series D Preferred Stock, which election shall employ cumulative voting of the shares of Series D Preferred Stock. "SUBSIDIARY" means, with respect to any Person, (a) any corporation of which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned or controlled by such Person, by one or more Subsidiaries of such Person or by such Person and one or more of its Subsidiaries, or (b) any corporate or non-corporate entity in which such Person, one or more Subsidiaries of such Person, or such person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has an 13 ownership interest and one hundred percent (100%) of the revenue of which is included in the consolidated financial reports of such Person consistent with GAAP. "SUPERMAJORITY VOTE" means the affirmative vote of six (6) directors of the Company with respect to the matter subject to such vote. "SUPERVOTING SECURITIES" means any class or series of the Company's Capital Stock the holders of which have the right to cast more than one vote per share and/or have the right to elect one or more members of the Board of Directors, voting as a class or series. "TYPE B EVENT DATE" has the meaning set forth in Section 6 of the Series C Certificate of Designation and the Series B Certificate of Designation. "TYPE B PERCENTAGE" means a percentage equal to (i) the number of shares of Common Stock held by all holders of Series B Preferred Stock and Series C Preferred Stock as of a Type B Event Date (assuming full conversion of all such shares of Series B Preferred Stock and Series C Preferred Stock into Common Stock) divided by (ii) the total number of shares of Common Stock outstanding as of a Type B Event Date (assuming full conversion of all convertible shares of Preferred Stock as of such Type B Event Date); PROVIDED, HOWEVER, that the maximum Type B Percentage shall be sixty-four percent (64%). 14 IN WITNESS WHEREOF, InSight Health Services Corp. has caused this Certificate to be executed by its Executive Vice President and Secretary this 14th day of October, 1997. INSIGHT HEALTH SERVICES CORP. By: /s/ Thomas V. Croal ---------------------------------- Name: Thomas V. Croal Office: Executive Vice President and Secretary 15 EX-3.5 5 EXHIBIT 3.5 AMENDED AND RESTATED BYLAWS OF INSIGHT HEALTH SERVICES CORP. A Delaware Corporation PREAMBLE These bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware (the "Delaware General Corporation Law") and the certificate of incorporation of InSight Health Services Corp., a Delaware corporation (the "Corporation"). References herein to the certificate of incorporation shall be interpreted and construed to mean the certificate of incorporation of the Corporation, as in existence from time to time, including any amendments thereto, restatements thereof and certificates of designations in effect at such times. In the event of a direct conflict between the provisions of these bylaws and the provisions of the Delaware General Corporation Law or the provisions of the certificate of incorporation, such provisions of the Delaware General Corporation Law or the certificate of incorporation, as the case may be, will be controlling. ARTICLE 1: OFFICES 1.1 REGISTERED OFFICE AND AGENT. The registered office of the Corporation in the state of Delaware shall be located at 1013 Centre Road, Wilmington, Delaware 19805-1297. The name of the Corporation's registered agent at such address shall be CSC Networks/Prentice Hall Corporate Services. The registered office and registered agent of the Corporation shall be as designated from time to time by action of the Board of Directors and by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. 1.2 OTHER OFFICES. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE 2: MEETINGS OF STOCKHOLDERS 2.1 ANNUAL MEETING. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. At such meeting, the stockholders shall elect directors and transact such other business as may properly be brought before the meeting. 2.2 SPECIAL MEETING. A special meeting of the stockholders may be called at any time by the Board of Directors, the chairman of the board, or the President, and shall be called by the President or the Secretary at the request in writing of the stockholders of record of shares entitled to cast not less than ten percent (10%) of all votes entitled to be cast at such meeting or as otherwise provided by the certificate of incorporation. A special meeting shall be held on such date and at such time as shall be designated by the person(s) calling the meeting and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting or in a duly executed waiver of notice of such meeting. 2.3 PLACE OF MEETINGS. An annual meeting of stockholders may be held at any place within or without the State of Delaware designated by the Board of Directors. A special meeting of stockholders may be held at any place within or without the State of Delaware designated in the notice of the meeting or a duly executed waiver of notice of such meeting. Meetings of stockholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein. 2.4 NOTICE. Written or printed notice stating the place, day, and time of each meeting of the stockholders and, in case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or person(s) calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is to be sent by mail, it shall be directed to such stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. 2.5 VOTING LIST. At least ten (10) days before each meeting of stockholders, the Secretary or other officer of the Corporation who has charge of the Corporation's stock ledger, either directly or through another officer appointed by him or through a transfer agent appointed by the Board of Directors, shall prepare a complete list of stockholders entitled to vote thereat, arranged in alphabetical order and showing the address of each stockholder and number of shares registered in the name of each stockholder. For a period of ten (10) days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting or a duly executed waiver of notice of such meeting or, if not so specified, at the place where the meeting is to be held and shall be open to examination by any stockholder during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting and may be inspected by any stockholder who is present. 2.6 QUORUM. The holders of shares entitled to cast a majority of the votes entitled to be cast on a matter, present in person or by proxy, shall constitute a quorum at any meeting of stockholders, except as otherwise provided by law, the certificate of incorporation, or these bylaws. If a quorum shall not be present, in person or by proxy, at any meeting of stockholders, the stockholders entitled to vote thereat who are present, in person or by proxy, or, if no 2 stockholder entitled to vote is present, any officer of the Corporation may adjourn the meeting from time to time, without notice other than announcement at the meeting (unless the Board of Directors, after such adjournment, fixes a new record date for the adjourned meeting), until a quorum shall be present, in person or by proxy. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have been transacted at the original meeting had a quorum been present; provided that, if the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. 2.7 REQUIRED VOTE: WITHDRAWAL OF QUORUM. When a quorum is present at any meeting, the vote of the holders of shares entitled to cast at least a majority of the votes entitled to be cast by holders who are present, in person or by proxy, shall decide any question brought before such meeting, unless the question is one on which, by express provision of statute, applicable stock exchange, NASD, Inc. or Nasdaq rules, the certificate of incorporation, or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2.8 METHOD OF VOTING: PROXIES. Except as otherwise provided in the certificate of incorporation or by law, each outstanding share, regardless of class, shall be entitled to one (1) vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by a proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after three (3) years from the date of its execution, unless otherwise provided in the proxy. If no date is stated in a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law. 2.9 RECORD DATE. (a) For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, for any such determination of stockholders, such date in any case to be not more than sixty (60) days and not less than ten (10) days prior to such meeting nor more than sixty (60) days prior to any other action. If no record date is fixed: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the 3 day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (iii) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law or these bylaws, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office in the State of Delaware or principal place of business shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law or these bylaws, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. 2.10 CONDUCT OF MEETING. The Chairman shall preside at all meetings of stockholders. The Secretary shall keep the records of each meeting of stockholders. In the absence or inability to act of any such officer, such officer's duties shall be performed by the officer given the authority to act for such absent or non-acting officer under these bylaws or by some person appointed by the meeting. 2.11 INSPECTORS. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and 4 shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request, or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. 2.12 ACTION BY WRITTEN CONSENT. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken and bearing the dates of signature of the stockholders who signed the consent or consents, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, or the Corporation's principal place of business, or an officer or agent of the Corporation having custody of the book or books in which proceedings of meetings of the stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. All consents properly delivered in accordance with this section shall be deemed to be recorded when so delivered. No written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the Corporation as required by this section, written consents signed by the holders of a sufficient number of shares to take such corporate action are so recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders were delivered to the Corporation. Any action taken pursuant to such written consent or consents of the stockholders shall have the same force and effect as if taken by the stockholders at a meeting thereof. 2.13 NOTICE OF STOCKHOLDER NOMINEES. (a) Only persons who are nominated in accordance with the procedures set forth in this Section 2.13 shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at a meeting of the Corporation's stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of the director so nominated at such meeting who complies with the procedures set forth in this Section 2.13. (b) All nominations by stockholders shall be made pursuant to timely notice in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation 5 not less than 50 days nor more than 75 days before the meeting; provided, however, that if less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to the stockholders, notice by the stockholder must be received at the principal executive offices of the Corporation not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first. (c) Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation l4A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to the stockholder giving the notice (x) the name and address, as they appear on the Corporation's books of such stockholder and (y) the class and number of shares of the Corporation which are beneficially owned by such stockholder; and (iii) as to the beneficial owner, if any, on whose behalf the nomination is made, (x) the name and address of such person and (y) the class and number of shares of the Corporation which are beneficially owned by such person. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. (d) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in these Bylaws of the Corporation. The chairman of the stockholders' meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he shall so determine, he shall announce such determination to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. (e) (i) Sections 2.13(a), (b), (c) and (d) shall not have any application or effect whatsoever with respect to the nomination or election of any director who, pursuant to the terms of the certificate of incorporation: (A) is to be elected by the holders of shares of either the Corporation's Series B Preferred Stock or Series C Preferred Stock (the "Preferred Stock Directors"), (B) is to be nominated (subject to approval of such nominee by the Board of Directors) jointly by the holders of shares of Series B Preferred Stock and Series C Preferred Stock (the "Joint Director"; prior to a Type B Event Date, all directors other than the Joint Director and the Preferred Stock Directors are the "Common Stock Directors") or (C) after a Type B Event Date is to be elected by holders of shares of the Series D Preferred Stock to a newly created directorship ("Conversion Directors"). (ii) With respect to the nomination and election of any Preferred Stock Director, the holders of shares of Series B Preferred Stock or of Series C Preferred Stock, as appropriate, shall give written notice to the Secretary of the Corporation of the identity of the 6 person or persons nominated and elected as a director or directors by such holders. Such written notice shall be executed, manually or by photocopy or facsimile, in any number of counterparts, by holders of a majority of the then outstanding shares of Series B Preferred Stock or Series C Preferred Stock, as appropriate. The person so elected shall become a Preferred Stock Director immediately upon delivery to the Company of such notice, or at such other time as is specified therein. No nominations for such director shall be made or received other than as described in this Section 2.13(e)(ii). (iii) With respect to the nomination and election of any Conversion Directors, on or after a Type B Event Date, the holders of shares of Series D Preferred Stock shall give written notice to the Secretary of the Corporation of the identity of the persons nominated and elected as a director by such holders. Such written notice shall be executed, manually or by photocopy or facsimile, in any number of counterparts, by holders of a majority of the then outstanding shares of Series D Preferred Stock. The persons so elected shall become Conversion Directors immediately upon delivery to the Company of such notice, or at such other time as is specified therein. Election of such directors shall be by cumulative voting by the holders of the shares of Series D Preferred Stock. No nominations for such director shall be made or received other than as described in this Section 2.13(e)(iii). ARTICLE 3: DIRECTORS 3.1 MANAGEMENT. The business and property of the Corporation shall be managed by or under the direction of the Board of Directors subject to the restrictions and delegations of power and authority contained in the certificate of incorporation or these bylaws. Subject to the restrictions imposed by law, the certificate of incorporation, or these bylaws, the Board of Directors may exercise all the powers of the Corporation. 3.2 NUMBER: QUALIFICATION: ELECTION: TERM. Prior to a Type B Event Date, the number of directors shall be no less than eight (8) nor more than nine (9) (the exact number within such range to be determined by the Board of Directors), of which one member shall be the Joint Director, up to three members (the exact number to be determined in accordance with the certificate of incorporation) shall be Preferred Stock Directors, and the remainder shall be Common Stock Directors. After a Type B Event Date, the Board of Directors shall comprise: (i) one Joint Director, until the expiration of his term, as provided in the certificate of incorporation; (ii) three Preferred Stock Directors, until the expiration of their respective terms, after which time such positions previously elected by holders of the series of Preferred Stock that gave the Type B Conversion Notice shall be subject to election by holders of shares of Series D Preferred Stock, subject to the limitations contained in the Series D Certificate of Designation; (iii) not less than four (4) nor more than five (5) additional directors elected by holders of shares of Common Equity and Series D Preferred Stock, subject to the limitations contained in the Series D Certificate of Designation; and (iv) the Conversion Directors. 3.3 MEETINGS OF DIRECTORS. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by statute, in such place or places within or without the State of Delaware as the Board of Directors may from time 7 to time determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting. 3.4 FIRST MEETING. Each newly elected Board of Directors shall hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of stockholders, and the newly constituted Board of Directors shall meet at the principal offices of the Corporation two calendar days after the delivery to the Company of the notice provided for in Section 2.13(e)(iii)(in either case, such first meeting is the "First Meeting"). 3.5 ELECTION OF OFFICERS. At each First Meeting, the Board of Directors shall select the officers of the Corporation. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by resolution of the Board of Directors, but no less frequently than once per fiscal quarter. Notice of such regular meetings shall not be required. 3.7 SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by or at the request of the chairman of the board, the President, any director, or as designated from time to time by resolution of the Board of Directors. 3.8 NOTICE. The Secretary shall give notice of each special meeting and of any First Meeting following a Type B Event Date, to each director at least 24 hours before the meeting, either personally, by telephone, by mail, or by telegraph (facsimile). Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him. The business to be transacted at, and the purpose of, any regular or special meeting of the Board of Directors shall be specified in the notice or waiver of notice of such meeting. 3.9 QUORUM: MAJORITY VOTE. (a) A majority of the total number of directors then in office shall constitute a quorum for the transaction of business, provided, that in no event shall a quorum consist of less than one third of the total number of directors established pursuant to Section 3.2 of this Article 3. The vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the question is one upon which by express provisions of an applicable law or of the certificate of incorporation or in this Section 3.9 or elsewhere in these bylaws a different vote is required, in which case such express provision shall govern and control the decision of such question. (b) If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 8 (c) Section 6.14(c) of that certain Securities Purchase Agreement dated as of October 10, 1997 by and among the Corporation and certain entities providing, among other things, for the issuance and sale of shares of Series B Preferred Stock, and Section 6.14(c) of that certain Securities Purchase Agreement dated as of October 14, 1997 by and among the Corporation and certain entities providing, among other things, for the issuance and sale of shares of Series C Preferred Stock, contain provisions relating to the size of the stockholder or Board of Directors majority vote required for approval of certain transactions described in such Sections 6.14(c). Notwithstanding any other provision of this Section 3.9, the approval of any waiver, consent, modification or any other action taken by or on behalf of the Corporation with respect to such provisions shall require the affirmative vote of a majority of the Common Stock Directors. 3.10 COMPENSATION. The Board of Directors shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the Board of Directors or any committee thereof; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefor. 3.11 TELEPHONE MEETINGS. Members of the Board of Directors or any committee thereof may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting pursuant to this section shall constitute presence in person at the meeting. 3.12 WAIVER OF NOTICE AND PRESUMPTION OF ASSENT. Any member of the Board of Directors or any committee thereof who is present at a meeting shall be conclusively presumed to have waived notice of such meeting except when such member attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action 3.13 ACTION BY WRITTEN CONSENT. Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. ARTICLE 4: COMMITTEES 4.1 DESIGNATION The following committees of the Board of Directors are hereby created, and the Board of Directors shall appoint the following committees of the Board of Directors with the respective duties, membership and voting requirements stated below. After such appointment and until a Type B Event Date, the following matters shall be deemed 9 approved by the Board of Directors only upon receiving the affirmative vote of a majority of the Board of Directors and a majority of the directors elected by the holders of the Series B Preferred Stock and the Series C Preferred Stock: (A) a decision to eliminate or discharge the Audit Committee, Compensation Committee, Executive Committee or the Acquisitions Committee, as described more fully below (such committees are the "Committees"), (B) a decision to reduce, narrow, attenuate or otherwise weaken the delegation of powers by the Board of Directors to any of the Committees, unless such reduction, narrowing, attenuation or other weakening is the transfer of delegated powers from the Compensation Committee or the Acquisitions Committee to the Executive Committee, (C) a decision to change the number of members of any Committee, the identity of the persons or entities entitled to select each of the members of any Committee, the size of the required vote for approval by any Committee and the size of the required vote of the Board of Directors necessary to approve actions that failed to obtain the required approval vote on the appropriate Committee; and (D) a decision to create any new committee. If the holders of the Series B Preferred Stock or the holders of the Series C Preferred Stock shall cease to have the right to nominate and elect any director at all, otherwise than as a result of the conversion of their respective shares of Series B Preferred Stock or Series C Preferred Stock in a Type B Conversion, then such holders shall no longer have the right to select any member of any of the committees set forth below and the member or members of such committees selected by such holders shall automatically cease to be a member or members of such committees. (1) COMPENSATION COMMITTEE. The Compensation Committee shall consist of three (3) members, at least one (1) of whom shall be selected jointly by the Series B Directors and the director elected by holders of the Series C Preferred Stock (the "SERIES C DIRECTOR"), and who shall be a director. An affirmative vote of at least two (2) members of the Compensation Committee shall be required for approval of matters considered by the Compensation Committee. The Compensation Committee shall ensure that the representative on the Compensation Committee nominated by the Series B Directors and the Series C Director shall receive adequate notice of and an opportunity to participate in any meetings of the Compensation Committee; (2) AUDIT COMMITTEE. The Audit Committee shall consist of three (3) directors, including as many Independent directors as are available, not to exceed three (3). An affirmative vote of at least two (2) members of the Audit Committee shall be required for approval of matters considered by the Audit Committee. (3) EXECUTIVE COMMITTEE. The Executive Committee shall consist of four (4) members, one (1) of whom shall be selected by the Series B Directors (and shall be a Series B Director), one (1) of whom shall be the Series C Director and two (2) of whom shall be selected by the Board of Directors. The members selected by the Series B Directors and the Series C Director may be removed only by the Series B Directors and the Series C Director, respectively. The Executive Committee shall, in addition to the customary duties of an executive committee, have the right to approve any financing activity, including but not limited to the Capital Budget Plan. An affirmative vote of at least three (3) members of the 10 Executive Committee shall be required for approval of any matters considered by the Executive Committee. Each financing activity not approved by the Executive Committee may be referred to the Board of Directors for approval, which approval shall require a Supermajority Vote; and (4) ACQUISITIONS COMMITTEE. The Acquisitions Committee shall consist of four (4) members, one (1) of whom shall be selected by the Series B Directors (and shall be a Series B Director), one (1) of whom shall be the Series C Director, and two (2) of whom shall be selected by the Board of Directors (and shall be directors). The Acquisitions Committee shall have the right to approve any transaction of the types described in Sections 11(n), (o), (p) and (q) of the Series B Certificate of Designation with respect to which transaction the aggregate consideration payable in connection with such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is less than $15 million. A unanimous vote of the Acquisitions Committee shall be required for approval of any matters considered by the Acquisitions Committee. Except as described in Section 4.1(5) below, each matter considered but not unanimously approved by the Acquisitions Committee may be referred to the Board of Directors for approval, which approval shall require a majority vote of the Board of Directors. (5) CERTAIN TRANSACTIONS. The unanimous approval of the Acquisitions Committee or the unanimous approval of the Board of Directors shall be required before the Corporation or any of its Subsidiaries engage in a transaction of the types described in Section 11(n), (o) (which, only for purposes of this clause, shall also apply to Capital Expenditures made by the Corporation in the ordinary course of business), (p) and (q) of the Series B Certificate of Designation, in which transaction: (A) the aggregate consideration payable in connection with such transaction (including, without limitation, cash consideration, the fair market value of any securities and the net present value of any deferred consideration) is less than $15 million; and (B) the Corporation is to issue its Common Equity at an implicit or explicit price of less than $8.375 per share. Such implicit price shall be determined in an appraisal approved unanimously by the Acquisitions Committee or unanimously by the Board of Directors, such appraisal to be performed by an independent appraiser selected unanimously by the Acquisitions Committee or unanimously by the Board of Directors. 4.2 TERM. Each committee member shall serve as such until the earliest of (a) the expiration of his term as director, (b) his resignation as a committee member or as a director, or (c) his removal as a committee member or as a director. A Committee member elected to such Committee by the Board of Directors, and, after a Type B Event Date, any Committee member elected to such Committee by one or more Preferred Stock Directors, may be removed as a Committee member by a majority of the Board of Directors. Prior to a Type B Event Date, a Committee member elected to such Committee by either the Series B Directors or the Series C 11 Director, or by both, shall not be removed as a Committee member except by the director or directors who elected such Committee member to such Committee. 4.3 AUTHORITY. Each committee, to the extent expressly provided in these bylaws or in the resolution establishing such committee, shall have and may exercise all of the authority of the Board of Directors in the management of the business and property of the Corporation except to the extent expressly restricted by law, the certificate of incorporation, or these bylaws. 4.4 COMMITTEE CHANGES. The Board of Directors shall have the power at any time to fill vacancies in the committees, but only to the extent the Board of Directors would have the power, pursuant to Section 4.2 hereof, to remove a member who was occupying the committee position that is vacant. 4.5 ALTERNATE MEMBERS OF COMMITTEES. The person or entity with the power to select a particular member of a Committee (but such person or entity only, and no other) may designate one or more directors as alternate members of such Committee and any such alternate member may replace the absent or disqualified member for whom he is the alternate member at any meeting of such Committee. 4.6 REGULAR MEETINGS. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.7 SPECIAL MEETINGS. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two days before such special meeting. The business to be transacted at, and the purpose of, any special meeting of any committee shall be specified in the notice or waiver of notice of any special meeting. 4.8 QUORUM: MAJORITY VOTE. At meetings of any committee, a majority of its membership shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the certificate of incorporation, or these bylaws. 4.9 MINUTES. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the Board of Directors upon the request of the Board of Directors. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation. 4.10 COMPENSATION. Committee members may, by resolution of the Board of Directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary. 12 4.11 COMMITTEE RULES. Each committee of the Board of Directors may fix its own rules or procedures and shall hold its meetings as provided by such rules, except as may otherwise be provided in the certificate of incorporation, these bylaws or by a resolution of the Board of Directors designating such committee. ARTICLE 5: NOTICE 5.1 METHOD. Whenever by statute, the certificate of incorporation, or these bylaws, notice is required to be given to any committee member, director, or stockholder and no provision is made as to how such notice shall be given, personal notice shall not be required and any such notice may be given (a) in writing, by mail, postage prepaid, addressed to such committee member, director, or stockholder at his address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation, or (b) by any other method permitted by law (including but not limited to overnight courier service, telegram, telex, or facsimile). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given at the time delivered to such service with all charges prepaid and addressed as aforesaid and shall be deemed to be received two business days after such delivery to such service. Any notice required or permitted to be given by telegram, telex, or facsimile shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.2 WAIVER. Whenever any notice is required to be given to any stockholder, director, or committee member of the Corporation by statute, the certificate of incorporation, or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a stockholder, director, or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business relevant on the ground that the meeting is not lawfully called or convened. ARTICLE 6: OFFICERS 6.1 NUMBER: TITLES: TERM OF OFFICE. The officers of the Corporation shall be a President, a Secretary, and such other officers as the Board of Directors may from time to time elect or appoint, including one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the Board of Directors shall determine), and a Treasurer. The officers of the Corporation shall be elected by the Board of Directors at the First Meetings, or as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and shall have qualified, until his death, or until he shall resign or shall have been removed in the matter hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware. In its discretion, the Board of Directors may choose not to fill any office for any period of time as it may deem advisable. 13 6.2 REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.3 VACANCIES. Any vacancy occurring in any office of the Corporation because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors for the unexpired portion of the term by the Board of Directors then in office. 6.4 AUTHORITY. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these bylaws. 6.5 COMPENSATION. The compensation, if any, of officers and agents shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such compensation by virtue of his also being a director of the Corporation. 6.6 DUTIES OF CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall perform such other duties and have such other powers as may be prescribed from time to time by the Board of Directors. 6.7 DUTIES OF VICE CHAIRMAN OF THE BOARD. The Vice Chairman shall, in the absence or disability of, or in the event of a vacancy in the office of, the Chairman of the Board, perform the duties and exercise the powers of such Chairman of the Board. The Vice Chairman of the Board shall perform such other duties and have such other powers as may be prescribed from time to time by the Board of Directors. 6.8 DUTIES OF PRESIDENT. The President shall be the chief executive officer of the Corporation. The President shall be responsible for the general and active management of the business of the Corporation and shall ensure that all orders and resolutions of the Board of Directors and the Committees are carried into effect. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except when required or permitted by law to be otherwise signed and executed and except when the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall, in the absence or disability of, or in the event of a vacancy in the office of, the Vice Chairman of the Board, perform the duties and exercise the powers of such Vice Chairman of the Board. The President shall perform such other duties and have such other duties as may be prescribed from time to time by the Board of Directors. 6.9 DUTIES OF THE VICE PRESIDENTS. The Vice Presidents shall, in the order of their organizational ranking, in the absence or disability, or in the event of a vacancy in the office, of the President, perform the duties and exercise the powers of the President, and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. 14 6.10 DUTIES OF THE SECRETARY. The Secretary shall keep, or cause to be kept, in books provided for that purpose, the minutes of the meetings of the stockholders, the Board of Directors, or any committee thereof, and shall see that all notices are duly given in accordance with the provisions of these bylaws. As required by law, the Secretary shall be the custodian of the records of the Corporation. The Secretary shall keep the seal of the Corporation in safe custody and, when authorized by the Board of Directors, affix such seal to any document requiring it, and when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary. The Secretary shall perform such other duties and have such other powers as may be prescribed from time to time by the Board of Directors. 6.11 DUTIES OF THE TREASURER. The Treasurer shall have charge and custody of, and shall be responsible for, all funds and securities of the Corporation and shall deposit such funds in the name of the Corporation in such banks, trust companies and other depositories as shall be designated by the Board of Directors. The Treasurer shall perform such other duties and have such other powers as may be prescribed from time to time by the Board of Directors. 6.12 OTHER OFFICERS, ASSISTANT OFFICERS AND AGENTS. Officers, assistant officers and agents, if any, other than those whose duties are provided for in these bylaws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the Board of Directors. 6.13 ABSENCE OR DISABILITY OF OFFICERS. In the case of the absence or disability of any officer of the Corporation and of any person hereby authorized to act in such officer's place during such officer's absence or disability, the Board of Directors may by resolution delegate the powers and duties of such officer to any other officer or to any director, or to any other person whom it may select. ARTICLE 7: INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS 7.1 NATURE OF INDEMNITY. 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, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer, of the Corporation or, while a director or officer of the Corporation, 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, shall be indemnified and held harmless by the Corporation to the fullest extent which it is empowered to do so by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended against all expense, liability and loss (including attorneys' fees actually and reasonably incurred by such person in connection with such proceeding) and such indemnification shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in Section 7.2 hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors. The Corporation may, by action of its Board of Directors, provide indemnification to 15 employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. 7.2 PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. Any indemnification of a director or officer of the Corporation under Section 7.2 of this Article 7 or advance of expenses under Section 7.5 of this Article 7 shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the Corporation that the director or officer is entitled to indemnification pursuant to this Article 7 is required, and the Corporation fails to respond within sixty (60) days to a written request for indemnity, the Corporation shall be deemed to have approved the request. If the Corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article 7 shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 7.3 ARTICLE NOT EXCLUSIVE. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article 7 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 7.4 INSURANCE. The Corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the Corporation 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 any liability asserted against him and incurred by him in any such capacity, whether or not the Corporation would have the power to indemnify such person against such liability under this Article 7. 16 7.5 EXPENSES. Expenses incurred by any person described in Section 7.1 of this Article 7 in defending a proceeding shall be paid by the Corporation in advance of such proceeding's final disposition upon receipt of any undertaking required by applicable law by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. 7.6 EMPLOYEES AND AGENTS. Persons who are not covered by the foregoing provisions of this Article 7 and who are or were employees or agents of the Corporation, or who are or were serving at the request of the Corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the Board of Directors. 7.7 CONTRACT RIGHTS. The provisions of this Article 7 shall be deemed to be a contract right between the Corporation and each director or officer who serves in any such capacity at any time while this Article 7 and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law are in effect, and any repeal or modification of this Article 7 or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceedings then existing. 7.8 MERGER OR CONSOLIDATION. For purposes of this Article 7, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article 7 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. ARTICLE 8: CERTIFICATES AND STOCKHOLDERS 8.1 CERTIFICATES FOR SHARES. Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the Board of Directors. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by or in the name of the Corporation. The certificates shall be signed by the chairman of the board, the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and may be sealed with the seal of the Corporation or a facsimile thereof. If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date 17 of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. 8.2 REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of a certificate or certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. 8.3 TRANSFER OF SHARES. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. The Board of Directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the Corporation. 8.4 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 8.5 REGULATIONS. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer, and registration or the replacement of certificates for shares of stock of the Corporation. 8.6 LEGENDS. The Board of Directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the Board of Directors deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. 8.7 SUBSCRIPTIONS FOR STOCK. Unless otherwise provided for in the subscription agreement, subscriptions for shares shall be paid in full at such time, or in such installments and at such times, as shall be determined by the Board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all shares of the same class or as to 18 all shares of the same series. In case of default in the payment of any installment or call when such payment is due, the Corporation may proceed to collect the amount due in the same manner as any debt due the Corporation. ARTICLE 9: MISCELLANEOUS PROVISIONS 9.1 DIVIDENDS. Subject to provisions of law and the certificate of incorporation, dividends upon the capital stock of the Corporation, may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property, or in shares of the capital stock of the Corporation. Subject to provisions of law and the certificate of incorporation, such declaration and payment shall be at the discretion of the Board of Directors. 9.2 RESERVES. There may be created by the Board of Directors out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Board of Directors shall consider beneficial to the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 9.3 BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and Board of Directors and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours of business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean any purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in the state of Delaware or at its principal place of business. 9.4 CHECKS, DRAFTS OR ORDERS. All checks, drafts, or other orders for the payment of money by or to the Corporation and all notes and other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner, as shall be determined by resolution of the Board of Directors or a duly authorized committee thereof. 9.5 CONTRACTS. Subject to the limitations contained in the certificate of incorporation, the Board of Directors or the appropriate Committee may authorize any officer or officers, or any agent or agents, of the Corporation to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. 19 9.6 LOANS. Subject to the limitations contained in the certificate of incorporation, the Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. Subject to the limitations contained in the certificate of incorporation, the loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Subject to the limitations contained in the certificate of incorporation, nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. 9.7 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by the Board of Directors; provided, that if such fiscal year is not fixed by the Board of Directors and the selection of the fiscal year is not expressly deferred by the Board of Directors, the fiscal year shall be the calendar year. 9.8 SEAL. The Board of Directors shall provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 9.9 RESIGNATIONS. Any director, committee member, or officer may resign by so stating at any meeting of the Board of Directors or by giving written notice to the Board of Directors, the President, or the Secretary. Such resignation shall take effect at the time specified therein or, if no time is specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9.10 VOTING SECURITIES OWNED BY CORPORATION. Voting securities in any other corporation held by the Corporation shall be voted by the President, unless the Board of Directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution. 9.11 MORTGAGES, ETC. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the Board of Directors authorizing such execution expressly state that such attestation is necessary. 9.12 HEADINGS. The headings used in these bylaws have been inserted for administrative convenience only and shall not be given any substantive effect in limiting or otherwise construing any provision herein. 20 9.13 REFERENCES. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender should include each other gender where appropriate. All capitalized terms not otherwise defined herein shall have the meaning assigned such terms in the certificate of incorporation. 9.14 INCONSISTENT PROVISIONS. In the event that any provision of these bylaws is or becomes inconsistent with any provision of the certificate of incorporation, the General Corporation Law of the State of Delaware or any other applicable law, the provision of these bylaws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect. 9.15 AMENDMENTS. Except as otherwise provided in the certification of incorporation, these bylaws may be altered, amended, or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular or special meeting of the stockholders or the Board of Directors, but only if such alteration, amendment, repeal, or adoption has been approved: (i) in case of adoption by the Board of Directors prior to the First Meeting following a Type B Event Date, by a majority of the Preferred Stock Directors and either (A) a majority of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does not increase the number of directors) or (B) by at least 80% of the members of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does increase the number of directors); (ii) in case of adoption by the Board of Directors at or after the First Meeting following a Type B Event Date, by either (A) a majority of the entire Board of Directors (if such alteration, amendment, repeal, or adoption neither increases the number of directors nor amends or repeals Section 3.9(c) of these bylaws) or (B) by at least 80% of the members of the entire Board of Directors (if such alteration, amendment, repeal, or adoption does increase the number of directors or does amend or repeal Section 3.9(c) of these bylaws); (iii) in case of adoption by the stockholders at any meeting of stockholders (other than the first meeting of stockholders following a Type B Event Date) with a record date on or prior to a Type B Conversion Date, by holders of at least eighty percent (80%) of the outstanding shares of the Corporation entitled to vote in the election of directors, voting as one class, and by holders of a majority of the shares, outstanding as of such record date, of whichever (or both) of Series B Preferred Stock and Series C Preferred Stock continued (as of such record date) to have the right under the certificate of incorporation to elect one or more Preferred Stock Directors; or (iv) in case of adoption by the stockholders at the first meeting of stockholders following a Type B Event Date or at any meeting of stockholders with a record date after a Type B Conversion Date, by holders of at least eighty percent (80%) of the outstanding shares of the Corporation entitled to vote in the election of directors, voting as one class. For the avoidance of doubt, all Series D Preferred Stock of the Corporation issued pursuant to a Type B Conversion Event shall be deemed to be "entitled to vote in the election of 21 directors" at any time after such issuance, for all purposes of this Section 9.15. If the holders of Series B Preferred Stock no longer have the right to elect any Series B Directors at all under the certificate of incorporation, then the requirement of approval by the holders of shares of Series B Preferred Stock contained in Section 9.15(iii) shall not apply. If the holders of Series C Preferred Stock no longer have the right to elect a Series C Director under the certificate of incorporation, then the requirement of approval by the holders of shares of Series C Preferred Stock contained in Section 9.15(iii) shall not apply. If the holders of neither Series B Preferred Stock nor Series C Preferred Stock continue to have the right to elect any Preferred Stock Directors at all under the certificate of incorporation, then the requirement of approval by the Preferred Stock Directors contained in Section 9.15(i) shall not apply. Notice of such proposed alteration, amendment, repeal, or adoption shall be contained in the notice of such meeting. 22 EX-10.19 6 EXHIBIT 10.19 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, OFFERED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. No. S-1 Certificate for 35,000 Warrants EXERCISABLE COMMENCING ON THE DATE OF ISSUANCE HEREOF AND ENDING 5:00 P.M., NEWPORT BEACH, CALIFORNIA TIME, ON THE EXPIRATION DATE INSIGHT HEALTH SERVICES CORP. WARRANT CERTIFICATE THIS CERTIFIES that Shattuck Hammond Partners, Inc. or registered assigns is the registered holder (the "Warrantholder") of the number of warrants (the "Warrants") set forth above, each of which represents the right to purchase one fully paid and non-assessable share of common stock, par value $.001 per share (the "Common Shares"), of InSight Health Services Corp., a Delaware corporation (the "Company"), at the exercise price of $5.50 per share (the "Exercise Price"), at any time prior to the Expiration Date hereinafter referred to, by surrendering this Warrant Certificate, with the form of Election to Purchase set forth hereon duly executed, at the Company's principal executive office, 4400 MacArthur Boulevard, Newport Beach, California 92660 (the "Office"), and by paying in full the Exercise Price, plus transfer taxes, if any, in United States currency by certified check, bank cashier's check or money order payable to the order of the Company. SECTION 1. DURATION AND EXERCISE OF WARRANTS. (a) The Warrants represented by this Warrant Certificate shall vest cumulatively and be exercisable at the rate of 2,072 Warrants on August 1, 1996, and 2,058 Warrants each month thereafter commencing on September 1, 1996, and shall expire at 5:00 p.m. Los Angeles time, on July 1, 2000 (the "Expiration Date"); PROVIDED, HOWEVER, that if the Warrantholder's engagement under the August 14, 1996 letter agreement between the Warrantholder and the Company is terminated (the "Termination Date") at any time prior to December 31, 1997, those Warrants which are vested and exercisable as of the Termination Date shall remain vested and exercisable, but any unvested Warrants shall be cancelled on the Termination Date. Any Warrant Certificate not surrendered to the Company for exercise prior to the close of business on the Expiration Date shall be void. (b) Subject to the provisions of this Warrant Certificate, after the date of this Warrant Certificate and prior to the close of business on the Expiration Date, the Warrantholder shall have the right to purchase from the Company the number of Common Shares specified above at the Exercise Price. In order to exercise such right, the Warrantholder shall surrender the Warrant Certificate(s) evidencing such Warrants to the Company at the Office with the form of Election to Purchase set forth hereon duly completed and signed, and shall tender payment in full to the Company for the Company's account of the Exercise Price, together with such taxes as are specified in Section 4 hereof, for each Common Share with respect to which such Warrants are being exercised. Such Exercise Price and taxes shall be paid in full by certified check, bank cashier's check or money order, payable in United States currency to the order of the Company. In addition, if the Common Shares deliverable upon exercise have not been registered pursuant to the Securities Act, the Warrantholder shall deliver a duly executed certificate substantially in the form of Exhibit A hereto. (c) The Warrants evidenced by this Warrant Certificate shall be exercisable only in multiples of one (1) Warrant. If less than all of the Warrants evidenced by this Warrant Certificate are exercised at any time prior to the close of business on the Expiration Date, a new Warrant Certificate(s) shall be issued to the Warrantholder, or its duly authorized assigns, by the Company for the remaining number of Warrants evidenced by the Warrant Certificate so surrendered. SECTION 2. ISSUANCE OF SHARE CERTIFICATES. Upon surrender of this Warrant Certificate and payment of the Exercise Price, and, if the Common Shares deliverable on exercise have not been registered under the Securities Act, upon delivery of a certificate in the form of Exhibit A hereto, the Company shall issue certificates representing Common Shares ("Share Certificates") for the number of full Common Shares to which the holder of such Warrants is entitled, registered in accordance with the instructions set forth in the Election to Purchase. If such Common Shares have not been registered under the Securities Act, the Share Certificates shall bear a legend substantially similar to the legend on this Warrant Certificate. SECTION 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF COMMON SHARES PURCHASABLE PER NUMBER OF WARRANTS. The Exercise Price and the number of Common Shares purchasable upon the exercise of each Warrant are subject to adjustment from time to time upon the occurrence of the events specified in this Section 3: (a) If the Company at any time after the date of this Warrant Certificate (i) declares a dividend or makes a distribution on the outstanding Common Shares payable in Common Shares, (ii) subdivides or reclassifies the outstanding Common Shares into a greater number of shares or (iii) combines or reclassifies the outstanding Common Shares into a smaller number of Common Shares, the Exercise Price in effect immediately after the record date for such dividend or distribution or at the effective date of such subdivision, combination or reclassification, shall be adjusted to equal the quotient obtained by multiplying the Exercise Price in effect immediately prior to such date by a fraction, the numerator of which shall be the number of Common Shares outstanding immediately prior to such dividend, distribution, subdivision, combination or reclassification, and the denominator of which shall be the number of Common Shares outstanding immediately after such dividend, distribution, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) If at any time, as a result of an adjustment made pursuant to paragraph (a), the holder of any Warrant thereafter exercised shall become entitled to receive any additional Common Shares (the "New Shares"), thereafter the number of such New Shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in paragraph (a), and the provisions of this Warrant Certificate with respect to the Common Shares shall apply on like terms to any such New Shares. -2- (c) All calculations of the Exercise Price under this Section 3 shall be made to the nearest one hundredth of a cent. No adjustment in the Exercise Price in accordance with the provisions of paragraph (a) hereof need be made if such adjustment, together with other adjustments carried forward pursuant to this paragraph (c), would amount to a change in such Exercise Price of less than 1%; PROVIDED, HOWEVER, that the amount by which any adjustment is not made by reason of this paragraph (c) shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. (d) Unless the Company shall have exercised its election as provided in paragraph (e), upon each adjustment of the Exercise Price as a result of the calculations made in paragraph (a), each Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price that number of Common Shares obtained by (i) multiplying (A) the number of Common Shares purchasable upon exercise of a Warrant immediately prior to such adjustment of the Exercise Price by (B) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (e) The Company may elect, on or after the date of any adjustment of the Exercise Price, to adjust the number of Warrants in substitution for an adjustment in the number of Common Shares purchasable upon the exercise of a Warrant as provided in paragraph (d). (f) In case of any reorganization of the Company, or in case of the consolidation or merger of the Company with or into any other legal entity or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other legal entity (collectively, "Reorganization"), all vested Warrants shall be exercisable, and any unvested Warrants shall become immediately exercisable, after such Reorganization, upon the terms and conditions specified in this Warrant Certificate, for the stock or other securities or property (including cash) to which a holder of the number of Common Shares purchasable (at the time of such Reorganization) upon exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization; and in any such case, if necessary, the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any such stock or other securities or property thereafter deliverable upon exercise of the Warrants. The Company shall not effect any such Reorganization unless prior to or simultaneously with the consummation thereof the successor (if other than the Company) resulting from such Reorganization or the legal entity purchasing such assets shall assume, by written instrument executed and delivered to the holder of each Warrant, the obligation to deliver to the holder of each Warrant such stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase, and the other obligations under this Warrant Certificate. SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes that may be imposed by the United States of America or any state or territory thereof ("Taxes") attributable to the initial issuance of Common Shares upon the exercise of Warrants prior to the close of business on the Expiration Date; PROVIDED, HOWEVER, that the Company shall not be required to pay any Taxes which may be payable in respect of any transfer involved in the issuance of any Warrant Certificates or any Share Certificates in a name other than that of the Warrantholder of record surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Share Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such Taxes or shall have established to the satisfaction of the Company that such Taxes have been paid. -3- SECTION 5. REGISTRATION. (a) This Warrant Certificate shall be registered in the name of the record holder to whom it is distributed; and the Company shall maintain a list showing the name, address and number of Warrants held by each of the Warrantholders of record. (b) The Company may deem and treat the Warrantholder of record as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing thereon made by anyone) for the purpose of any exercise thereof and any distribution to the holder thereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. SECTION 6. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) The Company shall register the transfer of this Warrant Certificate upon the records to be maintained by it for that purpose, upon surrender of this Warrant Certificate accompanied (if so required by the Company) by (i) a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered holder(s) thereof or by the duly appointed legal representative thereof or by a duly authorized attorney, and (ii) an opinion of counsel, reasonably satisfactory to the Company, that such transfer is exempt from registration under the Securities Act. Upon any such registration or transfer, a new Warrant Certificate shall be issued to the transferee, and the surrendered Warrant Certificate shall be cancelled by the Company. (b) This Warrant Certificate may be exchanged at the option of the holder, when surrendered to the Company at the Office, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange, transfer or exercise shall be cancelled by the Company. SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for any Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and an indemnity or bond, if requested, also satisfactory to the Company. Applicants for such substitute Warrant Certificate shall also comply with such other reasonable charges as the Company may prescribe. SECTION 8. NOTICES. (a) Any notice or demand authorized by this Warrant Certificate to be given or made by the Warrantholder to or on the Company shall be in writing and shall be sufficiently given or made if personally delivered or sent by mail or by telegram or telex confirmed by letter addressed (until another address is given in writing by the Company) to the Office. -4- (b) Any notice pursuant to this Warrant Certificate to be given by the Company to the Warrantholder shall be in writing and shall be sufficiently given if personally delivered or sent by mail or telegram or telex confirmed by letter, addressed (until another address is filed in writing by the Warrantholder with the Company) to the address specified in the Warrant register maintained by the Company. SECTION 9. RIGHTS OF WARRANTHOLDERS: VOTING. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Warrantholder any of the rights of a stockholder of the Company, including without limitation the right to vote, to receive dividends and other distributions, to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company. SECTION 10. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Warrant Certificate without the consent or concurrence of the Warrantholder in order to cure any ambiguity, manifest error or other mistake in this Warrant Certificate, or to make provision in regard to any matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not adversely affect, alter or change the interests of the Warrantholder. SECTION 11. WARRANT AGENT. The Company may, by written notice to the Warrantholder, appoint an agent for the purpose of issuing Common Shares on the exercise of the Warrants, exchanging Warrants, replacing Warrants or any of the foregoing, and thereafter any such issuance, exchange or replacement shall be made at such office by such agent. SECTION 12. SUCCESSORS. All the representations, warranties, covenants and provisions of this Warrant Certificate by or for the benefit of the Company or the Warrantholder shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 13. GOVERNING LAW. This Warrant Certificate shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed in accordance with the laws of said State, regardless of the laws that might be applied under applicable principles of conflicts of laws. SECTION 14. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Warrantholder any legal or equitable right, remedy or claim under this Warrant Certificate, and this Warrant Certificate shall be for the sole and exclusive benefit of the Company and the Warrantholder. SECTION 15. INTERPRETATION. The headings contained in this Warrant Certificate are for reference purposes only and shall not affect in any way the meaning or interpretation of this Warrant Certificate. SECTION 16. INVALIDITY OF PROVISIONS. If any provision of this Warrant Certificate is or becomes invalid, illegal or unenforceable in any respect, such provision shall be amended to the extent necessary to cause it to express the intent of the parties and be valid, legal and enforceable. The amendment of such provision shall not affect the validity, legality or enforceability of any other provision hereof. -5- SECTION 17. REGISTRATION RIGHTS. (a) If at any time or from time to time the Company proposes to file a registration statement on any appropriate form (a "Registration Statement") (other than in connection with an exchange offer or a registration statement on Form S-4 or S-8 or otherwise unsuitable registration statements) under the Securities Act with respect to any Common Shares, whether or not for sale for its own account, on a form and in a manner which would permit registration of Common Shares received upon exercise of the Warrants ("Warrant Shares") for sale to the public under the Securities Act, the Company shall (i) promptly give to the Warrantholder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities law); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Warrant Shares specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by the Warrantholder. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Warrantholder as a part of the written notice given pursuant to Section 17(a)(i). In such event the right of the Warrantholder to registration pursuant to this Section 17 shall be conditioned upon the Warrantholder's participation, as a selling security holder, in such underwriting and the inclusion of the Warrant Shares in the underwriting to the extent provided herein. The Warrantholder shall (together with the Company and the other holders of Common Shares distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriters selected for such underwriting by the Company. The Warrantholder shall not be required to make any representations or warranties to the Company or the underwriters other than those relating to the Warrantholder, the Warrant Shares and the intended method of distribution and information about the Warrantholder provided by the Warrantholder for use in the Registration Statement. (c) Notwithstanding any other provision of this Section 17: (i) subject to clause (iii) below, if the registration is an underwritten primary registration on behalf of the Company and the managing underwriters of such offering determine in good faith that the aggregate amount of Common Shares which the Warrantholder and the Company propose to include in such Registration Statement exceeds the maximum amount of Common Shares that could practicably be included therein, the Company will include in such registration, first, the Common Shares which the Company proposes to sell, and second, the Warrant Shares and the Common Shares of any holders of other piggyback registration rights, if any, which can practicably be included therein, pro rata among all such holders, taken together, on the basis of the relative amount of Common Shares owned by the Warrantholder and such other holders who have requested that Common Shares owned by them be included; (ii) subject to clause (iii) below, if the registration is an underwritten secondary registration on behalf of any of the other security holders of the Company and the managing underwriters determine in good faith that the aggregate amount of Common Shares which the Warrantholder and such security holders propose to include in such registration exceeds the maximum -6- amount of Common Shares that could practicably be included therein, the Company will include in such registration, first, the Common Shares to be sold for the account of any other holders entitled to demand registration and, second, the Warrant Shares and other Common Shares to be sold for the account of other holders electing to include (but not being entitled to demand inclusion of) Common Shares in such registration, pro rata among all such holders, taken together, on the basis of the relative amount of Common Shares owned by the Warrantholder and such other holders who have requested that Common Shares owned by them be included; and (iii) in the event of a conflict between the rights of the Warrantholder set forth in this Section 17 and the registration rights of General Electric Company, the rights hereunder shall be subordinate to such other rights and the Company's obligations shall be limited to those that can be performed without violating the terms of such other registration rights. (d) The Company may withdraw any Registration Statement at any time before it becomes effective, or postpone the offering of Common Shares, without obligation or liability to the Warrantholder. (e) With respect to a Registration Statement in which any of the Warrant Shares are included, the Warrantholder agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of Common Shares, including a sale pursuant to Rule 144 under the Securities Act (except as part of such registration), during the 180-day period beginning on the effective date of such Registration Statement; PROVIDED, HOWEVER, that such agreement shall be applicable only to the first three such Registration Statements which cover Common Shares (or other securities) to be sold on the Company's behalf to the public in an underwritten offering. (f) All Registration Expenses (as defined below) incurred in connection with any registration, qualification or compliance pursuant to this Section 17 shall be borne by the Company. All Selling Expenses (as defined below) incurred in connection with any registrations hereunder shall be borne by the holders of the Common Shares so registered pro rata on the basis of the number of shares so registered. For purposes of this Section 17, (i) "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with this Section 17, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Warrantholder and all other holders of Common Shares to be registered, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of the Company's regular employees which shall be paid in any event by the Company) and (ii) "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. (g) In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 17, the Company will keep the Warrantholder advised in writing as to the qualification and compliance and as to the completion thereof. At its expense the Company will: (i) Keep such registration, qualification or compliance effective for a period of 120 days or until the Warrantholder has completed the distribution described in the Registration Statement relating thereto, whichever first occurs; -7- (ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the requisite period; (iii) Furnish such number of prospectuses and other documents incident thereto as the Warrantholder from time to time may reasonably request; (iv) Use its reasonable efforts to register or qualify such Warrant Shares under the securities or blue sky laws of such jurisdictions as the Warrantholder reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable the Warrantholder to consummate the disposition in such jurisdictions of the Warrant Shares owned by the Warrantholder (PROVIDED that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 17, (B) subject itself to taxation in any such jurisdiction, (C) consent to general service of process in any such jurisdiction, or (D) qualify such Warrant Shares in a given jurisdiction where, in the sole discretion of the Company, expressions of investment interest are not sufficient in such jurisdiction to reasonably justify the expense of qualification in that jurisdiction or where such qualification would require the Company to register as a broker or dealer in such jurisdiction); (v) Notify the Warrantholder at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event known to the Company as a result of which the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and in such event, at the request of the Warrantholder, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Warrant Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (vi) Cause all such Warrant Shares to be listed on each securities exchange on which similar securities issued by the Company are then listed and qualify such Warrant Shares for trading on each system on which similar securities issued by the Company are from time to time qualified; (vii) Provide a transfer agent and registrar for all such Warrant Shares not later than the effective date of such Registration Statement and thereafter maintain such a transfer agent and registrar; (viii) Permit the Warrantholder, if in the Company's sole and exclusive judgment, such holder might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such Rregistration Statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and it's counsel should be included; and (ix) In the event of the issuance of any stop order suspending the effectiveness of a Registration Statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Shares included in such Registration Statement for sale in any jurisdiction, the Company will use its reasonable efforts promptly to obtain the withdrawal of such order. -8- (h) The Warrantholder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 17(g)(v) or (ix), such holder will forthwith discontinue disposition of Warrant Shares pursuant to a registration hereunder until receipt of the copies of an appropriate supplement or amendment to the prospectus under Section 17(g)(ii) or until the withdrawal of such order under Section 17(g)(ix). (i) No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Common Shares on the basis provided in any underwriting arrangements approved by the persons entitled to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements and (iii) furnishes to the Company such information regarding such person and the distribution proposed by such person as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 17. (j) The Company agrees to indemnify, to the extent permitted by law, the Warrantholder, its officers, directors and trustees and each person who controls (within the meaning of the Securities Act) such holder against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the Registration Statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters at least to the same extent as provided above with respect to the indemnification of the Warrantholder. (k) In connection with any Registration Statement in which Warrantholder is participating, such Warrantholder will furnish to the Company in writing such information as the Company reasonably requests for use in connection with any such Registration Statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each person who controls (within the meaning of the Securities Act) the Company against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of a material fact contained in the Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information so furnished in writing by such Holder; PROVIDED that the obligation to indemnify will be limited to the net amount of proceeds received by such holder from the sale of Warrant Shares pursuant to such Registration Statement. In connection with an underwritten offering, such holder will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters at least to the same extent as provided above with respect to the indemnification of the Company. -9- (l) Any person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (m) The indemnification provided for under this Section 17 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. The Warrantholder also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event such holder's indemnification is unavailable for any reason. (n) The provisions of this Section 17 shall apply until such time as all Warrant Shares that have not been resold to the public may be resold pursuant to Rule 144 under the Securities Act within a three month period. SECTION 18. CERTAIN REPRESENTATIONS. The Warrantholder, by its acceptance of this Warrant Certificate, as evidenced by delivery of the Warrant Certificate to the Warrantholder, has made the following representations to the Company and agreed as follows: The Warrantholder is not an executive officer or director of the Company and understands that, in connection with complying with California law, the Company (i) may issue Warrants to no more than thirty-five (35) purchasers in connection with an offering of such Warrants, excluding executive officers and directors of the Company and certain other persons as provided under California law, (ii) the Warrantholder is included in the foregoing thirty-five (35) purchaser number, and (iii) the Company, in compliance with California law, is granting the Warrants pursuant to this Warrant Certificate in part in reliance on Warrantholder's representations made herein. The Warrantholder represents that the Warrantholder either has a preexisting personal or business relationship with the Company or any of its partners, officers, directors or controlling persons, or, by reason of the Warrantholder's business or financial experience or the business or financial experience of the Warrantholder's professional advisor is unaffiliated with and who is not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, the Warrantholder can be reasonably assumed by the Company to have the capacity to protect the Warrantholder's interests in connection with the issuance of Warrants pursuant to this Warrant Certificate. The Warrantholder understands that in making the foregoing representation the term "preexisting personal or business -10- relationship" includes any relationship consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent purchasers to be aware of the character, business acumen and general business and financial circumstances of the person with whom such relationship exists, and that a relationship of employer-employee, or as a security holder of the Company does not necessarily involve contacts of a nature which are sufficient to establish a preexisting personal or business relationship as required under California law. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed. INSIGHT HEALTH SERVICES CORP. Attest: /s/ Thomas V. Croal By: /s/ E. Larry Atkins - -------------------------------- --------------------------------- Thomas V. Croal, Secretary Name: E. Larry Atkins Title: President and Chief Executive Officer -11- ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise___________of the Warrants represented by this Warrant Certificate and to purchase the Common Shares issuable upon the exercise of said Warrants, and requests that Certificates for such shares be issued and delivered as follows: ISSUE TO: (Name) (Address, Including Zip Code) (Social Security or Tax Identification Number) DELIVER TO: (Name) at (Address, Including Zip Code) If the number of Warrants hereby exercised is less than all the Warrants represented by this Warrant Certificate, the undersigned requests that a new Warrant Certificate representing the number of full Warrants not exercised be issued and delivered as set forth above or otherwise as the undersigned shall direct in writing. In full payment of the purchase price with respect to the Warrants exercised and transfer taxes, if any, the undersigned hereby tenders payment of $________ by certified check, bank cashier's check or money order payable in United States currency to the order of the Company. Dated: , 19 __________________ ______ Signature (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER OF HOLDER -12- ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned represented by the within Warrant Certificate, with respect to the number of Warrants set forth below: Name of Social Security No. No. of Assignee or Tax I.D. Address Warrants ----------- -------------------- ---------- ----------- and does hereby irrevocably constitute and appoint ___________________________ Attorney,to make such transfer on the books of InSight Health Services Corp. maintained for that purpose, with full power of substitution in the premises. Dated: , 19 _________________ ____ Signature (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate} -13- EXHIBIT A FORM OF STOCKHOLDERS CERTIFICATE The undersigned (the "Purchaser") is exercising the warrants (the "Warrants") tendered with this certificate, and in connection with such exercise, hereby certifies to InSight Health Services Corp. (the "Company") that the Purchaser understands and agrees that: 1. The shares of common stock of the Company (the "Common Shares") deliverable upon exercise of the Warrants are not registered pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and the offering and sale of the Common Shares is intended to be exempt from registration under the Securities Act; 2. The Common Shares to be acquired by the Purchaser pursuant to exercise of the Warrants are being acquired for its own account and without a view to the distribution of such Common Shares or any interest therein; PROVIDED that (i) this representation shall not prejudice the Purchaser's right at all times to sell or otherwise dispose of all or any part of the Common Shares so acquired by the Purchaser pursuant to a registration under the Securities Act or an exemption from such registration available under the Securities Act and (ii) the disposition of the Purchaser's property shall be at all times within its control; 3. The Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Common Shares and the Purchaser is capable of bearing the economic risks of such investment and is able to bear a complete loss of its investment in the Common Shares; 4. The Purchaser represents and warrants that the Company has made available to the Purchaser or its agents all documents and information relating to an investment in Common Shares requested by or on behalf of the Purchaser; and 5. All Common Shares issued on delivery of this certificate shall bear the legend set forth on page 1 of the Warrant Certificate. In witness whereof, the Purchaser has caused this Certificate to be duly executed on this_____________day of______________, 19____. [Name of Purchaser] By: Name: Title: A-1 EX-10.20 7 EXHIBIT 10.20 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, OFFERED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. No. L-1 Certificate for 15,000 Warrants EXERCISABLE COMMENCING ON THE DATE OF ISSUANCE HEREOF AND ENDING 5:00 P.M., NEWPORT BEACH, CALIFORNIA TIME, ON THE EXPIRATION DATE INSIGHT HEALTH SERVICES CORP. WARRANT CERTIFICATE THIS CERTIFIES that Anthony J. LeVecchio, or his registered assigns is the registered holder (the "Warrantholder") of the number of warrants (the "Warrants") set forth above, each of which represents the right to purchase one fully paid and non-assessable share of common stock, par value $.001 per share (the "Common Shares"), of InSight Health Services Corp., a Delaware corporation (the "Company"), at the exercise price of $5.50 per share (the "Exercise Price"), at any time prior to the Expiration Date hereinafter referred to, by surrendering this Warrant Certificate, with the form of Election to Purchase set forth hereon duly executed, at the Company's principal executive office, 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660 (the "Office"), and by paying in full the Exercise Price, plus transfer taxes, if any, in United States currency by certified check, bank cashier's check or money order payable to the order of the Company. SECTION 1. DURATION AND EXERCISE OF WARRANTS. (a) The Warrants represented by this Warrant Certificate shall vest cumulatively and be exercisable at the rate of 5,000 Warrants on each of March 11, 1998, March 11, 1999 and March 11, 2000 and shall expire at 5:00 p.m. Newport Beach, California time, on March 11, 2001 ("Expiration Date"). (b) Subject to the provisions of this Warrant Certificate, after the date of this Warrant Certificate and prior to the close of business on the Expiration Date, the Warrantholder shall have the right to purchase from the Company the number of Common Shares specified above at the Exercise Price. In order to exercise such right, the Warrantholder shall surrender the Warrant Certificate(s) evidencing such Warrants to the Company at the Office with the form of Election to Purchase set forth hereon duly completed and signed, and shall tender payment in full to the Company for the Company's account of the Exercise Price, together with such taxes as are specified in Section 4 -1- hereof, for each Common Share with respect to which such Warrants are being exercised. Such Exercise Price and taxes shall be paid in full by certified check, bank cashier's check or money order, payable in United States currency to the order of the Company. In addition, if the Common Shares deliverable upon exercise have not been registered pursuant to the Securities Act, the Warrantholder shall deliver a duly executed certificate substantially in the form of Exhibit A hereto. (c) The Warrants evidenced by this Warrant Certificate shall be exercisable only in multiples of one (1) Warrant. If less than all of the Warrants evidenced by this Warrant Certificate are exercised at any time prior to the close of business on the Expiration Date, a new Warrant Certificate(s) shall be issued to the Warrantholder, or his duly authorized assigns, by the Company for the remaining number of Warrants evidenced by the Warrant Certificate so surrendered. SECTION 2. ISSUANCE OF SHARE CERTIFICATES. Upon surrender of this Warrant Certificate and payment of the Exercise Price, and, if the Common Shares deliverable on exercise have not been registered under the Securities Act, upon delivery of a certificate in the form of Exhibit A hereto, the Company shall issue certificates representing Common Shares ("Share Certificates") for the number of full Common Shares to which the holder of such Warrants is entitled, registered in accordance with the instructions set forth in the Election to Purchase. If such Common Shares have not been registered under the Securities Act, the Share Certificates shall bear a legend substantially similar to the legend on this Warrant Certificate. SECTION 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF COMMON SHARES PURCHASABLE PER NUMBER OF WARRANTS. The Exercise Price and the number of Common Shares purchasable upon the exercise of each Warrant are subject to adjustment from time to time upon the occurrence of the events specified in this Section 3: (a) If the Company at any time after the date of this Warrant Certificate (i) declares a dividend or makes a distribution on the outstanding Common Shares payable in Common Shares, (ii) subdivides or reclassifies the outstanding Common Shares into a greater number of shares or (iii) combines or reclassifies the outstanding Common Shares into a smaller number of Common Shares, the Exercise Price in effect immediately after the record date for such dividend or distribution or at the effective date of such subdivision, combination or reclassification, shall be adjusted to equal the quotient obtained by multiplying the Exercise Price in effect immediately prior to such date by a fraction, the numerator of which shall be the number of Common Shares outstanding immediately prior to such dividend, distribution, subdivision, combination or reclassification, and the denominator of which shall be the number of Common Shares outstanding immediately after such dividend, distribution, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) If at any time, as a result of an adjustment made pursuant to subsection (a), the holder of any Warrant thereafter exercised shall become entitled to receive any additional Common Shares (the "New Shares"), thereafter the number of such New Shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in paragraph (a), and the provisions of this Warrant Certificate with respect to the Common Shares shall apply on like terms to any such New Shares. -2- (c) All calculations of the Exercise Price under this Section 3 shall be made to the nearest one hundredth of a cent. No adjustment in the Exercise Price in accordance with the provisions of subsection (a) hereof need be made if such adjustment, together with other adjustments carried forward pursuant to this subsection (c), would amount to a change in such Exercise Price of less than 1%; PROVIDED, HOWEVER, that the amount by which any adjustment is not made by reason of this subsection (c) shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. (d) Unless the Company shall have exercised its election as provided in subsection (e), upon each adjustment of the Exercise Price as a result of the calculations made in subsection (a), each Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price that number of Common Shares obtained by (i) multiplying (A) the number of Common Shares purchasable upon exercise of a Warrant immediately prior to such adjustment of the Exercise Price by (B) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (e) The Company may elect, on or after the date of any adjustment of the Exercise Price, to adjust the number of Warrants in substitution for an adjustment in the number of Common Shares purchasable upon the exercise of a Warrant as provided in subsection (d). (f) In case of any reorganization of the Company, or in case of the consolidation or merger of the Company with or into any other legal entity or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other legal entity (collectively, "Reorganization"), all vested Warrants shall be exercisable, and any unvested Warrants shall become immediately exercisable, after such Reorganization, upon the terms and conditions specified in this Warrant Certificate, for the stock or other securities or property (including cash) to which a holder of the number of Common Shares purchasable (at the time of such Reorganization) upon exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization; and in any such case, if necessary, the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any such stock or other securities or property thereafter deliverable upon exercise of the Warrants. The Company shall not effect any such Reorganization unless prior to or simultaneously with the consummation thereof the successor (if other than the Company) resulting from such Reorganization or the legal entity purchasing such assets shall assume, by written instrument executed and delivered to the holder of each Warrant, the obligation to deliver to the holder of each Warrant such stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase, and the other obligations under this Warrant Certificate. SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes that may be imposed by the United States of America or any state or territory thereof ("Taxes") attributable to the initial issuance of Common Shares upon the exercise of Warrants prior to the close of business on the Expiration Date; PROVIDED, HOWEVER, that the Company shall not be required to pay any Taxes which may be payable in respect of any transfer involved in the issuance of any Warrant Certificates or any Share Certificates in a name other than that of the Warrantholder of record surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Share Certificates unless or until -3- the person or persons requesting the issuance thereof shall have paid to the Company the amount of such Taxes or shall have established to the satisfaction of the Company that such Taxes have been paid. SECTION 5. REGISTRATION. (a) This Warrant Certificate shall be registered in the name of the record holder to whom it is distributed, and the Company shall maintain a list showing the name, address and number of Warrants held by each of the Warrantholders of record. (b) The Company may deem and treat the Warrantholder of record as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing thereon made by anyone) for the purpose of any exercise thereof and any distribution to the holder thereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. SECTION 6. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) The Company shall register the transfer of this Warrant Certificate upon the records to be maintained by it for that purpose, upon surrender of this Warrant Certificate accompanied (if so required by the Company) by (i) a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered holder(s) thereof or by the duly appointed legal representative thereof or by a duly authorized attorney, and (ii) an opinion of counsel, reasonably satisfactory to the Company, that such transfer is exempt from registration under the Securities Act. Upon any such registration or transfer, a new Warrant Certificate shall be issued to the transferee, and the surrendered Warrant Certificate shall be cancelled by the Company. (b) This Warrant Certificate may be exchanged at the option of the holder, when surrendered to the Company at the Office, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange, transfer or exercise shall be cancelled by the Company. SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for any Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and an indemnity or bond, if requested, also satisfactory to the Company. Applicants for such substitute Warrant Certificate shall also comply with such other reasonable charges as the Company may prescribe. SECTION 8. NOTICES. (a) Any notice or demand authorized by this Warrant Certificate to be given or made by the Warrantholder to or on the Company shall be in writing and shall be sufficiently given or made if personally delivered or sent by mail or by telegram or telex confirmed by letter addressed (until another address is given in writing by the Company) to the Office. -4- (b) Any notice pursuant to this Warrant Certificate to be given by the Company to the Warrantholder shall be in writing and shall be sufficiently given if personally delivered or sent by mail or telegram or telex confirmed by letter, addressed (until another address is filed in writing by the Warrantholder with the Company) to the address specified in the Warrant register maintained by the Company. SECTION 9. RIGHTS OF WARRANTHOLDERS; VOTING. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Warrantholder any of the rights of a stockholder of the Company, including without limitation the right to vote, to receive dividends and other distributions, to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company. SECTION 10. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Warrant Certificate without the consent or concurrence of the Warrantholder in order to cure any ambiguity, manifest error or other mistake in this Warrant Certificate, or to make provision in regard to any matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not adversely affect, alter or change the interests of the Warrantholder. SECTION 11. WARRANT AGENT. The Company may, by written notice to the Warrantholder, appoint an agent for the purpose of issuing Common Shares on the exercise of the Warrants, exchanging Warrants, replacing Warrants or any of the foregoing, and thereafter any such issuance, exchange or replacement shall be made at such office by such agent. SECTION 12. SUCCESSORS. All the representations, warranties, covenants and provisions of this Warrant Certificate by or for the benefit of the Company or the Warrantholder shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 13. GOVERNING LAW. This Warrant Certificate shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed in accordance with the laws of said State, regardless of the laws that might be applied under applicable principles of conflicts of laws. SECTION 14. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Warrantholder any legal or equitable right, remedy or claim under this Warrant Certificate, and this Warrant Certificate shall be for the sole and exclusive benefit of the Company and the Warrantholder. SECTION 15. INTERPRETATION. The headings contained in this Warrant Certificate are for reference purposes only and shall not affect in any way the meaning or interpretation of this Warrant Certificate. SECTION 16. INVALIDITY OF PROVISIONS. If any provision of this Warrant Certificate is or becomes invalid, illegal or unenforceable in any respect, such provision shall be amended to the extent necessary to cause it to express the intent of the parties and be valid, legal and enforceable. The amendment of such provision shall not affect the validity, legality or enforceability of any other provision hereof. -5- SECTION 17. REGISTRATION RIGHTS. (a) If at any time or from time to time the Company proposes to file a registration statement on any appropriate form (a "Registration Statement") (other than in connection with an exchange offer or a registration statement on Form S-4 or S-8 or otherwise unsuitable registration statements) under the Securities Act with respect to any Common Shares, whether or not for sale for its own account, on a form and in a manner which would permit registration of Common Shares received upon exercise of the Warrants ("Warrant Shares") for sale to the public under the Securities Act, the Company shall (i) promptly give to the Warrantholder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities law); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Warrant Shares specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by the Warrantholder. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Warrantholder as a part of the written notice given pursuant to Section 17(a)(i). In such event the right of the Warrantholder to registration pursuant to this Section 17 shall be conditioned upon the Warrantholder's participation, as a selling security holder, in such underwriting and the inclusion of the Warrant Shares in the underwriting to the extent provided herein. The Warrantholder shall (together with the Company and the other holders of Common Shares distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriters selected for such underwriting by the Company. The Warrantholder shall not be required to make any representations or warranties to the Company or the underwriters other than those relating to the Warrantholder, the Warrant Shares and the intended method of distribution and information about the Warrantholder provided by the Warrantholder for use in the Registration Statement. (c) Notwithstanding any other provision of this Section 17: (i) subject to subsection (iii) below, if the registration is an underwritten primary registration on behalf of the Company and the managing underwriters of such offering determine in good faith that the aggregate amount of Common Shares which the Warrantholder and the Company propose to include in such Registration Statement exceeds the maximum amount of Common Shares that could practicably be included therein, the Company will include in such registration, first, the Common Shares which the Company proposes to sell, and second, the Warrant Shares and the Common Shares of any holders of other piggyback registration rights, if any, which can practicably be included therein, pro rata among all such holders, taken together, on the basis of the relative amount of Common Shares owned by the Warrantholder and such other holders who have requested that Common Shares owned by them be included; (ii) subject to subsection (iii) below, if the registration is an underwritten secondary registration on behalf of any of the other security holders of the Company and the managing -6- underwriters determine in good faith that the aggregate amount of Common Shares which the Warrantholder and such security holders propose to include in such registration exceeds the maximum amount of Common Shares that could practicably be included therein, the Company will include in such registration, first, the Common Shares to be sold for the account of any other holders entitled to demand registration and, second, the Warrant Shares and other Common Shares to be sold for the account of other holders electing to include (but not being entitled to demand inclusion of) Common Shares in such registration, pro rata among all such holders, taken together, on the basis of the relative amount of Common Shares owned by the Warrantholder and such other holders who have requested that Common Shares owned by them be included; and (iii) in the event of a conflict between the rights of the Warrantholder set forth in this Section 17 and the registration rights of General Electric Company, the rights hereunder shall be subordinate to such other rights and the Company's obligations shall be limited to those that can be performed without violating the terms of such other registration rights. (d) The Company may withdraw any Registration Statement at any time before it becomes effective, or postpone the offering of Common Shares, without obligation or liability to the Warrantholder. (e) With respect to a Registration Statement in which any of the Warrant Shares are included, the Warrantholder agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of Common Shares, including a sale pursuant to Rule 144 under the Securities Act (except as part of such registration), during the 180-day period beginning on the effective date of such Registration Statement; PROVIDED, HOWEVER, that such agreement shall be applicable only to the first three such Registration Statements which cover Common Shares (or other securities) to be sold on the Company's behalf to the public in an underwritten offering. (f) All Registration Expenses (as defined below) incurred in connection with any registration, qualification or compliance pursuant to this Section 17 shall be borne by the Company. All Selling Expenses (as defined below) incurred in connection with any registrations hereunder shall be borne by the holders of the Common Shares so registered pro rata on the basis of the number of shares so registered. For purposes of this Section 17, (i) "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with this Section 17, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Warrantholder and all other holders of Common Shares to be registered, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of the Company's regular employees which shall be paid in any event by the Company) and (ii) "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. (g) In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 17, the Company will keep the Warrantholder advised in writing as to the qualification and compliance and as to the completion thereof. At its expense the Company will: (i) Keep such registration, qualification or compliance effective for a period of 120 days or until the Warrantholder has completed the distribution described in the Registration Statement relating thereto, whichever first occurs; -7- (ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the requisite period; (iii) Furnish such number of prospectuses and other documents incident thereto as the Warrantholder from time to time may reasonably request; (iv) Use its reasonable efforts to register or qualify such Warrant Shares under the securities or blue sky laws of such jurisdictions as the Warrantholder reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable the Warrantholder to consummate the disposition in such jurisdictions of the Warrant Shares owned by the Warrantholder (PROVIDED that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 17, (B) subject itself to taxation in any such jurisdiction, (C) consent to general service of process in any such jurisdiction, or (D) qualify such Warrant Shares in a given jurisdiction where, in the sole discretion of the Company, expressions of investment interest are not sufficient in such jurisdiction to reasonably justify the expense of qualification in that jurisdiction or where such qualification would require the Company to register as a broker or dealer in such jurisdiction); (v) Notify the Warrantholder at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event known to the Company as a result of which the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and in such event, at the request of the Warrantholder, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Warrant Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (vi) Cause all such Warrant Shares to be listed on each securities exchange on which similar securities issued by the Company are then listed and qualify such Warrant Shares for trading on each system on which similar securities issued by the Company are from time to time qualified; (vii) Provide a transfer agent and registrar for all such Warrant Shares not later than the effective date of such Registration Statement and thereafter maintain such a transfer agent and registrar; (viii) Permit the Warrantholder, if in the Company's sole and exclusive judgment, such holder might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such Registration Statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and his counsel should be included; and (ix) In the event of the issuance of any stop order suspending the effectiveness of a Registration Statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Shares included in such Registration Statement -8- for sale in any jurisdiction, the Company will use its reasonable efforts promptly to obtain the withdrawal of such order. (h) The Warrantholder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 17(g)(v) or (ix), such holder will forthwith discontinue disposition of Warrant Shares pursuant to a registration hereunder until receipt of the copies of an appropriate supplement or amendment to the prospectus under Section 17(g)(ii) or until the withdrawal of such order under Section 17(g)(ix). (i) No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Common Shares on the basis provided in any underwriting arrangements approved by the persons entitled to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements and (iii) furnishes to the Company such information regarding such person and the distribution proposed by such person as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 17. (j) The Company agrees to indemnify, to the extent permitted by law, the Warrantholder and each person who controls (within the meaning of the Securities Act) such holder against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the Registration Statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters at least to the same extent as provided above with respect to the indemnification of the Warrantholder. (k) In connection with any Registration Statement in which Warrantholder is participating, such Warrantholder will furnish to the Company in writing such information as the Company reasonably requests for use in connection with any such Registration Statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each person who controls (within the meaning of the Securities Act) the Company against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of a material fact contained in the Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information so furnished in writing by such Holder; PROVIDED that the obligation to indemnify will be limited to the net amount of proceeds received by such holder from the sale of Warrant Shares pursuant to such Registration Statement. In connection with an underwritten offering, such holder will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters at least to the same extent as provided above with respect to the indemnification of the Company. -9- (l) Any person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (m) The indemnification provided for under this Section 17 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. The Warrantholder also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event such holder's indemnification is unavailable for any reason. (n) The provisions of this Section 17 shall apply until such time as all Warrant Shares that have not been resold to the public may be resold pursuant to Rule 144 under the Securities Act within a three month period. SECTION 18. CERTAIN REPRESENTATIONS. The Warrantholder, by his acceptance of this Warrant Certificate, as evidenced by delivery of the Warrant Certificate to the Warrantholder, has made the following representations to the Company and agreed as follows: The Warrantholder is not an executive officer or director of the Company and understands that, in connection with complying with California law, the Company (i) may issue Warrants to no more than thirty-five (35) purchasers in connection with an offering of such Warrants, excluding executive officers and directors of the Company and certain other persons as provided under California law, (ii) the Warrantholder is included in the foregoing thirty-five (35) purchaser number, and (iii) the Company, in compliance with California law, is granting the Warrants pursuant to this Warrant Certificate in part in reliance on Warrantholder's representations made herein. The Warrantholder represents that the Warrantholder either has a preexisting personal or business relationship with the Company or any of his partners or controlling persons, or, by reason of the Warrantholder's business or financial experience or the business or financial experience of the Warrantholder's professional advisor is unaffiliated with and who is not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, the Warrantholder can be reasonably assumed by the Company to have the capacity to protect the Warrantholder's -10- interests in connection with the issuance of Warrants pursuant to this Warrant Certificate. The Warrantholder understands that in making the foregoing representation the term "preexisting personal or business relationship" includes any relationship consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen and general business and financial circumstances of the person with whom such relationship exists, and that a relationship of employer-employee, or as a security holder of the Company does not necessarily involve contacts of a nature which are sufficient to establish a preexisting personal or business relationship as required under California law. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed. INSIGHT HEALTH SERVICES CORP. Attest: /s/ Thomas V. Croal BY. /s/ Larry Atkins - ------------------------------- ----------------------------------- Thomas V. Croal, Secretary Name: E. Larry Atkins Title: President and Chief Executive Officer -11- ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise _________________ of the Warrants represented by this Warrant Certificate and to purchase the Common Shares issuable upon the exercise of said Warrants, and requests that Certificates for such shares be issued and delivered as follows: ISSUE TO: (Name) (Address, Including Zip Code) (Social Security or Tax Identification Number) DELIVER TO: (Name) at (Address, Including Zip Code) If the number of Warrants hereby exercised is less than all the Warrants represented by this Warrant Certificate, the undersigned requests that a new Warrant Certificate representing the number of full Warrants not exercised be issued and delivered as set forth above or otherwise as the undersigned shall direct in writing. In full payment of the purchase price with respect to the Warrants exercised and transfer taxes, if any, the undersigned hereby tenders payment of $______ by certified check, bank cashier's check or money order payable in United States currency to the order of the Company. Dated:____________ , 19__ Signature (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER OF HOLDER -12- ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned represented by the within Warrant Certificate, with respect to the number of Warrants set forth below: Name of Social Security No. No. of Assignee or Tax I.D. Address Warrants -------- ---------- ------- -------- and does hereby irrevocably constitute and appoint _________________ Attorney, to make such transfer on the books of InSight Health Services Corp. maintained for that purpose, with full power of substitution in the premises. Dated:___________________, 19__ Signature (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) -13- EX-10.21 8 EXHIBIT 10-21 INSIGHT HEALTH SERVICES CORP. 1996 DIRECTORS' STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT INSIGHT HEALTH SERVICES CORP. 1996 DIRECTORS' STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is made as of ("Grant Date"), by and between INSIGHT HEALTH SERVICES CORP., a Delaware corporation ("Corporation") and ("Optionee"). WITNESSETH RECITALS A. The stockholders and the Board of Directors of the Corporation ("Board") have adopted the 1996 Directors' Stock Option Plan ("Plan") of the Corporation for the purpose of attracting and retaining highly qualified individuals to serve as members of the Board, who are not officers or employees of the Corporation or any of its subsidiaries. B. The Optionee is a director of the Corporation or its subsidiaries, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the grant by the Corporation of a nonstatutory stock option to the Optionee. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement and the Plan, a copy of which is attached hereto, the Corporation hereby grants to the Optionee, as of the Grant Date, a nonstatutory stock option to purchase up to ___ shares ("Option Shares") of the common stock, par value $0.001 per share, of the Corporation ("Common Stock") from time to time during the Option Period (as defined below) at the price of $ per share ("Option Price"). 2. OPTION PERIOD. This option shall be exercisable only during the Option Period. Termination of the Optionee's services as a director for any reason shall not cause this option to terminate; however, upon the Expiration Date or upon its earlier termination under Paragraph 4, this option shall cease to be exercisable and have no further force or effect whatsoever. 3. VESTING AND EARLY TERMINATION. The Option Shares shall vest each month following the Grant Date on a pro rata basis over a three (3) year period following the Grant Date until fully vested, so long as continuously during such time period the Optionee remains a director, or is an employee or independent contractor of the Corporation or any of its subsidiaries or is a director of one of the Corporation's subsidiaries. If the Optionee's services terminate prior to the end of such three (3) year period, then the vested Option Shares shall be fixed at such time, and should the calculation result in a fractional share, it shall be rounded down to the nearest whole number of shares. 4. DEATH OR DISABILITY OF AN OPTIONEE. If the Optionee's services to the Corporation are terminated as a result of the Optionee's death or disability, then the Optionee, or the executors or administrators of the Optionee's estate or the Optionee's heirs or legatees (as the case may be) shall have the right to exercise this option with respect to all options theretofore granted to such Optionee, unless earlier terminated in accordance with their terms. In the event of such termination, the period for exercising this option shall be a period of twelve (12) months commencing with the date of such termination of services, provided that in no event shall this option be exercisable at any time after the Expiration Date. For purposes of this section, "disability" shall mean an Optionee's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. 5. TIMING AND METHOD OF EXERCISE. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, the Optionee (or in the case of exercise after the Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must comply with the provisions of Section 10 of the Plan. A form of exercise notice is attached hereto as Exhibit A. 6. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 4, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, devisees, legal representatives and assigns of the Optionee and the successors and assigns of the Corporation. 7. LIABILITY OF CORPORATION. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. 8. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. 9. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Delaware. 2 10. WARRANTIES AND OBLIGATIONS OF THE OPTIONEE. (a) The Optionee represents, warrants and agrees that the Optionee will acquire and hold the Option Shares for the Optionee's own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with federal and state securities laws, and that the Optionee will not, at any time or times, directly or indirectly, offer, sell, distribute, pledge or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any Option Shares (or solicit an offer to buy, take in pledge or otherwise acquire or receive, allow all or any portion thereof), except pursuant to either (i) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended ("Act"), which Registration Statement has become effective and is current with respect to the shares being offered or sold, or (ii) a specific exemption from the registration requirements of the Act, the availability of which exemption shall be the subject matter of an opinion of counsel reasonably acceptable to the Corporation that no registration under the Act is required with respect to such offer, sale, distribution, pledge, grant or other disposition or transfer. (b) The Optionee acknowledges that the Optionee understands that (i) the option has been granted and the shares to be sold to the Optionee upon exercise of the option will be sold to the Optionee pursuant exemptions from the registration requirements in the Act until such time as the Corporation shall file a Registration Statement under the Act which has become effective and is current with respect to the shares being offered or sold and in this connection the Corporation is relying in part on the representations set forth in this Agreement; (ii) such shares must be held indefinitely unless they are registered or an exemption from registration becomes available under the Act and the securities laws of any state; (iii) the Corporation is under no obligation to register such shares or to comply with any exemption from such registration, including those portions of Rule 144 under the Act to be complied with by the Corporation; (iv) if Rule 144 is available for sales of such shares, and there is no assurance that the Optionee will ever be able to sell under Rule 144, such sales in reliance upon Rule 144 may be made only after the shares have been held for the requisite holding period and then only in limited amounts in accordance with the conditions of that Rule, all of which must be met; and (v) the Optionee must, therefore, continue to bear the economic risks of the investment in such shares for an indefinite period of time after the exercise of the option. (c) The Optionee acknowledges that the Optionee has had the opportunity to ask questions of, and receive answers from, the officers and representatives of the Corporation concerning all material information concerning the Corporation and the terms and conditions of the transactions in which the Optionee is acquiring the option and may subsequently acquire Option Shares. The Optionee further acknowledges that the Optionee understands that the Corporation may use the proceeds from the exercise of the option for general corporate purposes. (d) Immediately prior to the exercise of all or any portion of the option, the Optionee shall deliver to the Corporation a signed statement, in a form satisfactory to the 3 Corporation, confirming that each of the representations, warranties, acknowledgments and agreements contained in this Paragraph is true as to the Optionee as of the date of such exercise. (e) The Optionee understands that all certificates representing shares transferred pursuant to this Agreement, unless made pursuant to an appropriate Registration Statement under the Act, will bear the following restrictive legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred or hypothecated without prior registration under said Act or an exemption therefrom established to the satisfaction of the issuer." (f) If the legal counsel of the Corporation, at the request of the Corporation, advises it that registration under the Act of the shares deliverable upon the exercise of the option is required prior to delivery thereof, or that listing of such shares on any exchange is required prior to delivery thereof, the Corporation shall not be required to issue or deliver such shares unless and until such legal counsel shall advise that such registration and/or listing has been completed and is then effective, or is not required. 11. SEVERABILITY. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 12. DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. For purposes of interpreting this Agreement, the following definitions shall also apply: (a) "Exercise Date" means the date on which the Corporation receives written notice of the exercise of this option together with payment of the Option Price for the purchased shares. (b) "Exercise Price" means the Option Price multiplied by the number of purchased shares. (c) "Expiration Date" means, unless earlier terminated pursuant to the terms of this Agreement or the Plan, the day immediately preceding the tenth anniversary of the Grant Date. (d) "Option Period" means the period commencing on the Grant Date and, unless earlier terminated in accordance with Paragraph 4, ending on the close of business on the Expiration Date. 4 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed in duplicate on its behalf and the Optionee has also executed this Agreement in duplicate, all as of the date first above written. OPTIONEE INSIGHT HEALTH SERVICES CORP. By: - ----------------------------------- --------------------------------- 5 EX-10.22 9 EXHIBIT 10.22 INSIGHT HEALTH SERVICES CORP. 1996 EMPLOYEE STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT INSIGHT HEALTH SERVICES CORP. 1996 EMPLOYEE STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is made as of ("Grant Date") by and between INSIGHT HEALTH SERVICES CORP., a Delaware corporation ("Corporation") and ("Optionee"). WITNESSETH RECITALS A. The stockholders and the Board of Directors of the Corporation ("Board") have adopted the 1996 Employee Stock Option Plan ("Plan") of the Corporation for the purpose of advancing the interests of the Corporation by providing eligible individuals with an opportunity to develop a proprietary interest in the Corporation, which will thereby create strong performance incentives for such individuals to maximize the growth and success of the Corporation and its subsidiaries and will encourage such eligible individuals to remain in the employ of the Corporation or any of its subsidiaries. B. The Optionee is a full-time employee of the Corporation or its subsidiaries, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the grant by the Corporation of a nonstatutory stock option to the Optionee. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement and the Plan, a copy of which is attached hereto, the Corporation hereby grants to the Optionee, as of the Grant Date, a nonstatutory stock option to purchase up to ( ) shares ("Option Shares") of the common stock, par value $0.001 per share, of the Corporation ("Common Stock") from time to time during the Option Period (as defined below) at the price of $ per share ("Option Price"). 2. OPTION PERIOD. This option shall be exercisable only during the Option Period. Subject to Paragraph 5, upon the termination of the Optionee's employment, this option shall terminate three (3) months after the date of such termination of employment. In addition, upon the Expiration Date, this option shall cease to be exercisable and have no further force or effect whatsoever. 3. VESTING AND EARLY TERMINATION. The Option Shares shall vest at the rate of 25% each year following the Grant Date for a period of four (4) years and until fully vested, so long as continuously during such time period the Optionee remains an employee or independent contractor of the Corporation or any of its subsidiaries. If the Optionee's employment terminates prior to the end of such four (4) year period, then the vested Option Shares shall be fixed at such time, and should the calculation result in a fractional share, it shall be rounded down to the nearest whole number of shares. 4. DEATH OR DISABILITY OF AN OPTIONEE. If the Optionee's services to the Corporation are terminated as a result of the Optionee's death or "permanent or total disability" (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended), then the Optionee, or the executors or administrators of the Optionee's estate or the Optionee's heirs or legatees (as the case may be) shall have the right to exercise this option with respect to all options theretofore granted to such Optionee, unless earlier terminated in accordance with their terms. In the event of such termination, the period for exercising this option shall be a period of twelve (12) months commencing with the date of such termination of services, provided that in no event shall this option be exercisable at any time after the Expiration Date. 5. TIMING AND METHOD OF EXERCISE. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, the Optionee (or in the case of exercise after the Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must comply with the provisions of Section 10 (c) of the Plan. A form of exercise notice is attached hereto as Exhibit A. 6. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 4, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, devisees, legal representatives and assigns of the Optionee and the successors and assigns of the Corporation. 7. LIABILITY OF CORPORATION. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. 8. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. 9. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Delaware. 10. WARRANTIES AND OBLIGATIONS OF THE OPTIONEE. (a) The Optionee represents, warrants and agrees that the Optionee will acquire and hold the Option Shares for the Optionee's own account for investment and not with the view to the resale or distribution thereof, except for resales or distributions in accordance with federal and state securities laws, and that the Optionee will not, at any time or times, 2 directly or indirectly, offer, sell, distribute, pledge or otherwise grant a security interest in or otherwise dispose of or transfer all, any portion of or any interest in, any Option Shares (or solicit an offer to buy, take in pledge or otherwise acquire or receive, allow all or any portion thereof), except pursuant to either (i) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended ("Act"), which Registration Statement has become effective and is current with respect to the shares being offered or sold, or (ii) a specific exemption from the registration requirements of the Act, the availability of which exemption shall be the subject matter of an opinion of counsel reasonably acceptable to the Corporation that no registration under the Act is required with respect to such offer, sale, distribution, pledge, grant or other disposition or transfer. (b) The Optionee acknowledges that the Optionee understands that (i) the option has been granted and the shares to be sold to the Optionee upon exercise of the option will be sold to the Optionee pursuant exemptions from the registration requirements in the Act until such time as the Corporation shall file a Registration Statement under the Act which has become effective and is current with respect to the shares being offered or sold and in this connection the Corporation is relying in part on the representations set forth in this Agreement; (ii) such shares must be held indefinitely unless they are registered or an exemption from registration becomes available under the Act and the securities laws of any state; (iii) the Corporation is under no obligation to register such shares or to comply with any exemption from such registration, including those portions of Rule 144 under the Act to be complied with by the Corporation; (iv) if Rule 144 is available for sales of such shares, and there is no assurance that the Optionee will ever be able to sell under Rule 144, such sales in reliance upon Rule 144 may be made only after the shares have been held for the requisite holding period and then only in limited amounts in accordance with the conditions of that Rule, all of which must be met; and (v) the Optionee must, therefore, continue to bear the economic risks of the investment in such shares for an indefinite period of time after the exercise of the option. (c) The Optionee acknowledges that the Optionee has had the opportunity to ask questions of, and receive answers from, the officers and representatives of the Corporation concerning all material information concerning the Corporation and the terms and conditions of the transactions in which the Optionee is acquiring the option and may subsequently acquire Option Shares. The Optionee further acknowledges that the Optionee understands that the Corporation may use the proceeds from the exercise of the option for general corporate purposes. (d) Immediately prior to the exercise of all or any portion of the option, the Optionee shall deliver to the Corporation a signed statement, in a form satisfactory to the Corporation, confirming that each of the representations, warranties, acknowledgments and agreements contained in this Paragraph is true as to the Optionee as of the date of such exercise. (e) The Optionee understands that all certificates representing shares transferred pursuant to this Agreement, unless made pursuant to an appropriate Registration Statement under the Act, will bear the following restrictive legend: 3 "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred or hypothecated without prior registration under said Act or an exemption therefrom established to the satisfaction of the issuer." (f) If the legal counsel of the Corporation, at the request of the Corporation, advises it that registration under the Act of the shares deliverable upon the exercise of the option is required prior to delivery thereof, or that listing of such shares on any exchange is required prior to delivery thereof, the Corporation shall not be required to issue or deliver such shares unless and until such legal counsel shall advise that such registration and/or listing has been completed and is then effective, or is not required. 11. SEVERABILITY. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 12. DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. For purposes of interpreting this Agreement, the following definitions shall also apply: (a) "Exercise Date" means the date on which the Corporation receives written notice of the exercise of this option together with payment of the Option Price for the purchased shares. (b) "Exercise Price" means the Option Price multiplied by the number of purchased shares. (c) "Expiration Date" means, unless earlier terminated pursuant to the terms of this Agreement or the Plan, the day immediately preceding the tenth anniversary of the Grant Date. (d) "Option Date" means the period commencing on the Grant Date and, unless earlier termined in accordance with Paragraph 4, ending on the close of business on the Expiration Date. 13. HOLDING PERIOD FOR OPTIONEES. Because the grant of this option has been approved in advance by the Board, the requirement set forth in Section 15 (c) of the Plan is hereby eliminated as no longer necessary for compliance with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. 4 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed in duplicate on its behalf and the Optionee has also executed this Agreement in duplicate, all as of the date first above written. OPTIONEE INSIGHT HEALTH SERVICES CORP. By: - ------------------------------------ ---------------------------------- 6 EX-21 10 EXHIBIT 21 EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- InSight Health Corp. Delaware Radiosurgery Centers, Inc. Delaware Maxum Health Corp. Delaware Quest Financial Services, Inc. Delaware Maxum Health Services Corp. Delaware DiagnosTemps, Inc. Delaware Diagnostic Solutions Corp. Delaware Maxum Health Services of North Texas, Inc. Texas Maxum Health Services of Arlington, Inc. Texas Maxum Health Services of Dallas, Inc. Texas MTS Enterprises, Inc. Texas NDDC, Inc. Texas Open MRI, Inc. Delaware Radiology Services Corp. Delaware EX-27.1 11 EX 27.1 FDS
5 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 7,135 0 26,271 10,626 0 24,692 50,691 16,203 98,322 30,432 0 0 6,750 3 (68) 98,322 90,533 93,063 0 78,831 7,431 1,506 4,055 1,708 427 1,281 0 0 0 1,281 0.24 0
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