-----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, OOokZeMKpQai6/Cx+VGcwvt8PlDjWbe1VE/T+aVT3AUTdhecxuV4mhEUExHLln7u eHg5ncLBlEHmMSut+DHt3g== 0001047469-97-001867.txt : 19971029 0001047469-97-001867.hdr.sgml : 19971029 ACCESSION NUMBER: 0001047469-97-001867 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971028 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/A SEC ACT: SEC FILE NUMBER: 333-02935 FILM NUMBER: 97702189 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/A 1 FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (Mark One) [ X ] AMENDMENT TO 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) The undersigned Registrant hereby amends Part III, Items 10 through 13 of its Annual Report on Form 10-K for the fiscal year ended June 30, 1997 ("Form 10-K") as set forth in the pages attached hereto. Capitalized terms used but not defined herein have the meanings ascribed to them in the Form 10-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT THE BOARD OF DIRECTORS FOLLOWING THE RECAPITALIZATION Pursuant to the terms of the Recapitalization (see "Item 1, Business - --Recapitalization" in the Form 10-K), the number of directors comprising the Company's Board of Directors ("Board") is fixed at nine. Six directors ("Common Stock Directors") are to be elected by the Common Stock holders, one of whom ("Joint Director") is to be proposed by the holders of a majority of each of the Series B Preferred Stock and the Series C Preferred Stock 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 ("Series B Directors") and one is to be elected by the holders of the Series C Preferred Stock ("Series C Director"), in each case acting by written consent and without a meeting of the Common Stock holders. As long as the initial purchasers of the Series B Preferred Stock and their affiliates ("Carlyle Stockholders") own 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 the Carlyle Stockholders own at least 25% but less than 50% of such stock, such holders will have the right to elect one Preferred Stock Director. As long as GE owns at least 25% of the Series C Preferred Stock, the holders of the Series C Preferred Stock will have the right to elect one Preferred Stock Director. Except in the event of a conversion of all of the Series B Preferred Stock and Series C Preferred Stock into Series D Preferred Stock (see "Possible Future Board Changes" below), if the ownership percentage of the Carlyle Stockholders or GE falls below the applicable threshold, the Preferred Stock Director(s) formerly entitled to be elected by the Series B Preferred Stock holders or the Series C Preferred Stock holders, as applicable, will automatically be removed and the Board will be able to fill the resulting vacancies for the balance of the terms of such directors. Thereafter, such directors will be elected by the Common Stock holders. Holders of the Series B Preferred Stock and Series C Preferred Stock are not entitled to participate in the election of the Common Stock Directors. Such holders are otherwise entitled to vote as a single class with the Common Stock on an as-if-converted basis, provided that the maximum aggregate voting percentage in such event may not exceed 37% of the shares eligible to vote. Carlyle owns approximately 33% of the voting power of the Common Stock assuming the conversion of the Series B Preferred Stock and the Series C Preferred Stock (approximately 35% assuming exercise of the Carlyle Warrants). GE will own approximately 37% of the voting power of the Common Stock assuming the conversion of the Series B Preferred Stock and the Series C Preferred Stock and assuming the Second Closing occurs (approximately 39% assuming exercise of the GE Warrants). Presently, the Board consists of seven directors, five of whom are Common Stock Directors and two of whom are Series B Directors. GE intends to elect its Preferred Stock Director as of the Second Closing. The vacancy created for the Joint Director has not yet been filled. The Company's Certificate of Incorporation provides that the Common Stock Directors serve for three-year terms which are staggered to provide for the election of approximately one-third of the Board members each year. The term of the Class I directors (which will include the Joint Director) expires at the next annual stockholders' meeting, the term of the Class II directors expires at the 1998 annual meeting and the term of the Class III directors expires at the 1999 annual meeting. The terms of the two Series B Directors will coincide with the terms of the Class I and Class III directors, respectively, and the term of the Series C Director will coincide with the term of the Class II directors. 2 Certain information about the Company' s directors is set forth in the following table:
NAME AGE CURRENT POSITION TERM TO EXPIRE YEAR FIRST - ----- ---- ---------------- --------------- ELECTED TO SERVE COMMON STOCK DIRECTORS: --------- E. Larry Atkins 50 President and Chief Executive Officer and Director, Class I 1997 1996 Grant R. Chamberlain 32 Director, Class II 1998 1996 Frank E. Egger 53 Chairman of the Board and Director, Class III 1999 1996 Leonard H. Habas 54 Director, Class III 1999 1996 Ronald G. Pantello 53 Director, Class II 1998 1996 PREFERRED STOCK DIRECTORS: David W. Dupree 44 Series B Director 2000 1997 Glenn A. Youngkin 30 Series B Director 1998 1997
E. Larry Atkins has been a director and president and chief executive officer of the Company since February 23, 1996. Mr. Atkins joined AHS in 1986 and has served as AHS's president and chief executive officer since August 1990 and chairman of the board from December 1990 to June 1992. Mr. Atkins served as executive vice president and chief operating officer of AHS from 1986 to August 1990. Mr. Atkins became a director of AHS in 1988. From 1979 to 1986, Mr. Atkins served as president and chief executive officer of AMI Diagnostic Services, a wholly owned subsidiary of American Medical International, Inc. Grant R. Chamberlain has been a director of the Company since July 19, 1996. Since April 1995, Mr. Chamberlain has been a vice president of Shattuck Hammond Partners, Inc., an investment banking firm based in New York City. From April 1991 to April 1995, he served as manager of strategic investments and restructurings for GE. Frank E. Egger has been chairman of the board and a director of the Company since February 23, 1996. Mr. Egger was a director of AHS from August 1991 until June 26, 1996. He was appointed chairman of the board of AHS in May 1995, and served as such until June 26, 1996. From 1995 through December 1996, Mr. Egger served as vice president of Kovens & Associates, Inc. ("Kovens & Associates"), a successor entity to Kovens Enterprises, where Mr. Egger served as chief financial officer from 1980 to 1995. Kovens & Associates was a group of real estate development and investment companies based in Miami, Florida. Since December 1996, Mr. Egger has been a consultant. Leonard H. Habas has been a director of the Company since February 23, 1996. From 1986 to June 26, 1996, Mr. Habas was a director of MHC. Since 1995 he has been a director , chairman of the board and chief executive officer of Advance Publishers, L.C., a book distribution company based in Winter Park, Florida. He established his own financing and consulting firm in 1987, which he continues to own. Mr. Habas is also a director of Dick Davis Digest and CeraMed Corporation. Ronald G. Pantello has been a director of the Company since February 23, 1996. From 1993 to June 26, 1996, Mr. Pantello was a director of MHC. He is a founding partner of Lally, McFarland & Pantello, an advertising agency specializing in the health care industry, based in New York City, and has been its chief executive officer since 1980. David W. Dupree is a Managing Director of The Carlyle Group, a Washington, D.C. based merchant banking firm, where he has been employed since 1992. From 1990 to 1992, Mr. Dupree was a principal in Corporate Finance, Private Placements, with Montgomery Securities. From 1988 to 1990, he was Vice President-Corporate Finance and Co-Head of Equity Private Placements at Alex. Brown & Sons, Incorporated. Mr. Dupree managed the Corporate Finance Department and served on the Management Advisory Committee at Johnston Lemon & Co., Incorporated, a regional investment banking 3 firm based in Washington, D.C. from 1983 to 1988. Mr. Dupree is also a director of Care Systems Corporation, Pharmaceutical Research Associates, Inc., and Whole Foods Market, Inc. Glenn A. Youngkin is a Vice President at The Carlyle Group, where he has been employed since 1995. Mr. Youngkin was a consultant with McKinsey & Company, a global management consulting firm from 1994 to 1995. From 1990 to 1992, Mr. Youngkin worked in the Natural Resource Group of CS First Boston where he structured and executed merger and acquisition transactions and capital market financings. In fiscal 1997, the Board of Directors held four meetings at which all the directors were present. In addition, the Board of Directors took action by unanimous written consent eight times. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During fiscal 1997, the Company's Compensation Committee consisted of two non-employee directors, Messrs. Habas (co-chairman) and Pantello (co-chairman). The Compensation Committee is responsible for determining the specific forms and levels of compensation of the Company's executive officers, and administering the Company's 1996 Employee Stock Option Plan and 1996 Directors' Stock Option Plan, AHS's 1987 Stock Option Plan, AHS's 1992 Option and Incentive Plan, and MHC's 1989 Stock Option Plan. COMPENSATION OF DIRECTORS. The members of the Board who are not employees of the Company receive an annual director fee of $15,000 and options to purchase InSight Common Stock for their services as directors, as provided in the Company's 1996 Directors' Stock Option Plan ("Directors' Plan"). On March 28, 1996, the Company entered into a consulting agreement with Mr. Egger pursuant to which Mr. Egger receives $100,000 per year for services rendered to the Company in connection with its acquisition and financing activities. See "Item 11 - Employment Agreements and Severance Agreements" and "Item 13 - -Certain Relationships and Related Transactions." The Directors' Plan provided for the automatic grant at the effective time of the Merger to each non-employee director then serving on the Board of an option to purchase 15,000 shares of InSight Common Stock at an exercise price equal to the fair market value of such stock on the date of the grant. In addition, each new director of the Company who commences service after the effective time of the Merger will be granted an option to purchase 15,000 shares of InSight Common Stock. The initial grants vest monthly on a pro rata basis over a three-year period, so long as the individual remains a director of the Company or is an employee or independent contractor of the Company or any of its subsidiaries. At the end of such three-year period and annually thereafter during the term of the Directors' Plan, so long as the individual remains a director, he or she will be granted an option to purchase 5,000 shares of InSight Common Stock. These additional grants vest monthly over one year on the same terms as the initial grants. These options expire ten years from the date of grant. In accordance with this formula, on June 26, 1996, each of Messrs. Egger, Habas and Pantello were granted options to purchase 15,000 shares of InSight Common Stock at an exercise price of $5.37 per share. In addition, on July 19, 1996, Mr. Chamberlain was granted an option to purchase 15,000 shares of InSight Common Stock at an exercise price of $7.00 per share. On July 17, 1997, the Company issued to each of Messrs. Chamberlain, Egger, Habas and Pantello a warrant to purchase 15,000 shares of InSight Common Stock at an exercise price of $4.56 per share. The warrants vest cumulatively at the rate of 416.66 shares per month and are exercisable at any time up to July 17, 2000. EXECUTIVE OFFICERS For fiscal 1997, the executive officers of the Company, together with the year in which they were appointed to their current positions, are set forth below: EXECUTIVE OFFICER AGE POSITION YEAR - ----------------- ----- --------- ----- E. Larry Atkins 50 President, Chief Executive Officer 1996 and Director Glenn P. Cato 44 Senior Executive Vice President and 1996 Chief Operating Officer Thomas V. Croal 38 Executive Vice President, Chief Financial Officer and Secretary 1996 Michael A. Boylan 41 Senior Vice President-Operations 1996 Michael D. Cragin 50 Senior Vice President-Operations 1996 4 Brian G. Drazba 36 Senior Vice President-Finance and 1996 Corporate Controller Robert N. LaDouceur 53 Senior Vice President-Operations 1996 Deborah M. MacFarlane 42 Senior Vice President-Marketing 1996 Robert J. Armstrong 60 Vice President-Design and Construction 1996 T. Michael Henderson 53 Vice President-Business Development 1997 Information concerning Mr. Atkins is set forth above under "The Board of Directors Following The Recapitalization." Glenn P. Cato has been senior executive vice president and chief operating officer of the Company since February 23, 1996. Mr. Cato has served as president and chief executive officer of MHC since March 1994 and served as secretary from 1993 until June 26, 1996. From 1989 to 1994, he served as senior vice president and chief financial officer of MHC. Thomas V. Croal has been executive vice president, chief financial officer and secretary of the Company since February 23, 1996. Mr. Croal served as a director of AHS from March 1991 until June 26, 1996. He has served as vice president and chief financial officer of AHS since April 1991. He was controller of AHS from 1989 until April 1991. In December 1990, Mr. Croal was appointed corporate secretary. From 1981 to 1989, Mr. Croal was employed by Arthur Andersen & Co., an independent public accounting firm. Michael A. Boylan has been senior vice president-operations of the Company since February 23, 1996. Mr. Boylan has served as executive vice president of MHC since March 1994. From 1992 to 1994, he served as a regional vice president of MHC's principal operating subsidiary, Maxum Health Services Corp. ("MHSC"). From 1991 to 1992, he served as an executive director of certain of MHC's operations. From 1986 to 1991, Mr. Boylan served in various capacities as an officer or employee, including president and chief operating officer, with American Medical Imaging Corporation. Michael D. Cragin has been senior vice president-operations of the Company since February 23, 1996. Mr. Cragin has served as regional vice president, western operations of AHS since he joined AHS in May 1994. From 1989 to 1994, he was Director of Professional Business Affairs at Saint John's Hospital, Santa Monica, California. Brian G. Drazba was elected senior vice president-finance of the Company on July 18, 1997. From March 28, 1996 he served as vice president-finance of the Company. Since June 1995, he has served as vice president, finance of AHS. Mr. Drazba served as corporate controller for AHS from 1992 to 1995. From 1985 to 1992, Mr. Drazba was employed by Arthur Andersen & Co. Robert N. LaDouceur has been senior vice president-operations of the Company since February 23, 1996. Mr. LaDouceur has served as executive vice president of MHC since March 1994. From 1992 to 1994, he served as a regional vice president of MHSC. From 1991 to 1992, he served as an executive director of certain of MHC's operations. From 1984 to 1991, Mr. LaDouceur served in various capacities as an officer or employee, including vice president, with Glassrock Home Health Care. Deborah M. MacFarlane has been senior vice president-marketing of the Company since March 28, 1996. Since July 1991, she has served as vice president, marketing of AHS. From 1987 until June 1991, Ms. MacFarlane served as director of marketing for the Center Operating Group of Medical Imaging Centers of America, Inc. Robert J. Armstrong has been vice president-design and construction of the Company since March 28, 1996. Since 1985, Mr. Armstrong has been vice president, design and construction of AHS. Mr. Armstrong served as director of design and construction of AHS from 1983 to 1985. T. Michael Henderson has been vice president-business development of the Company since February 10, 1997. From 1996 to February 1997, Mr. Henderson was director of strategic accounts for Toshiba America Medical Systems, Inc. From 1992 to 1996, Mr. Henderson was president of International Medical Resources, Inc., an international marketer of medical equipment. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") requires the Company's directors and officers and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and the National 5 Association of Securities Dealers, Inc. Directors and officers and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of the reports they file. Based solely on the review of the copies of such reports and written representations from certain persons that certain reports were not required to be filed by such persons, the Company believes that all its directors, officers and greater than 10% beneficial owners complied with all filing requirements applicable to them with respect to transactions for the period July 1, 1996 through June 30, 1997, except that Mr. Henderson failed to timely file an Initial Statement of Beneficial Ownership of Securities on Form 3, and Mr. Egger failed to file timely a Statement of Changes in Beneficial Ownership on Form 4 reporting the grant of a warrant; when it was brought to their attention, Mr. Henderson promptly filed a Form 3 and Mr. Egger promptly filed a Form 4, disclosing these inadvertent omissions. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Because (i) the Company was not a reporting company pursuant to Section 13(a) or 15(d) of the Exchange Act until June 26, 1996, (ii) its fiscal year ended shortly thereafter on June 30, 1996 and (iii) each of its predecessors, MHC and AHS, were reporting companies and have reported executive compensation information through the year ended December 31, 1995, the following table sets forth information concerning the annual, long-term and all other compensation for services rendered in all capacities to the Company, its subsidiaries and predecessors for the years ended December 31, 1995 and 1994, the six months ended June 30, 1996 and the year ended June 30, 1997 of (i) the Company's Chief Executive Officer and (ii) the four most highly compensated executive officers (other than the chief executive officer) of the Company (the "Other Executive Officers") whose aggregate cash compensation exceeded $100,000 for the year ended June 30, 1997
Summary Compensation Table Long-Term All Other Annual Compensation Compensation Comp(3) ----------------------------------------------------------- Awards Name and Principal Stock Options Position Period Salary(1) Bonus(2) Other(3) (Shares) - --------- --------- ----------- --------- ----------- ----------- --------- E. Larry Atkins Year ended 1997 $246,400 $86,000 $2,160 100,000 $11,040 President and Chief Six months ended Executive Officer June 30, 1996 123,200 -- 5,250 -- 4,691 Year ended 1995 246,400 61,600 4,680 175,000 7,882 Year ended 1994 220,000 54,000 3,789 -- 9,327 Glenn P. Cato Year ended 1997 180,000 54,000 9,000 25,000 13,296 Senior Executive Vice Six months ended President and Chief June 30, 1996 97,500 10,000 3,000 -- -- Operating Officer Year ended 1995 172,500 20,000 6,000 30,000 3,158 Year ended 1994 143,750 71,875 4,500 57,500 1,751 Thomas V. Croal Year ended 1997 175,230 53,000 2,340 25,000 9,804 Executive Vice Six months ended President, Chief June 30, 1996 87,615 -- 4,500 -- 2,669 Financial Officer and Year ended 1995 175,230 43,808 4,742 125,000 5,252 Corporate Secretary Year ended 1994 148,500 38,000 4,836 -- 3,519 Robert N. LaDouceur Year ended 1997 165,000 36,000 7,800 10,000 8,169 Senior Vice Six months ended President-Operations June 30, 1996 82,500 10,000 3,900 -- -- Year ended 1995 165,000 20,000 6,400 30,000 3,072 Year ended 1994 165,000 82,500 5,400 35,000 1,751 6 Michael A. Boylan Year ended 1997 165,000 36,000 7,800 10,000 5,509 Senior Vice Six months ended President-Operations June 30, 1996 81,865 25,000 3,900 -- -- Year ended 1995 165,000 20,000 6,400 30,000 -- Year ended 1994 165,000 82,500 5,400 35,000 -- --------------- -------- ------- ------- ---------- ---------
(1) Includes amounts for periods during which the chief executive officer and the Other Executive Officers of the Company, whose aggregate cash compensation exceeded $100,000, served as executive officers of AHS or MHC, which are now wholly owned subsidiaries of the Company. (2) Annual bonuses are earned and accrued during the fiscal years indicated, and paid subsequent to the end of each fiscal year. (3) Amounts of Other Annual Compensation include perquisites (auto allowances and commissions for contract awards and renewals) and amounts of All Other Compensation include (i) amounts contributed to the Company's, MHC's or AHS's 401(k) profit sharing plans, as the case may be, (ii) specified premiums on executive split-dollar insurance arrangements, and (iii) specified premiums on executive health insurance arrangements, for the chief executive officer and the Other Executive Officers of the Company. OPTION GRANTS The following table sets forth information concerning options granted to each of the chief executive officer and the Other Executive Officers of the Company during the year ended June 30, 1997.
Individual Grants ----------------------------------------------------- % of Total Number of Options Potential Realizable Securities Granted to Value at Assumed Underlying Employees Exercise Annual Rates of Stock Options in Price Per Expiration Price Appreciation for Name Granted Fiscal Year Share (2) Date (3) Option Term (1) - ------ --------- ------------- ---------- -------- ----------------- 5% 10% E. Larry Atkins 100,000 46% $6.25 10-02-2006 $393,059 $996,089 Glenn P. Cato 25,000 11% 6.25 10-02-2006 98,265 249,022 Thomas V. Croal 25,000 11% 6.25 10-02-2006 98,265 249,022 Robert N. LaDouceur 10,000 5% 6.25 10-02-2006 39,306 99,609 Michael A. Boylan 10,000 5% 6.25 10-02-2006 39,306 99,609
(1) Potential realizable value is determined by taking the exercise price per share and applying the stated annual appreciation rate compounded annually for the remaining term of the option (ten years), subtracting the exercise price per share at the end of the period and multiplying the remaining number by the number of options granted. Actual gains, if any, on stock option exercises and InSight Common Stock holdings are dependant on the future performance of InSight Common Stock and overall stock market conditions. (2) All options were granted at fair market value (the closing price reported on NASDAQ Small Cap Market for InSight Common Stock). (3) Options granted in fiscal 1997 are exercisable starting twelve (12) months after the grant date, with 25% of the shares becoming exercisable at that time and with an additional 25% of the shares becoming exercisable on each 7 successive anniversary date, with full vesting occurring on the fourth anniversary date. The options were granted for a term of ten years, subject to earlier termination in certain events related to termination of employment. No stock options were granted under any stock option plan of either AHS or MHC, to the chief executive officer and the Other Executive Officers of the Company. OPTION EXERCISES AND FISCAL YEAR-END VALUES During the year ended June 30, 1997, neither of the chief executive officer nor the Other Executive Officers of the Company exercised any stock options. The following table sets forth information with respect to the unexercised stock options to purchase InSight Common Stock granted, under (i) MHC's and AHS's stock option plans and assumed by the Company pursuant to the Merger, and (ii) the Company's 1996 Employee Stock Option Plan, to the chief executive officer and the Other Executive Officers of the Company as of June 30, 1997. Number of Unexercised Value of Unexercised Options Held at In-the-Money Options at Name June 30, 1997 June 30, 1997 -------------------------- --------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- E. Larry Atkins 10,500 107,000 $ 18,375 $ 12,250 Glenn P. Cato 52,325 25,000 195,819 -- Thomas V. Croal 7,500 30,000 13,125 8,750 Robert N. LaDouceur 38,870 10,000 144,260 -- Michael A. Boylan 38,870 10,000 144,260 -- -------- ------- --------- ----------- (1) Based on the closing price reported on NASDAQ Small Cap Market for InSight Common Stock on that date of $4.25. INDEMNIFICATION AGREEMENTS The Company has entered into separate indemnification agreements with each of its directors and officers that could require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and officers and to advance expenses incurred by them as a result of any proceedings against them as to which they could be indemnified. The Recapitalization agreements also contain provisions for the indemnification of the Company's directors under certain circumstances. The agreements pursuant to which the Carlyle Stockholders and GE acquired Series B Preferred Stock and Series C Preferred Stock, respectively, provide that the Company will indemnify, defend and hold harmless the Carlyle Stockholders and GE, as the case may be, and their respective affiliates, directors, officers, advisors, employees and agents to the fullest extent lawful from and against all demands, losses, damages, penalties, claims, liabilities, obligations, actions, causes of action and reasonable expenses ("Losses') arising out of the agreements or the related transactions or arising by reason of or resulting from the breach of any representation, warranty, covenant or agreement of the Company contained in such agreements for the period for which such representation or warranty survives; provided, however, that the Company does not have any liability to indemnify the Carlyle Stockholders or GE with respect to Losses arising from the bad faith or gross negligence of the Carlyle or GE indemnified party. The Recapitalization agreements provide that no claim may be made by the Carlyle Stockholders or GE against the Company for indemnification until the aggregate dollar amount of all Losses incurred by the Carlyle Stockholders or GE, as applicable, exceeds $250,000 and the indemnification obligations of the Company shall be effective only until the dollar amount paid in respect of the Losses incurred by the Carlyle Stockholders or GE, as applicable, and indemnified against aggregates to an amount equal to $25 million, except with respect to Losses resulting from the breaches of certain representations or covenants, which are unlimited in amount. 8 EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS The Company has entered into executive employment agreements with its chief executive officer, the Other Executive Officers and Messrs. Cragin, Drazba and Henderson and Ms. MacFarlane, which provide for rolling twelve (12) month periods of employment, and severance compensation equal to 12 months of compensation at his or her annual salary rate then in effect, in the event the executive's employment is terminated (i) because of physical or mental disability, (ii) because of discretionary action of the Board of InSight, or (iii) voluntarily by the executive due to a "Change of Control." A "Change of Control" will have occurred if (a) the Company or its stockholders enter into an agreement to dispose of, whether by sale, exchange, merger, consolidation, reorganization, dissolution or liquidation, (i) not less than 80% of the assets of the Company or (ii) a portion of the outstanding InSight Common Stock such that one person or "group" (as defined by the SEC) owns, of record or beneficially, not less than 50% of the outstanding InSight Common Stock; or (b) one person or "group" (as defined by the SEC) acquires not less than 18% of the Post-Conversion Common Stock (as defined below). However, a Change of Control will not have occurred if GE converts its Series A Preferred Stock into InSight Common Stock. "Post-Conversion Common Stock" means the outstanding InSight Common Stock issuable, at the time a determination is made, upon conversion of the outstanding Series A Preferred Stock. In the event that the executive's employment is terminated for cause, he or she has no right to receive any severance compensation under his or her employment agreement. In consideration for such severance compensation, each executive has agreed not to solicit, entice, divert or otherwise contact any customer or employee of InSight for any provision of services which constitute "Company Business" during the period that the executive is receiving severance compensation or for a period of 12 months after the executive's termination of employment, whichever is later. "Company Business" means the development and operation, at times together with other healthcare providers, of outpatient facilities which provide diagnostic services in the areas of general radiology, MRI, cardiology and neurosciences utilizing the related equipment and computer programs and software and various distribution methods and investment structures. Mr. Egger, a director and chairman of the board, has entered into a consulting agreement with InSight providing for compensation at the rate of $100,000 per year. Mr. Egger's agreement provides for severance compensation equal to 12 months of compensation in the event the agreement is terminated as a result of (i) Mr. Egger becoming physically or mentally disabled, (ii) discretionary action of the Board of InSight, or (iii) a corporate reorganization that has the effect of diminishing or impairing Mr. Egger's consulting responsibilities. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the beneficial ownership, reported to the Company as of October 14, 1997, of InSight's Common Stock, including shares as to which a right to acquire ownership exists (for example, through the exercise of stock options and warrants and conversions of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock within the meaning of Rule 13d-3(d)(1) under the Exchange Act), of (i) each person known to the Company to own beneficially 5% or more of InSight Common Stock, (ii) each director of the Company, (iii) the Company's executive officers, and (iv) all directors and executive officers, as a group. NAME AND ADDRESSES OF AMOUNT AND NATURE PERCENT OF BENEFICIAL OWNERS OF BENEFICIAL COMMON STOCK ------------------- OWNERSHIP OF BENEFICIALLY COMMON STOCK (1) OWNED (1) ---------------- ----------- Carlyle Stockholders (2) 3,235,075 54.4% 1001 Pennsylvania Avenue, N.W. Suite 220 South Washington, D.C. 20004 General Electric Company (3) 3,587,581 56.9% 20825 Swenson Drive Suite 100 Waukesha, WI 53186 E. Larry Atkins (4) 47,600 1.7% 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 9 Grant R. Chamberlain (5) 7,083 * 620 Fifth Avenue - Suite 2950 New York, NY 10111 Frank E. Egger (6) 52,804 1.9% 10301 S.W. 13th Street Pembroke Pines, FL 33025 Leonard H. Habas (7) 39,925 1.5% 501 S. New York Avenue - Suite 210 Winter Park, FL 32789 David W. Dupree (8) 0 0 1001 Pennsylvania Avenue, N.W. Suite 220 South Washington, D.C. 20004 Glenn A. Youngkin (9) 0 0 1001 Pennsylvania Avenue, N.W. Suite 220 South Washington, D.C. 20004 Estate of Cal Kovens (10) 482,031 17.4% 9999 Collins Avenue #1K Bal Harbour, FL 33154 Roz Kovens (11) 563,276 20.3% 9999 Collins Avenue #1K Bal Harbour, FL 33154 Ronald G. Pantello (12) 25,440 * 60 Madison Avenue New York, NY 10010 Glenn P. Cato (13) 58,575 2.1% 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Thomas V. Croal (14) 15,250 * 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Michael A. Boylan (15) 41,370 1.5% 110 Gibraltar Road Horsham, PA 18901 Robert N. LaDouceur (16) 41,370 1.5% 11011 King Street - Suite 240 Overland Park, KS 66210 Robert J. Armstrong (17) 0 0 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Michael D. Cragin (18) 3,750 * 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 10 Brian G. Drazba (19) 2,000 * 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 T. Michael Henderson (20) 0 0 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Deborah M. MacFarlane (21) 3,750 * 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Tammy M. Morita (22) 0 0 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Susan E. Arnheiter (23) 0 0 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Cecilia A. Guastaferro (24) 0 0 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Joseph F. Denninger (25) 8,970 * 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 Julia E. Krikorian (26) 0 0 4400 MacArthur Boulevard - Suite 800 Newport Beach, CA 92660 All directors and executive officers as a group (21 persons) (27) 347,887 11.6% * Less than 1% of the outstanding Common Stock. (1) For purposes of this table, a person is deemed to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after October 14, 1997. (2) The information in the table is based upon the Schedule 13D filed with the SEC by the Carlyle Stockholders on October 24, 1997. Represents shares of Common Stock issuable upon conversion of all 25,000 shares of Series B Preferred Stock (convertible into 2,985,075 shares of Common Stock) and exercise of the Carlyle Warrants (exercisable for 250,000 shares of Common Stock) held by the Carlyle Stockholders, which Stockholders are comprised of the entities listed in the following sentence. The cumulative Carlyle Stockholders ownership figure represents (i) 3,235,075 shares beneficially owned by Carlyle Partners II, L.P., including 8,208 shares of Series B Preferred Stock (convertible into 980,028 shares of Common Stock) and Carlyle Warrants to purchase 82,077 shares of Common Stock with respect to which it has disposal power, and 3,235,075 shares with respect to which it shares voting power; (ii) 3,235,075 shares beneficially owned by Carlyle Partners III, L.P., including 375 shares of Series B Preferred Stock (convertible into 44,732 shares of Common Stock) and Carlyle Warrants to purchase 3,764 shares of Common Stock with respect to which it has disposal power, and 3,235,075 shares with respect to which it shares voting power; (iii) 896,526 shares beneficially owned by Carlyle International Partners II, L.P., including 6,928 shares of Series B Preferred Stock (convertible into 827,244 shares of Common Stock) and Carlyle Warrants to purchase 69,282 shares of Common Stock with respect to which it has disposal power and shares voting power; (iv) 48,304 shares beneficially owned by Carlyle International Partners III, L.P., including 373 shares of Series B Preferred Stock (convertible into 44,571 shares of Common Stock) and Carlyle Warrants to purchases 3,733 shares of Common Stock with respect to which it has disposal power and shares voting power; (v) 11 201,857 shares beneficially owned by C/S International Partners, including 1,559 shares of Series B Preferred Stock (convertible into 186,258 shares of Common Stock) and Carlyle Warrants to purchase 15,599 shares of Common Stock with respect to which it has disposal power and shares voting power; (vi) 1,115 shares beneficially owned by Carlyle Investment Group, L.P., including 9 shares of Series B Preferred Stock (convertible into 1,029 shares of Common Stock) and Carlyle Warrants to purchase 86 shares of Common Stock with respect to which it has disposal power and shares voting power; (vii) 118,902 shares beneficially owned by Carlyle-InSight International Partners, L.P., including 919 shares of Series B Preferred Stock (convertible into 109,714 shares of Common Stock) and Carlyle Warrants to purchase 9,178 shares of Common Stock with respect to which it has disposal power and shares voting power; (viii) 3,235,075 shares beneficially owned by Carlyle-InSight Partners, L.P. including 3,181 shares of Series B Preferred Stock (convertible into 379,863 shares of Common Stock) and Carlyle Warrants to purchase 31,813 shares of Common Stock with respect to which it has disposal power and 3,235,075 shares with respect to which it shares voting power; and (ix) 446,404 shares beneficially owned by Carlyle Investment Management, L.L.C. acting as investment advisor and manager with responsibility to invest certain assets of the State Board of Administration of the State of Florida ("State Board"), including 3,448 shares of Series B Preferred Stock (convertible into 411,658 shares of Common Stock) and Carlyle Warrants to purchase 34,746 shares of Common Stock with respect to which it has disposal power and shares voting power. TC Group, L.L.C. may be deemed to share voting and disposal power with respect to, and therefore be the beneficial owner of, 3,235,075 shares of Common Stock as the general partner of Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle Investment Group, L.P., and Carlyle-InSight Partners, L.P., and as the managing partner of Carlyle International Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, and Carlyle-InSight International Partners II, L.P. TCG Holdings, L.L.C., as a member holding a controlling interest in TC Group, L.L.C., may be deemed to share all rights herein described belonging to TC Group, L.L.C. Furthermore, because certain managing members of TCG Holdings, L.L.C, are also managing members of Carlyle Investment Management, L.L.C., Carlyle Investment Management, L.L.C. may be deemed to be part of the Carlyle Stockholders and consequently, TCG Holdings, L.L.C. may be deemed the beneficial owner of the shares of Common Stock controlled by Carlyle Investment Management, L.L.C. The principal business address of TC Group, L.L.C. and TCG Holdings, L.L.C. is c/o The Carlyle Group, 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington, D.C. 20004. The principal business address of Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle Investment Group, L.P., Carlyle-InSight Partners, L.P., and Carlyle Investment Management, L.L.C. is Delaware Trust Building, 900 Market Street, Suite 200, Wilmington, Delaware 19801. The principal business address of Carlyle International Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, and Carlyle-InSight International Partners, L.P. is Coutts & Co., P.O. Box 707, Cayman Islands, British West Indies. The Carlyle Stockholders own all of the outstanding shares of the Series B Preferred Stock. (3) The information in the table is based upon Amendment No. 1 to Schedule 13D filed by GE with the SEC on October 23, 1997. Represents shares of Common Stock issuable upon (i) conversion of all 2,501,760 shares of Series A Preferred Stock (convertible into 2,501,760 shares of Common Stock) and 7,000 shares of Series C Preferred Stock (convertible into 835,821 shares of Common Stock) held by GE and (ii) exercise of the GE Warrants (exercisable for 250,000 shares of Common Stock). GE is obligated to exchange the shares of Series A Preferred Stock for 20,953 shares of Series C Preferred Stock (convertible into 2,501,851 shares of Common Stock) at the Second Closing. GE owns all of the outstanding shares of Series A Preferred Stock and Series C Preferred Stock. (4) Includes options to purchase 10,500 shares of Common Stock at an exercise price of $2.50 per share and (ii) options to purchase 25,000 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 7,000 shares of Common Stock at an exercise price of $2.50 per share, (ii) options to purchase 75,000 shares of Common Stock at an exercise price of $6.25 per share, and (iii) options to purchase 50,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (5) Includes (i) options to purchase 5,833 shares of Common Stock at an exercise price of $7.00 per share and (ii) warrants to purchase 1,250 shares of Common Stock at an exercise price of $4.56 per share. Does not include options to purchase 9,167 shares of Common Stock at an exercise price of $7.00 per share and (ii) warrants to purchase 13,750 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (6) Includes (i) options to purchase 6,250 shares of Common Stock at an exercise price of $5.37 per share, (ii) options to purchase 1,800 shares of Common Stock at an exercise price of $2.50 per share, (iii) options to purchase 2,000 shares of Common Stock at an exercise price of $16.20 per share, (iv)warrants to purchase 2,268 shares of 12 Common Stock at an exercise price of $5.64 per share, and (v) warrants to purchase 1,250 shares of Common Stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 9,750 shares of Common Stock at an exercise price of $5.37 per share, (ii) options to purchase 1,200 shares of Common Stock at an exercise price of $2.50 per share and (iii) warrants to purchase 13,750 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. 19,218 shares of Common Stock and the warrants listed in clause (iv) of the first sentence of this footnote are pledged to the estate of Cal Kovens as security for the repayment of a loan. If the loan is not repaid when due, the estate of Mr. Kovens would have the right to sell such of the pledged securities as are necessary to satisfy such indebtedness. (7) Includes (i) options to purchase 6,250 shares of Common Stock at an exercise price of $5.37 per share, (ii) options to purchase 4,485 shares of Common Stock at an exercise price of $15.84 per share, (iii) options to purchase 8,970 shares of Common Stock at an exercise price of $1.25 per share, (iv) options to purchase 8,970 shares of Common Stock at an exercise price of $0.10 per share and (v) warrants to purchase 1,250 shares of Common Stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 8,750 shares of Common Stock at an exercise price of $5.37 per share and (ii) warrants to purchase 13,750 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (8) Mr. Dupree is a Managing Member of TCG Holdings, L.L.C. Mr. Dupree's interest in TCG Holdings, L.L.C. is not controlling and thus Mr. Dupree expressly disclaims any beneficial ownership in the Common Stock beneficially owned by TCG Holdings, L.L.C. (9) Mr. Youngkin is an employee of The Carlyle Group and holds no economic interest in either TC Group L.L.C. or TCG Holdings, L.L.C., and as such expressly disclaims any beneficial ownership in the Common Stock beneficially owned by any of the Carlyle Stockholders. (10) The information in the table is based upon Amendment No. 1 to Schedule 13D filed with the SEC on July 9, 1996. Includes (i) warrants to purchase 20,000 shares of Common Stock at an exercise price of $2.50 per share and (ii) warrants to purchase 33,645 shares of Common Stock at an exercise price of $5.64 per share. (11) The information in the table is based upon Amendment No. 1 to Schedule 13D filed with the SEC on July 9, 1996. Includes (i) warrants to purchase 7,660 shares of Common Stock at an exercise price of $5.64 per share, (ii) options to purchase 1,800 shares of Common Stock at an exercise price of $2.50 per share and (iii) by virtue of her status as personal representative of the estate of Cal Kovens, the 482,031 shares beneficially owned thereby. (12) Includes (i) options to purchase 6,250 shares of Common Stock at an exercise price of $5.37 per share, (ii) options to purchase 8,970 shares of Common Stock at an exercise price of $1.25 per share, (iii) options to purchase 8,970 shares of Common Stock at an exercise price of $0.10 per share and (iv) warrants to purchase 1,250 shares of Common Stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 8,750 shares of Common Stock at an exercise price of $5.37 per share and (ii) warrants to purchase 13,750 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (13) Includes (i) options to purchase 25,415 shares of Common Stock at an exercise price of $0.42 per share, (ii) options to purchase 8,970 shares of Common Stock at an exercise price of $0.10 per share, (iii) options to purchase 17,940 shares of Common Stock at an exercise price of $0.84 per share and (iv) options to purchase 6,250 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 18,750 shares of Common Stock at an exercise price of $6.25 and (ii) options to purchase 30,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (14) Includes (i) options to purchase 7,500 shares of Common Stock at an exercise price of $2.50 per share and (ii) options to purchase 6,250 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 18,750 shares of Common Stock at an exercise price of $6.25 per share and (ii) options to purchase 25,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable, (15) Includes (i) options to purchase 11,960 shares of Common Stock at an exercise price of $0.42 per share, (ii) options to purchase 8,970 shares of Common Stock at an exercise price of $0.10 per share, (iii) options to purchase 17,940 shares of Common Stock at an exercise price of $0.84 per share and (iv) options to purchase 2,500 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 7,500 13 shares of Common Stock at an exercise price of $6.25 per share and (ii) options to purchase 10,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (16) Includes (i) options to purchase 11,960 shares of Common Stock at an exercise price of $0.42 per share, (ii) options to purchase 8,970 shares of Common Stock at an exercise price of $0.10 per share, (iii) options to purchase 17,940 shares of Common Stock at an exercise price of $0. 84 per share and (iv) options to purchase 2,500 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 7,500 shares of Common Stock at an exercise price of $6.25 and (ii) options to purchase 10,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (17) Does not include options to purchase 10,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (18) Includes options to purchase 3,750 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 11,250 shares of Common Stock at an exercise price of $6.25 per share and (ii) options to purchase 10,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (19) Includes options to purchase 2,000 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 6,000 shares of Common Stock at an exercise price of $6.25 per share and (ii) options to purchase 10,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (20) Does not include (i) options to purchase 10,000 shares of Common Stock at an exercise price of $4.75 per share and (ii) options to purchase 5,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (21) Includes options to purchase 3,750 shares of Common Stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 11,250 shares of Common Stock at an exercise price of $6.25 per share and (ii) options to purchase 10,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (22) Does not include options to purchase 5,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (23) Does not include options to purchase 5,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (24) Does not include options to purchase 5,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (25) Includes (i) options to purchase 2,990 shares of Common Stock at an exercise price of $15.64 per share, (ii) options to purchase 4,485 shares of Common Stock at an exercise price of $0.10 per share and (iii) options to purchase 1,495 shares of Common Stock at an exercise price of $0.16 per share. Does not include options to purchase 5,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (26) Does not include options to purchase 5,000 shares of Common Stock at an exercise price of $4.56 per share, which are not currently exercisable. (27) Assumes the exercise in full of options or warrants described in footnotes (4) through (9) and (12) through (26) that are currently exercisable or that will become exercisable within 60 days of October 14, 1997. Except as otherwise noted, the Company believes that each of the stockholders listed in the table above has sole voting and dispositive power over all shares owned. POSSIBLE FUTURE BOARD CHANGES Pursuant to the terms of the Series B Preferred Stock and the Series C Preferred Stock (collectively, the "Preferred Stock"), the number of directors is currently fixed at nine, including six Common Stock Directors (one of whom is the Joint Director) who are to be elected by the Common Stock holders (without the participation of the Preferred Stock holders), and three Preferred Stock Directors, two of whom (the "Series B Directors") are to be elected by the 14 Series B Preferred Stock holders and one of whom (the "Series C Director") is to be elected by the Series C Preferred Stock holders. There are currently seven directors, including five Common Stock Directors and two Series B Directors. GE intends to fill the Series C Director vacancy as of the date of the Second Closing. The Joint Director vacancy has not yet been filled. Thus, the Common Stock holders currently are entitled to elect a majority of the Board. Under certain circumstances, the holders of the Series D Preferred Stock (which is issuable only on conversion of the Series B Preferred Stock and the Series C Preferred Stock) would be entitled to elect a majority of the Board. If, at any time on or after the first anniversary of the initial funding under the Bank Financing (which occurred on October 22, 1997) ("Trigger Date"), a majority of the holders of each of the Series B Preferred Stock and the Series C Preferred Stock elect to convert such stock into Series D Preferred Stock, then all shares of Series B Preferred Stock and Series C Preferred Stock will automatically be converted into shares of Series D Preferred Stock on the date of such election ("Conversion Date"). Immediately following such conversion, the number of members of the Board will be increased by the smallest number of directors ("Conversion Directors") such that the percentage of the total Board represented by the Conversion Directors and the Preferred Stock Directors ("Series D Directors") would correspond to the percentage of Common Stock owned by the Series D Preferred Stock holders on an as-if-converted basis, provided that the Series D Directors shall constitute less than two-thirds of the Board. In such event, the Preferred Stock Directors would remain on the Board and the vacancies created for the Conversion Directors would be filled by the Series D Preferred Stock holders. The percentage of the outstanding Common Stock currently owned by the Series B Preferred Stock holders, assuming conversion of all of the outstanding Series B Preferred Stock and Series C Preferred Stock, is approximately 33% and the percentage of the outstanding Common Stock currently owned by the Series C Preferred Stock holders, assuming conversion of all of the outstanding Series B Preferred Stock and Series C Preferred Stock, is approximately 37%. If such Preferred Stock were converted into Series D Preferred Stock on or after the Trigger Date, the aggregate percentage of Common Stock owned by the Series D Preferred Stock holders would be approximately 70%. Thus, as a result of such conversion, designees of the Series D Preferred Stock holders would constitute a majority (but less than two-thirds) of the Board. The holders of Series D Preferred Stock will have the right to vote with the holders of Common Stock with respect to all matters submitted to a stockholder vote except, until the second annual meeting of stockholders after the Conversion Date, for the election of directors. At and after the second annual stockholders meeting, the positions of all directors whose terms have expired will be subject to election by holders of Common Stock and Series D Preferred Stock voting together as a class, with each share of Series D Preferred Stock having the number of votes equal to the number of shares of Common Stock into which such share is then convertible. Notwithstanding the foregoing, if the Conversion Date is prior to October 14, 1999, then from the Conversion Date until the second subsequent annual stockholders meeting, except as provided in the next sentence, none of the following transactions may be effected by the Company, and neither the Carlyle Stockholders, GE, nor any other holder of Series D Preferred Stock shall participate in such transactions, if any transferee of the Carlyle Stockholders or GE or any other person referred to in the following clauses beneficially owns five percent (5%) or more of the Company's voting shares: (i) any merger or consolidation of the Company or any of its subsidiaries with or into such person; (ii) any sale, lease, exchange or other disposition of all or any substantial part of the assets of the Company or any of its subsidiaries to such other person; (iii) the issuance or delivery of any voting securities of the Company or any of its subsidiaries to such other person in exchange for cash, other assets or securities, or a combination thereof; or (iv) any dissolution or liquidation of the Company. The foregoing prohibition shall not apply with respect to a transaction approved by (i) at least 80% of the Company's outstanding voting shares (which includes the Common Stock and the Series D Preferred Stock) or (ii) at least two-thirds of the Company's directors (which must include, to the extent still a director, either (A) the Joint Director, if such Joint Director served in such position as of the Conversion Date or has been approved by a majority of the directors who were Common Stock Directors as of the Conversion Date, or (B) at least one director who was a Common Stock Director prior to the Conversion Date). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH THE ESTATE OF CAL KOVENS In February 1992, AHS purchased a Gamma Knife from Elekta to be located in California and made a deposit toward the purchase of another Gamma Knife. AHS received nonrecourse interim financing of $2,000,000 toward the acquisition of the Gamma Knife and the deposit for the other Gamma Knife from Cal Kovens (a director until his death on February 6, 1995). The interim financing was borrowed from Mr. Kovens pursuant to the terms of a nonrecourse promissory note secured by the Gamma Knife and due August 24, 1992, at an interest rate of 10.5% per annum. Mr. Kovens extended the term of the note while AHS sought to obtain permanent financing. 15 In December 1992, AHS's wholly owned subsidiary, Radiosurgery Centers, Inc. ("RCI"), entered into a five-year loan of $2,750,000 with City National Bank of Florida ("City National Bank"), and the promissory note in favor of Mr. Kovens was repaid from the proceeds of such loan in the first quarter of 1993. The new loan was guaranteed by Mr. Kovens and his spouse, Roz Kovens. During the second half of fiscal 1993, Mr. Kovens repurchased RCI's promissory note from City National Bank. Pursuant thereto, Mr. Kovens was paid approximately $195,000 in interest in fiscal 1993. In early 1993, RCI, AHS and Elekta became involved in a dispute when RCI advised Elekta that it intended to relocate the Gamma Knife it purchased for a location in California to Miami, Florida, since in December 1992, RCI had entered into an agreement with Public Health Trust, an agency and instrumentality of Metropolitan Dade County, Florida, to establish and operate a Gamma Knife center at Jackson Memorial Hospital Medical Center located in Miami. The parties settled their claims and, pursuant to the terms thereof, Mr. Kovens agreed to guarantee certain scheduled payments of $250,000 to be made by RCI to Elekta in connection with the delivery of the Gamma Knife to Miami, which payment has been made by RCI. In February 1994, RCI entered into a new five-year loan of $2,900,000 with County National Bank of South Florida. Mr. Kovens was repaid from the proceeds of such new bank loan in the first quarter of 1994. This loan was guaranteed by Mr. Kovens and secured by certain real property owned by Mr. Kovens. Effective March 1, 1996, RCI refinanced the remainder of the equipment loan (approximately $2,075,000) with GE on terms substantially equivalent to the original equipment loan. The loan is secured by all of the assets of the Gamma Knife center. The loan was also secured by a letter of credit of $400,000 which was guaranteed by the estate of Cal Kovens until September 30, 1997. On February 4, 1997, GE permitted the estate of Cal Kovens to substitute securities in exchange for the letter of credit. In November 1994, AHS issued Mr. Kovens a warrant to purchase 200,000 shares of AHS Common Stock at $0.25 per share in consideration of the Gamma Knife financing activities discussed above. Pursuant to the terms of the Merger, InSight assumed the warrant which, after the applicable exchange ratio, became a warrant to purchase 20,000 shares of InSight Common Stock at the exercise price of $2.50 per share. The warrant is exercisable at any time up to November 14, 1997. TRANSACTIONS WITH FRANK E. EGGER Since July 1, 1996, Mr. Egger has been paid $100,000 per year for acquisition and financing activities pursuant to a consulting agreement. In the event the agreement is terminated as a result of (i) Mr. Egger becoming physically or mentally disabled, (ii) discretionary action of the Board of InSight, or (iii) a corporate reorganization that has the effect of diminishing or impairing Mr. Egger's consulting responsibilities, he is entitled to a severance compensation equal to 12 months of compensation. Pursuant to certain agreements among InSight, AHS and the holders of AHS Series B Preferred Stock, InSight issued to Mr. Egger on August 9, 1996 a warrant to purchase 2,268 shares of InSight Common Stock at the exercise price of $5.64 per share. The warrant is exercisable at any time up to August 9, 2001. In addition, subject to certain conditions, Mr. Egger, and other holders, have certain "piggyback" registration rights to register the shares subject to the warrants under the Securities Act. See "Transactions with Holders of AHS Series B Preferred Stock." TRANSACTIONS WITH GE GE, as the primary creditor of AHS and Maxum, had from time to time granted AHS and Maxum certain financial accommodations with respect to certain loans and leases. In exchange for such accommodations, AHS and Maxum issued certain considerations to GE. As a prerequisite to the consummation of the Merger, certain financial accommodations were provided by GE, the primary creditor of each of AHS and Maxum, and its affiliates. As a result, certain debt and operating lease obligations of AHS and Maxum were reduced in exchange for, among other things, the issuance to GE immediately prior to the consummation of the Merger of AHS Series C Preferred Stock and Maxum Series B Preferred Stock. At the effective time of the Merger, the AHS Series C Preferred Stock and Maxum Series B Preferred Stock issued to GE was converted into the right to receive such number of shares of InSight Series A Preferred Stock which were convertible into InSight Common Stock representing approximately 48% of InSight Common Stock outstanding at the effective time of the Merger (after giving effect to such conversion). 16 In addition, as part of the granting of certain financial accommodations contemplated to be provided by GE, at the effective time of the Merger, warrants previously issued to GE by AHS to acquire 1,589,072 shares of AHS Common Stock, and warrants previously issued to GE by Maxum to acquire 700,000 shares of Maxum Common Stock, were canceled. Furthermore, GE had the right to receive for ten years annual payments ("Supplemental Service Fee") under its maintenance agreements with InSight, AHS and Maxum equal to 14% of InSight pre-tax income, subject to certain adjustments, and further subject to proportional reductions for certain post-Merger acquisitions. InSight terminated the Supplemental Service Fee on October 14, 1997 as part of the Recapitalization in exchange for the issuance to GE of 7,000 shares of Series C Preferred Stock. TRANSACTIONS WITH HOLDERS OF AHS SERIES B PREFERRED STOCK Pursuant to certain agreements among InSight, AHS and the holders of AHS Series B Preferred Stock, the holders of Series B Preferred Stock agreed to waive any rights to dividends, liquidation preferences, voting and redemption they might have had in connection with the Merger and certain other rights. In consideration therefor, upon the consummation of the Merger, InSight issued to such holders, including Mr. Egger, Roz Kovens and the estate of Cal Kovens, warrants to purchase an aggregate of 50,000 shares of InSight Common Stock at the exercise price of $5.64 per share. The warrants are exercisable at any time up to August 9, 2001. In addition, subject to certain conditions, the holders have certain "piggy-back" registration rights to register the shares subject to the warrants under the Securities Act. TRANSACTIONS WITH SHATTUCK HAMMOND PARTNERS On August 14, 1996, the Company entered into an agreement with Shattuck Hammond Partners, Inc. ("SHP"), an investment banking firm located in New York in which a director of the Company, Mr. Chamberlain, is a vice president, pursuant to which SHP will provide general strategic advisory and investment banking services. The term of the agreement commenced July 1, 1996 and extends through December 31, 1997. The Company is obligated to pay SHP $180,000, payable in quarterly installments of $30,000. SHP is also entitled to separately negotiated fees for certain mergers or acquisitions. In connection with the Recapitalization, the Company has agreed to pay SHP a fee of $500,000 for providing certain advisory services. In addition, the Company also issued SHP a warrant to purchase 35,000 shares of InSight Common Stock at an exercise price of $5.50 per share. The warrant vests cumulatively on a monthly basis over the 18 month term of the agreement. The warrant is exercisable at any time up to August 14, 2000. In addition, SHP has certain "piggy-back" registration rights to register the shares subject to the warrant under the Securities Act. FINANCIAL ADVISORY AND PLACEMENT FEES In connection with the Recapitalization, the Company paid to each of the Carlyle Stockholders and GE a placement fee of $125,000, reimbursed the Carlyle Stockholders and GE an aggregate of $500,000 for reasonable out-of-pocket expenses incurred and agreed to pay each of the Carlyle Stockholders and GE an annual financial advisory fee equal to $50,000, payable quarterly, for a two-year period. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused the amendment to 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 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, the amendment to 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 - ----------- ------------- ----------- Director, President and October 28, 1997 /S/ E. LARRY ATKINS Chief Executive Officer - ---------------------- E. Larry Atkins (Principal Executive Officer) Executive Vice President and October 28, 1997 /S/ THOMAS V. CROAL Chief Financial Officer - ---------------------- Thomas V. Croal (Principal Accounting Officer) Director October 28, 1997 /S/ GRANT R. CHAMBERLAIN - ---------------------- Grant R. Chamberlain Director October 28, 1997 /S/ DAVID W. DUPREE - ---------------------- David W. Dupree Director October 28, 1997 /S/ FRANK E. EGGER - ---------------------- Frank E. Egger Director October __, 1997 - ---------------------- Leonard H. Habas Director October __, 1997 - ---------------------- Ronald G. Pantello Director October __, 1997 - ---------------------- Glenn A. Youngkin 18 -----END PRIVACY-ENHANCED MESSAGE-----