-----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, O0cwrGcEmUSUFF6WovCdkSVzm4OQ5u3K94yqeXxzkHCHxoVhjUL6Uyo/Yv/ewyMZ YxEROFG538T6cc4bYM2JFQ== 0001047469-98-029249.txt : 19980805 0001047469-98-029249.hdr.sgml : 19980805 ACCESSION NUMBER: 0001047469-98-029249 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19980804 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: S-4 SEC ACT: SEC FILE NUMBER: 333-60573 FILM NUMBER: 98676713 BUSINESS ADDRESS: STREET 1: 4440 VON KARMAN AVENUE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9494760733 MAIL ADDRESS: STREET 1: 4440 VON KARMAN AVE STE 800 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- INSIGHT HEALTH SERVICES CORP. (Exact name of Registrant as specified in its charter) DELAWARE 8071 33-0702770 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
-------------------------- SEE TABLE OF ADDITIONAL REGISTRANTS ------------------------------ 4400 MACARTHUR BOULEVARD SUITE 800 NEWPORT BEACH, CALIFORNIA 92660 (949) 476-0733 (Address, including zip code, and telephone number of Registrant's principal executive offices) ------------------------------ MR. THOMAS V. CROAL SENIOR EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER 4400 MACARTHUR BOULEVARD SUITE 800 NEWPORT BEACH, CALIFORNIA 92660 (949) 476-0733 (Name, address, including zip code, and telephone number of agent for service) THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO: GERALD P. MCCARTIN, ESQ. ARENT FOX KINTNER PLOTKIN & KAHN, PLLC 1050 CONNECTICUT AVENUE, N.W. WASHINGTON, D.C. 20036 (202) 857-6000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. / / If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED TO BE REGISTERED UNIT(2) PRICE(2) REGISTRATION FEE 9 5/8% Series B Senior Subordinated Notes due 2008(1) $100,000,000 100% $100,000,000 $29,500
(1) The Subsidiary Guarantees (as defined below) of the payment of principal and interest on the Notes are also being registered hereby. Pursuant to Rule 457(n) under the Securities Act, no registration fee is required with respect to the Subsidiary Guarantees. (2) Estimated solely for purposes of calculating the registration fee. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF ADDITIONAL REGISTRANTS
STATE OR OTHER JURISDICTION OF PRIMARY STANDARD INCORPORATION INDUSTRIAL IRS EMPLOYER OR CLASSIFICATION CODE IDENTIFICATION NAME ORGANIZATION NUMBER NUMBER - -------------------------------------------------------------- --------------- ------------------- ------------- InSight Health Corp........................................... Delaware 8071 52-1278857 Radiosurgery Centers, Inc..................................... Delaware 8071 33-0522445 Maxum Health Services Corp.................................... Delaware 8071 75-2135957 Quest Financial Services, Inc................................. Delaware 8071 75-2327889 MTS Enterprises, Inc.......................................... Texas 8071 75-227322 DiagnosTemps, Inc............................................. Delaware 8071 75-2482470 Maxum Health Corp............................................. Delaware 8071 75-2287276 Maxum Health Services of North Texas, Inc..................... Texas 8071 75-2435797 NDDC, Inc..................................................... Texas 8071 75-2407830 Diagnostic Solutions Corp..................................... Delaware 8071 75-2565249 Maxum Health Services of Arlington, Inc....................... Texas 8071 75-2576423 Maxum Health Services of Dallas, Inc.......................... Texas 8071 75-2615132 Open MRI, Inc................................................. Delaware 8071 94-3251529 Radiology Services Corp....................................... Delaware 8071 33-0771659 Mississippi Mobile Technology, Inc............................ Mississippi 8071 64-0769460 Signal Medical Services, Inc.................................. Delaware 8071 33-0802413
The address, including zip code and telephone number, including area code, of each of the above Registrant's principal executive offices is: 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660, (949) 476-0733. THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH OR TO ANY PERSON TO WHOM SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 4, 1998 PROSPECTUS $100,000,000 OFFER FOR ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OF [LOGO] HEALTH SERVICES CORP. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. InSight Health Services Corp., a Delaware corporation (the "Company") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (which together constitute the "Exchange Offer"), to exchange an aggregate principal amount of up to $100,000,000 of 9 5/8% Series B Senior Subordinated Notes Due 2008 (the "Exchange Notes") of the Company, which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement (as defined herein) of which this Prospectus constitutes a part, for a like principal amount of 9 5/8% Senior Subordinated Notes Due 2008 (the "Outstanding Notes" and, with the Exchange Notes, the "Notes") of the Company with the holders (the "Holders") thereof. The terms of the Exchange Notes are identical in all material respects to the Outstanding Notes except for certain transfer restrictions and registration rights relating to the Outstanding Notes and except that, if the Exchange Offer is not consummated on or prior to December 9, 1998 or a shelf registration statement is not declared effective when required, the Company will pay liquidated damages to each Holder of Outstanding Notes for the first 90 days following such date in an amount equal to $.05 per week per $1,000 principal amount of Outstanding Notes held by such Holder. The amount of liquidated damages will increase by an additional $.05 per week per $1,000 principal amount of Outstanding Notes at the beginning of each subsequent 90-day period until the Exchange Offer is consummated or the shelf registration is declared effective, up to a maximum amount of liquidated damages of $.30 per week per $1,000 principal amount of Outstanding Notes. The Exchange Notes are offered hereunder in order to satisfy certain obligations of the Company under the Purchase Agreement dated as of June 9, 1998 (the "Purchase Agreement") among the Company, the existing Subsidiary Guarantors (as defined below) and the initial purchasers of the Outstanding Notes (the "Initial Purchasers") and the Registration Rights Agreement dated June 12, 1998 (the "Registration Rights Agreement") among the Company, the existing Subsidiary Guarantors and the Initial Purchasers. The Exchange Notes evidence the same debt as the Outstanding Notes and are issued under and are entitled to the same benefits under the Indenture (as defined herein) as the Outstanding Notes. In addition, the Exchange Notes and the Outstanding Notes are treated as one series of securities under the Indenture. The net proceeds from the issuance of the Outstanding Notes, together with the net proceeds of the term loan portion of the Senior Credit Facilities (as defined herein), were used by the Company to repay existing indebtedness of the Company under the Senior Credit Facilities and for general corporate purposes. The Notes mature on June 15, 2008, unless previously redeemed. Interest on the Notes is payable semiannually on June 15 and December 15, commencing December 15, 1998. The Notes are redeemable at the option of the Company, in whole or in part, on or after June 15, 2003, at the redemption prices set forth herein, plus accrued and unpaid interest thereon, if any, to the Redemption Date (as defined herein). Notwithstanding the foregoing, at any time on or prior to June 15, 2001, the Company may redeem up to 35% of the sum of (i) the initial aggregate original principal amount of Notes and (ii) the initial aggregate principal amount of any Additional Notes (as defined herein) with the net proceeds of one or more Equity Offerings (as defined herein) at a redemption price equal to 109.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date; provided that at least 65% of the sum of (i) the initial aggregate principal amount of Notes and (ii) the initial aggregate principal amount of any Additional Notes remains outstanding immediately after the occurrence of such redemption. Upon a Change of Control (as defined herein), the Company will be required to offer to repurchase all outstanding Notes at 101% of the unpaid principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. The Notes are unsecured senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Company, including borrowings under the Senior Credit Facilities. The Notes rank PARI PASSU with all existing and future senior subordinated indebtedness of the Company and rank senior to all other existing and future subordinated indebtedness of the Company. The Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated basis (the "Subsidiary Guarantees") by all existing and future subsidiaries of the Company (other than Permitted Joint Ventures (as defined herein)) (collectively, the "Subsidiary Guarantors"). The Notes are also effectively subordinated to all existing and future Senior Indebtedness of the Subsidiary Guarantors. As of March 31, 1998, after giving pro forma effect to the acquisition of Signal Medical Services, Inc. ("Signal"), the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Notes and the application of the net proceeds therefrom, the Company would have had $53.4 million of Senior Indebtedness outstanding and $100 million available to be borrowed under the Senior Credit Facilities, all of which would be Senior Indebtedness, and the Subsidiary Guarantors would have had $53.4 million of Senior Indebtedness outstanding, all of which would have represented guarantees of indebtedness under the Senior Credit Facilities. SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. The Exchange Notes will be issued in the form of a global note (the "Global Note"), which will be deposited with, or on behalf of, the Depositary (as defined herein) and registered in the name of the Depositary or its nominee. Except as set forth herein, owners of beneficial interests in the Global Note will not be entitled to have the Exchange Notes represented by the Global Note registered in their names, will not receive or be entitled to receive physical delivery of certificated Exchange Notes in definitive form and will not be considered to be the owners or holders of any Exchange Notes under the Global Note. Payment of principal of and interest on Exchange Notes represented by the Global Note registered in the name of and held by the Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner and holder of the Global Note. See "Description of Notes -- Book Entry, Delivery and Form." The Company is making the Exchange Offer in reliance on the position of the staff of the Securities and Exchange Commission (the "Commission") as set forth in certain no-action letters addressed to other parties in other transactions. However, the Company has not sought its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Based upon these interpretations by the staff of the Commission, the Company believes that Exchange Notes issued pursuant to this Exchange Offer in exchange for Outstanding Notes may be offered for resale, resold and otherwise transferred by a holder thereof, other than (i) a broker-dealer who purchased such Outstanding Notes directly from the Company for resale pursuant to Rule 144A or other available exemptions under the Securities Act of 1933, as amended (the "Securities Act") or (ii) a person that is an "affiliate" (as defined in Rule 405 of the Securities Act) of the Company, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in the distribution of such Exchange Notes. Holders of Outstanding Notes accepting the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may not rely on the position of the staff of the Commission as set forth in these no-action letters and would have to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. A secondary resale transaction in the United States by a holder who is using the Exchange Offer to participate in the distribution of Exchange Notes must be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K under the Securities Act. Each broker-dealer (other than an "affiliate" of the Company) that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Outstanding Notes as a result of market-making activities or other trading activities and will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period (the "Exchange Offer Registration Period") the longer of (A) the period until consummation of the Exchange Offer and (B) two years after the effectiveness of the Registration Statement (as defined herein) (unless, in the case of (B), all resales of Exchange Notes covered by the Registration Statement have been made), the Company will make this Prospectus, as amended or supplemented, available to any such broker-dealer for use in connection with any such resale; provided, however, that the Company shall not be required to maintain the effectiveness of the Registration Statement for more than 60 days following the consummation of the Exchange Offer unless the Company has been notified in writing on or prior to the 60th day following the consummation of the Exchange Offer by one or more broker-dealers that such holder has received Exchange Notes as to which it will be required to deliver this Prospectus upon resale. See "Plan of Distribution." Any broker-dealer i who is an affiliate of the Company may not rely on such no-action letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transactions. See "Exchange Offer." There is currently no market for the Exchange Notes. Although the Initial Purchasers have informed the Company that they currently intend to make a market in the Exchange Notes, they are not obligated to do so, and any such market-making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Exchange Notes. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). Any Outstanding Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the rights and preferences and will be subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the holders of Outstanding Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Outstanding Notes held by them. To the extent that Outstanding Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Outstanding Notes could be adversely affected. It is not expected that an active market for the Outstanding Notes will develop while they are subject to restrictions on transfer. The Company will accept for exchange any and all Outstanding Notes that are validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the date the Exchange Offer expires, which will be , 1998 (the "Expiration Date"), unless the Exchange Offer is extended by the Company, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Tenders of Outstanding Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date, unless previously accepted for payment by the Company. The Exchange Offer is not conditioned upon any minimum principal amount of Outstanding Notes being tendered for exchange. However, the Exchange Offer is subject to certain conditions which may be waived by the Company and to the terms and provisions of the Registration Rights Agreement. The Exchange Notes will bear interest from the last interest payment date of the Outstanding Notes to occur prior to the issue date of the Exchange Notes or, if no such interest has been paid, from June 12, 1998. Holders of the Outstanding Notes whose Outstanding Notes are accepted for exchange will not receive interest on such Outstanding Notes for any period subsequent to the last interest payment date to occur prior to the issue date of the Exchange Notes or, if no such interest has been paid, from June 12, 1998, and will be deemed to have waived the right to receive any interest payment on the Outstanding Notes accrued from and after such date. ii NOTE REGARDING FORWARD-LOOKING INFORMATION The information contained in this Prospectus contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which are identified by the use of forward-looking terminology such as "may," "will," "could," "should," "expect," "anticipate," "intend," "plan," "estimate" or "continue" or the negative thereof or other variations thereof. Such forward-looking statements are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, regulatory, judicial and other governmental authorities and officials. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements under the caption "Risk Factors" beginning on page 13 of this Prospectus or in the reports, proxy statements, and other information referred to in "Available Information" constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those reflected in such forward-looking statements. MARKET SHARE DATA Except as otherwise indicated, the market share data presented herein are based upon estimates by management of the Company, utilizing various third party sources, where available. While management believes that such estimates are reasonable and reliable, in certain cases, such estimates cannot be verified by information available from independent sources. Accordingly, no assurance can be given that such market share data are accurate in all material respects. ------------------------ AVAILABLE INFORMATION The Company is subject to certain of the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files reports and other information with the Commission. Reports, proxy statements and other information filed by the Company with the Commission can be inspected without charge and copied, upon payment of prescribed rates, at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048, and the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports, proxy statements and other information concerning the Company are also available for inspection at the offices of The Nasdaq SmallCap Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. Copies of such material and any part thereof are also available by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, and via the Commission's address on the World Wide Web at http://www.sec.gov. In addition, the Indenture provides that whether or not the Company is subject to the reporting requirements of the Exchange Act, the Company will furnish without cost to each holder of Notes and file with the Commission and the Trustee copies of the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to Section 13(a) and 15(d) of the Exchange Act or any successor provision thereto if the Company were so required. This Prospectus constitutes a part of a registration statement on Form S-4 (together with all amendments thereto, the "Registration Statement") filed by the Company and the Subsidiary Guarantors with the Commission under the Securities Act. This Prospectus, which forms a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. Separate iii financial statements of the Subsidiary Guarantors are not presented because the Company's management has determined that they would not be material to investors. Reference is hereby made to the Registration Statement and related exhibits and schedules filed therewith for further information with respect to the Company and the Subsidiary Guarantors and the Exchange Notes offered hereby. Statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. iv SUMMARY THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "INSIGHT" REFER TO INSIGHT HEALTH SERVICES CORP., ITS CONSOLIDATED SUBSIDIARIES, PARTNERSHIPS AND LIMITED LIABILITY COMPANIES, INCLUDING SIGNAL, AND REFERENCES TO THE COMPANY'S "SUBSIDIARIES" REFER TO THE COMPANY'S CONSOLIDATED SUBSIDIARIES, PARTNERSHIPS AND LIMITED LIABILITY COMPANIES, INCLUDING SIGNAL. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "PRO FORMA TRANSACTIONS" REFER TO PRO FORMA RESULTS FOR THE COMPANY AFTER GIVING EFFECT TO THE ISSUANCE OF THE OUTSTANDING NOTES, THE BORROWING UNDER THE TERM LOAN PORTION OF THE SENIOR CREDIT FACILITIES AND THE APPLICATION OF THE NET PROCEEDS THEREFROM, THE RECAPITALIZATION (AS DEFINED HEREIN) AND THE ACQUISITIONS OF SIGNAL AND MOBILE IMAGING CONSORTIUM, LIMITED PARTNERSHIP AND MOBILE IMAGING CONSORTIUM--NEW HAMPSHIRE (TOGETHER, "MIC") AND THE OTHER ACQUISITIONS REFERRED TO HEREIN (EXCLUDING THE ACQUISITIONS OF MOUNTAIN DIAGNOSTICS AND REDWOOD CITY MRI) DURING THE RELEVANT PERIOD AS IF THEY HAD OCCURRED AT THE BEGINNING OF THE RELEVANT PERIOD. SEE "SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA." SEE ALSO "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS. THE COMPANY The Company is a leading nationwide provider of diagnostic imaging and related information services, including magnetic resonance imaging ("MRI"), computed tomography ("CT"), mammography, ultrasound, x-ray and lithotripsy services. The Company believes it is unique in its ability to offer a broad continuum of diagnostic imaging services, ranging from single modality mobile services to comprehensive multi-modality diagnostic imaging centers to the joint ownership and management of the multi-modality radiology department of a hospital or multi-specialty physician group. The breadth of the Company's services allows it to meet the diverse and developing needs of its customers, which include leading health care providers such as managed care organizations, hospitals, radiologists and insurance companies. InSight delivers these services through strong regional networks of diagnostic imaging facilities, which will continue to be the principal method of development for the Company. The Company believes its regional networks increase its economies of scale and enhance its appeal to managed care organizations, thereby increasing its overall scan volume. The Company has a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio), and provides its services through 50 fixed site imaging facilities ("Fixed Facilities"), including 16 multi-modality imaging centers ("Multi-Modality Centers"), and 51 mobile imaging facilities ("Mobile Facilities"). For the twelve months ended March 31, 1998, MRI services accounted for approximately 77% of the Company's total revenues. The Company was formed in June 1996 as a result of the merger (the "Merger") of American Health Services Corp. ("AHS") and Maxum Health Corp. ("MHC"), two publicly held providers of diagnostic imaging services. The Merger was consummated in order to achieve cost savings, enhanced marketing capabilities, increased market presence and greater financial resources, and to take advantage of the positive consolidating trends in the diagnostic imaging industry. Under the leadership of its experienced management team, the Company has successfully implemented its business strategy and capitalized on the business strengths afforded by the Merger through a geographically disciplined growth strategy focused on providing the highest quality, most cost-effective diagnostic information within its regional diagnostic imaging networks. The Company's operating profits have increased during each of the seven quarters since the Merger (excluding a one-time non-cash charge of $6.3 million incurred in connection with the Recapitalization) due in part to its successful integration of seven acquisitions and increases in scan volumes at its existing facilities. For the twelve months ended March 31, 1998, after giving effect to the Pro Forma Transactions, the Company had revenues of $135.3 million and adjusted EBITDA of $38.1 million. 1 DIAGNOSTIC IMAGING INDUSTRY OVERVIEW Diagnostic imaging uses non-surgical techniques to generate representations of internal structures and organs on film or video. The Company believes that diagnostic imaging services accounted for 1997 revenues in the United States in excess of $50 billion, constituting approximately 5% of total health care spending. The Company believes that outpatient diagnostic imaging services, including MRI services, accounted for approximately $6 billion of revenues in the United States in 1996, which is the most recent year for which such information is available. The approximately 4,000 MRI systems in the United States include approximately 2,400 hospital-owned systems, 1,000 independent fixed site systems and 600 mobile systems. MRI uses high strength magnetic fields and radio waves to produce cross-sectional images of the anatomy, enabling physicians to differentiate between internal organs, structures and tissues, thereby facilitating the early diagnosis of diseases and disorders. MRI frequently lessens the cost and amount of care needed and often eliminates the need for invasive diagnostic procedures. MRI is the preferred imaging modality for the brain, the spine and soft tissue because it produces a superior image and does not expose patients to ionizing radiation. As a result of MRI's increasing cost efficiency and clinical effectiveness, MRI services have experienced substantial growth as measured by total scan volume, which increased at a compounded annual growth rate of 8.6% from 7.7 million in 1993 to 10.7 million in 1997. The Company believes that growth in MRI scan volumes has been attributable to increased physician acceptance, substitution of MRI for other imaging modalities (including x-ray based techniques), expanding applications for MRI technology and health care reform, which has led to a significant increase in outpatient services. The MRI services industry is highly fragmented. Recently, however, the industry has begun to undergo consolidation. The Company believes such consolidation is primarily driven by (i) economies of scale in the provision of services to a larger customer base; (ii) growth of managed care in the delivery of health care services; and (iii) the decision by many smaller, capital constrained operators to sell their MRI businesses rather than make substantial investments in new imaging systems. Despite ongoing industry consolidation, the top ten MRI service providers accounted for less than 15% of the nation's total outpatient diagnostic imaging revenues in 1996, which is the most recent year for which such information is available. COMPETITIVE STRENGTHS The Company believes it is well-positioned to take advantage of current trends in the diagnostic imaging industry and attributes its favorable market position to the following strengths: STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. InSight has developed a substantial presence in its targeted markets by forming regional networks of diagnostic imaging services that provide superior service and convenience to the Company's customers, including managed care organizations, hospitals, radiologists and insurance companies. The Company believes these networks enable InSight to increase its overall scan volume by effectively addressing its customers' demands for high-quality service, customized diagnostic information, flexible scheduling, single invoices and convenient locations. In addition, such regional networks enable the Company to benefit from enhanced economies of scale, including greater purchasing power, reduced overhead, centralized billing and more efficient use of marketing expenditures. CONTINUUM OF SERVICES. The Company believes it is unique in its ability to offer a broad continuum of diagnostic services, from single modality Mobile Facilities to comprehensive Multi-Modality Centers to the joint ownership and management of the multi-modality radiology department of a hospital or multi- specialty physician group. Through this continuum of increasing value-added services, the Company is able to meet the diverse and developing needs of its customers as their individual requirements change. 2 STRONG RELATIONSHIPS WITH HOSPITALS AND MANAGED CARE. The Company's contractual relationships with its hospital and managed care customers accounted for approximately 83% of the Company's revenues during the twelve months ended March 31, 1998. HOSPITALS. The Company has over 200 exclusive contracts with hospitals for Mobile Facility services and 13 exclusive contracts with hospitals for Fixed Facility services. The Company provides MRI services to hospitals that require such services but that do not want to incur the substantial capital investment associated with MRI systems. InSight's Mobile Facilities employ systems housed in specially designed trailers and typically operate under contracts with average terms of three years to provide a specified schedule of service on a fee-per-scan basis. The Company designs schedules for each system to rotate among multiple hospitals in a manner that optimizes equipment utilization. Since the Merger, the Company has experienced a renewal rate of approximately 85% for its Mobile Facility hospital contracts. InSight's contracts with hospitals to provide Fixed Facility and other diagnostic imaging services generally last from five to ten years. MANAGED CARE ORGANIZATIONS. The Company recognizes managed care as the driving force behind its changing customer mix and has focused its marketing efforts on appealing to what it believes are the primary concerns of managed care: quality, cost, convenience and service. As a result, the Company currently has in excess of 400 contracts with managed care organizations for diagnostic imaging services at the Company's Fixed Facilities, primarily on a discounted fee-for-service basis. The Company provides managed care organizations with "one-stop shopping" consisting of centralized scheduling, single invoices, wide geographic coverage, quality assurance and utilization management. The Company experienced a 25% increase in the number of its managed care contracts from March 31, 1997 to March 31, 1998. TECHNOLOGICALLY ADVANCED EQUIPMENT. The Company's Fixed Facilities and Mobile Facilities are operated with state-of-the-art equipment. Of the Company's 100 conventional MRI systems, 79% have a magnet strength of at least 1.0 Tesla. In addition, the Company operates 13 Open MRI systems, nine of which are less than one year old. The Company believes its technologically advanced equipment allows the Company to perform the variety and volume of scans and to produce the high quality images that its customers demand. In order to increase throughput and productivity, the Company's MRI systems are periodically upgraded with the latest software, which reduces the time per scan and improves image quality. As a result of these upgrades, the Company's maintenance capital expenditures have been stable and the Company expects such expenditures to remain stable for the foreseeable future. In addition, the Company believes it is well-positioned to benefit from new applications (e.g. mammography and stroke detection) for MRI technology. EXPERIENCED MANAGEMENT TEAM. The Company has a highly experienced senior management team with an average of 15 years industry experience. Since the Merger, management has successfully implemented the Company's business strategy, resulting in increasing quarterly operating profitability (excluding a one-time non-cash charge of $6.3 million incurred in connection with the Recapitalization). In addition, the Company's successful integration of seven acquisitions has produced increased revenues and cash flows. Management will continue to develop the Company's business strategy by growing through regional network expansion, pursuing opportunities within existing networks, focusing on managed care and introducing new products. STRONG EQUITY SPONSORSHIP. InSight enjoys strong strategic support from its equity sponsors, The Carlyle Group and General Electric Company ("GE"). In October 1997, certain affiliates of The Carlyle Group ("Carlyle") purchased $25 million of a new series of the Company's preferred stock, currently convertible into approximately 30% of the Company's common stock on a fully diluted basis, and GE exchanged its existing preferred stock for a new series of the Company's preferred stock, currently convertible into approximately 33% of the Company's common stock on a fully diluted basis. The Carlyle Group is a global investment firm which originates, structures and acts as lead equity investor in targeted industries. Designees of Carlyle and GE serve on the Company's Board of Directors (the "Board"). 3 BUSINESS STRATEGY The Company's business strategy is to further develop and expand regional diagnostic imaging networks that emphasize quality of care, produce cost-effective diagnostic information and provide superior service and convenience to its customers. The Company's strategy primarily consists of the following components: GROWTH THROUGH REGIONAL NETWORK EXPANSION. The Company intends to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing regional diagnostic imaging networks through geographically disciplined acquisitions. In addition, the Company may develop or acquire additional regional networks in strategic locations where the Company can offer a broad range of services to its customers and realize increased economies of scale. PURSUE OPPORTUNITIES WITHIN EXISTING NETWORKS. The Company will continue to market current diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume. The Company also expects to increase scan volumes as new applications develop for the Company's existing diagnostic imaging equipment. In addition, the Company's management remains focused on maximizing cost savings through increased purchasing power and the reduction of overhead. FOCUS ON MANAGED CARE. As the Company continues to strengthen its regional diagnostic imaging networks, management recognizes the importance of managed care customers and has developed specialized "one-stop shopping" for managed care organizations. InSight intends to capitalize on its existing relationships in the managed care industry and believes its regional networks and strategically located Fixed Facilities give it a significant competitive advantage in marketing to managed care organizations. NEW PRODUCT INTRODUCTIONS. The Company is currently implementing a variety of new products and services designed to further leverage its core business strengths, including: OPEN MRI SYSTEMS. The Company intends to expand beyond its existing 13 Open MRI systems by establishing Open MRI imaging services throughout its regional diagnostic imaging networks. Open MRI services allow for the diagnosis of a patient without requiring the patient to enter into a conventional large-bore MRI. The "open" application of the MRI technology offers treatment previously unavailable to certain patients, including infants, pediatric patients, claustrophobic patients, large or obese patients and patients suffering from post-traumatic stress syndrome. Certain MRI applications, such as kinematic studies, are more easily conducted in an Open MRI than in a conventional MRI. RADIOLOGY CO-SOURCE PRODUCT. The Company seeks to develop its co-sourcing product, which will involve the joint ownership and management (outsourcing) of the physical and technical operations of the multi-modality radiology department of a hospital or multi-specialty physician group. The Company believes it has the expertise to manage these operations more efficiently and cost-effectively than many hospitals and multi-specialty groups and views the co-source product as a significant opportunity to expand its products and services from the $6 billion outpatient diagnostic imaging services industry to the $50 billion diagnostic imaging services industry as a whole. 4 RECENT DEVELOPMENTS On July 21, 1998, Glenn P. Cato, the Company's Senior Executive Vice President and Chief Operating Officer, resigned and Thomas V. Croal, the Company's Executive Vice President and Chief Financial Officer, was elected Senior Executive Vice President and Chief Operating Officer to replace Mr. Cato. Mr. Croal will continue to act as the Company's Chief Financial Officer until his replacement is appointed. On June 12, 1998, concurrently with the issuance of the Outstanding Notes, the Company entered into an amendment to and restatement of the Senior Credit Facilities, pursuant to which, among other things, the Company refinanced and consolidated its prior $20 million tranche term loan and $40 million tranche term loan into a single $50 million term loan. See "Description of Senior Credit Facilities." The Company utilized a portion of the net proceeds from the sale of the Outstanding Notes, together with the net proceeds of the borrowing under the term loan portion of the Senior Credit Facilities, to repay outstanding indebtedness under the Senior Credit Facilities (including indebtedness incurred in connection with the acquisition of Signal) in the approximate aggregate amount of $114.5 million. The remainder of such proceeds were or will be used for general corporate purposes. On May 18, 1998, the Company acquired Signal, a Farmington, Connecticut based provider of mobile and fixed site MRI services, mobile lithotripsy services, fixed site CT services and other outsourced health care services. The purchase price, including the assumption of indebtedness, was $45.7 million (subject to certain post-closing adjustments). Signal operates 16 mobile MRI systems and several other diagnostic imaging systems, primarily in New England and the Southeast. ------------------------ The Company's principal executive offices are located at 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660 and its telephone number is (949) 476-0733. The Company's common stock is quoted on The Nasdaq SmallCap Market under the symbol "IHSC." EXCHANGE OFFER Securities Offered................ Up to $100,000,000 principal amount of 9 5/8% Series B Senior Subordinated Notes Due 2008, which have been registered under the Securities Act. The terms of the Exchange Notes are identical in all material respects to the Outstanding Notes except for certain transfer restrictions and registration rights relating to the Outstanding Notes and except that if the Exchange Offer has not been consummated on or prior to December 9, 1998 or a shelf registration statement is not declared effective when required, then the Company will pay liquidated damages to each Holder of Outstanding Notes for the first 90 days following such date in an amount equal to $.05 per week per $1,000 principal amount of Outstanding Notes held by such Holder. The amount of liquidated damages will increase by an additional $.05 per week per $1,000 principal amount of Outstanding Notes at the beginning of each subsequent 90-day period until the Exchange Offer is consummated or the shelf registration is declared effective, up to a maximum amount of liquidated damages of $.30 per week per $1,000 principal amount of Outstanding Notes.
5 The Exchange Offer................ The Exchange Notes are being offered in exchange for a like principal amount of Outstanding Notes. The issuance of the Exchange Notes is intended to satisfy obligations of the Company contained in the Registration Rights Agreement. The Exchange Notes evidence the same debt as the Outstanding Notes and will be issued, and holders thereof are entitled to the same benefits as holders of the Outstanding Notes, under the Indenture. Tenders, Expiration Date; Withdrawal........................ The Exchange Offer will expire at 5:00 p.m., New York City time on , 1998, or such later date and time to which it is extended. Tenders of Outstanding Notes may be withdrawn at any time prior to the Expiration Date. Any Outstanding Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer" for a description of the procedures for tendering the Outstanding Notes. Federal Income Tax Consequences... The exchange pursuant to the Exchange Offer should not result in income, gain or loss to the holders of Notes who participate in the Exchange Offer or to the Company for U.S. federal income tax purposes. See "Certain Federal Income Tax Considerations". Use of Proceeds................... There will be no proceeds to the Company from the exchange pursuant to the Exchange Offer. Exchange Agent.................... State Street Bank and Trust Company, N.A. is serving as Exchange Agent (the "Exchange Agent") pursuant to the Exchange Offer.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER The Company is making the Exchange Offer in reliance on the position of the staff of the Commission as set forth in certain no-action letters addressed to other parties in other transactions. However, the Company has not sought its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Based upon these interpretations by the staff of the Commission, the Company believes that Exchange Notes issued pursuant to this Exchange Offer in exchange for Outstanding Notes may be offered for resale, resold and otherwise transferred by a holder thereof, other than (i) a broker-dealer who purchased such Outstanding Notes directly from the Company for resale pursuant to Rule 144A or other available exemptions under the Securities Act or (ii) a person that is an "affiliate" (as defined in Rule 405 of the Securities Act) of the Company without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in the distribution of such Exchange Notes. Holders of Outstanding Notes accepting the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may not rely on the position of the staff of the Commission as set forth in these no-action letters and would have to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. A secondary resale transaction in the United States by a holder who is using the Exchange Offer to participate in the distribution of Exchange Notes must be covered by an effective registration statement containing the selling securityholder information required by Item 507 of Regulation S-K under the Securities Act. 6 Each broker-dealer (other than an "affiliate" of the Company) that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Outstanding Notes as a result of market-making activities or other trading activities and will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for the Exchange Offer Registration Period, the Company will make this Prospectus, as amended or supplemented, available to any such broker-dealer for use in connection with any such resale; provided, however, that the Company shall not be required to maintain the effectiveness of the Registration Statement for more than 60 days following the consummation of the Exchange Offer unless the Company has been notified in writing on or prior to the 60th day following the consummation of the Exchange Offer by one or more broker-dealers that such holder has received Exchange Notes as to which it will be required to deliver this Prospectus upon resale. See "Plan of Distribution". Any broker-dealer who is an affiliate of the Company may not rely on such no-action letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transactions. See "Exchange Offer." SUMMARY DESCRIPTION OF THE EXCHANGE NOTES The terms of the Exchange Notes are identical in all material respects to the Outstanding Notes except for certain transfer restrictions and registration rights relating to the Outstanding Notes and except that, if the Exchange Offer has not been consummated on or prior to December 9, 1998 or a shelf registration statement is not declared effective when required, then the Company will pay liquidated damages to each Holder of Outstanding Notes for the first 90 days following such date in an amount equal to $.05 per week per $1,000 principal amount of Outstanding Notes held by such Holder. The amount of liquidated damages will increase by an additional $.05 per week per $1,000 principal amount of Outstanding Notes at the beginning of each subsequent 90-day period until the Exchange Offer is consummated or the shelf registration is declared effective, up to a maximum amount of liquidated damages of $.30 per week per $1,000 principal amount of Outstanding Notes. The Exchange Notes will bear interest from the last interest payment date of the Outstanding Notes to occur prior to the issue date of the Exchange Notes or, if no such interest has been paid, from June 12, 1998. Holders of the Outstanding Notes whose Outstanding Notes are accepted for exchange will not receive interest on such Outstanding Notes for any period subsequent to the last interest payment date to occur prior to the issue date of the Exchange Notes or, if no such interest has been paid, from June 12, 1998, and will be deemed to have waived the right to receive any interest payment on the Outstanding Notes accrued from and after such date. 7 ISSUER............................. InSight Health Services Corp. SECURITIES OFFERED................. $100,000,000 in aggregate principal amount of 9 5/8% Series B Senior Subordinated Notes due 2008 of the Company. MATURITY DATE...................... June 15, 2008 INTEREST PAYMENT DATES............. June 15 and December 15, commencing December 15, 1998 SUBSIDIARY GUARANTEES.............. The Notes are fully and unconditionally guaranteed by each of the Subsidiary Guarantors. Each of the Subsidiary Guarantees is a guarantee of payment and not of collection. SUBORDINATION...................... The Notes are unsecured senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including borrowings under the Senior Credit Facilities. The Notes will rank PARI PASSU with all existing and future senior subordinated indebtedness of the Company and rank senior to all other existing and future subordinated indebtedness of the Company. The Subsidiary Guarantees are unsecured senior subordinated obligations of the Subsidiary Guarantors and are subordinated in right of payment to all existing and future Senior Indebtedness of the Subsidiary Guarantors, including the guarantees of indebtedness under the Senior Credit Facilities. As of March 31, 1998, after giving pro forma effect to the acquisition of Signal, the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Outstanding Notes and the application of net proceeds therefrom, the Company would have had $53.4 million of Senior Indebtedness outstanding and $100 million available to be borrowed under the Senior Credit Facilities, all of which would be Senior Indebtedness, and the Subsidiary Guarantors would have had $53.4 million of Senior Indebtedness outstanding, all of which would have represented guarantees of indebtedness under the Senior Credit Facilities. See "Risk Factors--Subordination of Notes and Subsidiary Guarantees; Asset Encumbrances." OPTIONAL REDEMPTION................ On or after June 15, 2003, the Company may redeem the Notes, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest thereon, if any, to the Redemption Date. Notwithstanding the foregoing, at any time on or before June 15, 2001, the Company may redeem up to 35% of the sum of (i) the initial aggregate original principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes with the net proceeds of one or more Equity Offerings at a redemption price equal to 109.625% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided, that at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes remains outstanding immediately after the occurrence of such
8 redemption. See "Description of Notes--Optional Redemption." MANDATORY REDEMPTION............... None, except at maturity on June 15, 2008. CHANGE OF CONTROL.................. Upon a Change of Control, the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the unpaid principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Notes--Repurchase at the Option of Holders--Change of Control." COVENANTS.......................... The Indenture pursuant to which the Notes are issued (the "Indenture") restricts among other things, the ability of the Company and the Subsidiary Guarantors to incur additional indebtedness and issue preferred stock, enter into sale and leaseback transactions, incur liens, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person, sell stock of subsidiaries, and assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. See "Description of Notes--Certain Covenants." USE OF PROCEEDS.................... The Company will not receive any proceeds from the Exchange Offer. See "Use of Proceeds."
RISK FACTORS Prospective investors should carefully consider the factors discussed in detail elsewhere in this Prospectus under the caption "Risk Factors." 9 SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The Company's summary unaudited pro forma consolidated statement of operations data for the twelve month period ended March 31, 1998, the nine months ended March 31, 1998 and the year ended June 30, 1997 are for informational purposes only and give effect to the issuance of the Outstanding Notes, the borrowing under the term loan portion of the Senior Credit Facilities and the application of the net proceeds therefrom, the October 1997 purchase by Carlyle of $25 million of a new series of the Company's preferred stock and exchange by GE of its existing preferred stock and certain other rights for a new series of the Company's preferred stock, currently convertible into approximately 30% and 33%, respectively, of the Company's common stock on a fully diluted basis (the "Recapitalization") and the acquisitions of Signal, MIC and other smaller acquisitions as if they had occurred on July 1, 1996, the beginning of the Company's most recently completed fiscal year. The following summary unaudited pro forma consolidated balance sheet data of the Company as of March 31, 1998 is based upon the Company's historical and unaudited balance sheet, Signal's historical unaudited balance sheet and after giving pro forma effect to the issuance of the Outstanding Notes, the borrowing under the term loan portion of the Senior Credit Facilities and the application of the net proceeds therefrom. The summary unaudited pro forma consolidated financial data does not purport to represent what the Company's results of operations or financial position would have been had such transactions in fact occurred at the beginning of the periods or on the date indicated. This financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto of the Company and the unaudited pro forma combined condensed statements of operations and balance sheet of the Company located elsewhere in this Prospectus.
TWELVE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED MARCH 31, MARCH 31, JUNE 30, 1998(1) 1998(1) 1997 ------------- ------------ ------------ (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues............................................................. $ 135,316 $ 102,397 $ 127,666 Gross profit......................................................... 27,507 20,827 19,078 Operating income..................................................... 16,433 12,412 11,483 Interest expense, net................................................ 12,176 8,782 11,546 Net income (loss).................................................... 3,182 2,639 (63) OTHER DATA: EBITDA (2)........................................................... $ 36,304 $ 27,795 $ 30,091 Adjusted EBITDA (3).................................................. 38,078 29,124 31,126 Cash interest expense, net........................................... 11,576 8,332 10,946 Depreciation and amortization........................................ 19,871 15,383 18,608 Capital expenditures (4)............................................. 19,928 15,233 7,102 Ratios: Adjusted EBITDA to cash interest expense, net...................... 3.3x 3.5x 2.8x Pro forma ratio of earnings to fixed charges (5)................... 1.2x 1.3x 1.0x Total net debt to adjusted EBITDA.................................. 3.0x Margins: Gross margin....................................................... 20.3% 20.3% 14.9% Operating margin................................................... 12.1% 12.1% 9.0% Adjusted EBITDA margin............................................. 28.1% 28.4% 24.4% BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents............................................ $ 40,792 Working capital...................................................... 42,668 Total assets......................................................... 211,130 Total debt, including current maturities............................. 153,351 Stockholders' equity................................................. 35,844
- ------------------------------ (1) These amounts do not include the one-time non-cash charge of approximately $6.3 million for the elimination of the GE supplemental service fee. Such charge was recorded on October 14, 1997 and was a direct result of the Recapitalization. (2) EBITDA is defined as the operating income plus depreciation and amortization. This measurement has been included herein because management believes that certain investors will find it to be a useful tool for measuring the Company's ability to meet debt service, capital expenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningful than, earnings from operations or other traditional indicators of operating performance and cash flow from operating activities. (3) Adjusted EBITDA represents EBITDA of the Company for the relevant period plus the calculated EBITDA of the Company for the relevant period with respect to the Mountain Diagnostics and Redwood City MRI acquisitions. Calculated EBITDA with respect to Mountain Diagnostics and Redwood City MRI was computed using annualized unaudited financial information. (4) Capital expenditures represent historical capital expenditures of the Company, excluding Signal, for the periods presented. (5) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of earnings before extraordinary items, income taxes and fixed charges. Fixed charges consist of interest on indebtedness, the amortization of debt issuance costs and that portion of lease rental expense representing interest. 10 SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The Merger was accounted for using the purchase method of accounting and treating MHC as the acquiror. Accordingly, the following table presents summary consolidated historical financial data of the Company for the nine months ended March 31, 1998 and 1997, the fiscal year ended June 30, 1997 and the summary pro forma combined financial data of MHC and AHS for the twelve months ended June 30, 1996, adjusted to give effect to the Merger as if it had occurred as of July 1, 1995. The summary historical information presented for each of the nine months ended March 31, 1998 and 1997 has been derived from unaudited interim consolidated financial statements of the Company, and, in the opinion of management of the Company, reflects a fair presentation of the Company's financial information. The summary historical data presented below under the caption "Statement of Operations" for the fiscal year ended June 30, 1997 are derived from the consolidated financial statements of the Company, which financial statements have been audited by Arthur Andersen LLP, independent certified public accountants, and are included elsewhere in this Prospectus. The summary pro forma combined financial data of MHC and AHS for the twelve months ended June 30, 1996 has been provided for comparison purposes only and has been derived from (i) available information and certain assumptions that management believes are reasonable and (ii) the separate unaudited financial information of each of AHS and MHC for the year ended June 30, 1996. Such financial data is provided for informational purposes only and does not purport to represent what the Company's results of operations would actually have been had the Merger in fact occurred as of July 1, 1995. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto of the Company included elsewhere in this Prospectus. The following table also presents summary historical financial data of Signal for the three months ended March 31, 1998 and 1997 and fiscal years ended December 31, 1997 and 1996. The summary historical information presented for each of the three months ended March 31, 1998 and 1997 has been derived from unaudited interim financial statements of Signal, and, in the opinion of management of the Company, reflects a fair presentation of Signal's financial information. The summary historical data presented below under the caption "Statement of Operations" for the years ended December 31, 1997 and 1996 are derived from the financial statements of Signal, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included elsewhere in this Prospectus. The following information should be read in conjunction with the financial statements and notes thereto of Signal included elsewhere in this Prospectus. 11
NINE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ---------------------------- ------------------------- INSIGHT HEALTH SERVICES CORP. 1998 1997 1997 1996 - -------------------------------------------------------- --------------- ----------- ----------- ------------ (UNAUDITED) (PRO FORMA) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues.............................................. $ 85,673 $ 68,129 $ 93,063 $ 87,720 Gross profit.......................................... 15,982 8,602 12,726 7,130 Operating income (loss)............................... 3,643(1) 3,623 5,763 (973) OTHER DATA: EBITDA (2)............................................ $ 14,313 $ 10,826 $ 15,634 $ 9,197 Adjusted EBITDA....................................... 20,622(3) 10,826 15,634 9,197 Depreciation and amortization......................... 10,670 7,203 9,871 10,170 Capital expenditures.................................. 15,233 2,407 7,102 -- Margins: Gross margin........................................ 18.7% 12.6% 13.7% 8.1% Operating margin.................................... 4.3% 5.3% 6.2% EBITDA margin....................................... 16.7% 15.9% 16.8% 10.5% BALANCE SHEET DATA (AT PERIOD END): Working capital....................................... $ 13,192 Total assets.......................................... 126,787 Total debt, including current maturities.............. 73,487 Stockholders' equity.................................. 35,844
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------------------- -------------------------- SIGNAL MEDICAL SERVICES, INC. 1998 1997 1997 1996 - ------------------------------------------------------- --------------- ----------- ----------- ------------- (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues............................................. $ 5,622 $ 5,085 $ 20,704 $ 17,852 Gross profit......................................... 1,811 1,473 5,876 4,920 Operating income..................................... 966 767 3,175 2,663 OTHER DATA: EBITDA (2)........................................... $ 2,024 $ 1,655 $ 6,851 $ 5,863 Depreciation and amortization........................ 1,058 888 3,676 3,200 Capital expenditures................................. 107 68 3,421 2,918 Margins: Gross margin....................................... 32.2% 29.0% 28.4% 27.6% Operating margin................................... 17.2% 15.1% 15.3% 14.9% EBITDA margin...................................... 36.0% 32.5% 33.1% 32.8% BALANCE SHEET DATA (AT PERIOD END): Working capital (deficit)............................ $ (24) Total assets......................................... 18,345 Total debt, including current maturities............. 7,900 Stockholders' equity................................. 3,966
- ------------------------------ (1) This amounts includes the one-time non-cash charge of approximately $6.3 million for the elimination of the GE supplemental service fee. Such charge was recorded on October 14, 1997 and was a direct result of the Recapitalization. (2) EBITDA is defined as the operating income plus depreciation and amortization. This measurement has been included herein because management believes that certain investors will find it to be a useful tool for measuring the Company's ability to meet debt service, capital expenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningful than, earnings from operations or other traditional indicators of operating performance and cash flow from operating activities. (3) Adjusted EBITDA is defined as EBITDA and the add-back of the one-time non-cash charge of approximately $6.3 million discussed above. 12 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE THE FOLLOWING FACTORS RELATING TO THE COMPANY AND THE ISSUANCE OF THE OUTSTANDING NOTES, TOGETHER WITH THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, IN EVALUATING, AND BEFORE MAKING AN INVESTMENT IN, THE EXCHANGE NOTES OFFERED HEREBY. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Outstanding Notes who do not exchange their Outstanding Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Outstanding Notes as set forth in the legend thereon as a consequence of the issuance of the Outstanding Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Outstanding Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register Outstanding Notes under the Securities Act. In addition, the tender of Outstanding Notes pursuant to the Exchange Offer may have an adverse effect upon holders of, and may increase the volatility of the market price of, the Outstanding Notes due to a reduction in liquidity. Based on interpretations by the staff of the Commission, Exchange Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes may be offered for resale, resold or otherwise transferred by Holders thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such Holders' business and such Holders have no arrangement or understanding with any person to participate in the distribution of Exchange Notes. Each Holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If any Holder is an affiliate of the Company, is engaged in or intends to engage in or has any arrangement or understanding with respect to the distribution of the Exchange Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer (other than an "affiliate" of the Company) that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Outstanding Notes as a result of market-making activities or other trading activities and will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for the Exchange Offer Registration Period, the Company will make this Prospectus, as amended or supplemented, available to any such broker-dealer for use in connection with any such resale; provided, however, that the Company shall not be required to maintain the effectiveness of the Registration Statement for more than 60 days following the consummation of the Exchange Offer unless the Company has been notified in writing on or prior to the 60th day following the consummation of the Exchange Offer by one or more broker-dealers that such holder has received Exchange Notes as to which it will be required to deliver this Prospectus upon resale. See "Plan of Distribution." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the Exchange Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. The Company does not currently intend to register or qualify the sale of the Exchange Notes in any such jurisdictions. See "Exchange Offer -- Terms of the Exchange Offer" and "Consequences of Failure to Exchange." 13 Issuance of the Exchange Notes in exchange for the Outstanding Notes pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Outstanding Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Outstanding Notes desiring to tender such Outstanding Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes for exchange. Outstanding Notes that are not tendered or that are tendered but not accepted by the Company for exchange, will, following consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof under the Securities Act and, upon consummation of the Exchange Offer, certain registration rights under the Registration Rights Agreement will terminate. SUBSTANTIAL LEVERAGE The Company has incurred substantial indebtedness to finance its acquisition strategy and to refinance outstanding indebtedness, and is highly leveraged and has significant debt service obligations. At March 31, 1998, on a pro forma basis after giving effect to the acquisition of Signal, the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Outstanding Notes and the application of the net proceeds therefrom, the Company would have had $153.4 million of consolidated indebtedness outstanding. See "Capitalization." Subject to certain limitations, the Indenture and the Senior Credit Facilities permit the Company and its subsidiaries to incur additional indebtedness. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain additional financing in the future for capital expenditures, acquisitions or general corporate purposes, including working capital, may be limited; (ii) a substantial portion of the Company's cash flow from operations will be required for debt service, thereby reducing the funds available to the Company for its operations, capital expenditures, acquisitions or other purposes; (iii) the Company's borrowings under the Senior Credit Facilities will bear interest at variable rates, which could result in higher interest expense if interest rates rise; (iv) the Company's level of indebtedness could limit its flexibility in planning for and reacting to, and make it more vulnerable to, competitive pressures and changes in industry and economic conditions generally; and (v) indebtedness incurred under the Senior Credit Facilities is scheduled to become due prior to the time any principal payments are required on the Notes and, therefore, the Company may need to refinance such indebtedness. The Company's ability to refinance the Senior Credit Facilities, if necessary, will depend on, among other things, its financial condition at the time, the restrictions in the instruments governing its then outstanding indebtedness and other factors, including general economic and market conditions, that are beyond the control of the Company. In addition, the Company's operating flexibility with respect to certain business matters will be limited by financial and restrictive covenants contained in the Indenture and the Senior Credit Facilities and the failure to comply with those covenants could have a material adverse effect on the Company. There can be no assurance that those covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in business activities that may be in its interest. See "Description of Senior Credit Facilities" and "Description of Notes." The ability of the Company to service its indebtedness, and to comply with the financial and restrictive covenants contained in the Indenture and the Senior Credit Facilities, will depend upon the Company's future performance and ability to generate cash, which are subject to financial, economic, competitive and other factors, many of which are beyond the Company's control. Based on the Company's current expectations with respect to its existing business, the Company does not expect to generate cash sufficient to repay the Notes at maturity and, accordingly, will have to refinance the Notes at their maturity. In addition, there can be no assurance that the Company will be able to generate sufficient cash to meet its other debt service obligations. If the Company is unable to generate sufficient funds to meet its debt service obligations, it may be required to refinance some of its indebtedness, to sell assets or to raise additional equity. No assurance can be given that such refinancings, asset sales or equity sales could be 14 accomplished or, if accomplished, would raise sufficient funds to meet the Company's debt service obligations. The Company's high degree of leverage and related financial covenants could have a material adverse effect on its ability to withstand competitive pressures or adverse economic conditions, to make acquisitions, to obtain future financing or to take advantage of business opportunities that may arise. SUBORDINATION OF NOTES AND SUBSIDIARY GUARANTEES; ASSET ENCUMBRANCES The Notes are general unsecured obligations of the Company, subordinated in right of payment to all of the Company's existing and future Senior Indebtedness, including borrowings under the Senior Credit Facilities. In addition, each Subsidiary Guarantee is a general unsecured obligation of the relevant Subsidiary Guarantor, and similarly subordinated in right of payment to all existing and future Senior Indebtedness of that Subsidiary Guarantor, including guarantees of indebtedness under the Senior Credit Facilities. At March 31, 1998, on a pro forma basis after giving effect to the acquisition of Signal, the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Outstanding Notes and the application of the net proceeds therefrom, the aggregate amount of Senior Indebtedness of the Company would have been approximately $53.4 million, and the aggregate amount of Senior Indebtedness of the Subsidiary Guarantors would have been $53.4 million, all of which would have represented guarantees of indebtedness under the Senior Credit Facilities. In addition, the Company would have had additional availability of $100 million for borrowings under the Senior Credit Facilities, all of which would be Senior Indebtedness, if borrowed. Additional Senior Indebtedness may be incurred by the Company and the Subsidiary Guarantors from time to time, subject to certain restrictions. See "Description of Senior Credit Facilities." In the event of the bankruptcy, liquidation or reorganization of the Company or any Subsidiary Guarantor, the assets of the Company and the Subsidiary Guarantors will be available to pay obligations on the Notes only after all Senior Indebtedness of those entities has been paid in full, following which there may not be sufficient assets remaining to pay amounts due in respect of the Notes then outstanding. In addition, under certain circumstances the Company will not be permitted to pay its obligations under the Notes in the event of a default under certain Senior Indebtedness. See "Description of Notes-- Subordination" and "--Subsidiary Guarantees." In addition, the Notes and each Subsidiary Guarantee are effectively subordinated to all secured obligations of the Company and such Subsidiary Guarantor, respectively, to the extent of the assets securing those obligations. The Senior Credit Facilities are secured by all of the capital stock of the Company's subsidiaries and substantially all of the assets of the Company and its subsidiaries. The Notes would be effectively subordinated to all existing and future indebtedness of the Subsidiary Guarantors if the Subsidiary Guarantees were avoided or subordinated in favor of the Subsidiary Guarantors' other creditors. See "--Fraudulent Conveyance Statutes." BUSINESS STRATEGY; ACQUISITIONS The ongoing acquisition of diagnostic imaging services providers is a principal component of the Company's business strategy. Accordingly, the Company is continually investigating and evaluating potential acquisition candidates. Although at present the Company has no agreements or understandings relating to any such acquisitions, it may enter into such agreements or understandings in the future, including with respect to acquisitions that may be substantial in size. In addition, the Company's expansion and acquisition strategy may require substantial capital, and no assurance can be given that the Company will be able to raise any necessary additional funds through bank financing or through the issuance of equity or debt securities on terms acceptable to the Company, if at all. Acquisitions also involve the integration of acquired operations with those of the Company. Although the Company believes it has successfully integrated such acquisitions in the past, there can be no assurance that the Company will be able to successfully integrate the operations of any future acquisitions. See "Management's Discussion and 15 Analysis of Financial Condition and Results of Operations" and "Business--Business Strategy--Growth Through Regional Network Expansion." GOVERNMENT REGULATION The health care industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretations of existing laws can have a material effect on permissible activities of the Company, the relative costs associated with doing business and the amount of reimbursement by government and other third party payors. The federal government and all states in which the Company currently operates regulate various aspects of the Company's business. Failure to comply with these laws could adversely affect the Company's ability to receive reimbursement for its services and subject the Company and its officers to penalties. See "Business--Government Regulation" for a more complete description of the following regulations and other regulations to which the Company may be subject. HEALTH CARE FRAUD AND ABUSE REGULATIONS The fraud and abuse provisions of the Social Security Act prohibit the solicitation, payment, receipt or offering of any direct or indirect remunerations in return for, or the inducement of, the referral of patients, items or services that are paid for, in whole or in part, by Medicare, Medicaid or any other federally funded health care program. These laws also impose significant penalties for false or improper billings for health care services. Violations of the fraud and abuse laws may result in substantial civil or criminal penalties, including large civil monetary penalties and exclusion from participation in Medicare, Medicaid or other federally funded health care programs. See "Business--Government Regulation--Anti-Kickback Statutes." Under another provision of the Social Security Act, known as "Stark II," physicians who refer Medicare and Medicaid patients to the Company for certain designated health care services are not permitted to have an investment interest in or a compensation arrangement with the Company, subject to specified exceptions, and the Company may not accept referrals from such physicians. Violations of Stark II may be the basis for substantial civil fines and exclusion from Medicare, Medicaid or other federally funded health care programs. See "Business--Government Regulation--Stark II; State Physician Self-Referral Laws." Many states also have enacted "anti-kickback" and "anti-referral" laws similar to those contained in the Social Security Act, as well as certain licensing requirements for the radiologists with whom the Company contracts for interpretive services. Some of these state laws are broader than their federal counterparts. For example, they may apply to the provision of health care items and services generally, not just to those covered by government-funded programs. Violations of state fraud and abuse and anti-referral laws or licensing requirements may result in civil or criminal penalties for individuals or entities, including the Company. See "Business--Government Regulation--Anti-Kickback Statutes," "--Stark II: State Physician Self-Referral Laws" and "--Radiologist Licensing." Although the Company believes that its operations materially comply with these federal and state laws, there can be no assurance that such federal and state laws will not be interpreted or changed in a manner that would have a material adverse effect on the Company's business, financial condition or results of operations. OTHER STATE HEALTH CARE REGULATIONS The laws of many states prohibit business corporations, such as the Company, from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as fee-splitting, with physicians. These laws and their interpretations vary from state to state and are typically enforced by the courts and regulatory authorities, each with broad discretion. The Company 16 provides the management, administrative and technical services associated with diagnostic imaging and the Company's position is that it does not engage in the practice of medicine. The laws of many states also require licensure or certification of diagnostic imaging equipment, and the laws of some states require the licensure or certification of diagnostic imaging centers, or define narrow exemptions from licensure requirements for diagnostic imaging centers. Although the Company believes its operations are conducted in material compliance with existing laws, there can be no assurance that such laws will not be interpreted or changed in a manner that would have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Government Regulation--Anti-Kickback Statutes." In addition, some states require hospitals and certain other health care facilities to obtain a Certificate of Need ("CON") or similar regulatory approval prior to the commencement of certain health care operations or services and/or the acquisition of major medical equipment, including MRI and Gamma Knife systems. CON regulations may limit or preclude the Company from providing diagnostic imaging services or systems in certain states. The Company believes that it will not be required to obtain CONs in most of the states in which it intends to operate and, in those states where a CON is required, the Company believes it has complied or will comply with such requirements. Nevertheless, a significant increase in the number of states regulating the Company's business within the CON or state licensure framework could adversely affect the Company's business, financial condition and results of operation. Conversely, repeal of existing CON regulations in jurisdictions where the Company has obtained or operates under a CON could also adversely affect the Company's business, financial condition and results of operation as barriers to entry are reduced or removed. This is an area of continuing legislative activity, and there can be no assurance that the Company will not be subject to CON and licensing statutes in other states in which it operates or may operate in the future. See "Business--Government Regulation-- Certificates of Need." REIMBURSEMENT OF HEALTH CARE COSTS The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain others. Providers of service are paid by the federal government in accordance with regulations promulgated by the United States Department of Health and Human Services ("HHS") and generally accept said payment, with nominal co-insurance amounts required to be paid by the service recipient, as payment in full. 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. In recent years, there have been numerous initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of health care services, including services provided by the Company. The Company believes that such initiatives may continue in the future. Among other things, in late 1997, the Clinton Administration and Congress approved the Balanced Budget Act of 1997 (the "Balanced Budget Act"), which seeks to achieve a balanced federal budget by, among other things, reducing federal spending on the Medicare and Medicaid programs and limiting reimbursement payments made to providers of diagnostic services in future years. The Company believes that such limitations on reimbursement amounts and other cost containment pressures have resulted in decreasing revenues per scan. Although scan prices appear to have stabilized, the Company expects continuing downward pressure on pricing levels. In addition, it is not clear at this time what proposals, if any, will be adopted in addition to the Balanced Budget Act or pursuant to any recommendations made to Congress by the recently formed National Bipartisan Commission on the Future of Medicare or, if any such proposals are adopted, what effect such proposals will have on the Company's business, financial condition and results of operations. There can be no assurance that changes in Medicare or Medicaid program reimbursement would not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Reimbursement of Health Care Costs--Medicare" and "--Medicaid." 17 Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs") attempt to control the cost of health care services. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. The development and expansion of HMOs, PPOs and other managed care organizations within the Company's regional networks could have a negative impact on utilization of the Company's services in certain markets and/or affect the revenue per procedure which the Company can collect. See "Business--Reimbursement of Health Care Costs--Managed Care" and "Business--Operations--Customers and Fees." In addition, the Company believes that private health insurance programs will also reduce reimbursement levels in response to reductions in government reimbursement, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Reimbursement of Health Care Costs--Private Insurance Reimbursement." DEPENDENCE ON REFERRALS FOR FIXED FACILITIES The Company's Fixed Facility operations are principally dependent on the Company's ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). The Company currently has in excess of 400 contracts with managed care organizations for diagnostic imaging services provided at the Company's Fixed Facilities, primarily on a discounted fee-for-service basis. A significant decline in referrals would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Operations--Customers and Fees." CONTRACT RENEWALS Contract services revenues, which are primarily earned by Mobile Facilities and certain Fixed Facilities, represented approximately 46% of the Company's total revenues for the nine months ended March 31, 1998. Each year approximately one-quarter to one-third of the Company's contract services agreements for Mobile Facilities are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past, when such agreements have not been renewed, the Company has generally been able to obtain replacement contracts. While some replacement accounts have initially been smaller than the lost accounts, such replacement accounts' revenues have generally increased over the term of the agreement. There can be no assurance, however, that new and renewal contracts will offset revenues lost from customers electing not to renew their contracts with the Company. Although the non-renewal of a single customer agreement would not have a material adverse effect on the Company's contract services revenues, non-renewal of several agreements could have a material adverse effect on contract services revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Operations-- Customers and Fees." In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some hospital accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, the Company's contract services revenues would be adversely affected. No single source accounts for more than 10% of the Company's revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Operations--Customers and Fees." 18 ADVERSE UTILIZATION TRENDS FOR CERTAIN DIAGNOSTIC IMAGING PROCEDURES During the early 1990's, decreased utilization of outpatient services contributed to a downturn in the diagnostic imaging industry. See "The Diagnostic Imaging Industry--MRI Industry Trends." Currently, the supply of diagnostic imaging equipment exceeds the demand for such equipment in the market. Such demand may be further decreased by payor perceptions that diagnostic imaging services such as those provided by the Company are sometimes requested when not medically justified. In addition, the relatively low cost of Open MRI systems compared to conventional MRI systems has led to an influx of Open MRI systems in the industry and has aggravated excess capacity levels. The current excess capacity for diagnostic imaging equipment could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, hospitals comprise a large portion of the Company's customers. Continued consolidation in the hospital industry will cause certain hospitals to close and, as a result, could decrease utilization of the Company's services. Such continued trends could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS INHERENT IN THE PROVISION OF DIAGNOSTIC IMAGING SERVICES The hospitals and physicians who use the Company's diagnostic imaging services and imaging systems are involved in the delivery of health care services to the public and, therefore, are exposed to the risk of liability claims. The Company's position is that it does not engage in the practice of medicine. The Company provides only the equipment and technical components of diagnostic imaging, including certain limited nursing services, and has not experienced any material losses due to claims for malpractice. Nevertheless, claims for malpractice have been asserted against the Company in the past and any future claims, if successful, could result in substantial damage awards to the claimants, which may exceed the limits of any applicable insurance coverage. While the Company maintains professional liability insurance, there can be no assurance that any such claims against the Company will not exceed the amount of insurance maintained. Successful malpractice claims asserted against the Company, to the extent not covered by the Company's liability insurance, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Liability Insurance." TECHNOLOGICAL CHANGES The Company's services require the use of state-of-the-art diagnostic imaging equipment that has been characterized by constant technological advances. Although the Company believes that substantially all of the MRI and other diagnostic imaging systems it provides can be upgraded to maintain their state-of-the-art character, the development of new technologies or refinements of existing ones might make the Company's existing systems technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, the Company's systems. MRI and other diagnostic imaging systems are currently manufactured by numerous companies. Competition among manufacturers for a greater share of the MRI and other diagnostic imaging systems market may result in technological advances in the capacity of these new systems. Consequently, the obsolescence of the Company's systems may be accelerated. Although the Company is aware of no imminent substantial technological changes, should such changes occur, there can be no assurance that the Company would be able to acquire the new or improved systems that may be required to service its customers. COMPETITION The health care industry in general, and the market for diagnostic imaging services in particular, is highly competitive. The Company competes principally on the basis of its reputation for productive and cost-effective quality services. The Company's operations must compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies, that own and operate imaging equipment. The Company will continue to encounter substantial competition from hospitals and independent organizations, including, with respect to the 19 Company's Mobile Facilities, Alliance Imaging, Inc. and its affiliates. Some of the Company's direct competitors that provide contract diagnostic imaging services may have access to greater financial resources than the Company. Certain hospitals, particularly the larger hospitals, may be expected to directly acquire and operate imaging and treatment equipment on-site as part of their overall inpatient servicing capability, subject only to their decision to acquire a high-cost diagnostic imaging system, assume the associated financial risk, employ the necessary technologists and satisfy applicable licensure and CON requirements, if any. Historically, smaller hospitals have been reluctant to purchase imaging and treatment equipment. This reluctance, however, has encouraged the entry of start-up ventures and more established business operations into the diagnostic 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. POTENTIAL CONTROL BY GE AND CARLYLE GE and Carlyle own all of the Company's Series C Preferred Stock and Series B Preferred Stock, respectively. Currently, GE has the right to elect one member to the Board and Carlyle has the right to elect two members to the Board. In addition, GE and Carlyle are each entitled to vote their Preferred Stock (as defined herein) on an as-converted basis with the holders of the Company's common stock on all matters submitted to a stockholder vote other than the election of directors, provided that the aggregate number of votes cast by GE and Carlyle does not exceed 37% of the number of votes entitled to be cast. Each of GE and Carlyle also has certain approval rights with respect to certain significant transactions by the Company. In addition, if GE and Carlyle both convert their Preferred Stock pursuant to the terms thereof into shares of the Company's common stock or Series D Preferred Stock (as defined herein), which votes on an as-converted basis with the Company's common stock, GE and Carlyle acting together would hold approximately 70% of the common stock's voting power. If either GE or Carlyle, but not both, were to convert its shares of Preferred Stock to the Company's common stock and exercise all warrants held by it pursuant to the terms thereof, GE or Carlyle, as appropriate, would beneficially own, pursuant to the provisions of Rule 13d-3 under the Exchange Act, over 50% of the Company's issued and outstanding common stock. Accordingly, either GE or Carlyle, or GE and Carlyle acting together, could under certain circumstances control the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition, Liquidity and Capital Resources," "Security Ownership of Certain Beneficial Owners and Management--Possible Future Board Changes" and "Description of Preferred Stock." DEPENDENCE ON KEY PERSONNEL The Company is dependent upon the services and management experience of its executive officers. The loss of the service of one or more of its executive officers or other key management personnel could adversely affect the Company. Furthermore, the success of the Company's Fixed Facilities depends on the Company's ability to retain and attract competent managers for each location. There can be no assurance that the Company will be successful in attracting or retaining key personnel. The inability to attract and retain key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of Notes will be entitled to require the Company to purchase any or all of the Notes held by such holder at 101% of the unpaid principal amount thereof, plus accrued and unpaid interest to the date of purchase. However, the Company's ability to purchase Notes upon a Change of Control may be limited by the terms of then existing contractual obligations of the Company. In addition, the Company may not have adequate financial resources to effect 20 such a purchase, and there can be no assurance that the Company would be able to obtain such resources through a refinancing of the Notes to be purchased or otherwise. The Company's failure to purchase all of the Notes tendered for purchase upon the occurrence of a Change of Control would constitute an Event of Default under the Indenture. The Change of Control provision may not necessarily afford the holders of Notes protection in the event of a highly leveraged transaction, including a reorganization, restructuring, merger or similar transaction involving the Company that may adversely affect the holders, because such transactions may not involve a shift in voting power or beneficial ownership or, even if they do, may not otherwise fall within the definition of a Change of Control under the Indenture. FRAUDULENT CONVEYANCE STATUTES Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent transfer law, if, among other things, the Company or any Subsidiary Guarantor, at the time it incurred the indebtedness evidenced by the Notes or executed its Subsidiary Guarantee, (i) (a) was or is insolvent or rendered insolvent by reason of such occurrence, (b) was or is engaged in a business or transaction for which the assets remaining with the Company or such Subsidiary Guarantor constituted unreasonably small capital or (c) intended or intends to incur, or believed or believes that it would incur, debts beyond its ability to pay those debts as they mature, and (ii) the Company or such Subsidiary Guarantor received or receives less than reasonably equivalent value or fair consideration for the incurrence of that indebtedness, the Notes and the Subsidiary Guarantees could be voided, or claims in respect of the Notes or the Subsidiary Guarantees could be subordinated to other debts of the Company or such Subsidiary Guarantor in addition to Senior Indebtedness. For similar reasons, other indebtedness of the Company or any Subsidiary Guarantor, including indebtedness under the Senior Credit Facilities and any pledge or other security interest securing that indebtedness, could be voided or subordinated. The voiding or subordination of any such pledges or other security interests or of any such other indebtedness, could result in an event of default with respect to that indebtedness, which could result in acceleration thereof. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Company or a Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets at a fair valuation or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature or (ii) it could not pay its debts as they become due. On the basis of their historical financial information and recent operating history as discussed elsewhere herein under the headings "Selected Historical Consolidated Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as other factors, the Company and each Subsidiary Guarantor believe that, after giving effect to the acquisition of Signal, the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Outstanding Notes and the application of the net proceeds therefrom, they (i) will not be insolvent, will not have unreasonably small capital for the business in which they are engaged and will not incur debts beyond their ability to pay such debts as they mature and (ii) will have sufficient assets to satisfy any probable money judgment against them in any pending action. There can be no assurance, however, as to what standard a court would apply in making such determinations. ABSENCE OF PUBLIC MARKET The Exchange Notes are new securities for which there currently is no market and there can be no assurance as to the liquidity of any markets that may develop for the Exchange Notes, the ability of holders of the Exchange Notes to sell their Exchange Notes, or the prices at which holders would be able to sell 21 their Exchange Notes. Future trading prices of the Exchange Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Initial Purchasers have advised the Company that they currently intend to make a market in the Exchange Notes; however, the Initial Purchasers are not obligated to do so and any market making may be discontinued at any time without notice. The Company does not intend to apply for listing of the Exchange Notes offered hereby on any securities exchange or for quotation through the facilities of The Nasdaq Stock Market. USE OF PROCEEDS The net proceeds from the issuance of the Outstanding Notes, together with the net proceeds borrowed under the term loan portion of the Senior Credit Facilities, were approximately $144 million. The Company used a portion of the net proceeds to repay existing indebtedness under the Senior Credit Facilities, including indebtedness recently incurred in connection with the acquisition of Signal. See "Summary--Recent Developments." The remaining proceeds were or will be used for general corporate purposes, including future acquisitions of diagnostic imaging facilities and providers. Immediately following application of the net proceeds from the issuance of the Outstanding Notes and the term loan portion of the Senior Credit Facilities, the Company had no outstanding indebtedness under the revolving credit facility or the acquisition facility portions of the Senior Credit Facilities and each such facility was available to the Company in full for future borrowings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Senior Credit Facilities." The following table sets forth the sources and uses of funds in connection with the issuance of the Outstanding Notes, the borrowing under the term loan portion of the Senior Credit Facilities and the application of the net proceeds therefrom: SOURCES AND USES OF FUNDS (dollars in thousands)
SOURCES OF FUNDS Senior Credit Facilities (1)....................................... $ 50,000 9% Senior Subordinated Notes due 2008.............................. 100,000 --------- Total Sources of Funds........................................... $ 150,000 --------- --------- USES OF FUNDS Refinancing of Existing Debt....................................... $ 114,500 Transaction Costs (2).............................................. 6,000 Cash at Closing.................................................... 29,500 --------- Total Uses of Funds.............................................. $ 150,000 --------- ---------
- ------------------------------ (1) Upon application of the net proceeds of the issuance of the Outstanding Notes and borrowing under the $50 million term loan portion of the $150 million Senior Credit Facilities, the Company had thereunder a $75 million acquisition facility and a $25 million revolving credit facility, all of which were available to the Company in full for future borrowings. (2) Includes discounts and commissions and estimated expenses to be incurred in connection with the issuance of the Outstanding Notes and amendment of the Senior Credit Facilities. See "Description of Senior Credit Facilities." The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered hereby, the terms of which are identical in all material respects to those of the Outstanding Notes. The Outstanding Notes surrendered in exchange for the Exchange Notes will be canceled and cannot be reissued. The issuance of the Exchange Notes will not result in any change in the aggregate indebtedness of the Company. 22 EXCHANGE OFFER The Outstanding Notes were not registered under the Securities Act or any state securities laws. The Outstanding Notes were offered and sold (i) to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in compliance with Rule 144A, (ii) to a limited number of institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and (iii) pursuant to offers and sales that occurred outside the United States in accordance with Regulation S under the Securities Act. The Outstanding Notes sold to "qualified institutional buyers" are eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") market. TERMS OF THE EXCHANGE OFFER Promptly after the Registration Statement of which this Prospectus constitutes a part has been declared effective, the Company will offer the Exchange Notes in exchange for surrender of the Outstanding Notes. The Company will keep the Exchange Offer open for not less than 30 days and not more than 45 days (or longer if required by applicable law) after the date on which notice of the Exchange Offer is mailed to the holders of the Outstanding Notes. For each Outstanding Note validly tendered to the Company pursuant to the Exchange Offer and not withdrawn by the holder thereof, the holder of such Outstanding Note will receive an Exchange Note having a principal amount equal to the principal amount of such surrendered Outstanding Note. Interest on each Exchange Note will accrue from the last interest payment date on which interest was paid on the Outstanding Note surrendered in exchange therefor or, if no interest has been paid on such Outstanding Note, from the date of the original issue of the Outstanding Notes. The Exchange Notes evidence the same debt as the Outstanding Notes and are issued under and are entitled to the same benefits under the Indenture as the Outstanding Notes. In addition, the Exchange Notes and the Outstanding Notes are treated as one series of securities under the Indenture. If the Exchange Offer has not been consummated on or prior to December 9, 1998 or a shelf registration statement is not declared effective when required, then the Company will pay liquidated damages to each Holder of Outstanding Notes for the first 90 days following such date in an amount equal to $.05 per week per $1,000 principal amount of Outstanding Notes held by such Holder. The amount of liquidated damages will increase by an additional $.05 per week per $1,000 principal amount of Outstanding Notes at the beginning of each subsequent 90-day period until the Exchange Offer is consummated or the shelf registration is declared effective, up to a maximum amount of liquidated damages of $.30 per week per $1,000 principal amount of Outstanding Notes. Upon the consummation of the Exchange Offer or the effectiveness of a shelf registration statement, as the case may be, the interest rate borne by the Notes from the date of such consummation or effectiveness, as the case may be, will be reduced to the original interest rate of 9 5/8% per annum; provided, however, that, if after such reduction in interest rate, a different event specified above occurs, the interest rate may again be increased pursuant to the foregoing provisions. PERIOD FOR TENDERING OUTSTANDING NOTES Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (which together constitute the Exchange Offer), the Company will accept for exchange Outstanding Notes which are properly tendered on or prior to the Expiration Date and not withdrawn as permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City time, on , 1998; provided, however, that if the period of time for which the Exchange Offer is open is extended, the term "Expiration Date" means the latest time and date to which the Exchange Offer is extended. As of the date of this Prospectus, $100,000,000 aggregate principal amount of Notes is outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about , 1998, to all Holders of Outstanding Notes known to the Company. The Company's obligation to accept 23 Outstanding Notes for exchange pursuant to the Exchange Offer is subject to certain conditions set forth under "--Certain Conditions to the Exchange Offer" below. Outstanding Notes tendered in the Exchange Offer must be in denominations of principal amount of $1,000 or any integral multiple thereof. The Company expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Outstanding Notes not theretofore accepted for exchange, upon the occurrence of any of the conditions of the Exchange Offer specified below under "--Certain Conditions to the Exchange Offer." The Company will give oral or written notice of any extension, amendment, non-acceptance or termination to the Holders of the Outstanding Notes as promptly as practicable, such notice in the case of any extension to be issued by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. PROCEDURES FOR TENDERING OUTSTANDING NOTES The tender to the Company of Outstanding Notes by a Holder thereof as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering Holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a Holder who wishes to tender Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to, or an Agent's Message (as defined herein) in connection with a book-entry transfer must be completed and received by, State Street Bank and Trust Company, N.A. (the "Exchange Agent") at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date. In addition, either (i) certificates for such Outstanding Notes must be received by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Outstanding Notes, if such procedure is available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY. The term "Agent's Message" means a message, transmitted by the Book-Entry Transfer Facility to, and received by, the Exchange Agent, forming a part of a confirmation of a book-entry transfer, which states that the Book-Entry Transfer Facility has received an express acknowledgment from the participant in the Book-Entry Transfer Facility tendering the Outstanding Notes that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Issuers may enforce such agreement against such participant. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Outstanding Notes surrendered for exchange pursuant thereto are tendered (i) by a registered Holder of the Outstanding Notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). If signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be made by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States (collectively, "Eligible Institutions"). 24 All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Outstanding Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all tenders of any particular Outstanding Notes not properly tendered or not to accept any particular Outstanding Notes which acceptance might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to any particular Outstanding Notes either before or after the Expiration Date (including the right to waive the ineligibility of any Holder who seeks to tender Outstanding Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer as to any particular Outstanding Notes either before or after the Expiration Date (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes for exchange must be cured within such reasonable period of time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of Outstanding Notes for exchange, nor shall any of them incur any liability for failure to give such notification. If Outstanding Notes are registered in the name of a person other than a signer of the Letter of Transmittal, the Outstanding Notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered Holder with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Outstanding Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. In all cases, issuance of Exchange Notes for Outstanding Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Outstanding Notes or a timely Book-Entry Confirmation of such Outstanding Notes in the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Outstanding Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Outstanding Notes are submitted for a greater principal amount than the Holder desires to exchange, such unaccepted or non-exchanged Outstanding Notes will be returned without expense to the tendering Holder thereof (or, in the case of Outstanding Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry procedures described below, such non-exchanged Outstanding Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility system may make book-entry delivery of Outstanding Notes by causing DTC to transfer such Outstanding Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with DTC's procedures for transfer. However, although delivery of Outstanding Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under 25 "--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered Holder of Outstanding Notes desires to tender such Outstanding Notes and such Outstanding Notes are not immediately available, or time will not permit such Holder's Outstanding Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent received from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, or mail or hand delivery), setting forth the name and address of the Holder of Outstanding Notes and the amount of Outstanding Notes tendered, stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Outstanding Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Outstanding Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within five New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL RIGHTS Tenders of Outstanding Notes may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Outstanding Notes to be withdrawn, identify the Outstanding Notes to be withdrawn (including the principal amount of such Outstanding Notes), and (where certificates for Outstanding Notes have been transmitted) specify the name in which such Outstanding Notes are registered, if different from that of the withdrawing Holder. If certificates for Outstanding Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing Holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such Holder is an Eligible Institution. If Outstanding Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Outstanding Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Outstanding Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Outstanding Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Holder thereof without cost to such Holder (or, in the case of Outstanding Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Outstanding Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Outstanding Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by following one of the procedures described under "--Procedures for Tendering Outstanding Notes" above at any time on or prior to the Expiration Date. 26 CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, the Company shall not be required to accept for exchange, or to issue Exchange Notes in exchange for, any Outstanding Notes and may terminate or amend the Exchange Offer, if at any time before the acceptance of such Outstanding Notes for exchange or the exchange of the Exchange Notes for such Outstanding Notes, any of the following events shall occur: (a) the Exchange Offer violates applicable law or any applicable interpretation of the staff of the Commission; (b) an action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially impair the ability of the Company to proceed with the Exchange Offer, or a material adverse development shall have occurred in any existing action or proceeding with respect to the Company; or (c) all governmental approvals shall not have been obtained, which approvals the Company deems necessary for the consummation of the Exchange Offer. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, the Company will not accept for exchange any Outstanding Notes tendered, and no Exchange Notes will be issued in exchange for any such Outstanding Notes, if at such time any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939. EXCHANGE AGENT State Street Bank and Trust Company, N.A. has been appointed as the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal should be directed to the Exchange Agent at one of the addresses set forth below. Questions and requests for assistance, requests for additional copies of the Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY: State Street Bank and Trust State Street Bank and Trust Company Company Corporate Trust Dept. Two International Place PO Box 778 Corporate Trust Window, 4th Floor Boston, Massachusetts 02102 Boston, Massachusetts 02110 Attn: Kellie Mullen Attn: Kellie Mullen BY FACSIMILE: (for Eligible Institutions Only) State Street Bank and Trust Company CONFIRM BY FAX Attn: Corporate Trust Operations (617) 664-5290 CONFIRM BY TELEPHONE: (617) 664-5587
27 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. FEES AND EXPENSES The Company will not make any payment to brokers, dealers, or others soliciting acceptances of the Exchange Offer. The Company will pay certain other expenses to be incurred in connection with the Exchange Offer, including the fees and expenses of the Exchange Agent, accounting and certain legal fees. TRANSFER TAXES Holders who tender their Outstanding Notes for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct the Company to register Exchange Notes in the name of, or request that Outstanding Notes not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Outstanding Notes who do not exchange their Outstanding Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Outstanding Notes as set forth in the legend thereon as a consequence of the issuance of the Outstanding Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Outstanding Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register Outstanding Notes under the Securities Act. To the extent that Outstanding Notes are tendered and accepted in connection with the Exchange Offer, any trading market for Outstanding Notes not tendered in connection with the Exchange Offer could be adversely affected. The tender of Outstanding Notes pursuant to the Exchange Offer may have an adverse effect upon, and increase the volatility of, the market price of the Outstanding Notes due to a reduction in liquidity. 28 CAPITALIZATION The following table sets forth as of March 31, 1998 (i) the pro forma combined cash and cash equivalents and capitalization of the Company giving effect to the acquisition of Signal and (ii) the cash and cash equivalents and capitalization of the Company as adjusted to give effect to the acquisition of Signal, the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Outstanding Notes and the application of the net proceeds therefrom as if they occurred on March 31, 1998. See "Use of Proceeds."
MARCH 31, 1998 ----------------------- PRO FORMA AS ADJUSTED ---------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................................................ $ 11,292 $ 40,792 ---------- ----------- ---------- ----------- Current maturities of long-term debt..................................................... $ 9,008 $ 9,008 ---------- ----------- ---------- ----------- Long-term debt, net of current maturities: Senior Credit Facilities............................................................... $ 106,981 $ 42,481 Equipment and other notes.............................................................. 1,862 1,862 9 5/8% Senior Subordinated Notes due 2008.............................................. -- 100,000 ---------- ----------- Total long-term debt................................................................. 108,843 144,343 ---------- ----------- Minority interest........................................................................ 1,871 1,871 ---------- ----------- Stockholders' equity: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series B preferred stock, 25,000 shares outstanding at March 31, 1998..................................................................... 23,923 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at March 31, 1998..................................................................... 13,173 13,173 Common stock, $.001 par value, 25,000,000 shares authorized: 2,805,660 shares outstanding at March 31, 1998........................................................ 3 3 Additional paid-in capital............................................................. 23,366 23,366 Accumulated deficit.................................................................... (24,621) (24,621) ---------- ----------- Total stockholders' equity........................................................... 35,844 35,844 ---------- ----------- Total capitalization............................................................... $ 146,558 $ 182,058 ---------- ----------- ---------- -----------
29 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS REFERENCES TO THE "OFFERING" IN THESE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS INCLUDE THE SALE OF THE OUTSTANDING NOTES, THE BORROWING UNDER THE TERM LOAN PORTION OF THE SENIOR CREDIT FACILITIES AND THE APPLICATION OF THE NET PROCEEDS THEREFROM. The accompanying unaudited pro forma combined condensed financial statements reflect (i) the acquisition by the Company of all the issued and outstanding common stock of Signal, all the assets of MIC and other smaller acquisitions made by the Company since July 1, 1996 (excluding Mountain Diagnostics, see below) (the "Acquisitions"), (ii) the Recapitalization consummated on October 14, 1997 and (iii) the Offering. The Acquisitions have been or will be accounted for by the Company using the purchase method of accounting. The accompanying unaudited pro forma combined condensed balance sheet is based upon the Company's historical unaudited condensed consolidated balance sheet as of March 31, 1998, Signal's historical unaudited balance sheet as of March 31, 1998 and the pro forma effect of the Offering and is presented as if the acquisition of Signal and the Offering had been consummated on March 31, 1998. The accompanying unaudited pro forma combined condensed statements of operations for the year ended June 30, 1997 and the nine months ended March 31, 1998 give the effect to the Acquisitions, the Recapitalization and the Offering as if they had occurred on July 1, 1996, the beginning of the Company's most recently completed fiscal year. The unaudited pro forma combined condensed statement of operations for the year ending June 30, 1997 combines the audited historical consolidated results of the Company for such year with the (i) unaudited results of Signal for the twelve month period ended June 30, 1997, (ii) unaudited results of MIC for an eleven month period ended May 31, 1997 (the date of acquisition by the Company), (iii) the unaudited results of the other smaller acquisitions for the twelve month periods ended June 30, 1997, (iv) the unaudited pro forma effects of the Recapitalization, and (v) the unaudited pro forma effects of the Offering. The unaudited pro forma combined condensed statement of operations for the nine months ended March 31, 1998 combines the unaudited historical consolidated results for the Company for such period with (i) the unaudited results of Signal for the nine month period ended March 31, 1998, (ii) the unaudited results of the other smaller acquisitions for the nine month period ended March 31, 1998 to the extent not already included in the Company's historical financial results, (iii) the unaudited pro forma effects of the Recapitalization and (iv) the unaudited pro forma effects of the Offering. The pro forma financial statements referred to above exclude any adjustments for the Company's acquisition of Mountain Diagnostics in Las Vegas, Nevada because the Company purchased Mountain Diagnostics from the trustee in bankruptcy and limited financial data was available for the periods preceding such acquisition. The pro forma adjustments are based upon available information and upon certain assumptions that the management of the Company believes are reasonable. However, the unaudited pro forma combined condensed financial statements do not purport to be indicative of the results that would have been achieved if the transactions had been completed on the respective dates above or the results that may be achieved in the future. 30 INSIGHT HEALTH SERVICES CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET MARCH 31, 1998 (DOLLARS IN THOUSANDS)
PRO SIGNAL PRO FORMA HISTORICAL HISTORICAL ACQUISITION FORMA OFFERING AFTER INSIGHT SIGNAL ADJUSTMENTS COMBINED ADJUSTMENTS OFFERING ---------- ---------- ----------- -------- ----------- -------- ASSETS Cash and cash equivalents....................... $ 9,650 $ 1,642 $-- $ 11,292 $29,500(3) $ 40,792 Trade accounts receivable, net.................. 21,674 3,397 -- 25,071 -- 25,071 Other receivable, net........................... 330 239 -- 569 -- 569 Other current assets............................ 2,149 121 -- 2,270 -- 2,270 ---------- ---------- ----------- -------- ----------- -------- Total current assets............................ 33,803 5,399 -- 39,202 29,500 68,702 Property and equipment, net..................... 46,745 12,286 4,309(2) 63,340 -- 63,340 Investment in partnerships...................... 495 -- -- 495 -- 495 Other assets, net............................... 2,471 660 -- 3,131 6,000(3) 9,131 Intangible assets, net.......................... 43,273 -- 26,189(1) 69,462 -- 69,462 ---------- ---------- ----------- -------- ----------- -------- Total assets.................................... $ 126,787 $18,345 $30,498 $175,630 $35,500 $211,130 ---------- ---------- ----------- -------- ----------- -------- ---------- ---------- ----------- -------- ----------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of equipment and other notes.... $ 5,706 $ 3,302 $-- $ 9,008 $-- $ 9,008 Accounts payable and accrued expenses........... 14,905 2,121 -- 17,026 -- 17,026 ---------- ---------- ----------- -------- ----------- -------- Total current liabilities....................... 20,611 5,423 -- 26,034 -- 26,034 Long-term portion of equipment and other notes.. 67,781 4,598 32,155(1) 4,309(2) 108,843 (64,500)(3) 44,343 9 5/8% Senior Subordinated Notes................ -- -- -- -- 100,000(3) 100,000 Other........................................... 680 2,358 -- 3,038 -- 3,038 ---------- ---------- ----------- -------- ----------- -------- Total liabilities............................... 89,072 12,379 36,464 137,915 35,500 173,415 ---------- ---------- ----------- -------- ----------- -------- Minority interest............................... 1,871 -- -- 1,871 -- 1,871 ---------- ---------- ----------- -------- ----------- -------- Redeemable convertible cumulative preferred stock......................................... -- 2,000 (2,000)(1) -- -- -- ---------- ---------- ----------- -------- ----------- -------- Stockholders' equity Convertible Series B preferred stock.......... 23,923 -- -- 23,923 -- 23,923 Convertible Series C preferred stock.......... 13,173 -- -- 13,173 -- 13,173 Common stock.................................. 3 -- -- 3 -- 3 Additional paid-in capital.................... 23,366 156 (156)(1) 23,366 -- 23,366 (Accumulated deficit) retained earnings....... (24,621) 4,310 (4,310)(1) (24,621) -- (24,621) Treasury stock................................ -- (500) 500(1) -- -- -- ---------- ---------- ----------- -------- ----------- -------- Total stockholders' equity.................... 35,844 3,966 (3,966) 35,844 -- 35,844 ---------- ---------- ----------- -------- ----------- -------- Total liabilities and stockholders' equity.... $ 126,787 $18,345 $30,498 $175,630 $35,500 $211,130 ---------- ---------- ----------- -------- ----------- -------- ---------- ---------- ----------- -------- ----------- --------
31 The pro forma combined condensed balance sheet as of March 31, 1998 reflects the following pro forma adjustments: (1) To record the acquisition of the common stock of Signal for $32,155 in borrowed funds and the resulting goodwill of $26,189. (2) To record the acquisition of equipment for debt on equipment that is currently under operating leases. The above reflects the acquisition of Signal by the Company using the purchase method of accounting. Under purchase accounting, the assets and liabilities of Signal are stated at fair market value (FMV). For purposes of these pro forma financial statements, the book value of Signal's assets and liabilities are assumed to approximate FMV. The excess purchase price is allocated to goodwill.
Goodwill calculation for Signal acquisition - --------------------------------------------------------------- Cash purchase price............................................ $ 32,155 Estimated FMV of net assets acquired........................... 5,966 ---------- Purchase price in excess of FMV................................ $ 26,189 ---------- ----------
(3) To record the proceeds of the issuance of the Outstanding Notes of $100,000, the proceeds from the term loan portion of the Senior Credit Facilities of $50,000, transaction costs of $6,000, repayment of existing indebtedness of $114,500 and net cash proceeds of $29,500. 32 INSIGHT HEALTH SERVICES CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL 11 MONTHS ADJUSTMENTS FOR HISTORICAL OF MIC ADJUSTMENTS HISTORICAL OTHER OTHER ADJUSTMENTS FOR INSIGHT (B) FOR MIC (B) ACQUISITIONS (A) ACQUISITIONS (A) RECAPITALIZATION ---------- --------- ----------- ---------------- ---------------- ---------------- Revenues................. $93,063 $6,675 $-- $8,597 $-- -$- ---------- --------- ----------- ------ ------- ------ Costs of operations: Costs of services...... 52,070 3,581 -- 4,572 -- (278)(4) Equipment leases....... 18,396 -- -- 116 -- -- Depreciation and amortization......... 9,871 1,112 247(1) 989 864(1) -- ---------- --------- ----------- ------ ------- ------ Total costs of operations............. 80,337 4,693 247 5,677 864 (278) ---------- --------- ----------- ------ ------- ------ Gross profit (loss)...... 12,726 1,982 (247) 2,920 (864) 278 Corporate operating expenses............... 7,431 -- -- 632 -- -- ---------- --------- ----------- ------ ------- ------ Income (loss) from company operations..... 5,295 1,982 (247) 2,288 (864) 278 Equity in earnings....... 468 -- -- -- -- -- ---------- --------- ----------- ------ ------- ------ Operating income (loss)................. 5,763 1,982 (247) 2,288 (864) 278 Interest (income) expense................ 4,055 129 615(3) 118 1,730(3) (1,481)(5) ---------- --------- ----------- ------ ------- ------ Income (loss) before provision for taxes.... 1,708 1,853 (862) 2,170 (2,594) 1,759 Provision (benefit) for income taxes........... 427 35 213(8) 15 (121)(8) 440(8) ---------- --------- ----------- ------ ------- ------ Net income (loss)........ $ 1,281 $1,818 $(1,075) $2,155 $(2,473) $1,319 ---------- --------- ----------- ------ ------- ------ ---------- --------- ----------- ------ ------- ------ Net income (loss) per common and preferred share Basic................ $ 0.25 Diluted.............. $ 0.24 Weighted average common and preferred shares outstanding: Basic................ 5,215 Diluted.............. 5,440 SIGNAL PRO FORMA HISTORICAL ACQUISITION PRO FORMA OFFERING AFTER SIGNAL ADJUSTMENTS COMBINED ADJUSTMENTS OFFERING ---------- ----------- ---------- ----------- --------- Revenues................. $19,331 $ -- $127,666 $-- $127,666 ---------- ----------- ---------- ----------- --------- Costs of operations: Costs of services...... 9,390 -- 69,335 -- 69,335 Equipment leases....... 3,651 (1,518)(6) 20,645 20,645 Depreciation and amortization......... 3,354 1,309(1) 18,608 18,608 862(2) ---------- ----------- ---------- ----------- --------- Total costs of operations............. 16,395 653 108,588 -- 108,588 ---------- ----------- ---------- ----------- --------- Gross profit (loss)...... 2,936 (653) 19,078 -- 19,078 Corporate operating expenses............... -- -- 8,063 8,063 ---------- ----------- ---------- ----------- --------- Income (loss) from company operations..... 2,936 (653) 11,015 -- 11,015 Equity in earnings....... -- -- 468 -- 468 ---------- ----------- ---------- ----------- --------- Operating income (loss)................. 2,936 (653) 11,483 -- 11,483 Interest (income) expense................ 720 2,894(3) 8,780 2,766(7) 11,546 ---------- ----------- ---------- ----------- --------- Income (loss) before provision for taxes.... 2,216 (3,547) 2,703 (2,766) (63) Provision (benefit) for income taxes........... 887 (1,220)(8) 676 (676)(8) -- ---------- ----------- ---------- ----------- --------- Net income (loss)........ $ 1,329 $ (2,327) $ 2,027 $(2,090) $ (63) ---------- ----------- ---------- ----------- --------- ---------- ----------- ---------- ----------- --------- Net income (loss) per common and preferred share Basic................ $ 0.22 $ (0.01) Diluted.............. $ 0.22 $ (0.01) Weighted average common and preferred shares outstanding: Basic................ 9,035 9,035 Diluted.............. 9,261 9,035
33 The pro forma combined condensed statement of operations for the year ended June 30, 1997 reflects the following Recapitalization and acquisition adjustments: (1) To record the amortization of goodwill over 20 years. (2) To record depreciation expense on operating leases purchased. (3) To record interest expense for acquisition financing. (4) To record the reversal of maintenance expense related to the GE supplemental service fee through June 30, 1997. (5) To record net interest savings from the October 14, 1997 Recapitalization. (6) To record the reversal of lease expense on operating leases purchased. (7) To record additional interest expense of $4,389 as a result of the Offering offset by interest income of $1,623 on the net cash to be received. (8) To record the tax effect on the above entries at estimated effective rates. (A) These amounts include the Company's other smaller acquisitions that have been completed since the fiscal year ended June 30, 1997. The acquisitions included in these amounts are Chattanooga, Columbus and Murfreesboro. Excluded from these amounts is Mountain Diagnostics, which was acquired by the Company out of bankruptcy and for which there is limited financial data available. The other smaller acquisitions were made for an aggregate cash purchase price of $16,800 and resulted in goodwill of $17,289. Acquisition financing was $16,700 at a weighted average interest rate of 10.4 percent. (B) The acquisition of MIC was made in May 1997 for a cash purchase price of $6,800, all borrowed at a rate of 9 percent, and resulted in goodwill of $4,940. 34 INSIGHT HEALTH SERVICES CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (DOLLARS IN THOUSANDS)
ADJUSTMENTS FOR SIGNAL HISTORICAL ADJUSTMENTS FOR HISTORICAL OTHER OTHER HISTORICAL ACQUISITION INSIGHT (A) RECAPITALIZATION ACQUISITIONS (A) ACQUISITIONS (A) SIGNAL ADJUSTMENTS ----------- ----------------- ----------------- ----------------- ----------- ------------- Revenues.................. $ 85,673 $ -- $ 629 $ -- $ 16,095 $ -- ----------- ------ ------ ----- ----------- ------------- Costs of operations: Costs of services....... 46,038 (413)(1) 272 -- 5,993 -- Equipment leases........ 12,983 -- 40 -- 2,412 (1,138)(5) Depreciation and amortization.......... 10,670 -- 4 92(3) 2,989 982(3) 646(6) ----------- ------ ------ ----- ----------- ------------- Total costs of operations.............. 69,691 (413) 316 92 11,394 490 ----------- ------ ------ ----- ----------- ------------- Gross profit.............. 15,982 413 313 (92) 4,701 (490) Provision for supplemental service fee termination............. 6,309 (6,309)(8) -- -- -- -- Corporate operating expenses................ 6,510 -- 220 -- 2,165 -- ----------- ------ ------ ----- ----------- ------------- Income (loss) from company operations.............. 3,163 6,722 93 (92) 2,536 (490) Equity in earnings........ 480 -- -- -- -- -- ----------- ------ ------ ----- ----------- ------------- Operating income (loss)... 3,643 6,722 93 (92) 2,536 (490) Interest (income) expense................. 4,665 (679)(2) (1) 60(4) 492 2,170(4) ----------- ------ ------ ----- ----------- ------------- Income (loss) before provision for taxes..... (1,022) 7,401 94 (152) 2,044 (2,660) Provision (benefit) for income taxes............ 431 1,311(9) (2) (15)(9) 829 (997)(9) ----------- ------ ------ ----- ----------- ------------- Net income (loss)......... $ (1,453) $ 6,090 $ 96 $ (137) $ 1,215 $ (1,663) ----------- ------ ------ ----- ----------- ------------- ----------- ------ ------ ----- ----------- ------------- Net income (loss) per common and preferred share Basic................. $ (0.19) Diluted............... $ (0.19) Weighted average common and preferred shares outstanding: Basic................. 7,590 Diluted............... 7,590 PRO FORMA PRO FORMA OFFERING AFTER COMBINED ADJUSTMENTS OFFERING ----------- ------------- ----------- Revenues.................. $ 102,397 $ -- $ 102,397 ----------- ------------- ----------- Costs of operations: Costs of services....... 51,890 -- 51,890 Equipment leases........ 14,297 14,297 Depreciation and amortization.......... 15,383 15,383 ----------- ------------- ----------- Total costs of operations.............. 81,570 -- 81,570 ----------- ------------- ----------- Gross profit.............. 20,827 -- 20,827 Provision for supplemental service fee termination............. -- -- -- Corporate operating expenses................ 8,895 -- 8,895 ----------- ------------- ----------- Income (loss) from company operations.............. 11,932 -- 11,932 Equity in earnings........ 480 480 ----------- ------------- ----------- Operating income (loss)... 12,412 -- 12,412 Interest (income) expense................. 6,707 2,075(7) 8,782 ----------- ------------- ----------- Income (loss) before provision for taxes..... 5,705 (2,075) 3,630 Provision (benefit) for income taxes............ 1,557 (566)(9) 991 ----------- ------------- ----------- Net income (loss)......... $ 4,148 $ (1,509) $ 2,639 ----------- ------------- ----------- ----------- ------------- ----------- Net income (loss) per common and preferred share Basic................. $ 0.46 $ 0.29 Diluted............... $ 0.44 $ 0.28 Weighted average common and preferred shares outstanding: Basic................. 9,054 9,054 Diluted............... 9,331 9,331
35 The pro forma combined condensed statement of operations for the nine months ended March 31, 1998 reflect the following Recapitalization and acquisition adjustments: (1) To record the reversal of maintenance expense related to the GE supplemental service fee agreement through December 31, 1997. (2) To record net interest savings from the October 14, 1997 Recapitalization. (3) To record the amortization of goodwill over 20 years. (4) To record interest expense for acquisition financing. (5) To record the reversal of lease expense on operating leases purchased. (6) To record depreciation expense on operating leases purchased. (7) To record additional interest expense of $3,292 as a result of the Offering offset by interest income on of $1,217 the net cash to be received. (8) To record the reversal of the one-time charge of approximately $6.3 million for the elimination of the GE supplemental service fee. Such charge was recorded on October 14, 1997 and was a direct result of the Recapitalization. (9) To record the tax effect on the above entries at estimated effective rates. (A) These amounts include the Company's insignificant acquisition of Murfreesboro. Excluded from these amounts is Mountain Diagnostics, which was acquired by the Company out of bankruptcy and for which limited financial data is available. Murfreesboro was acquired in November 1997 for a cash purchase price of $2,300, which was borrowed at a rate of 7.9 percent. 36 SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The Merger was accounted for using the purchase method of accounting and treating MHC as the acquiror. Accordingly, the following table presents summary consolidated historical financial data of the Company for the fiscal year ended June 30, 1997 and each of the nine months ended March 31, 1998 and March 31, 1997, the summary pro forma combined financial data of MHC and AHS for the twelve months ended June 30, 1996, adjusted to give effect to the Merger as if it had occurred on July 1, 1995, and the summary consolidated historical financial data of MHC for the six months ended June 30, 1996 and 1995 and each of the fiscal years in the four year period ended December 31, 1995. The selected historical data presented below under the caption "Statement of Operations" for each of the fiscal periods ended June 30, 1997 and 1996 and December 31, 1995, 1994, 1993 and 1992 are derived from the consolidated financial statements of the Company or MHC, as appropriate, which financial statements have been audited by Arthur Andersen LLP, independent certified public accountants (for the Company) or Deloitte & Touche LLP, independent auditors (for MHC) as of December 31, 1995 and prior, and are included elsewhere in this Prospectus. The historical information presented for each of the nine month periods ended March 31, 1998 and 1997 and the six month period ended June 30, 1995 has been derived from unaudited interim consolidated financial statements of the Company or MHC, as appropriate, and, in the opinion of management of the Company, reflects a fair presentation of the Company's and MHC's financial information. The summary pro forma combined financial data of MHC and AHS for the twelve months ended June 30, 1996 has been provided for comparison purposes only and has been derived from (i) available information and certain assumptions that management believes are reasonable and (ii) the separate unaudited financial information of each AHS and MHC for the year ended June 30, 1996. Such financial data is provided for informational purposes only and does not purport to represent what the Company's results of operations would actually have been had the Merger in fact occurred as of July 1, 1995. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto of the Company included elsewhere in this Prospectus. 37
NINE MONTHS ENDED PRO FORMA SIX MONTHS ENDED ----------------------- YEAR ENDED YEAR ENDED --------------------- MARCH 31, MARCH 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, (DOLLARS IN THOUSANDS) 1998(4) 1997(4) 1997 1996(4) 1996(1) 1995(1)(4) - ---------------------------------------- --------- --------- ---------- ---------- --------- ---------- STATEMENT OF OPERATIONS DATA: Revenues................................ $85,673 $68,129 $ 93,063 87,720 $ 26,460 $ 24,434 Costs of operations (2)................. 69,691 59,527 80,337 80,590 27,420 22,986 --------- --------- ---------- ---------- --------- ---------- Gross profit (loss)..................... 15,982 8,602 12,726 7,130 (960) 1,448 Corporate operating expenses............ 12,819(5) 5,343 7,431 8,453 2,127 1,915 --------- --------- ---------- ---------- --------- ---------- Income (loss) from company operations... 3,163 3,259 5,295 (1,323) (3,087) (467) Equity in earnings of unconsolidated partnerships.......................... 480 364 468 350 138 136 --------- --------- ---------- ---------- --------- ---------- Operating income (loss)................. 3,643 3,623 5,763 (973) (2,949) (331) Interest expense, net................... (4,665) (2,741) (4,055) (3,813) (1,144) (648) Provision for securities litigation settlement............................ -- -- -- (1,500) -- -- Gain on sale of partnership interests... -- -- -- -- -- -- Provision for income taxes.............. (431) (134) (427) (281) (65) -- --------- --------- ---------- ---------- --------- ---------- Income (loss) before extraordinary item.................................. (1,453) 748 1,281 (6,567) (4,158) (979) Extraordinary item...................... -- -- -- 3,179 3,179 -- --------- --------- ---------- ---------- --------- ---------- Net income (loss)....................... $(1,453) $ 748 $ 1,281 (3,388) $ (979) $ (979) --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item per common and preferred share (3) Basic................................. $ (0.19) $ 0.14 $ 0.25 $ (2.43) $ (2.99) $ (0.73) --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- Diluted............................... $ (0.19) $ 0.14 $ 0.24 $ (2.43) $ (2.99) $ (0.73) --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- Income (loss) per common and preferred share: Basic................................. $ (0.19) $ 0.14 $ 0.25 $ (1.25) $ (0.70) $ (0.73) --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- Diluted............................... $ (0.19) $ 0.14 $ 0.24 $ (1.25) $ (0.70) $ (0.73) --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- Weighted average number of common and preferred shares outstanding Basic................................. 7,590 5,214 5,215 2,706 1,389 1,333 --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- Diluted............................... 7,590 5,444 5,440 2,706 1,389 1,333 --------- --------- ---------- ---------- --------- ---------- --------- --------- ---------- ---------- --------- ---------- Ratio of earnings to fixed charges...... 1.3x 1.2x 1.0x -- Fixed charge coverage deficiency........ -- -- -- $ 4,093 YEARS ENDED DECEMBER 31, ------------------------------------------ (DOLLARS IN THOUSANDS) 1995(1) 1994(1) 1993(1) 1992(1) - ---------------------------------------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues................................ $ 50,609 $ 45,868 $ 45,075 $ 45,135 Costs of operations (2)................. 48,778 45,439 47,456 45,329 --------- --------- --------- --------- Gross profit (loss)..................... 1,831 429 (2,381) (194) Corporate operating expenses............ 3,372 4,040 4,344 6,747 --------- --------- --------- --------- Income (loss) from company operations... (1,541) (3,611) (6,725) (6,941) Equity in earnings of unconsolidated partnerships.......................... 348 834 685 1,020 --------- --------- --------- --------- Operating income (loss)................. (1,193) (2,777) (6,040) (5,921) Interest expense, net................... (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.............. -- (160) -- -- --------- --------- --------- --------- Income (loss) before extraordinary item.................................. (4,319) 814 (7,813) (8,312) Extraordinary item...................... -- 3,342 1,036 -- --------- --------- --------- --------- Net income (loss)....................... $ (4,319) $ 4,156 $ (6,777) $ (8,312) --------- --------- --------- --------- --------- --------- --------- --------- INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item per common and preferred share (3) Basic................................. $ (3.21) $ 0.60 $ (4.49) $ (4.89) --------- --------- --------- --------- --------- --------- --------- --------- Diluted............................... $ (3.21) $ 0.58 $ (4.49) $ (4.89) --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per common and preferred share: Basic................................. $ (3.21) $ 3.04 $ (3.89) $ (4.89) --------- --------- --------- --------- --------- --------- --------- --------- Diluted............................... $ (3.21) $ 2.96 $ (3.89) $ (4.89) --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of common and preferred shares outstanding Basic................................. 1,345 1,367 1,742 1,699 --------- --------- --------- --------- --------- --------- --------- --------- Diluted............................... 1,345 1,402 1,742 1,699 --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges...... -- 1.2x -- -- Fixed charge coverage deficiency........ $ 4,319 -- $ 7,813 $ 8,312
AT MARCH 31, AT JUNE 30, AT DECEMBER 31, ------------ -------------------- ------------------------------------------ 1998(4) 1997 1996 1995(1) 1994(1) 1993(1) 1992(1) ------------ --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Working capital (deficit)............... 13,192 $ (5,740) $ (1,167) $ (2,228) $ 1,587 $ (8,594) $ (14,607) Property and equipment, net............. 46,745 34,488 29,852 12,386 5,272 9,791 18,772 Intangible assets....................... 43,273 33,272 16,965 4,047 1,194 1,263 2,513 Total assets............................ 126,787 98,322 70,386 28,306 22,592 23,566 38,043 Total long-term liabilities............. 68,461 59,205 39,839 19,723 9,575 7,967 8,368 Stockholders' equity (deficit).......... 35,844 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 MHC common stock and related conversion into InSight common stock had occurred on January 1, 1992. (4) Unaudited. (5) Amount includes a charge of $6,309 for provision for GE supplemental service fee termination. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNLESS THE CONTEXT OTHERWISE REQUIRES, HISTORICAL REFERENCES IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TO THE "COMPANY" OR "INSIGHT" REFER TO INSIGHT HEALTH SERVICES CORP., ITS CONSOLIDATED SUBSIDIARIES, PARTNERSHIPS AND LIMITED LIABILITY COMPANIES, EXCLUDING SIGNAL. OVERVIEW The Company is a leading nationwide provider of diagnostic imaging and related information services. While the Company generated approximately 77% of its revenues from MRI services during the twelve months ended March 31, 1998, it provides a comprehensive offering of diagnostic imaging and treatment services, including CT, mammography, diagnostic ultrasound, lithotripsy and x-ray, to leading health care organizations, including hospitals, managed care organizations and insurance companies. The Company has developed, and continues to develop, strong regional networks of diagnostic imaging services, enabling the Company to increase its overall utilization and to benefit from enhanced economies of scale. The Company has a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio), and provides its services through 50 Fixed Facilities, including 16 Multi-Modality Centers, and 51 Mobile Facilities. The Company's revenues are primarily generated from contract services and patient services. Contract services revenues are generally earned from services billed to a hospital or other health care provider which include: (i) fee-for-service arrangements in which revenues are based upon a contractual rate per procedure, (ii) equipment rental in which revenues are generally based upon a fixed monthly rental and (iii) management fees. Contract services revenues are primarily earned through Mobile Facilities and certain Fixed Facilities. Patient services revenues are earned from services billed directly to patients or third party payors (generally managed care organizations, Medicare, Medicaid, private insurers and workers compensation funds), and are primarily earned through Fixed Facilities. Contract and patient services revenues represented approximately 46% and 51%, respectively, of the Company's total revenues for the nine months ended March 31, 1998. During the nine months ended March 31, 1998 compared to the same period during the prior year, the Company increased scan volumes at its existing facilities by 35%. During the same period, the average fee-per-scan performed at Mobile Facilities increased by 1% and at Fixed Facilities decreased by 4%. Management believes the decrease in the average fee-per-scan at Fixed Facilities is the result of continuing competitive pressure in the MRI service industry, cost containment efforts by third party payors and an increase in the Company's managed care contracts with lower discounted fee-per-scan rates. Overall, the Company's average fee-per-scan is lower at its Fixed Facilities than at its Mobile Facilities due to the range of procedures, many of which have a lower fee-per-scan than MRI, provided at the Company's Multi-Modality Centers. The Company maintains a high fixed cost structure, with fixed costs and variable costs representing 85% and 15% of total operating expenses, respectively, for the nine months ended March 31, 1998. Four categories of fixed expenses account for approximately 72% of the Company's total operating expenses: (i) salaries and benefits expenses; (ii) equipment lease expenses; (iii) contractual maintenance expenses; and (iv) depreciation and amortization, comprising 30%, 19%, 8% and 15%, respectively, of the Company's total operating expenses for the nine months ended March 31, 1998. Due to this high degree of operating leverage with respect to the Company's equipment, any increase in existing facility scan volumes disproportionately increases the Company's operating cash flow. Service supplies, consisting mainly of film and contrast media used in the Company's diagnostic imaging services, comprised 5% of the Company's total operating expenses for the nine months ended March 31, 1998 and were the Company's largest variable operating expense during such period. 39 The Company 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 or Fixed, the range of services provided and the Company's ability to integrate the acquired businesses into its existing infrastructure. The following chart sets forth the Company's eight completed acquisitions since the Merger:
PURCHASE PRICE (INCLUDING NAME OF TYPE OF ASSUMED DEBT) DATE LOCATION FACILITY FACILITY (IN MILLIONS) - ------------------ ------------------ ----------------- ------------------ --------------- September 1996 Hayward, Open MRI of Fixed Facility $ 2.8 California Hayward May 1997 Maine and New MIC Mobile Facilities 8.7 Hampshire June 1997 Chattanooga, Chattanooga Fixed Facility(1) 10.9 Tennessee Outpatient Center July 1997 Columbus, Ohio Broad Street Fixed Facility(1) 5.5 Imaging Center November 1997 Murfreesboro, Imaging Center Fixed Facility(1) 2.3 Tennessee at Murfreesboro November 1997 Redwood City, Redwood City Fixed Facility 0.3 California MRI November 1997 Las Vegas, Mountain Fixed Facility(1) 10.3 Nevada Diagnostics May 1998 Farmington, Signal Mobile and 45.7 Connecticut Fixed Facilities (HQ) and other services(2)
- ------------------------ (1) Multi-Modality Center. (2) Acquisition consisted of the purchase by merger of all of the outstanding common stock of Signal, a provider of mobile and fixed MRI, mobile lithotripsy and other diagnostic services in eleven states, primarily in New England and the Southeast. See "Offering Memorandum Summary--Recent Developments." RESULTS OF OPERATIONS InSight, which has a fiscal year ending on June 30, commenced operations on June 26, 1996, following the merger of two public companies, AHS and MHC, each of which had fiscal years ending on December 31. Because MHC was treated as the acquiror for accounting purposes, the Company's operating results relating to the periods prior to July 1, 1996 represent the historical results of MHC only, while the Company's operating results relating to the periods on and after July 1, 1996 represent the operating results of InSight on a consolidated basis, including the results of AHS and MHC as operating subsidiaries. Due to such accounting treatment and different fiscal years, the operating results of the Company required to be presented herein include (i) the nine months ended March 31, 1998 compared to the nine months ended March 31, 1997 (in each case representing InSight's results); (ii) the year ended June 30, 1997 (representing InSight's results) compared to the six months ended June 30, 1996 (representing MHC's results only); (iii) the six months ended June 30, 1996 compared to the six months ended 40 June 30, 1995 (in each case representing MHC's results only); and (iv) the year ended December 31, 1995 compared to the year ended December 31, 1994 (in each case representing MHC's results only). In order to provide an additional basis for comparison with respect to the Company's operating results for the twelve months ended June 30, 1997, the Company has included elsewhere in this Offering Memorandum, and discussed below, unaudited pro forma financial information for the twelve months ended June 30, 1996, adjusted to give effect to the Merger as if it had occurred as of July 1, 1995. Such pro forma adjustments are based upon (i) available information and certain assumptions that management believes are reasonable and (ii) the separate financial information of each of AHS and MHC for the year ended June 30, 1996. Such presentation is provided for informational purposes only and does not purport to represent what the Company's results of operations would actually have been had the Merger in fact occurred as of July 1, 1995. The following table sets forth items of income and expense as a percentage of total revenues for the periods indicated:
INSIGHT HEALTH SERVICES CORP. --------------------------------------------- PRO NINE NINE FORMA MONTHS MONTHS YEAR YEAR ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, JUNE 30, JUNE 30, 1998 1997 1997 1996 --------- --------- -------- -------- Revenues.......................................... 100.0% 100.0% 100.0% 100.0% --------- --------- -------- -------- Costs of operations Costs of services............................... 52.0 54.9 54.3 55.6 Provision for doubtful accounts................. 1.8 1.6 1.6 3.7 Equipment leases................................ 15.2 20.3 19.8 21.1 Depreciation and amortization................... 12.5 10.6 10.6 11.6 --------- --------- -------- -------- Total operating expenses...................... 81.5 87.4 86.3 92.0 --------- --------- -------- -------- Gross profit.................................... 18.5 12.6 13.7 8.0 Corporate operating expenses.................... 15.0 7.8 8.0 9.6 --------- --------- -------- -------- Income (loss) from operations..................... 3.5 4.8 5.7 (1.6) Equity in earnings of unconsolidated partnerships..................................... 0.6 0.5 0.5 0.4 --------- --------- -------- -------- Operating income (loss)........................... 4.1 5.3 6.2 (1.2) Other income (expense) Interest expense, net........................... (5.4) (4.0) (4.4) (4.3) Provision for securities litigation settlement.................................... 0.0 0.0 0.0 (1.7) Gain on sale of partnership interests........... 0.0 0.0 0.0 0.0 --------- --------- -------- -------- Total other income (expense).................. (5.4) (4.0) (4.4) (6.0) --------- --------- -------- -------- Income (loss) before income taxes................. (1.3) 1.3 1.8 (7.2) Provision for income taxes........................ 0.5 0.2 0.5 0.3 --------- --------- -------- -------- Income (loss) before extraordinary item........... (1.8) 1.1 1.3 (7.5) Extraordinary item, net gain on debt extinguishment................................... 0.0 0.0 0.0 3.6 --------- --------- -------- -------- Net income (loss)................................. (1.8%) 1.1% 1.3% (3.9%) --------- --------- -------- -------- --------- --------- -------- -------- MAXUM HEALTH CORP. ------------------------------------------------------- SIX SIX MONTHS MONTHS ENDED ENDED YEAR ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 -------- -------- ------------ ------------ Revenues.......................................... 100.0% 100.0% 100.0% 100.0% -------- -------- ------------ ------------ Costs of operations Costs of services............................... 60.1 57.8 56.9 56.8 Provision for doubtful accounts................. 2.3 2.0 3.3 2.5 Equipment leases................................ 26.3 28.6 28.6 31.8 Depreciation and amortization................... 14.9 6.5 7.7 8.0 -------- -------- ------------ ------------ Total operating expenses...................... 103.6 94.9 96.5 99.1 -------- -------- ------------ ------------ Gross profit.................................... (3.6) 5.1 3.5 0.9 Corporate operating expenses.................... 8.0 7.0 6.7 8.8 -------- -------- ------------ ------------ Income (loss) from operations..................... (11.6) (1.9) (3.2) (7.9) Equity in earnings of unconsolidated partnerships..................................... 0.5 0.6 0.7 1.8 -------- -------- ------------ ------------ Operating income (loss)........................... (11.1) (1.3) (2.5) (6.1) Other income (expense) Interest expense, net........................... (4.3) (2.7) (3.2) (2.6) Provision for securities litigation settlement.................................... 0.0 0.0 (3.0) 0.0 Gain on sale of partnership interests........... 0.0 0.0 0.0 10.8 -------- -------- ------------ ------------ Total other income (expense).................. (4.3) (2.7) (6.2) 8.2 -------- -------- ------------ ------------ Income (loss) before income taxes................. (15.4) (4.0) (8.7) 2.1 Provision for income taxes........................ 0.2 0.0 0.0 0.3 -------- -------- ------------ ------------ Income (loss) before extraordinary item........... (15.6) (4.0) (8.7) 1.8 Extraordinary item, net gain on debt extinguishment................................... 12.0 0.0 0.0 7.3 -------- -------- ------------ ------------ Net income (loss)................................. (3.6%) (4.0%) (8.7%) 9.1% -------- -------- ------------ ------------ -------- -------- ------------ ------------
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) COMPARED TO NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) REVENUES. Revenues increased approximately 25.8% from approximately $68.1 million for the nine months ended March 31, 1997, to approximately $85.7 million for the nine months ended March 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $13 million) and an 41 increase in contract services, patient services and other revenues (approximately $4.6 million) at existing facilities. Contract services revenues increased approximately 11.4% from approximately $35.2 million for the nine months ended March 31, 1997, to approximately $39.2 million for the nine months ended March 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $1.4 million) and an increase at existing facilities (approximately $2.6 million). The increase at existing facilities was due to higher utilization (approximately 6%) and by nominal increases in reimbursement from customers, primarily hospitals. Patient services revenues increased approximately 40.8% from approximately $31.2 million for the nine months ended March 31, 1997, to approximately $43.9 million for the nine months ended March 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $11.5 million) and an increase in revenues at existing facilities (approximately $1.8 million). The increase at existing facilities was due to higher utilization (approximately 12%), partially offset by nominal declines in reimbursement from third party payors and reduced revenues from the termination of a Fixed Facility and a Gamma Knife center in fiscal 1998 (approximately $0.6 million). COSTS OF OPERATIONS. Costs of operations increased approximately 17.1% from approximately $59.5 million for the nine months ended March 31, 1997, to approximately $69.7 million for the nine months ended March 31, 1998. This increase was due primarily to an increase in costs due to the acquisitions discussed above (approximately $8.9 million) and an increase in costs at existing facilities (approximately $2.7 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $1.4 million). The increase at existing facilities was due primarily to increases in costs of services and depreciation and amortization. Costs of services, including the provision for doubtful accounts, increased approximately 19.6% from approximately $38.5 million for the nine months ended March 31, 1997, to approximately $46 million for the nine months ended March 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $6.7 million) and an increase in costs at existing facilities (approximately $1.8 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $1 million). The increase in costs at existing facilities was due primarily to (i) salaries and benefits, (ii) occupancy and (iii) marketing costs, offset by reduced costs in service supplies and equipment maintenance. Equipment leases and depreciation and amortization increased approximately 12.5% from approximately $21 million for the nine months ended March 31, 1997, to approximately $23.7 million for the nine months ended March 31, 1998. This increase was due primarily to the acquisitions discussed above (approximately $2.2 million) and an increase in costs at existing facilities (approximately $0.8 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $0.3 million). The increase at existing facilities was due primarily to the Company upgrading its existing diagnostic imaging equipment. GROSS PROFIT. Gross profit increased approximately 85.8% from approximately $8.6 million for the nine months ended March 31, 1997, to approximately $16 million for the nine months ended March 31, 1998. This increase was due to the acquisitions discussed above (approximately $4.1 million), an increase at existing facilities (approximately $2.5 million) and the elimination of losses at the two terminated facilities discussed above (approximately $0.8 million). CORPORATE OPERATING EXPENSES. Corporate operating expenses increased approximately 21.8%, from approximately $5.3 million for the nine months ended March 31, 1997, to approximately $6.5 million for the nine months ended March 31, 1998. This increase was due primarily to additional consulting, legal and travel costs associated with the Company's acquisition activities. 42 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION. As part of the Recapitalization and the Senior Credit Facilities, the Company issued to GE 7,000 shares of Series C Preferred Stock to terminate GE's right to receive supplemental service fee payments equal to 14% of the Company's pretax income. The Series C Preferred Stock was valued at $7 million and the Company recorded a one-time non-cash provision of approximately $6.3 million, net of amounts previously accrued, to account for the preferred stock issuance. INTEREST EXPENSE, NET. Interest expense, net increased approximately 70.2% from approximately $2.7 million for the nine months ended March 31, 1997, to approximately $4.7 million for the nine months ended March 31, 1998. This increase was due primarily to additional debt related to the acquisitions discussed above (approximately $2.4 million) and additional debt related to the Company upgrading its existing diagnostic imaging equipment, offset by reduced interest as a result of (i) the reduction in interest rate and the extinguishment of approximately $23 million in long-term debt relating to the Recapitalization and the Senior Credit Facilities (approximately $1.2 million) and (ii) amortization of long-term debt. PROVISION FOR INCOME TAXES. For the nine months ended March 31, 1998, the Company recorded a provision for income taxes of approximately $0.4 million. The provision was due primarily to increased income from the Company's operations and reflects the anticipated tax rate for the full fiscal year. INCOME (LOSS) PER COMMON SHARE. On a diluted basis, net loss per common share was ($0.19) for the nine months ended March 31, 1998, compared to net income per common share of $0.14 for the same period in 1997. Excluding the one-time provision for supplemental service fee termination, net income per common share on a diluted basis would have been $0.62. The improvement in net income per common share before provision for supplemental service fee termination is the result of (i) increased gross profit and (ii) an increase in earnings from unconsolidated partnerships, offset by (i) increased corporate operating expenses, (ii) increased interest expense and (iii) the provision for income taxes. YEAR ENDED JUNE 30, 1997 COMPARED TO PRO FORMA YEAR ENDED JUNE 30, 1996 (UNAUDITED) REVENUES. Revenues increased approximately 6.1%, from approximately $87.7 million for the year ended June 30, 1996, to approximately $93.1 million for the year ended June 30, 1997. The increase in revenues was due primarily to MHC's acquisitions in October 1995, the acquisitions in fiscal 1997 and an increase in contract services, patient services and other revenues. Contract services revenues increased approximately 4.7% from approximately $45.7 million for the year ended June 30, 1996, to approximately $47.8 million for the year ended June 30, 1997. This increase was due to higher utilization from customers, primarily hospitals. Patient services revenues increased approximately 4% from approximately $41 million for the year ended June 30, 1996, to approximately $42.7 million for the year ended June 30, 1997. This increase was due primarily to the acquisitions discussed above and to higher utilization at existing facilities, offset by declines in reimbursement from third party payors. COSTS OF OPERATIONS. Costs of operations decreased approximately 0.3% from approximately $80.6 million for the year ended June 30, 1996, to approximately $80.3 million for the year ended June 30, 1997. This decrease was due primarily to the write down of approximately $1.5 million of goodwill and other intangibles related to two of MHC's Multi-Modality Centers during the year ended June 30, 1996, offset by increased costs associated with the acquisitions discussed above. GROSS PROFIT. Gross profit increased approximately 78.5% from approximately $7.1 million for the year ended June 30, 1996, to approximately $12.7 million for the year ended June 30, 1997. The increase was due to the acquisitions discussed above increased utilization at existing facilities and the decrease in costs of operations. 43 CORPORATE OPERATING EXPENSES. Corporate operating expenses decreased approximately 12.1%, from approximately $8.5 million for the year ended June 30, 1996, to approximately $7.4 million for the year ended June 30, 1997. This decrease was due primarily to the duplicative administrative infrastructure of MHC and AHS in 1996. In fiscal 1997, the Company achieved annualized cost savings compared to the historical combined costs of MHC and AHS. INTEREST EXPENSE, NET. Interest expense, net increased approximately 6.4% from approximately $3.8 million for the year ended June 30, 1996, to approximately $4.1 million for the year ended June 30, 1997. The increase was due to additional debt related to the acquisitions discussed above, offset by amortization of the deferred gain on the debt restructure with GE and amortization of long-term debt. PROVISION FOR SECURITIES LITIGATION SETTLEMENT. In anticipation of the MHC settlement of two class-action lawsuits originally filed in 1993, the Company recorded a charge of $1.5 million in the year ended June 30, 1996. In February 1996, MHC and the other parties to such lawsuits 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. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT. In connection with the Merger, MHC recorded an extinguishment of $9 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 fair value of MHC's 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. YEAR ENDED JUNE 30, 1997 COMPARED TO 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 revenues as a result of the Merger (approximately $38.7 million), increases in revenues due to acquisitions (approximately $2 million) and an increase in contract services, patient services and other revenues at MHC (approximately $25.9 million). The increase of approximately $25.9 million in MHC revenues was due primarily to a year of results for 1997 compared to the six month period in 1996. MHC revenues decreased by approximately 0.1% from approximately $52.9 million (on an annualized basis) for the six months ended June 30, 1996 to approximately $52.4 million for the year ended June 30, 1997. 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 revenues as a result of the Merger (approximately $7.8 million), an increase in revenues due to acquisitions (approximately $0.2 million) and an increase in MHC revenues of approximately $19.8 million. The increase of approximately $19.8 million was due primarily to a year of results for 1997 compared to a six month period in 1996. MHC revenues decreased by approximately 0.5% from approximately $40.1 million (on an annualized basis) for the six months ended June 30, 1996 to approximately $39.9 million for the year ended June 30, 1997. This decrease was due to reductions in reimbursement (approximately 6%) from customers, primarily hospitals, offset by increased utilization (approximately 30%). 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 revenues as a result of the Merger (approximately $30.5 million), increased revenues due to acquisitions (approximately $1.8 million), and an increase in MHC revenues of approximately $4.6 million. The increase in MHC revenues of approximately $4.6 million was due primarily to a year of results for 1997 44 compared to a six month period in 1996. MHC revenues decreased by approximately 11% from approximately $11.7 million (on an annualized basis) for the six months ended June 30, 1996 to approximately $10.4 million for the year ended June 30, 1997. 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%). 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 costs as a result of the Merger (approximately $29.8 million), an increase in costs due to acquisitions (approximately $1.5 million), and an increase in costs at MHC of approximately $21.6 million. The increase of approximately $21.6 million at MHC was due primarily to a year of results for 1997 compared to a six month period in 1996. MHC costs decreased by approximately 10.6% from approximately $54.8 million (on an annualized basis) for the six months ended June 30, 1996 to approximately $49 million for the year ended June 30, 1997. 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 costs as a result of the Merger (approximately $20.8 million), an increase in costs due to acquisitions (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. MHC costs decreased by approximately 8.7% from approximately $33 million (on an annualized basis) for the six months ended June 30, 1996 to approximately $30.2 million for the year ended June 30, 1997. This decrease was due to (i) reduced costs in service supplies and equipment maintenance and (ii) one time charges in fiscal 1996 related to the closure of two Multi-Modality Centers and the early return of four Mobile Facilities. 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 costs as a result of the Merger (approximately $9.2 million), increased costs due to acquisitions (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. MHC costs decreased by approximately 13.3% from approximately $21.8 million (on an annualized basis) for the six months ended June 30, 1996 to approximately $18.9 million for the year ended June 30, 1997. This decrease was due to a write down of approximately $1.5 million of intangibles in fiscal 1996 which did not occur in fiscal 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. The Company recorded a non-recurring expense of $6.3 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 as a result of the Merger (approximately $8.9 million), an increase due to acquisitions (approximately $0.5 million), and an increase at MHC (approximately $4.3 million). 45 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 million) compared to the historical combined costs of MHC and AHS, 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 acquisitions (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 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 (x) increased corporate operating expenses and (y) increased interest expense. MAXUM HEALTH CORP. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) REVENUES. Revenues increased by approximately 8.3% from approximately $24.4 million for the six months ended June 30, 1995 to approximately $26.5 million for the six months ended June 30, 1996. The increase in revenues was due primarily to the (i) acquisition of certain customer contracts in April 1995, (ii) acquisition of certain Fixed Facility locations in October 1995 and (iii) increases in volumes on certain contracts serviced by Mobile Facilities and Fixed Facilities. These increases were offset by decreases in reimbursement rates from third party payors. COSTS OF OPERATIONS. Costs of operations increased by approximately 19.3% from approximately $23 million for the six months ended June 30, 1995 to approximately $27.4 million for the six months ended June 30, 1996. 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 Multi-Modality 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. 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 Multi-Modality 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 acquisitions 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 by approximately $0.4 million for the six months ended June 30, 1995 compared to the six months ended June 30, 1996. This decrease is primarily attributable to a $0.3 million charge recorded in June 1995. A similar charge was not recorded in 1996. 46 Depreciation and amortization increased by approximately $0.7 million for the six months ended June 30, 1995 compared to the six months ended June 30, 1996. 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 by approximately 166.3% from approximately $1.4 million for the six months ended June 30, 1995 to a loss of approximately $1 million for the six months ended June 30, 1996. This decrease was primarily attributable to the increase in costs of services discussed above. CORPORATE OPERATING EXPENSES. Corporate operating expenses increased by approximately 11.1% from approximately $1.9 million for the six months ended June 30, 1995 to approximately $2.1 million for the six months ended June 30, 1996. 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 by approximately 76.5% from approximately $0.6 million for the six months ended June 30, 1995 to approximately $1.1 million for the six months ended June 30, 1996. 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 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 MHC 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. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 REVENUES. Revenues increased by approximately 10.3% from approximately $45.9 million for the year ended December 31, 1994 to approximately $50.6 million for the year ended December 31, 1995. 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 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, including 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 Multi-Modality Centers, offset by continued declines in reimbursement rates. Other revenues decreased during 1995 compared to 1994, due primarily to the sale of MHC's technical services division in June 1994. 47 COSTS OF OPERATIONS. Costs of operations increased by approximately 7.4% from approximately $45.4 million for the year ended December 31, 1994 to approximately $48.8 million for the year ended December 31, 1995. 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 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 by approximately $0.8 million, or approximately 88%, for the year ended December 31, 1995 compared to the year ended December 31, 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 by approximately $0.7 million, or approximately 41% for the year ended December 31, 1995 compared to the year ended December 31, 1994. The increase was due primarily to the increase in patient services revenues and to costs incurred related to the capitated managed care contract. 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 operations 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. The provision for doubtful accounts increased by approximately $0.5 million, or approximately 48% for the year ended December 31, 1995 compared to the year ended December 31, 1994, due primarily to the increase in patient services revenues and a shift in the payor mix at MHC's Multi-Modality Centers related to the penetration of managed care. This change in payor mix had an unfavorable impact on reimbursement rates realized by the Multi-Modality 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 by approximately $0.2 million, or 6% for the year ended December 31, 1995 compared to the year ended December 31, 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 by approximately $1.4 million, or approximately 326% for the year ended December 31, 1995 compared to the year ended December 31, 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 by approximately 16.5% from approximately $4 million for the year ended December 31, 1994 to approximately $3.4 million for the year ended December 31, 1995. 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 by approximately 58.3% from approximately $0.8 million for the year ended December 31, 1994 to approximately $0.3 million for the year ended December 31, 1995. This decrease was due to the sale of certain partnerships in late 1994 discussed below. INTEREST EXPENSE, NET. Interest expense, net increased by approximately 34.8% from approximately $1.2 million for the year ended December 31, 1994 to approximately $1.6 million for the year ended December 31, 1995. 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. 48 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 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. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was approximately $10 million for the nine months ended March 31, 1998 and $7.3 million for the year ended June 30, 1997. Cash provided by operating activities resulted primarily from net income before depreciation and amortization (approximately $9.3 million) and the provision for supplemental service fee termination ($6.3 million), offset by an increase in accounts receivable (approximately $4.7 million). The increase in accounts receivable is due primarily to the Company's acquisition activities. Net cash used in investing activities was approximately $29.1 million for the nine months ended March 31, 1998 and $30.3 million for the year ended June 30, 1997. Cash used in investing activities resulted primarily from the Company purchasing new diagnostic imaging equipment or upgrading its existing diagnostic imaging equipment (approximately $15.2 million) and from the Company's acquisition activities (approximately $12.9 million). The Company generated approximately $21.6 million from financing activities, primarily from the Carlyle investment pursuant to the Recapitalization, which was used to refinance a portion of the Company's outstanding indebtedness. The decrease in cash from the refinancing of debt was offset primarily by increased debt incurred in connection with the Company's acquisition activities. The Company has committed to purchase or lease, at an aggregate cost of approximately $11.3 million, six MRI systems for delivery during the six months ending September 30, 1998. The Senior Credit Facilities are expected to 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 $24 million, including siting costs, 20 Open MRI systems for delivery and installation over the next two years. As of March 31, 1998, the Company had installed three of such Open MRI systems: one at an existing Multi-Modality Center, one at an existing Fixed Facility and one in a newly opened Fixed Facility, and siting improvements were under construction for installation of three other Open MRI systems. The Company may purchase, lease or upgrade other MRI systems as opportunities arise to place new equipment into service when new contract services agreements are signed, existing agreements are renewed, acquisitions are completed, or new imaging centers are developed in accordance with the Company's business strategy. On October 14, 1997, the Company consummated the Recapitalization, pursuant to which the Company issued 25,000 shares of Series B Preferred Stock and warrants to purchase 250,000 shares of the Company's common stock to Carlyle for cash proceeds of $25 million and 27,953 shares of Series C Preferred Stock to GE as part of the Recapitalization. Concurrently, the Company entered into the Senior Credit Facilities with NationsBank, N.A., as agent, which included a $50 million term loan facility, a $25 million revolving working capital facility and, as amended, a $75 million acquisition facility. The net proceeds from the Carlyle investment were used to refinance a portion of the outstanding GE indebtedness (approximately $20 million). At the initial funding of the Senior Credit Facilities, all of the term loan facility was drawn down to refinance all of the remaining GE indebtedness (approximately $50 million) and approximately $8 million of the revolving facility was drawn down for working capital purposes. See 49 "Description of Preferred Stock" and "Description of Senior Credit Facilities." The Company used the net proceeds from the issuance of the Outstanding Notes, together with the borrowing under the term loan portion of the Senior Credit Facilities, to repay all amounts outstanding under the revolving credit facility and the acquisition facility portions of the Senior Credit Facilities, leaving the $75 million acquisition facility and the $25 million working capital facility available in full for future borrowings. See "Use of Proceeds." The terms of the Series B Preferred Stock, the Series C Preferred Stock and the Senior Credit Facilities contain certain restrictions on the Company's ability to act without first obtaining a waiver or consent from Carlyle, GE and the required lenders under the Senior Credit Facilities. In addition, the covenants contained in the Senior Credit Facilities and the Notes will restrict, among other things, the ability of the Company and the Subsidiary Guarantors to incur additional indebtedness and issue preferred stock, enter into sale and leaseback transactions, pay dividends or make certain other restricted payments, incur liens, sell stock of subsidiares, apply net proceeds from certain asset sales, merge or consolidate with any other person, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company and enter into certain transactions with affiliates. See "Description of Notes" and "Description of Senior Credit Facilities." The Company believes that, based on proceeds from the issuance of the Outstanding Notes, current levels of operations and anticipated growth, its cash from operations, together with other available sources of liquidity, including borrowings available under the Senior Credit Facilities, will be sufficient over the next several years to fund anticipated capital expenditures and make required payments of principal and interest on its debt, including payments due on the Notes and obligations under the Senior Credit Facilities. In addition, the Company continually evaluates potential acquisitions and expects to fund such acquisitions from its available sources of liquidity, including borrowings under the Senior Credit Facilities. The Company's acquisition strategy, however, may require sources of capital in addition to that currently available to the Company, and no assurance can be given that the Company will be able to raise any such necessary additional funds on terms acceptable to the Company or at all. See "Risk Factors--Business Strategy; Acquisitions." YEAR 2000 ISSUE The Company has assessed and continues to assess the impact of the Year 2000 Issue on its reporting systems and operations. The Year 2000 Issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date occurs, date sensitive systems may recognize the Year 2000 as 1900 or not at all. This inability to recognize or properly treat Year 2000 may cause the Company's systems to process critical financial and operational information incorrectly. The Company has developed a plan to modify existing computer systems and applications. The Company has not determined the final amounts necessary to modify existing computer systems and applications but believes such amounts will not be material. If the Company's remediation plan is not successful, there could be a significant disruption of the Company's ability to transact business with its customers, third party payors and suppliers. INFLATION Inflation in recent years has not had a significant impact on the Company'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. 50 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. In fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share ("EPS")". SFAS No. 128 replaces primary EPS and fully diluted EPS with basic EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed in the same way as the previously used fully diluted EPS, except that the calculation now uses the average share price for the reporting period to compute dilution from options and warrants under the treasury stock method. In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." SFAS 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 effect on the Company. 51 THE DIAGNOSTIC IMAGING INDUSTRY OVERVIEW Diagnostic imaging uses non-surgical techniques to generate representations of internal structures and organs on film or video. The Company believes that diagnostic imaging services accounted for 1997 revenues in the United States in excess of $50 billion, constituting approximately 5% of total health care spending. The Company believes that outpatient diagnostic imaging services, including MRI services, accounted for approximately $6 billion of revenues in the United States in 1996, which is the most recent year for which such information is available. The approximately 4,000 MRI systems in the United States include approximately 2,400 hospital-owned systems, 1,000 independent fixed site systems and 600 mobile systems. MRI uses high strength magnetic fields and radio waves to produce cross-sectional images of the anatomy, enabling physicians to differentiate between internal organs, structures and tissues, thereby facilitating the early diagnosis of diseases and disorders. MRI frequently lessens the cost and amount of care needed and often eliminates the need for invasive diagnostic procedures. MRI is the preferred imaging modality for the brain, the spine and soft tissue because it produces a superior image and does not expose patients to ionizing radiation. As a result of MRI's increasing cost efficiency and clinical effectiveness, MRI services have experienced substantial growth as measured by total utilization, which increased at a compounded annual growth rate of 8.6% from 7.7 million in 1993 to 10.7 million in 1997. The Company believes that growth in MRI scan volumes has been attributable to increased physician acceptance, substitution of MRI for other imaging modalities (including x-ray based techniques), expanding applications for MRI technology and health care reform, which has led to a significant increase in outpatient services. DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY Diagnostic imaging systems have evolved from conventional x-rays to the advanced technologies of MRI, CT, ultrasound and nuclear medicine. Additional services provided by some diagnostic imaging companies, such as InSight, include radiation oncology, lithotripsy and Gamma Knife procedures. Following is a brief description of such diagnostic imaging and related services: - MRI uses magnetic fields and radio waves to produce cross-sectional images of the anatomy, enabling physicians to differentiate between internal organs, structures and tissues, thereby facilitating the early diagnosis of diseases and disorders. - CT uses digital x-ray technology to provide cross-sectional images of particular organs or areas of the body. - Ultrasound uses sound wave technology to generate images of soft tissues and internal body organs. - Nuclear medicine detects gamma radiation generated by inhaled or injected pharmaceuticals to develop information about organ functions. - X-ray is the conventional method of producing bone images and contrast-enhanced vasculature and organ images. Digital x-ray systems add computer image processing capability to traditional x-ray images. - Radiation oncology uses external beam radiation or electrons from linear accelerators to treat cancer. - Lithotripsy uses extracorporeal shockwaves to shatter kidney stones, which then pass out of the body naturally. - Gamma Knife procedures use a radiosurgical device to treat intracranial neoplasma and vascular anomalies without surgical intervention. 52 Each of these diagnostic imaging and treatment modalities (other than conventional x-ray) represents the marriage of computer technology and various medical imaging modalities. See "Business--Diagnostic Imaging and Treatment Services Offered." 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. Much of the thrust of product development during the last 20 years has been to reduce the hazards associated with conventional x-ray and nuclear medicine techniques, which include potentially harmful ionizing radiation, and to develop new, virtually harmless imaging technologies such as ultrasound and MRI. The Company expects technological improvements to expand the services and capabilities of diagnostic imaging systems and to favorably affect the diagnostic imaging industry in the upcoming years. Originally, MRI was used to explore the structure of the brain and for spinal and orthopedic imaging. Currently, however, newer MRI methods are creating a much broader array of uses for MRI. Magnetic resonance angiography, for example, is used to create images of blood flow through vessels, which may reduce the cost of bypass surgery and the length of inpatient hospital stay and replace conventional angiography for some patients. Furthermore, experimental MRI imaging techniques, such as magnetic resonance spectroscopic imaging, are used to show the functions of the brain and to investigate how epilepsy, AIDS, brain tumors, Alzheimer's and other abnormalities affect the brain. Additional improvements in MRI technologies, contrast agents and scan capabilities are leading to new non-invasive methods of diagnosing blockages in the heart's vital coronary arteries, liver metastasises, pelvic diseases and certain vascular abnormalities without exploratory surgery. MRI INDUSTRY TRENDS In 1984, the Food and Drug Administration (the "FDA") approved the sale of MRI systems to community hospitals and private clinics. MRI services today are provided by hospitals with in-house systems, independent fixed site operators and independent mobile operators. The history of the MRI industry can be divided into three periods: (i) initial growth from 1984 to 1992; (ii) downturn in 1993 and 1994; and (iii) renewed growth and consolidation from 1995 to the present. The increased use of MRI as a diagnostic tool between 1984 and 1992 resulted from a variety of factors, including declining equipment costs, increased physician acceptance of MRI technology, increased number of clinical applications and Congressional Medicare reform in 1983, which has led to a significant increase in outpatient services. Changes in the health care industry and legislative reform between 1992 and 1994 slowed the growth of the MRI industry. The threat of health care reform and the desire to control medical costs and pricing placed physicians under scrutiny to control costs and further contributed to the decrease in use of MRI by the medical profession. Simultaneously, the shift towards HMOs and the trend towards decreased utilization of outpatient services and declining reimbursement rates led to a period in which the use of MRI as a diagnostic tool was limited. Despite the new cost-conscious environment in which hospitals and physicians operated, the advantages of MRI as compared to other forms of diagnostic imaging equipment, development of new practical uses of MRI and increased Medicare reimbursement levels (1% to 2% increase per year between 1994 and 1996) resulted in increased MRI use beginning in 1995 to 1996. As a result, hospitals and other health care providers seeking to provide MRI technology and related services despite budgetary limitations are using third parties, such as the Company, to provide the necessary imaging systems and related services. Mobile MRI is a cost-effective alternative for hospitals unwilling or unable to make the significant capital investment associated with MRI systems or lacking the patient volume necessary to use an MRI system in a cost-effective manner. Mobile MRI operators employ systems housed in specially designed trailers and typically enter into contracts to provide a specified schedule of service on a fee-per-scan basis. Operators 53 then design schedules for each system to rotate among multiple hospitals in a manner that optimizes system utilization. The MRI services industry is highly fragmented. Recently, however, the industry has begun to undergo consolidation. The Company believes such consolidation is primarily driven by (i) economies of scale in the provision of services to a larger customer base; (ii) growth of managed care in the delivery of health care services; and (iii) the decision by many smaller, capital constrained operators to sell their MRI businesses rather than make substantial investments in new imaging systems. Despite ongoing industry consolidation, the top ten MRI service providers accounted for less than 15% of the nation's total outpatient diagnostic imaging revenues in 1996, which is the most recent year for which such information is available. 54 BUSINESS The Company is a leading nationwide provider of diagnostic imaging and related information services, including MRI, CT, mammography, ultrasound, x-ray and lithotripsy services. The Company believes it is unique in its ability to offer a broad continuum of diagnostic imaging services, ranging from single modality Mobile Facilities to comprehensive Multi-Modality Centers to the joint ownership and management of the multi-modality radiology department of a hospital or multi-specialty physician group. The breadth of the Company's services allows it to meet the diverse and developing needs of its customers, which include leading health care providers such as managed care organizations, hospitals, radiologists and insurance companies. InSight delivers these services through strong regional networks of diagnostic imaging facilities, which will continue to be the principal method of development for the Company. The Company believes its regional networks increase its economies of scale and enhance its appeal to managed care organizations, thereby increasing its overall scan volume. The Company has a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio), and provides its services through 50 Fixed Facilities, including 16 Multi-Modality Centers, and 51 Mobile Facilities. For the twelve months ended March 31, 1998, MRI services accounted for approximately 77% of the Company's total revenues. The Company was formed in June 1996 as a result of the merger of AHS and MHC, two publicly held providers of diagnostic imaging services. The Merger was consummated in order to achieve cost savings, enhanced marketing capabilities, increased market presence and greater financial resources, and to take advantage of positive consolidating trends in the diagnostic imaging industry. Under the leadership of its experienced management team, the Company has successfully implemented its business strategy and capitalized on the business strengths afforded by the Merger through a geographically disciplined growth strategy focused on providing the highest quality, most cost-effective diagnostic information within its regional diagnostic imaging networks. The Company's operating profits have increased during each of the seven quarters since the Merger (excluding a one-time non-cash charge of $6.3 million incurred in connection with the Recapitalization) due in part to its successful integration of seven acquisitions and increases in scan volumes, at its existing facilities. For the twelve months ended March 31, 1998, after giving effect to the Pro Forma Transactions, the Company had revenues of $135.3 million and adjusted EBITDA of $38.1 million. COMPETITIVE STRENGTHS The Company believes it is well-positioned to take advantage of current trends in the diagnostic imaging industry and attributes its favorable market position to the following strengths: STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. InSight has developed a substantial presence in its targeted markets by forming regional networks of diagnostic imaging services that provide superior service and convenience to the Company's customers, including managed care organizations, hospitals, radiologists and insurance companies. The Company believes these networks enable InSight to increase its overall scan volume by effectively addressing its customers' demands for high-quality service, customized diagnostic information, flexible scheduling, single invoices and convenient locations. In addition, such regional networks enable the Company to benefit from enhanced economies of scale, including greater purchasing power, reduced overhead, centralized billing and more efficient use of marketing expenditures. CONTINUUM OF SERVICES. The Company believes it is unique in its ability to offer a broad continuum of diagnostic services, from single modality Mobile Facilities to comprehensive Multi-Modality Centers to the joint ownership and management of the multi-modality radiology department of a hospital or multi- specialty physician group. Through this continuum of increasing value-added services, the Company is able to meet the diverse and developing needs of its customers as their individual requirements change. 55 STRONG RELATIONSHIPS WITH HOSPITALS AND MANAGED CARE. The Company's contractual relationships with its hospital and managed care customers accounted for approximately 83% of the Company's revenues during the twelve months ended March 31, 1998. HOSPITALS. The Company has over 200 exclusive contracts with hospitals for Mobile Facility services and 13 exclusive contracts with hospitals for Fixed Facility services. The Company provides MRI services to hospitals that require such services but that do not want to incur the substantial capital investment associated with MRI systems. InSight's Mobile Facilities employ systems housed in specially designed trailers and typically operate under contracts with average terms of three years to provide a specified schedule of service on a fee-per-scan basis. The Company designs schedules for each system to rotate among multiple hospitals in a manner that optimizes equipment utilization. Since the Merger, the Company has experienced a renewal rate of approximately 85% for its Mobile Facility hospital contracts. InSight's contracts with hospitals to provide Fixed Facility and other diagnostic imaging services generally last from five to ten years. MANAGED CARE ORGANIZATIONS. The Company recognizes managed care as the driving force behind its changing customer mix and has focused its marketing efforts on appealing to what it believes are the primary concerns of managed care: quality, cost, convenience and service. As a result, the Company currently has in excess of 400 contracts with managed care organizations for diagnostic imaging services at the Company's Fixed Facilities, primarily on a discounted fee-for-service basis. The Company provides managed care organizations with "one-stop shopping" consisting of centralized scheduling, single invoices, wide geographic coverage, quality assurance and utilization management. The Company experienced a 25% increase in the number of its managed care contracts from March 31, 1997 to March 31, 1998. TECHNOLOGICALLY ADVANCED EQUIPMENT. The Company's Fixed Facilities and Mobile Facilities are operated with state-of-the-art equipment. Of the Company's 100 conventional MRI systems, 79% have a magnet strength of at least 1.0 Tesla. In addition, the Company operates 13 Open MRI systems, nine of which are less than one year old. The Company believes its technologically advanced equipment allows the Company to perform the variety and volume of scans and to produce the high quality images that its customers demand. In order to increase throughput and productivity, the Company's MRI systems are periodically upgraded with the latest software, which reduces the time per scan and improves image quality. As a result of these upgrades, the Company's maintenance capital expenditures have been stable and the Company expects such expenditures to remain stable for the foreseeable future. In addition, the Company believes it is well-positioned to benefit from new applications (e.g. mammography and stroke detection) for MRI technology. EXPERIENCED MANAGEMENT TEAM. The Company has a highly experienced senior management team with an average of 15 years industry experience. Since the Merger, management has successfully implemented the Company's business strategy, resulting in increasing quarterly operating profitability (excluding a one-time non-cash charge of $6.3 million incurred in connection with the Recapitalization). In addition, the Company's successful integration of seven acquisitions has produced increased revenues and cash flows. Management will continue to develop the Company's business strategy by growing through regional network expansion, pursuing opportunities within existing networks, focusing on managed care and introducing new products. STRONG EQUITY SPONSORSHIP. InSight enjoys strong strategic support from its equity sponsors, The Carlyle Group and GE. In October 1997, Carlyle purchased $25 million of a new series of the Company's preferred stock, currently convertible into approximately 30% of the Company's common stock on a fully diluted basis, and GE exchanged its existing preferred stock for a new series of the Company's preferred stock, currently convertible into approximately 33% of the Company's common stock on a fully diluted basis. The Carlyle Group is a global investment firm which originates, structures and acts as lead equity investor in targeted industries. Designees of Carlyle and GE serve on the Board. 56 BUSINESS STRATEGY The Company's business strategy is to further develop and expand regional diagnostic imaging networks that emphasize quality of care, produce cost-effective diagnostic information and provide superior service and convenience to its customers. The Company's strategy primarily consists of the following components: GROWTH THROUGH REGIONAL NETWORK EXPANSION. The Company intends to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing regional diagnostic imaging networks through geographically disciplined acquisitions. In addition, the Company may develop or acquire additional regional networks in strategic locations where the Company can offer a broad range of services to its customers and realize increased economies of scale. PURSUE OPPORTUNITIES WITHIN EXISTING NETWORKS. The Company will continue to market current diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume. The Company also expects to increase scan volume as new applications develop for the Company's existing diagnostic imaging equipment. In addition, the Company's management remains focused on maximizing cost savings through increased purchasing power and the reduction of overhead. FOCUS ON MANAGED CARE. As the Company continues to strengthen its regional diagnostic imaging networks, management recognizes the importance of managed care customers and has developed specialized "one-stop shopping" for managed care organizations. InSight intends to capitalize on its existing relationships in the managed care industry and believes its regional networks and strategically located Fixed Facilities give it a significant competitive advantage in marketing to managed care organizations. NEW PRODUCT INTRODUCTIONS. The Company is currently implementing a variety of new products and services designed to further leverage its core business strengths, including: OPEN MRI SYSTEMS. The Company intends to expand beyond its existing 13 Open MRI systems by establishing Open MRI imaging services throughout its regional diagnostic imaging networks. Open MRI services allow for the diagnosis of a patient without requiring the patient to enter into a conventional large-bore MRI. The "open" application of the MRI technology offers treatment previously unavailable to certain patients, including infants, pediatric patients, claustrophobic patients, large or obese patients and patients suffering from post-traumatic stress syndrome. Certain MRI applications, such as kinematic studies, are more easily conducted in an Open MRI than in a conventional MRI. RADIOLOGY CO-SOURCE PRODUCT. The Company seeks to develop its co-sourcing product, which will involve the joint ownership and management (outsourcing) of the physical and technical operations of the multi-modality radiology department of a hospital or multi-specialty physician group. The Company believes it has the expertise to manage these operations more efficiently and cost-effectively than many hospitals and multi-specialty groups and views the co-source product as a significant opportunity to expand its products and services from the $6 billion outpatient diagnostic imaging services industry to the $50 billion diagnostic imaging services industry as a whole. DIAGNOSTIC IMAGING AND TREATMENT SERVICES OFFERED The Company provides a broad range of diagnostic imaging services, including MRI, Open MRI, CT, ultrasound, nuclear medicine and x-ray services, as well as a range of treatment services, including radiation oncology, lithotripsy and Gamma Knife services. MRI SERVICES. The Company provides MRI services through 51 Mobile Facilities and 49 Fixed Facilities serving its regional networks. For the twelve months ended March 31, 1998, MRI services accounted for approximately 77% of the Company's total revenues. During the nine months ended March 31, 1998 compared to the same period during the prior year, the Company had an increase in scan 57 volumes at its existing facilities of approximately 12%. MRI uses high strength magnetic fields and radio waves to produce cross-sectional images of the anatomy, enabling physicians to differentiate between internal organs, structures and tissues, thereby facilitating the early diagnosis of diseases and disorders. MRI frequently lessens the cost and amount of care needed and often eliminates the need for invasive diagnostic procedures. MRI is the preferred imaging modality for the brain, the spine and soft tissue because it uses low energy radiowaves to manipulate protons (usually hydrogen) in the body. As a result, MRI produces a superior image without exposing patients to ionizing radiation. The major components of an MRI system are a large magnet, radio wave equipment and a computer for data storage and image processing. During an MRI study, a patient lies on a table, which is then placed into the magnet. Once in the magnetic field, the protons in a patient's body will tend to align with the magnetic field. Radio frequency ("RF") waves, produced by a radio antenna coil which surrounds the body part to be imaged, are "pulsed" against the magnetic field. The RF energy is then turned off, and the protons are observed for different types of behavior, movement or "relaxation". Different tissues have different relaxation times, depending on the amount of hydrogen or water in the tissue. The data on each proton's behavior are collected digitally by the system's computer and then reconstructed into cross-sectional images in three dimensional planes of orientation. The resulting image reproduces soft tissue anatomy (as found in the brain, spinal cord and interior ligaments of body joints such as the knee) with superior clarity, not available by any other currently existing imaging modality. A typical MRI examination takes from 20 to 45 minutes. Because the signals used to produce magnetic resonance images contain both chemical and structural information, the Company believes this technique has greater potential for many important diagnostic applications than any other imaging technology currently in use. While existing MRI systems demonstrate excellent portrayals of anatomical structures within the human body, of even greater significance is the fact that MRI is also sensitive to subtle differences between tissues. Thus, MRI offers not only the opportunity for highly effective classical diagnosis, but also the potential for future monitoring of chemical processes within the body. Depending upon type, features and options selected, an MRI system and related housing and installation generally cost between $1.6 million and $2.2 million. The largest manufacturers of MRI systems are General Electric Medical Systems ("GEMS"), Hitachi Medical Systems America, Inc., Phillips Medical Systems North America Company, Picker International, Inc. and Siemens Medical Systems, Inc. These manufacturers also supply maintenance and service under warranties and contracts. Industry participants typically enter into contracts with the manufacturers after expiration of the warranty for comprehensive maintenance programs on equipment to minimize downtime (the period of time equipment is unavailable during scheduled use hours because of malfunctions). OPEN MRI SERVICES. The Company has 13 Open MRI systems, nine of which are less than one year old. 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. Open MRI systems use permanent electromagnetic technology rather than superconductivity magnets, substantially lowering both siting and service costs, but do not provide images as efficiently as conventional large-bore MRI systems. The open design allows for studies not normally possible in conventional MRI systems, including exams of infants, pediatric patients, claustrophobic patients, large or obese patients and patients suffering from post-traumatic stress syndrome. Open MRI is also capable of conducting musculoskeletal exams that require the patient to move or flex, such as kinematic knee studies. A typical Open MRI non-kinematic exam takes from 45 to 90 minutes. Open MRI systems are priced in the range of $0.6 million to $1 million. The Company believes that Open MRI provides additional flexibility to its customers within a regional network who either need or desire Open MRI capabilities. CT SERVICES. Thirteen of the Company's Multi-Modality Centers offer CT services in addition to MRI. CT scanning is performed by the rotation of a high output x-ray tube around the patient. The x-ray 58 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 side of the patient opposite 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. CT systems perform multiple scans to create a "stack" of cross-sectional images. Typical scanning times for a single 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. ULTRASOUND SERVICES. Nine of the Company's Multi-Modality Centers offer ultrasound services in addition to MRI. 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 SERVICES. Five of the Company's Multi-Modality Centers offer nuclear medicine services in addition to MRI. Nuclear medicine gamma cameras, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals injected or inhaled into the body, are used to provide information about organ function as opposed to anatomical structure. X-RAY SERVICES. Thirteen of the Company's Multi-Modality Centers offer x-ray services in addition to MRI. X-ray is the most common energy source used in imaging the body. In addition to its use for CT scans, x-ray is employed in two other imaging modalities: (i) conventional x-ray systems, the oldest method of imaging, produce bone images and images of contrast-enhanced vasculature and organs and constitute the largest number of installed systems; and (ii) digital x-ray systems add computer image processing capability to conventional x-ray systems. RADIATION ONCOLOGY SERVICES. The Company offers radiation oncology services at one Multi-Modality Center and at one dedicated radiation oncology center. Radiation oncology generally uses external beam radiation from a linear accelerator to treat cancer with ionizing radiation of the same type, but at higher doses, as for diagnostic x-rays. In addition to x-rays, certain linear accelerators have the capacity to produce electrons. While x-ray radiation can penetrate the body a certain distance before delivering its maximum dose, and therefore can treat internal structures, electrons have less penetrating ability and permit the clinician to treat superficial lesions. Radiation oncology also includes brachytherapy, which implants radioactive sources directly into or near a tumor. LITHOTRIPSY SERVICES. The Company acquired four mobile lithotripters in connection with its acquisition of Signal, all of which operate in New England or the Southeast. Lithotripsy is a non-invasive procedure for the treatment of kidney stones, typically performed on an outpatient basis, that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery. Lithotripters shatter kidney stones through the use of extracorporeal shockwaves, following which the resulting kidney stone fragments pass out of the body naturally. GAMMA KNIFE SERVICES. The Company currently owns one Gamma Knife system. The Gamma Knife delivers a single high dose of ionizing radiation by way of individual beams focused on a common target, producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient's skull. The Gamma Knife treatment requires no open surgical intervention, no lengthy hospital stay and no risk of post-surgical bleeding or infection. Typical treatment time is approximately 10 to 15 minutes per area of interest ("isocenter"). Gamma Knife systems generally cost approximately $3 million. During the nine months ended March 31, 1998, the Company transferred the operations of one Gamma Knife unit to the hospital where it was located. 59 OPERATIONS CUSTOMERS AND FEES. The Company's revenues are primarily generated from contract services and patient services. For the nine months ended March 31, 1998, contract services and patient services accounted for 46% and 51%, respectively, of the Company's revenues. Contract services revenues are generally earned from services billed to a hospital or other health care provider. During the nine months ended March 31, 1998, (i) 97% of contract services revenues were derived from fee-for-service arrangements, in which revenues are based upon a contractual rate per procedure; (ii) 1% of contract services revenues were derived from equipment rental, in which revenues are generally based upon a fixed monthly rental; and (iii) 2% of contract services revenues were derived from management fees. Contract services revenues are primarily earned through Mobile Facilities and certain Fixed Facilities and are generally paid pursuant to hospital contracts with a life span of one to five years for Mobile Facilities and five to ten years for Fixed Facilities. The Company has over 200 exclusive contracts with hospitals for Mobile Facility services and 13 exclusive contracts with hospitals for Fixed Facility services. Patient services are billed directly to patients or third party payors (generally managed care organizations, Medicare, Medicaid, private insurers and workers compensation funds) on a fee-for-service basis, and are primarily earned through Fixed Facilities, including Multi-Modality Centers. The following chart illustrates the Company's payor mix based on revenues for its patient services and contract services for the twelve months ended March 31, 1998:
PATIENT CONTRACT PAYOR SERVICES SERVICES CONSOLIDATED(1) - -------------------------------------------------------------------------------- -------- -------- --------------- Hospital........................................................................ 2% 100 % 56% Managed Care.................................................................... 60% -- 27% Medicare/Medicaid............................................................... 23% -- 10% Workers' Compensation, Liens and Personal Injury................................ 10% -- 4% Indemnity Insurance............................................................. 5% -- 3%
- ------------------------ (1) Consolidated payor mix refers to the weighted average calculation of each type of payor contribution to the Company's respective patient services and contract services. The Company's Fixed Facility operations are principally dependent on the Company's ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). The Company currently has in excess of 400 contracts with managed care organizations for diagnostic imaging services provided at the Company's Fixed Facilities, primarily on a discounted fee-for-service basis. A significant decline in referrals and/or reimbursement rates would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Dependence on Referrals for Fixed Facilities." Each year approximately one-quarter to one-third of the Company's contract services agreements for Mobile Facilities are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past, when such agreements have not been replaced, the Company has generally been able to obtain replacement contracts. While some replacement accounts have initially been smaller than the lost accounts, such replacement accounts' revenues have generally increased over the term of the agreement. There can be no assurance, however, that new and renewal contracts will offset revenues lost from customers electing not to renew their contracts with the Company. Although the non-renewal of a single customer agreement would not have a 60 material adverse effect on the Company's contract services revenues, non-renewal of several agreements could have a material adverse effect on contract services revenues. In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some hospital accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, the Company's contract services revenues would be adversely affected. No single source accounts for more than 10% of the Company's revenues. See "Risk Factors--Contract Renewals." SALES AND MARKETING. The Company selectively invests in marketing and sales resources and activities for the purpose of obtaining new sources of revenues for the Company, expanding business relationships, growing revenues at its existing facilities and maintaining present business alliances and contractual agreements. Marketing activities include efforts to contact physicians, education programs on new applications and uses of technology, customer service programs and contracting with insurance payors for volume discounts. Sales activities principally focus on hospital customers who purchase Mobile Facility services from the Company or enter into other more extensive relationships for Fixed Facility partnerships or radiology department management services. EQUIPMENT. The Company has estimated that it has invested approximately $50 million since the Merger to replace and upgrade its existing diagnostic imaging systems and to purchase new systems. As a result, the Company has technologically advanced, state-of-the-art diagnostic imaging equipment. The Company owns or leases 137 diagnostic imaging and treatment systems, of which 100 are conventional MRI systems, 13 are Open MRI systems, 16 are CT systems, five are lithotripters, two are radiation oncology systems and one is a Gamma Knife. The Company owns 75 of its imaging and treatment systems and has operating leases for the remaining 59 systems. Of the Company's 100 conventional MRI systems, 36% have a magnet strength of 1.5 Tesla and 40% have a magnet strength of 1.0 Tesla. Currently, the industry standard magnet strength for fixed systems is 1.5 Tesla and the industry standard magnet strength for mobile systems is 1.0 Tesla. The Company is in the process of upgrading or replacing its remaining conventional MRI systems from magnet strengths of less than 1.0 Tesla to magnet strengths of at least 1.0 Tesla. Nine of the Company's 13 Open MRI systems are less than one year old. The Company's master lease agreement with GEMS includes a variable lease arrangement for 17 of the Company's 59 leased imaging and treatment systems, which significantly reduces the Company's downside cash flow risk. Under the Company's standard operating lease agreement with GEMS, the Company pays approximately $30,000 per month to lease each system. Under the variable rate election, the Company may choose to pay a monthly rental fee averaging $18,000 per system, plus 40% of the operating profits generated by such system, or to store idle systems at a fixed location for a monthly payment from GEMS of $1,500 per system, representing approximately half of the monthly maintenance costs for an idle system. The Company's variable lease arrangement with GEMS covers most of the Company's older systems, which the Company either has upgraded or expects to replace within the next 18 to 24 months. As of May 15, 1998, the Company had elected the variable lease option with respect to four of the 17 systems in the variable rate pool, each of which requires total monthly payments of $13,000 or less. The option to elect the variable lease structure in the future with respect to additional systems provides the Company with downside cash flow protection in the event that any particular MRI system experiences low utilization. Several substantial companies are presently engaged in the manufacture of MRI (including Open MRI), CT and other diagnostic imaging equipment, including GEMS, Hitachi Medical Systems, Inc., Philips Medical Systems North America Company, Picker International, Inc. and Siemens Medical Systems, Inc. The Company maintains good working relationships with many of the major manufacturers to better ensure an adequacy of supply as well as access to those types of diagnostic imaging systems which appear most appropriate for the specific diagnostic or treatment center to be established. 61 COMPETITION The health care industry in general, and the market for diagnostic imaging services in particular, is highly competitive. The Company competes principally on the basis of its reputation for productive and cost-effective quality services. The Company's operations must compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies, that own and operate imaging equipment. The Company will continue to encounter substantial competition from hospitals and independent organizations, including, with respect to its Mobile Facilities, Alliance Imaging, Inc. and its affiliates. Some of the Company's direct competitors that provide contract diagnostic imaging services may have access to greater financial resources than the Company. Certain hospitals, particularly the larger hospitals, may be expected to directly acquire and operate imaging and treatment equipment on-site as part of their overall inpatient servicing capability, subject only to their decision to acquire a diagnostic imaging system, assume the associated financial risk, employ the necessary technologists and satisfy applicable licensure requirements, if any. Historically, smaller hospitals have been reluctant to purchase imaging and treatement equipment. This reluctance, however, has encouraged the entry of start-up ventures and more established business operations into the diagnostic services business. As a result, there is significant excess capacity in the diagnostic imaging business in the United States, which negatively affects utilization and reimbursement. See "Risk Factors--Competition." LIABILITY INSURANCE The hospitals and physicians who use the Company's diagnostic imaging services and imaging systems are involved in the delivery of health care services to the public and, therefore, are exposed to the risk of liability claims. The Company's position is that it does not engage in the practice of medicine. The Company provides only the equipment and technical components of diagnositic imaging, including certain limited nursing services, and has not experienced any material losses due to claims for malpractice. Nevertheless, claims for malpractice have been asserted against the Company in the past and any future claims, if successful, could result in substantial damage awards to the claimants, which may exceed the limits of any applicable insurance coverage. While the Company maintains professional liability insurance, there can be no assurance that any such claims against the Company will not exceed the amount of insurance maintained. Successful malpractice claims asserted against the Company, to the extent not covered by the Company's liability insurance, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Risks Inherent in the Provision of Diagnostic Imaging Services." GOVERNMENT REGULATION The health care industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretations of existing laws can have a material effect on permissible activities of the Company, the relative costs associated with doing business and the amount of reimbursement by government and other third party payors. The federal government and all states in which the Company currently operates regulate various aspects of the Company's business. Failure to comply with these laws could adversely affect the Company's ability to receive reimbursement for its services and subject the Company and its officers to penalties. See "Risk Factors--Government Regulation." ANTI-KICKBACK STATUTES The Company is subject to federal and state laws which govern financial and other arrangements between health care providers. These include the federal anti-kickback statute which prohibits bribes, kickbacks, rebates and any other direct or indirect remuneration in return for or to induce the referral of an individual to a person for the furnishing, directing or arranging of services, items or equipment for which payment may be made in whole or in part under Medicare, Medicaid or other federal health care 62 programs. Violation of the anti-kickback statute may result in criminal penalties and exclusion from the Medicare and other federal health care programs. Many states have enacted similar statutes which are not limited to items and services paid for under Medicare or a federally funded health care program. In recent years, there has been increasing scrutiny by law enforcement authorities, HHS, the courts and Congress of financial arrangements between health care providers and potential sources of patient and similar referrals of business to ensure that such arrangements are not designed as mechanisms to pay for patient referrals. HHS interprets the anti-kickback statute broadly to apply, under certain circumstances, to distributions of partnership and corporate profits to investors who refer federal health care program patients to a corporation or partnership in which they have an ownership interest and to payments for service contracts and equipment leases that are designed to provide direct or indirect remuneration for patient referrals or similar opportunities to furnish reimbursable items or services. In July 1991, HHS issued "safe harbor" regulations that set forth certain provisions which, if met, will assure that health care providers and other parties who refer patients or other business opportunities, or who provide reimbursable items or services, will be deemed not to violate the anti-kickback statute. The Company is also subject to separate laws governing the submission of false claims. The Company believes that its operations materially comply with the anti-kickback statutes. See "Risk Factors--Government Regulation--Health Care Fraud and Abuse Regulations." STARK II; STATE PHYSICIAN SELF-REFERRAL LAWS A federal law, commonly known as the "Stark Law" or "Stark II," also imposes civil penalties and exclusions for referrals for "designated health services" by physicians to certain entities with which they have a financial relationship (subject to certain exceptions). "Designated health services" include, among other things, radiology services, including MRIs, CTs and ultrasound, and inpatient and outpatient hospital services. The law applies only to services reimbursable by Medicare or Medicaid. The Stark Law is self-effectuating and does not require implementing regulation; however, while implementing regulations have been issued relating to referrals for clinical laboratory services, final regulations have not been issued regarding the other designated health services. In addition, several states in which the Company operates have enacted or are considering legislation that prohibits "physician self-referral" arrangements or requires physicians to disclose to their patients any financial interest they may have with a health care provider whom they recommend. Possible sanctions for violating these provisions include loss of licensure and civil and criminal sanctions. Such state laws vary from state to state and seldom have been interpreted by the courts or regulatory agencies. Nonetheless, strict enforcement of these requirements is likely. Although the Company believes its operations materially comply with these federal and state physician self-referral laws, there can be no assurance that Stark II or other regulations will not be interpreted or changed in a manner that would have a material adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors--Government Regulation--Health Care Fraud and Abuse Regulations." INDEPENDENT PHYSIOLOGICAL LABORATORIES; INDEPENDENT DIAGNOSTIC TREATMENT FACILITIES Under past Medicare policy, imaging centers generally participated in the Medicare program as either medical groups or, subject to the discretion of individual Medicare carriers, Independent Physiological Laboratories ("IPLs"). The IPL is a loosely defined Medicare provider category that is not specifically authorized to provide imaging services. Accordingly, certain carriers permit IPLs to provide imaging services and others do not. In the past, the Company has preferred, to the extent possible, to operate its imaging centers for Medicare purposes as IPLs. The Company believes that the designation of its imaging centers as IPLs gave it greater operational control than it would have had if its imaging centers were operated under the medical group model, where the Company would function as a "manager". The Health Care Financing Administration ("HCFA") has established a new category of Medicare provider intended to replace IPLs, referred to as Independent Diagnostic Treatment Facilities ("IDTFs"). HCFA has not yet implemented a mechanism for processing IDTF applications, but the Company expects such mechanism to be put in place during calendar 1998. Under the regulations, it appears that imaging 63 centers will have the option to participate in the Medicare program either as IDTFs or as medical groups. The Company believes that the impact of the IDTF regulations is likely to be positive overall. Accordingly, the Company will convert some or all of its existing centers into IDTFs, except in those states where the medical group model is required. Since the mechanism to be used to convert to IDTFs is still undetermined, it is possible that such conversions will raise unanticipated issues. In addition, since the IDTF designation is new, it is unclear to what extent and in what manner IDTFs will be monitored by HCFA, but it is probable that HCFA will exercise increased oversight of IDTFs compared to IPLs, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Reimbursement of Health Care Costs." FDA PREMARKET APPROVALS The FDA has issued the requisite premarket approval for all of the MRI, CT, lithotripsy and Gamma Knife systems utilized by the Company. Although the Company does not believe that any further FDA approval is required in connection with equipment currently in operation or proposed to be operated, there can be no assurance that the Company's equipment vendors will be able to obtain any requisite FDA premarket approvals in the future. CERTIFICATES OF NEED Some states require hospitals and certain other health care facilities to obtain a CON or similar regulatory approval prior to the commencement of certain health care operations or services and/or the acquisition of major medical equipment, including MRI and Gamma Knife systems. CON regulations may limit or preclude the Company from providing diagnostic imaging services or systems in certain states. The Company believes that it will not be required to obtain CONs in most of the states in which it intends to operate and in those states where a CON is required, the Company believes it has complied or will comply with such requirements. Nevertheless, a significant increase in the number of states regulating the Company's business within the CON or state licensure framework could adversely affect the Company's business, financial condition and results of operations. Conversely, repeal of existing CON regulations in jurisdictions where the Company has obtained or operates under a CON could also adversely affect the Company's business, financial condition and results of operations as barriers to entry are reduced or removed. This is an area of continuing legislative activity, and there can be no assurance that the Company will not be subject to CON and licensing statutes in other states in which it operates or may operate in the future. See "Risk Factors--Government Regulation--Other State Health Care Regulations." RADIOLOGIST LICENSING The radiologists with whom the Company may enter into agreements to provide professional services are subject to licensing and related regulations by the states. As a result, the Company requires its radiologists to have and maintain appropriate licensure. Although the Company does not believe that such laws and regulations will either prohibit or require licensure approval of its business operations, there can be no assurance that such laws and regulations will not be interpreted to extend such prohibitions or requirements to the Company's operations. See "Risk Factors--Government Regulation--Health Care Fraud and Abuse Regulations." 64 REIMBURSEMENT OF HEALTH CARE COSTS MEDICARE The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain others. Providers of service are paid by the federal government in accordance with regulations promulgated by HHS and generally accept said payment, with nominal co-insurance amounts required to be paid by the service recipient, as payment in full. In general, these regulations provide for a specific prospective payment to reimburse hospitals for inpatient treatment services based upon the diagnosis of the patient. Although outpatient services such as those primarily provided by the Company are presently exempt from prospective payment reimbursement, Congress has instructed the Prospective Payment Assessment Commission to study alternative methods for reimbursing hospitals for outpatient services, including prospective payment methods, and the Medicare program has adopted fee schedules for some diagnostic services. Recent congressional and regulatory action has also imposed additional requirements on the eligibility of certain diagnostic services for reimbursement by the Medicare program, including new requirements regarding necessary documentation from ordering physicians and supervision by radiologists. Such congressional and regulatory action reflects industry-wide cost containment pressures which the Company believes will affect all health care providers for the foreseeable future. Such reductions in reimbursement levels may affect health care providers' ability to pay for the services offered by the Company and could indirectly adversely affect the Company's business, financial condition and results of operations. See "Risk Factors--Reimbursement of Health Care Costs." MEDICAID The Medicaid program is a combined federal and state program providing coverage for low income persons. The specific services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program. There can be no assurance that changes in Medicaid program reimbursement would not have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Reimbursement of Health Care Costs." MANAGED CARE HMOs and PPOs attempt to control the cost of health care services. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. The development and expansion of HMOs, PPOs and other managed care organizations within the Company's regional networks could have a negative impact on utilization of the Company's services in certain markets and/or affect the revenue per procedure which the Company can collect because such organizations will exert greater control over patients' access to diagnostic imaging services, the selection of the provider of such services and the reimbursement thereof. The Company expects that the excess capacity of equipment in the United States may negatively impact operations because of the competition among health care providers for contracts with all types of managed care organizations. As a result of such competition, the length of term of any contracts which the Company may obtain and the payment to the Company for such services may also be negatively affected. See "Risk Factors--Reimbursement of Health Care Costs" and "Business--Operations--Customers and Fees." PRIVATE INSURANCE REIMBURSEMENT Private health insurance programs generally have authorized the payment for diagnostic imaging and Gamma Knife procedures on satisfactory terms and 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, the Company believes that private 65 health insurance programs will also reduce reimbursement, which could have an adverse impact on the Company's business, financial condition and results of operations. See "Risk Factors--Reimbursement of Health Care Costs." LEGAL PROCEEDINGS The Company is engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of its business and has insurance policies covering such potential insurable losses where the Company believes such coverage is cost-effective. The Company believes that the outcome of any such lawsuits will not have a material adverse impact on the Company's business. On May 8, 1998, Medical Synergies, Inc. ("MSI") and its subsidiary, The Center for Diagnostic Medical Services, Inc. ("CDMSI"), filed a complaint against InSight Health Corp., a wholly owned subsidiary of the Company ("IHC"), and certain of its officers, E. Larry Atkins, Thomas V. Croal, Glenn P. Cato, Robert N. LaDouceur and Michael A. Boylan, in the District Court of Dallas County, Texas. Plaintiffs allege that they had a final and binding agreement with IHC with respect to the acquisition by IHC of certain assets, and assumption by IHC of certain liabilities, of MSI and CDMSI. Plaintiffs' complaint includes claims of anticipatory repudiation of an alleged agreement, fraud, negligent misrepresentation, tortious interference with contract, tortious interference with prospective business relations and attorneys' fees based on breach or repudiation of the alleged agreement. The complaint requests a judgment for actual, compensatory and consequential damages in an unspecified amount, punitive and exemplary damages in an unspecified amount, pre-judgment and post-judgment interest, attorneys' fees, expenses, costs and disbursements. The Company, IHC and the other defendants have answered the complaint and the case has been removed to the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, since MSI and CDMSI filed, after the filing of the complaint against the defendants, for protection under Chapter 11 of the federal bankruptcy law. The Company, IHC and the other defendants believe that plaintiffs' claims are without merit and intend to vigorously defend the lawsuit. PROPERTIES The Company leases approximately 12,300 square feet of office space for its executive offices in Newport Beach, California, under a lease expiring in 2001, and approximately 5,300 square feet of office space in Farmington, Connecticut, under a lease expiring in 2002. The Company believes its facilities are adequate for its reasonably foreseeable needs. In addition, the following table sets forth the other principal properties used by the Company as of June 30, 1998:
APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ------------------------------------------- ------------- ----------------------------------- OWNED PROPERTIES: Northern Indiana Oncology Center........... 3,500 Valparaiso, Indiana Berwyn Magnetic Resonance Center (1)....... 3,800 Berwyn, Illinois Garfield Imaging Center (1)................ 4,500 Monterey Park, California LAC/USC Imaging Sciences Center (1)............................... 8,500 Los Angeles, California Maxum Diagnostic Center--Eighth Avenue..... 10,000 Ft. Worth, Texas Diagnostic Outpatient Center (1)........... 13,800 Hobart, Indiana Harbor/UCLA Diagnostic Imaging Center (1)...................................... 15,000 Torrance, California Mountain Diagnostics....................... 19,100 Las Vegas, Nevada
66
APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ------------------------------------------- ------------- ----------------------------------- LEASED PROPERTIES: Buckhead Imaging........................... 1,500 Atlanta, Georgia Redwood City MRI........................... 2,900 Redwood City, California Dublin Imaging............................. 3,900 Dublin, Ohio Open MRI of Orange County.................. 4,000 Santa Ana, California Washington Magnetic Resonance Center....... 4,100 Whittier, California Imaging Center at Murfreesboro............. 5,000 Murfreesboro, Tennessee Marshwood Imaging.......................... 5,000 Scarborough, Maine Maxum Diagnostic Center--Preston Road...... 5,800 Dallas/Plano, Texas Open MRI of Hayward........................ 6,400 Hayward, California Central Maine Imaging Center............... 7,250 Lewiston, Maine Ocean Medical Imaging Center............... 8,700 Tom's River, New Jersey Broad Street Imaging Center................ 12,700 Columbus, Ohio Maxum Diagnostic Center--Forest Lane....... 14,100 Dallas, Texas Chattanooga Outpatient Center.............. 14,700 Chattanooga, Tennessee Fleet Services/Training/Applications....... 20,000 Winston-Salem, North Carolina
- ------------------------ (1) The Company owns the building and holds the related land under a long-term lease. On April 24, 1998, the Company completed the purchase of 77,690 square feet of land in Ft. Worth, Texas, upon which the Company intends to build a Multi-Modality Center to which certain existing operations in Ft. Worth will be relocated. EMPLOYEES At June 30, 1998, the Company had approximately 800 full-time and 50 part-time employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes its employee relations to be satisfactory. 67 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position of each of the persons who are directors and executive officers of the Company. Each director will hold office until the date indicated in the appropriate footnote or until his successor has been elected and qualified. Officers are elected by the Board and serve at the discretion of the Board.
NAME AGE POSITIONS - -------------------------------- --- -------------------------------------------------------------------------- E. Larry Atkins................. 51 President, Chief Executive Officer and Director (1) (2) Thomas V. Croal................. 38 Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer Michael A. Boylan............... 42 Executive Vice President and Chief Development Officer Marilyn U. MacNiven-Young....... 47 Executive Vice President, General Counsel and Secretary Michael D. Cragin............... 50 Senior Vice President--Operations Brian G. Drazba................. 36 Senior Vice President--Finance and Corporate Controller Robert N. LaDouceur............. 53 Senior Vice President--Operations Deborah M. MacFarlane........... 42 Senior Vice President--Marketing Brian P. Stone.................. 38 Senior Vice President--Operations Frank E. Egger.................. 53 Chairman of the Board and Director (1) (3) Michael E. Aspinwall............ 45 Director (4) Grant R. Chamberlain............ 33 Director (1) (5) David W. Dupree................. 45 Director (6) Leonard H. Habas................ 54 Director (1) (3) Ronald G. Pantello.............. 54 Director (1) (5) Glenn A. Youngkin............... 31 Director (6)
- ------------------------ (1) Elected by the holders of the Company's common stock. (2) Class I Director (term expires at the Company's annual meeting of stockholders in 2000). (3) Class III Director (term expires at the Company's annual meeting of stockholders in 1999). (4) Elected by the holders of the Series C Preferred Stock. (5) Class II Director (term expires at the Company's annual meeting of stockholders in 1998). (6) Elected by the holders of the Series B Preferred Stock. 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. THOMAS V. CROAL has been senior executive vice president, chief operating officer and chief financial officer of the Company since July 21, 1998. He was executive vice president, chief financial officer and secretary of the Company from February 23, 1996 to July 21, 1998. 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 68 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 executive vice president and chief development officer of the Company since April 1, 1998. From February 23, 1996 to April 1, 1998, he was senior vice president-operations of the Company. 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 and employee, including president and chief operating officer, with American Medical Imaging Corporation. MARILYN U. MACNIVEN-YOUNG has been executive vice president, general counsel and secretary of the Company since August 1, 1998. From July 1, 1996 through July 31, 1998, she served as outside general counsel of the Company. From September 1994 through June 1995, Ms. MacNiven-Young served as vice president, general counsel and secretary of Abbey Healthcare Group Inc. From 1991 to 1994, she served as general counsel of AHS. 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. BRIAN P. STONE has been senior vice president-operations of the Company since May 18, 1998. From 1994 until May 18, 1998, Mr. Stone served as president and chief executive officer of Signal. From 1991 until 1994, Mr. Stone served as treasurer and chief financial officer of Signal. 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 is a group of real estate development and investment companies based in Miami, Florida. Since December 1996, Mr. Egger has been a consultant. MICHAEL E. ASPINWALL has been a director of the Company since November 20, 1997. Mr. Aspinwall is senior vice president and health care industry leader in Equity Capital Group, Inc., a subsidiary of General Electric Capital Corporation, and specializes in private equity investments in the health care industry. From 1994 to 1996, Mr. Aspinwall was senior vice president and manager, health care receivables in 69 Commercial Finance Group, Inc., a subsidiary of General Electric Capital Corporation. From 1987 to 1994, Mr. Aspinwall held several vice presidential positions with Chase Manhattan Bank, N.A. in New York. GRANT R. CHAMBERLAIN has been a director of the Company since July 19, 1996. Since January 1, 1998, Mr. Chamberlain has been a managing director of Shattuck Hammond Partners, Inc. ("Shattuck Hammond"), an investment banking firm based in New York City. From April 1995 to January 1, 1998, Mr. Chamberlain was a vice president of Shattuck Hammond. From April 1991 to April 1995, he served as manager of strategic investments and restructurings for GE. DAVID W. DUPREE has been a director of the Company since October 14, 1997. Mr. 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 is also a director of Care Systems Corporation, Pharmaceutical Research Associates, Inc., and Whole Foods Market, Inc. 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. GLENN A. YOUNGKIN has been a director of the Company since October 14, 1997. Mr. 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. Mr. Youngkin also serves as a director of Elgar Holdings, Inc. COMMITTEES COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During fiscal 1998 prior to the Recapitalization, the Company's Compensation Committee consisted of two non-employee directors, Messrs. Habas (co-chairman) and Pantello (co-chairman). Since the Recapitalization, the Compensation Committee has consisted of three non-employee directors, Messrs. Habas, Pantello and Youngkin. 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 1998 Employee Stock Option Plan, 1997 Management Stock Option Plan, 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. ACQUISITION COMMITTEE. The Acquisition Committee was created pursuant to the Recapitalization. It currently consists of Messrs. Aspinwall, Atkins, Egger and Youngkin. Its principal functions are to consider certain transactions with respect to which the aggregate compensation payable in connection therewith is less than $15 million. AUDIT COMMITTEE. During fiscal 1998 prior to the Recapitalization, the Audit Committee consisted of Messrs. Egger (chairman) and Chamberlain. Its principal functions are to review the results of the Company's annual audit with the Company's independent auditors and review the performance of the 70 Company's independent auditors. Since the Recapitalization, the Audit Committee has consisted of Messrs. Chamberlain and Pantello. It is intended that the Joint Director, when appointed and approved, will be a member of the Audit Committee. EXECUTIVE COMMITTEE. Following the Recapitalization, the Executive Committee was created. The Executive Committee currently consists of Messrs. Aspinwall, Atkins, Dupree and Egger. It is authorized to exercise all the power and authority of the Board in the management of the business of the Company but its authority does not extend to certain fundamental corporate transactions. NOMINATING COMMITTEE. The Nominating Committee currently consists of Messrs. Habas and Egger. Its principal function is to make recommendations relating to the composition of the Board, including identifying potential candidates as Board members. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Because the Company was not a reporting company pursuant to Section 13(a) or 15(d) of the Exchange Act until June 26, 1996, its fiscal year ended shortly thereafter on June 30, 1996 and each of its predecessors, MHC and IHC, 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 year ended December 31, 1995, the six months ended June 30, 1996 and the years ended June 30, 1998 and 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, 1998. 71 SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------------- AWARDS NAME AND PRINCIPAL FISCAL YEAR STOCK OPTIONS ALL OTHER POSITION ENDED SALARY(1) BONUS(2) OTHER(3) (SHARES) COMP(3) - -------------------------------------------------- ------------- ---------- --------- ----------- ------------- ----------- E. Larry Atkins................................... 1998 $ 287,000 $ -- $ 9,000 200,000 $ 16,242 President and Chief 1997 246,400 86,000 9,000 100,000 11,040 Executive Officer 1996(4) 123,200 -- 4,500 -- 4,691 1995 246,400 61,600 4,680 175,000 7,882 Glenn P. Cato..................................... 1998 207,000 -- 9,000 110,000 14,335 Senior Executive Vice 1997 180,000 54,000 9,000 25,000 13,296 President and Chief 1996(4) 97,500 10,000 3,000 -- -- Operating Officer(5) 1995 172,500 20,000 6,000 30,000 3,158 Thomas V. Croal................................... 1998 200,000 33,333 9,000 165,000 12,748 Executive Vice President, 1997 175,230 53,000 9,000 25,000 9,804 Chief Financial Officer and 1996(4) 87,615 -- 4,500 -- 2,669 Secretary (6) 1995 175,230 43,808 4,742 125,000 2,669 Robert N. LaDouceur............................... 1998 181,500 -- 7,800 60,000 14,638 Senior Vice President- 1997 165,000 36,000 7,800 10,000 8,169 Operations 1996(4) 82,500 10,000 3,900 -- -- 1995 165,000 20,000 6,400 30,000 3,072 Michael A. Boylan................................. 1998 188,250 -- 7,800 60,000 7,715 Executive Vice President and Chief 1997 165,000 36,000 7,800 10,000 5,509 Development Officer 1996(4) 81,865 25,000 3,900 -- -- 1995 165,000 20,000 6,400 30,000 --
- ------------------------ (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 IHC 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 IHC'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. (4) Six months ending June 30, 1996. (5) Mr. Cato's employment by the Company was terminated as of July 21, 1998. (6) On July 21, 1998 Mr. Croal became Senior Executive Vice President and Chief Operating Officer of the Company. He remained Chief Financial Officer of the Company and was replaced as Secretary of the Company. 72 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 the Company's 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 $85,000 per year for services rendered to the Company in connection with its acquisition and financing activities. See "Employment Agreements and Severance Agreements" and "Certain Relationships and Related Transactions." The Directors' Plan provided for the automatic grant at the effective time of the merger of each of AHS and MHC into wholly owned subsidiaries of the Company ("Merger") to each non-employee director then serving on the Board of an option to purchase 15,000 shares of the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's common stock at an exercise price of $4.56 per share, which was the fair market value of the Company's common stock on such date. The warrants vest cumulatively at the rate of 416.66 shares per month and are exercisable at any time up to July 17, 2000. In lieu of an automatic grant, under the Directors' Plan, to each of the Series B Directors and the Series C Director of an option to purchase 15,000 shares of the Company's common stock, at the request of the Preferred Stock Directors (as defined below), upon the date each of them became a Preferred Stock Director, the Company issued to an affiliate of Carlyle a warrant to purchase 30,000 shares of the Company's common stock at an exercise price of $7.25 per share and GE a warrant to purchase 15,000 shares of the Company's common stock at an exercise price of $10.00 per share. The Carlyle warrant vests cumulatively at the rate of 833.33 shares per month and the GE warrant vests cumulatively at the rate of 416.67 shares per month. The Carlyle warrant is exercisable at any time up to October 14, 2000 and the GE warrant is exercisable at any time up to November 20, 2000. See "Transactions With Holders of Preferred Stock". 73 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, 1998.
INDIVIDUAL GRANTS -------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES NUMBER OF % OF TOTAL OF STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM (2) OPTIONS EMPLOYEES PRICE PER EXPIRATION ------------------------ NAME GRANTED IN FISCAL YEAR SHARE (1) DATE 5% 10% - ---------------------------------- ----------- ----------------- ----------- ----------- ---------- ------------ E. Larry Atkins................... 50,000 5% $ 4.56 07/17/07(3) $ 143,388 $ 363,373 150,000 16% 8.37 11/07/07(4) 789,577 2,000,944 Glenn P. Cato..................... 30,000 3% 4.56 07/17/07(3) 86,033 218,024 80,000 8% 8.37 11/07/07(4) 421,108 1,067,170 Thomas V. Croal................... 25,000 3% 4.56 07/17/07(3) 71,694 181,687 140,000 14% 8.37 11/07/07(4) 736,939 1,867,547 Robert N. LaDouceur............... 10,000 1% 4.56 07/17/07(3) 28,678 72,675 50,000 5% 8.37 11/07/07(4) 263,192 666,981 Michael A. Boylan................. 10,000 1% 4.56 07/17/07(3) 28,678 72,675 50,000 5% 8.37 11/07/07(4) 263,192 666,981
- ------------------------ (1) All options were granted at fair market value (the closing price reported on The Nasdaq SmallCap Market for the Company's common stock) on the date of grant. (2) Potential realizable value is determined by taking the exercise price per share and applying the stated annual appreciation rate compounded annually for the remaining term of the options (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 the Company's common stock holdings are dependent on the future performance of the Company's common stock and overall stock market conditions. (3) Options 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 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. (4) 50% of the options are exercisable starting twelve (12) months after the grant date, with 33% of the shares becoming exercisable at that time and with in additional 33% of the shares becoming exercisable on each successive anniversary date. The remaining 50% of the options are exercisable 7 years after the grant date, with 33% of the shares becoming exercisable at that time and with an additional 33% of the shares becoming exercisable on each successive anniversary date, with acceleration in certain circumstances. The options were granted for a term of ten years, subject to earlier termination in certain events related to termination of employment. OPTION EXERCISES DURING FISCAL 1998 AND FISCAL YEAR-END VALUES During the year ended June 30, 1998, neither of the chief executive officer nor the Other Executive Officers of the Company (except Mr. Cato) exercised any stock options. The following table sets forth information with respect to the stock options exercised by Mr. Cato during fiscal 1998 and the unexercised stock options to purchase the Company's common stock granted, under (i) MHC's and AHS's stock option 74 plans and assumed by the Company pursuant to the Merger, and (ii) the Company's 1996 Employee Stock Option Plan and (iii) the Company's 1997 Management Stock Option Plan to the chief executive officer and the Other Executive Officers of the Company as of June 30, 1998.
NUMBER OF NUMBER OF UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS IN-THE- MONEY ACQUIRED HELD AT JUNE 30, 1998 OPTIONS AT JUNE 30, 1998(1) ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------- --------- -------- ----------- ------------- ----------- ------------- E. Larry Atkins......................... -- -- 39,000 278,500 $18,375 $1,032,875 Glenn P. Cato........................... 34,385 $487,011(2) 24,190 128,750 195,819 460,475 Thomas V. Croal......................... -- -- 16,250 186,250 13,125 592,950 Robert N. LaDouceur..................... -- -- 41,370 67,500 408,165 214,650 Michael A. Boylan....................... -- -- 41,370 67,500 408,165 214,650
- ------------------------ (1) Based on the closing price reported on The Nasdaq SmallCap Market for the Company's common stock on that date of $10.75 per share. (2) The value realized is the fair market value of the shares on the date of exercise less the exercise price. INDEMNIFICATION AGREEMENTS The Company has entered into separate indemnification agreements with each of its directors and executive 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 executive 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 Carlyle and GE acquired Series B Preferred Stock and Series C Preferred Stock, respectively, provide that the Company will indemnify, defend and hold harmless Carlyle 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 Carlyle 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 Carlyle or GE against the Company for indemnification until the aggregate dollar amount of all Losses incurred by Carlyle 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 Carlyle 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. 75 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 Stone and Ms. MacFarlane and Ms. MacNiven-Young, 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 or (iii) voluntarily by the executive due to a "Change of Control" and in the case of Mr. Stone and Ms. MacNiven-Young voluntarily by them for "good reason" as defined in their employment agreements. A "Change of Control" will have occurred if the Company or its stockholders enter into an agreement to dispose of, whether by sale, exchange, merger, consolidation, reorganization, dissolution or liquidation, (a) not less than 80% of the assets of the Company or (b) a portion of the Company's outstanding common stock such that one person or "group" (as defined by the SEC) owns, of record or beneficially, not less than 50% of the Company's outstanding common 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 $85,000 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, or (iii) a corporate reorganization that has the effect of diminishing or impairing Mr. Egger's consulting responsibilities. Pursuant to his executive employment agreement, Mr. Cato will receive severance equal to twelve months salary at his level of compensation as of July 21, 1998 in connection with his termination of employment. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the beneficial ownership, reported to the Company as of June 30, 1998, of the Company'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 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 76 beneficially 5% or more of the Company's common stock, (ii) each director of the Company, (iii) the Company's executive officers, and (iv) all directors and executive officers, as a group.
AMOUNT AND NATURE OF NAME AND ADDRESSES OF BENEFICIAL OWNERSHIP PERCENTAGE OF COMMON STOCK BENEFICIAL OWNERS OF COMMON STOCK (1) BENEFICIALLY OWNED (1) - --------------------------------------------------------------- -------------------- --------------------------- Carlyle (2) ................................................... 3,243,408 53.5% 1001 Pennsylvania Avenue, N.W. Suite 220 Washington, D.C. 20004 General Electric Company (3) .................................. 3,591,331 56.0% 20825 Swenson Drive Suite 100 Waukesha, WI 53186 E. Larry Atkins (4) ........................................... 63,600 2.2% 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660 Grant R. Chamberlain (5) ...................................... 16,250 * 620 Fifth Avenue Suite 2950 New York, NY 10111 Frank E. Egger (6) ............................................ 62,552 2.2% 10301 S.W. 13th Street Pembroke Pines, FL 33025 Leonard H. Habas (7) .......................................... 59,091 2.0% 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) ......................................... 1,000 * 1001 Pennsylvania Avenue, N.W. Suite 220 South Washington, D.C. 20004 Roz Kovens (10) ............................................... 149,079 5.0% 9999 Collins Avenue #1K Bal Harbour, FL 33154 Ronald G. Pantello (11) ....................................... 34,606 1.2% 60 Madison Avenue New York, NY 10010 Glenn P. Cato (12) ............................................ 66,371 2.0% 400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660
77 Thomas V. Croal (13) .......................................... 24,000 * 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660 Michael A. Boylan (14) ........................................ 43,870 1.5% 110 Gibraltar Road Horsham, PA 18901 Robert N. LaDouceur (15) ...................................... 43,870 1.5% 11011 King Street Suite 240 Overland Park, KS 66210 Michael D. Cragin (16) ........................................ 6,250 * 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660 Brian G. Drazba (17) .......................................... 4,500 * 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660 Deborah M. MacFarlane (18) .................................... 6,750 * 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660 Brian P. Stone (19) ........................................... 8,930 * 74 Batterson Park Road Farmington, CT 06032 All directors and executive officers as a group (15 persons) 434,140 13.4% (20).........................................................
- ------------------------ * Less than 1% of the Company's 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 June 30, 1998. (2) The information in the table is based upon the Schedule 13D filed with the Commission by Carlyle on October 24, 1997. Represents shares of the Company's common stock issuable upon conversion of all 25,000 shares of Series B Preferred Stock (convertible into 2,985,075 shares of the Company's common stock) and exercise of certain warrants ("Carlyle Warrants") (exercisable for 250,000 shares of the Company's common stock) held by Carlyle, which is comprised of the entities listed in the following sentence. The cumulative Carlyle 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 the Company's common stock) and Carlyle Warrants to purchase 82,077 shares of the Company's 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 the Company's common stock) and Carlyle Warrants to purchase 3,764 shares of the Company's 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, 78 L.P., including 6,928 shares of Series B Preferred Stock (convertible into 827,244 shares of the Company's common stock) and Carlyle Warrants to purchase 69,282 shares of the Company's 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 the Company's common stock) and Carlyle Warrants to purchases 3,733 shares of the Company's common stock with respect to which it has disposal power and shares voting power; (v) 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 the Company's common stock) and Carlyle Warrants to purchase 15,599 shares of the Company's 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 the Company's common stock) and Carlyle Warrants to purchase 86 shares of the Company's 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 the Company's common stock) and Carlyle Warrants to purchase 9,178 shares of the Company's 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 the Company's common stock) and Carlyle Warrants to purchase 31,813 shares of the Company's common stock with respect to which it has disposal power and 3,235,075 shares with respect to which it shares voting power; (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 the Company's common stock) and Carlyle Warrants to purchase 34,746 shares of the Company's common stock with respect to which it has disposal power and shares voting power; and (x) warrants to purchase 8,333 shares of the Company's common stock at an exercise price of $7.25 per share owned by TC Group Management, LLC. Does not include warrants to purchase 21,667 shares of the Company's common stock at an exercise price of $7.25 per share, owned by TC Group Management, LLC, which are not currently exercisable. 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 the Company's 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 Carlyle and consequently, TCG Holdings, L.L.C. may be deemed the beneficial owner of the shares of the Company's 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. Carlyle owns 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 Commission on October 23, 1997. Represents shares of the Company's common stock issuable upon 79 (i) conversion of all 27,953 shares of Series C Preferred Stock (convertible into 3,337,581 shares of the Company's common stock) held by GE, (ii) exercise of certain warrants ("GE Warrants") (exercisable for 250,000 shares of the Company's common stock), and (iii) warrants to purchase 3,750 shares of the Company's common stock at an exercise price of $10.00 per share. Does not include warrants to purchase 11,250 shares of the Company's common stock at an exercise price of $10.00 per share, which are not currently exercisable. GE owns all of the outstanding shares of Series C Preferred Stock. (4) Includes (i) options to purchase 14,000 shares of the Company's common stock at an exercise price of $2.50 per share, (ii) options to purchase 25,000 shares of the Company's common stock at an exercise price of $6.25 per share and (iii) options to purchase 2,500 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 3,500 shares of the Company's common stock at an exercise price of $2.50 per share, (ii) options to purchase 75,000 shares of the Company's common stock at an exercise price of $6.25 per share, (iii) options to purchase 37,500 shares of the Company's common stock at an exercise price of $4.56 per share, and (iv) options to purchase 150,000 shares of the Company's common stock at an exercise price of $8.37 per share, which are not currently exercisable. (5) Includes (i) options to purchase 10,417 shares of the Company's common stock at an exercise price of $7.00 per share and (ii) warrants to purchase 5,833 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include options to purchase 4,583 shares of the Company's common stock at an exercise price of $7.00 per share and (ii) warrants to purchase 9,167 shares of the Company's common stock at an exercise price of $4.56 per share, which are not currently exercisable. (6) Includes (i) options to purchase 10,833 shares of the Company's common stock at an exercise price of $5.37 per share, (ii) options to purchase 2,400 shares of the Company's common stock at an exercise price of $2.50 per share, (iii) options to purchase 2,000 shares of the Company's common stock at an exercise price of $16.20 per share, (iv) warrants to purchase 2,268 shares of the Company's common stock at an exercise price of $5.64 per share, and (v) warrants to purchase 5,833 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 4,167 shares of the Company's common stock at an exercise price of $5.37 per share, (ii) options to purchase 600 shares of the Company's common stock at an exercise price of $2.50 per share and (iii) warrants to purchase 9,167 shares of the Company's common stock at an exercise price of $4.56 per share, which are not currently exercisable. (7) Includes (i) options to purchase 10,833 shares of the Company's common stock at an exercise price of $5.37 per share, (ii) options to purchase 4,485 shares of the Company's common stock at an exercise price of $15.64 per share, (iii) options to purchase 8,970 shares of the Company's common stock at an exercise price of $1.25 per share, (iv) options to purchase 8,970 shares of the Company's common stock at an exercise price of $0.10 per share and (v) warrants to purchase 5,833 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 4,167 shares of the Company's common stock at an exercise price of $5.37 per share and (ii) warrants to purchase 9,167 shares of the Company's 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 Company's 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 Company's common stock beneficially owned by Carlyle. (10) The information in the table is based upon Schedule 13G filed with the Commission on March 12, 1998. Includes (i) options to purchase 600 shares of the Company's common stock at an exercise price 80 of $2.50 per share and (ii) by virtue of her status as personal representative of the Estate of Cal Kovens, the 1,004 shares of the Company's common stock beneficially owned thereby. Does not include options to purchase 600 shares at an exercise price of $2.50 per share, which are not currently exercisable. (11) Includes (i) options to purchase 10,417 shares of the Company's common stock at an exercise price of $5.37 per share, (ii) options to purchase 8,970 shares of the Company's common stock at an exercise price of $1.25 per share, (iii) options to purchase 8,970 shares of the Company's common stock at an exercise price of $0.10 per share and (iv) warrants to purchase 5,417 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 4,583 shares of the Company's common stock at an exercise price of $5.37 per share and (ii) warrants to purchase 9,583 shares of the Company's common stock at an exercise price of $4.56 per share, which are not currently exercisable. (12) Includes (i) options to purchase 17,940 shares of the Company's common stock at an exercise price of $2.50 per share, (ii) options to purchase 6,250 shares of the Company's common stock at an exercise price of $6.25 per share and (iii) options to purchase 7,500 shares of the Company's common stock at an exercise price of $4.56 per share. (13) Includes (i) options to purchase 10,000 shares of the Company's common stock at an exercise price of $2.50 per share and (ii) options to purchase 6,250 shares of the Company's common stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 18,750 shares of the Company's common stock at an exercise price of $6.25 per share, (ii) options to purchase 25,000 shares of the Company's common stock at an exercise price of $4.56 per share, (iii) options to purchase 2,500 shares of the Company's common stock at $2.50 per share, and (iv) options to purchase 140,000 shares of the Company's common stock at an exercise price of $8.37 per share, which are not currently exercisable. (14) Includes (i) options to purchase 11,960 shares of the Company's common stock at an exercise price of $0.42 per share, (ii) options to purchase 8,970 shares of the Company's common stock at an exercise price of $0.10 per share, (iii) options to purchase 17,940 shares of the Company's common stock at an exercise price of $0.84 per share and (iv) options to purchase 2,500 shares of the Company's common stock at an exercise price of $6.25 per share. Does not include (i) options to purchase 7,500 shares of the Company's common stock at an exercise price of $6.25 per share, (ii) options to purchase 10,000 shares of the Company's common stock at an exercise price of $4.56 per share, and (iii) options to purchase 50,000 shares of the Company's common stock at an exercise price of $8.37 per share, which are not currently exercisable. (15) Includes (i) options to purchase 11, 960 shares of the Company's common stock at an exercise price of $0.42 per share, (ii) options to purchase 8,970 shares of the Company's common stock at an exercise price of $0.10 per share, (iii) options to purchase 17,940 shares of the Company's common stock at an exercise price of $0. 84 per share, (iv) options to purchase 2,500 shares of the Company's common stock at an exercise price of $6.25 per share and (v) options to purchase 2,500 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 7,500 shares of the Company's common stock at an exercise price of $6.25 per share, (ii) options to purchase 7,500 shares of the Company's common stock at an exercise price of $4.56 per share, and (iii) options to purchase 50,000 shares of the Company's common stock at an exercise price of $8.37 per share, which are not currently exercisable. (16) Includes (i) options to purchase 3,750 shares of the Company's common stock at an exercise price of $6.25 per share and (ii) options to purchase 2,500 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 11,250 shares of the Company's common stock at an exercise price of $6.25 per share, (ii) options to purchase 7,500 shares of the Company's common stock at an exercise price of $4.56 per share, and (iii) options to purchase 81 30,000 shares of the Company's common stock at an exercise price of $8.37 per share, which are not currently exercisable. (17) Includes (i) options to purchase 2,000 shares of the Company's common stock at an exercise price of $6.25 per share and (ii) options to purchase 2,500 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 6,000 shares of the Company's common stock at an exercise price of $6.25 per share and (ii) options to purchase 7,500 shares of the Company's common stock at an exercise price of $4.56 per share, which are not currently exercisable. (18) Includes (i) options to purchase 3,750 shares of the Company's common stock at an exercise price of $6.25 per share and (ii) options to purchase 2,500 shares of the Company's common stock at an exercise price of $4.56 per share. Does not include (i) options to purchase 11,250 shares of the Company's common stock at an exercise price of $6.25 per share and (ii) options to purchase 7,500 shares of the Company's common stock at an exercise price of $4.56 per share, which are not currently exercisable. (19) Includes options to purchase 8,930 shares of the Company's common stock at an exercise price of $12.57 per share. Does not include options to purchase 98,230 shares of the Company's common stock at an exercise price of $12.57 per share, which are not currently exercisable. (20) Assumes the exercise in full of options or warrants described in footnotes (4) through (7) and (11) through (19) that are currently exercisable or that will become exercisable within 60 days of June 30, 1998. 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 The Company's 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 October 22, 1998 ("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 an additional 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. Assuming conversion of all of the outstanding Series B Preferred Stock and Series C Preferred Stock, the percentage of the Company's outstanding common stock currently owned by the Series B Preferred Stock holders is approximately 33% and the percentage of the Company's common stock currently owned by the Series C Preferred Stock holders is approximately 37%. If such Preferred Stock were converted into Series D Preferred Stock on or after the Trigger Date, the aggregate percentage of the Company's 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. 82 The holders of Series D Preferred Stock will have the right to vote with the holders of the Company's 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 the Company's 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 the Company's 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 Carlyle, GE nor any other holder of Series D Preferred Stock shall participate in such transactions, if any transferee of Carlyle 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 Company's 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 (as defined herein), 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 defined herein) as of the Conversion Date or (B) at least one director who was a Common Stock Director prior to the Conversion Date). See "Description of Preferred Stock." 83 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS KOVENS TRANSACTIONS In November 1994, AHS issued Cal Kovens, who was a director of AHS until his death on February 6, 1995, a warrant to purchase 200,000 shares of AHS common stock at $0.25 per share in consideration of certain Gamma Knife financing activities which Mr. Kovens assisted in facilitating. Pursuant to the terms of the Merger, the warrant became a warrant to purchase 20,000 shares of the Company's common stock at the exercise price of $2.50 per share. The warrant was exercised by the estate of Mr. Kovens, of which Roz Kovens, spouse of Mr. Kovens, is the personal representative, in November 1997. In addition, a loan to a wholly owned subsidiary of AHS was secured by a letter of credit of $400,000 which was guaranteed by the estate of Mr. Kovens until September 30, 1997, when the guarantee expired. See "--Transactions with Holders of AHS Series B Preferred Stock." TRANSACTIONS WITH FRANK E. EGGER Since July 1, 1996, Mr. Egger, chairman of the Board, has been and continues to be paid $85,000 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 or (iii) a corporate reorganization that has the effect of diminishing or impairing Mr. Egger's consulting responsibilities, he is entitled to severance compensation equal to twelve months of compensation. See "--Transactions with Holders of AHS Series B Preferred Stock." TRANSACTIONS WITH GE GE, as the primary creditor of AHS and MHC, had from time to time granted AHS and MHC certain financial accommodations with respect to certain loans and leases. In exchange for such accommodations, AHS and MHC 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 MHC, and its affiliates. As a result, certain debt and operating lease obligations of AHS and MHC 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 MHC Series B Preferred Stock. At the effective time of the Merger, the AHS Series C Preferred Stock and MHC 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 the Company's common stock representing approximately 48% of the Company's common stock outstanding at the effective time of the Merger (after giving effect to such conversion). 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 MHC to acquire 700,000 shares of MHC common stock, were canceled without payment therefor. Furthermore, GE had the right to receive for ten years annual payments ("Supplemental Service Fee") under its maintenance agreements with the Company, AHS and MHC equal to 14% of InSight pretax income, subject to certain adjustments, and further subject to proportional reductions for certain post-Merger acquisitions. The Company 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. In connection with the Recapitalization, the net proceeds from the Carlyle investment were used to refinance a portion of the Company's outstanding indebtedness to GE (approximately $20 million). At the initial funding of the Senior Credit Facilities, all of the term loan facility was drawn down to refinance all of the remaining GE indebtedness (approximately $50 million). In addition, the Company has purchased a majority of its MRI systems from GE, through GEMS, and the Company currently leases a majority of its diagnostic imaging and treatment systems from GEMS under a master lease agreement, including 18 systems within a variable lease pool. See 84 "Business--Operations--Equipment." GEMS also provides maintenance services with respect to the Company's GE equipment. TRANSACTIONS WITH HOLDERS OF AHS SERIES B PREFERRED STOCK Pursuant to certain agreements among the Company, AHS and the holders of AHS Series B Preferred Stock, including Mr. Egger, Roz Kovens and the estate of Cal Kovens, the holders of the AHS 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, the Company issued to such holders, warrants to purchase an aggregate of 50,000 shares of the Company's common stock (including 7,660 shares to Roz Kovens and 33,645 shares to the estate of Mr. Kovens, which have since been exercised, and 2,268 shares to Mr. Egger) at the exercise price of $5.64 per share, 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 On August 14, 1996, the Company entered into an agreement with Shattuck Hammond, an investment banking firm located in New York in which a director of the Company, Mr. Chamberlain, is a vice president, pursuant to which Shattuck Hammond provides general strategic advisory and investment banking services. The term of the agreement commenced July 1, 1996 and extended through December 31, 1997. The Company has agreed to extend the term of the agreement through December 31, 1998. The Company is obligated to pay Shattuck Hammond $30,000 per quarter. Shattuck Hammond also is entitled to separately negotiated fees for certain mergers or acquisitions. The Company also issued Shattuck Hammond a warrant to purchase 35,000 shares of the Company's common stock at an exercise price of $5.50 per share, which vested cumulatively on a monthly basis over the 18 month term of the initial agreement. The warrant is now fully exercisable and is exercisable at any time up to August 14, 2000. In addition, Shattuck Hammond has certain "piggy-back" registration rights to register the shares subject to the warrant under the Securities Act. In connection with the Recapitalization, the Company paid Shattuck Hammond a fee of $500,000 for providing certain advisory services. TRANSACTIONS WITH HOLDERS OF PREFERRED STOCK In lieu of an automatic grant, under the 1996 Directors' Stock Option Plan, to each of the Series B Directors (appointed by Carlyle) and the Series C Director (appointed by GE) of an option to purchase 15,000 shares of the Company's common stock, at the request of such Preferred Stock Directors, upon the date each of them became a Preferred Stock Director, the Company issued to an affiliate of Carlyle a warrant to purchase 30,000 shares of the Company's common stock at an exercise price of $7.25 per share and GE a warrant to purchase 15,000 shares of the Company's common stock at an exercise price of $10.00 per share. The Carlyle warrant vests cumulatively at the rate of 833.33 shares per month and the GE warrant vests cumulatively at the rate of 416.67 shares per month. The Carlyle warrant is exercisable at any time up to October 14, 2000 and the GE warrant is exercisable at any time up to November 20, 2000. In connection with the Recapitalization, the Company paid to each of Carlyle and GE a placement fee of $125,000, reimbursed Carlyle and GE an aggregate of $500,000 for reasonable out-of-pocket expenses incurred and agreed to pay each of Carlyle and GE an annual financial advisory fee equal to $50,000, payable quarterly, for a two-year period. TRANSACTIONS WITH BRIAN P. STONE In connection with the acquisition by merger of Signal (the "Signal Merger"), the Company paid to Mr. Stone approximately $2.9 million in cash in consideration for tendering his shares of Signal's common 85 stock in the Signal Merger. On May 18, 1998, at the consummation of the Signal Merger, the Company and Mr. Stone entered into an employment agreement pursuant to which Mr. Stone was appointed senior vice president-operations for an initial term of one year. Thereafter, such employment agreement renews automatically for additional one year terms unless terminated by either party pursuant to the terms thereof. Under the terms of his employment agreement, Mr. Stone receives a base salary of $165,000 per year, a stay bonus of $408,300 payable over four years and a discretionary bonus the amount of which is based upon the financial performance of the Company. Pursuant to his employment agreement, Mr. Stone also received options to purchase 107,160 shares of the Company's common stock at $12.57 per share. See "Security Ownership of Certain Beneficial Owners and Management." 86 DESCRIPTION OF SENIOR CREDIT FACILITIES The Company entered into a Credit Agreement, dated as of October 14, 1997, as amended on November 17, 1997, December 19, 1997, March 23, 1998 and June 12, 1998 (as so amended, the "Senior Credit Facilities"), among the Company, as the Borrower, certain of the Company's subsidiaries named therein, as the Guarantors, the financial institutions named therein, as the Lenders, and NationsBank, N.A., as the Agent, pursuant to which the Company obtained a $150 million credit facility, composed of (a) a five-year $25 million revolving credit facility, (b) a two-year $65 million acquisition facility with increasing amortization over a five-year period and (c) a $60 million term loan facility consisting of (i) a $20 million tranche with increasing amortization over a five-year period and (ii) a $40 million tranche with increasing amortization over a seven-year period. At March 31, 1998, approximately $8.3 million was outstanding under the revolving credit facility, $2.9 million under the acquisition facility and an aggregate of $59 million under the two term loan facilities, for a total of $70.2 million outstanding under the Senior Credit Facilities. Concurrently with the issuance of the Outstanding Notes (the "Amendment Date"), the Company amended the Senior Credit Facilities to, among other things, (i) increase the acquisition facility from $65 million to $75 million, with a two-year availability period and amortization over a five-year period from the first anniversary of the Amendment Date, (ii) refinance and consolidate the existing $20 million tranche term loan and $40 million tranche term loan into a single $50 million term loan, with amortization over a six-year period from the Amendment Date, and (iii) extend the termination date of the five-year $25 million revolving credit facility to the fifth anniversary of the Amendment Date. The amendment also provided that, without consent of the Agent, advances under the acquisition facility may not exceed $15 million with respect to any single acquisition or $50 million for all acquisitions in any fiscal year of the Company. The Senior Credit Facilities contain customary representations and warranties, affirmative and negative covenants and events of default. Specifically, the Company is (i) obligated to maintain a number of covenants keyed to the Company's financial conditions and performance, (ii) obligated to limit liens on its assets to those incurred in the ordinary course of business and for taxes and other similar obligations and (iii) subject to customary covenants, including (A) disposition of assets only in the ordinary course of business and generally at fair value and (B) restrictions on acquisitions, mergers, consolidations, loans, leases, joint ventures, contingent obligations and certain transactions with affiliates. The obligations of the Company under the Senior Credit Facilities are secured by substantially all of the assets of the Company, including a pledge of the capital stock of all of its subsidiaries, in favor of the Agent. The Company's obligations are also guaranteed by certain subsidiaries of the Company named in the Senior Credit Facilities and secured by substantially all of the assets of such subsidiaries in favor of the Agent. Specifically, the financial covenants of the Company were amended to require the Company's total leverage ratio not to exceed 4.5:1, the senior leverage ratio not to exceed 3.0:1, the interest coverage ratio not to be less than 2.0:1 and the fixed charge coverage ratio not to be less than 1.1:1, in each case during the first two years after the Amendment Date, with certain adjustments thereafter. Interest rates on the Senior Credit Facilities equal LIBOR plus 175 basis points, subject to a performance pricing. The net proceeds of the issuance of the Outstanding Notes and the borrowing under the term loan portion of the Senior Credit Facilities were or will be used in part to repay all of the Company's outstanding indebtedness under the acquisition facility and the revolving credit facility under the Senior Credit Facilities. Upon consummation of the issuance of the Outstanding Notes, the borrowing under the term loan portion of the Senior Credit Facilities and application of the net proceeds therefrom, the acquisition facility and the revolving credit facility became available to the Company in full for future borrowings. 87 DESCRIPTION OF NOTES UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS DESCRIPTION OF NOTES TO (I) THE "AMENDED CREDIT AGREEMENT" REFER TO THE AMENDED CREDIT AGREEMENT AND (II) THE "PREFERRED STOCK" REFER TO PREFERRED STOCK, EACH AS DEFINED IN "DESCRIPTION OF NOTES--CERTAIN DEFINITIONS." GENERAL The Outstanding Notes were issued, and the Exchange Notes will be issued, under an indenture dated as of June 1, 1998 (the "Indenture") among the Company, as issuer, each of the Company's Restricted Subsidiaries (the "Subsidiary Guarantors"), as Subsidiary Guarantors and State Street Bank and Trust Company, N.A., as trustee (the "Trustee"), a copy of which has been filed as an exhibit to the Registration Statement. The terms of the Exchange Notes are identical in all material respects to the terms of the Outstanding Notes except that the Exchange Notes have been registered under the Securities Act and are issued free from any covenant regarding registration and except that, if the Exchange Offer has not been consummated or a shelf registration statement is not declared effective on or prior to December __, 1998, then the Company will pay liquidated damages to each Holder of Outstanding Notes for the first 90 days following such date in an amount equal to $.05 per week per $1,000 principal amount of Outstanding Notes held by such Holder. The amount of liquidated damages will increase by an additional $.05 per week per $1,000 principal amount of Outstanding Notes at the beginning of each subsequent 90-day period until the Exchange Offer is consummated or the shelf registration is declared effective, up to a maximum amount of liquidated damages of $.30 per week per $1,000 principal amount of Outstanding Notes. The Exchange Notes and the Outstanding Notes are treated as one series of Notes under the Indenture and holders thereof are entitled to the benefit of the Indenture. Accordingly, unless specifically stated to the contrary, the following description applies equally to all Notes. Upon issuance of the Exchange Notes, the Indenture will be subject to and governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture does not purport to be complete and is subject to, and qualified in its entirety by, reference to the provisions of the Indenture, including the definitions of certain terms contained therein and those terms made part of the Indenture by reference to the Trust Indenture Act. For definitions of certain capitalized terms used in the following summary, see "Certain Definitions" below. PRINCIPAL, MATURITY AND INTEREST The Notes will mature on June 15, 2008, are limited in aggregate principal amount to $100 million and are senior subordinated unsecured obligations of the Company. The Indenture provides for the issuance of up to $75 million aggregate principal amount of additional Notes having identical terms and conditions to the Notes offered hereby (the "Additional Notes"), subject to compliance with the covenants contained in the Indenture. Any Additional Notes will be part of the same issue as the Notes offered hereby and will vote on all matters with the Notes offered hereby. For purposes of this "Description of the Notes," reference to the Notes does not include Additional Notes. No offering of any such Additional Notes is being or shall in any manner be deemed to be made by this Prospectus. In addition, there can be no assurance as to when or whether the Company will issue any such Additional Notes or as to the aggregate principal amount of such Additional Notes. Interest on the Notes accrues at the rate of 9 5/8% per annum and is payable semiannually on each June 15 and December 15, commencing December 15, 1998, to the Holders of record on the immediately preceding June 1 and December 1. Interest on the Notes accrues from the most recent date to which interest has been paid or, if no interest has been paid, from June 12, 1998 (the "Issue Date"). Interest is computed on the basis of a 360-day year comprising twelve 30-day months. The principal of and premium, if any, and interest on the Notes is payable and the Notes are exchangeable and transferable, at the office or agency of the Company in the City of New York maintained 88 for such purposes (which initially will be the office of the Trustee located at 61 Broadway, 15th Floor, New York, New York 10006) or, at the option of the Company, payment of interest may be paid by check mailed to the address of the person entitled thereto as such address appears in the security register. The Notes will be issued only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment in certain circumstances of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Notes that remain outstanding after the consummation of the Exchange Offer and Exchange Notes issued in connection with the Exchange Offer will be treated as a single class of securities under the Indenture. The Notes will not be entitled to the benefit of any sinking fund. SUBORDINATION The Notes are unsecured senior subordinated obligations of the Company. The payment of principal of, premium, if any, and interest on the Notes is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash or cash equivalents of Senior Indebtedness. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshaling of the Company's assets and liabilities, the holders of Senior Indebtedness will be entitled to receive payment in full in cash or cash equivalents of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness) before the Holders of Notes will be entitled to receive any payment in respect of any Obligations with respect to the Notes, and until all Obligations with respect to Senior Indebtedness are paid in full in cash or cash equivalents, any distribution to which the Holders of Notes would be entitled shall be made to the holders of Senior Indebtedness (except that Holders of Notes may receive securities that are subordinated at least to the same extent as the Notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness and Holders of Notes may recover payments made from the trust described under the caption "Legal Defeasance and Covenant Defeasance"). The Company also may not make any payment upon or in respect of the Notes (except in such subordinated securities or from the trust described under the caption "Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Indebtedness which permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Agent Bank or the holders or the representative of the holders of any Designated Senior Indebtedness. Payments on the Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received. No new period of payment blockage may be commenced by a Payment Blockage Notice unless and until (i) 360 days have elapsed since the first day of the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such default has been cured or waived for a period of not less than 90 days. 89 The Indenture further requires that the Company promptly notify holders of Senior Indebtedness if payment of the Notes is accelerated because of any Event of Default. As a result of the subordination provisions described above, in the event of an insolvency, bankruptcy, reorganization or liquidation of the Company, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the holders of the Notes, and assets which would otherwise be available to pay obligations in respect of the Notes will be available only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. See "Risk Factors--Subordination of Notes and Subsidiary Guarantees; Asset Encumbrances." As of March 31, 1998, after giving pro forma effect to the acquisition of Signal, the borrowing under the term loan portion of the Senior Credit Facilities, the issuance of the Outstanding Notes and the application of the net proceeds therefrom, the Company would have had $53.4 million of Senior Indebtedness outstanding and $100 million available to be borrowed under the Amended Credit Agreement, all of which would be Senior Indebtedness. The terms of the Indenture permit the Company and its Restricted Subsidiaries to incur additional Senior Indebtedness, subject to certain limitations, including Indebtedness that may be secured by Liens on property of the Company and its Restricted Subsidiaries. See the discussion below under the captions "Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock" and "Certain Covenants--Liens." See "Risk Factors--Subordination of Notes and Subsidiary Guarantees; Asset Encumbrances." SUBSIDIARY GUARANTEES Payment of the principal of (and premium, if any) and interest on the Notes, when and as the same become due and payable, is guaranteed, jointly and severally, on a senior subordinated and unsecured basis (the "Subsidiary Guarantees") by the Subsidiary Guarantors. At the Closing Date, each of the Company's Restricted Subsidiaries (other than Permitted Joint Ventures) became a Subsidiary Guarantor. In addition, if the Company or any of its Restricted Subsidiaries shall acquire or create another Subsidiary (other than any Foreign Subsidiary and any Permitted Joint Venture), then such Subsidiary shall be required to execute a Subsidiary Guarantee, in accordance with the terms of the Indenture. See "Certain Covenants-- Guarantees of Indebtedness by Restricted Subsidiaries." The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees are limited so as not to constitute a fraudulent conveyance under applicable statutes. See "Risk Factors--Fraudulent Conveyance Statutes." Each Subsidiary Guarantee is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash or cash equivalents of Senior Indebtedness of the relevant Subsidiary Guarantor. Upon any distribution to creditors of a Subsidiary Guarantor in a liquidation or dissolution of such Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to such Subsidiary Guarantor or its property, an assignment for the benefit of creditors or any marshaling of such Subsidiary Guarantor's assets and liabilities, the holders of Senior Indebtedness of such Subsidiary Guarantor will be entitled to receive payment in full in cash or cash equivalents of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness of such Subsidiary Guarantor) before the Holders of Notes will be entitled to receive any payment in respect of any Obligations with respect to the relevant Subsidiary Guarantee, and until all Obligations with respect to Senior Indebtedness of such Subsidiary Guarantor are paid in full in cash or cash equivalents, any payment that would have been made under such Subsidiary Guarantee shall be made to the holders of Senior Indebtedness of such Subsidiary Guarantor (except that Holders of Notes may receive (i) Capital Stock of such Subsidiary Guarantor (other than Disqualified Stock) and (ii) securities that are subordinated at least to the same extent as such Subsidiary Guarantee to Senior Indebtedness of such Subsidiary Guarantor and to any securities issued in exchange for Senior Indebtedness of such Subsidiary Guarantor). 90 Such Subsidiary Guarantor also may not make any payment upon or in respect of its Subsidiary Guarantee (except in such subordinated securities of such Subsidiary Guarantor) if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Indebtedness of the relevant Subsidiary Guarantor occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Indebtedness of such Subsidiary Guarantor which permits holders of the Designated Senior Indebtedness of such Subsidiary Guarantor as to which such default relates to accelerate its maturity and the Trustee receives a Payment Blockage Notice from the holders or the representative of the holders of any Designated Senior Indebtedness of such Subsidiary Guarantor. Any payments under any Subsidiary Guarantee may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in the case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received. No new period of payment blockage may be commenced by a Payment Blockage Notice unless and until (i) 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Notes that have become due and payable have been paid in full. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such default has been cured or waived for a period of not less than 90 days. As a result of the subordination provisions described above, in the event of an insolvency, bankruptcy, reorganization or liquidation of a Subsidiary Guarantor creditors of the relevant Subsidiary Guarantor who are holders of Senior Indebtedness of such Subsidiary Guarantor may recover more, ratably, than the holders of the Notes, and assets which would otherwise be available to pay obligations in respect of the Notes will be available only after all Senior Indebtedness of such Subsidiary Guarantor has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. As of March 31, 1998, after giving pro forma effect to the acquisition of Signal, the borrowing under the term loan portion of the Amended Credit Agreement, the issuance of the Outstanding Notes and the application of net proceeds therefrom, the Subsidiary Guarantors would have had $53.4 million of Senior Indebtedness outstanding, all of which would have represented guarantees of Indebtedness under the Amended Credit Agreement. The terms of the Indenture permit Restricted Subsidiaries of the Company to incur additional Senior Indebtedness, subject to certain limitations, including Indebtedness that may be secured by Liens on property of the Restricted Subsidiaries. See the discussion below under the captions "Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock" and "Certain Covenants--Liens." The Indenture provides that upon a sale or other disposition to a Person not an Affiliate of the Company of all or substantially all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition to a Person not an Affiliate of the Company of all of the Capital Stock of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, which transaction is carried out in accordance with the covenants described below under the captions "Repurchase at the Option of Holders--Asset Sales" or "Certain Covenants--Merger, Consolidation or Sale of Assets," so long as (a) no Default or Event of Default shall have occurred and be continuing at the time of, or would occur after giving effect on a pro forma basis to, such release, (b) the Company could incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of "Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock" on the date on which such release occurs, such Subsidiary Guarantor will be deemed automatically and unconditionally released and discharged from all of its obligations under its Subsidiary Guarantee without any further action on the part of the Trustee or any holder of the Notes; PROVIDED that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure any, Indebtedness of the Company shall also terminate upon such sale, disposition or release. 91 OPTIONAL REDEMPTION The Notes are not redeemable at the Company's option prior to June 15, 2003. Thereafter, the Notes will be redeemable, at the option of the Company, as a whole or from time to time in part, on not less than 30 nor more than 60 days' prior notice to the Holders at the following Redemption Prices (expressed as percentages of principal amount) together with accrued interest, if any, to the redemption date (subject to the right of holders of record in the relevant record date to receive interest due on an interest payment date), if redeemed during the 12-month period beginning on June 15 of the years indicated below.
REDEMPTION YEAR PRICE - ---------------------------------------------------------------- ------------ 2003............................................................ 104.8125% 2004............................................................ 103.2083% 2005............................................................ 101.6042% 2006 and thereafter............................................. 100.0000%
Notwithstanding the foregoing, at any time or from time to time prior to June 15, 2001, the Company may redeem, on one or more occasions, up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes with the net proceeds of one or more Equity Offerings at a redemption price equal to 109.625% of the principal amount thereof, plus accrued interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date); PROVIDED that, immediately after giving effect to such redemption, at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes remains outstanding; PROVIDED FURTHER that such redemptions shall occur within 60 days of the date of closing of each Equity Offering. If less than all the Notes or Additional Notes, if any, are to be redeemed, the particular Notes to be redeemed will be selected not more than 60 days prior to the redemption date by the Trustee by such method as the Trustee deems fair and appropriate, PROVIDED that no Note of $1,000 in principal amount at maturity or less shall be redeemed in part. MANDATORY REDEMPTION Except as set forth below under "Repurchase at the Option of Holders," the Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL If a Change of Control occurs at any time, then each Holder will have the right to require that the Company purchase such Holder's Notes and Additional Notes, if any, in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to the offer described below (the "Change of Control Offer") and the other procedures set forth in the Indenture. Within 30 days following any Change of Control, the Company will notify the Trustee thereof and give written notice of such Change of Control to each Holder of Notes and Additional Notes by first-class mail, postage prepaid, at its address appearing in the security register, stating, among other things: (i) the purchase price and the purchase date, which will be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed or such later date as is necessary to comply with requirements under the Exchange Act; (ii) that any Note or Additional Note not tendered will continue to accrue interest; (iii) that, unless the Company defaults in the payment of the purchase price, any Notes or 92 Additional Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control purchase date; and (iv) certain other procedures that a Holder must follow to accept a Change of Control Offer or to withdraw such acceptance. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the purchase price for all of the Notes and Additional Notes that might be tendered by Holders of Notes and Additional Notes seeking to accept the Change of Control Offer. The failure of the Company to make or consummate the Change of Control Offer or pay the applicable Change of Control purchase price when due would result in an Event of Default and would give the Trustee and the Holders of Notes and Additional Notes the rights described under "Events of Default and Remedies." The Amended Credit Agreement provides that certain change of control events with respect to the Company would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Indebtedness to which the Company becomes a party may contain similar restrictions and provisions. If a Change of Control occurs at a time when the Company is prohibited from purchasing Notes and Additional Notes, if any, the Company could seek the consent of its lenders to the purchase of Notes and Additional Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Notes and Additional Notes, if any. In such case, the Company's failure to purchase tendered Notes and Additional Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under the Amended Credit Agreement. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the Holders of Notes and Additional Notes. One of the events that constitutes a Change of Control under the Indenture is the disposition of "all or substantially all" of the Company's assets. This term has not been interpreted under New York law (which is the governing law of the Indenture) to represent a specific quantitative test. As a consequence, if Holders of Notes and Additional Notes elect to require the Company to purchase the Notes and Additional Notes and the Company elects to contest such election, there can be no assurance as to how a court interpreting New York law would interpret the phrase in many circumstances. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all the Notes validly tendered and not withdrawn under such Change of Control Offer. The existence of a Holder's right to require the Company to purchase such Holder's Notes or Additional Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes a Change of Control. The definition of "Change of Control" in the Indenture is limited in scope. The provisions of the Indenture may not afford Holders of Notes or Additional Notes the right to require the Company to repurchase such Notes or Additional Notes in the event of a highly leveraged transaction or certain transactions with the Company's management or its Affiliates, including a reorganization, restructuring, merger or similar transaction involving the Company (including, in certain circumstances, an acquisition of the Company by management or its Affiliates) that may adversely affect Holders, if such transaction is not a transaction defined as a Change of Control. See "Certain Definitions" below for the definition of "Change of Control." A transaction involving the Company's management or its Affiliates, or a transaction involving a recapitalization of the Company, would result in a Change of Control if it is the type of transaction specified in such definition. The Company will comply with the applicable tender offer rules including Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations in connection with a Change of 93 Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof. The Company will not, and will not permit any Restricted Subsidiary to, create any restriction (other than restrictions existing under Indebtedness as in effect on the Closing Date or in refinancings of such Indebtedness) that would materially impair the ability of the Company to make a Change of Control Offer to purchase the Notes or Additional Notes tendered for purchase. Restrictions in the Indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on its or their property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Notes and Additional Notes, if any, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. In certain circumstances, such restrictions and the restrictions on transactions with Affiliates may make more difficult or discourage any leveraged buyout of the Company or any of its Restricted Subsidiaries. While such restrictions cover a variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes and Additional Notes, if any, protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. ASSET SALES The Company will not, and will not permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the consideration received by the Company or such Restricted Subsidiary for such Asset Sale is not less than the fair market value of the assets sold evidenced by a resolution of the board of directors of such entity set forth in an officers' certificate delivered to the Trustee and (ii) the consideration received by the Company or the relevant Restricted Subsidiary in respect of such Asset Sale consists of at least 75% cash or cash equivalents (for purposes of this clause (ii), cash and cash equivalents includes (a) the principal amount of any Indebtedness for money borrowed (as reflected in the Company's consolidated balance sheet) of the Company or any Restricted Subsidiary that is assumed by any transferee of any such assets or other property in such Asset Sale, but only to the extent that such assumption is effected on a basis under which there is no further recourse to the Company or any of its Restricted Subsidiaries with respect to such Indebtedness) and (b) any securities, notes or other similar obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted within 90 days of the related Asset Sale by the Company or such Restricted Subsidiary into cash or cash equivalents (to the extent of the net cash proceeds or the cash equivalents (net of related costs) received upon such conversion)). If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may, at its option, within 12 months after such Asset Sale, (i) apply all or a portion of the Net Cash Proceeds to the permanent reduction of amounts outstanding under the Amended Credit Agreement (and to correspondingly reduce the commitments, if any, with respect thereto) or to the repayment of other Senior Indebtedness of the Company or a Restricted Subsidiary, PROVIDED that the repayment of any Indebtedness incurred under the Amended Credit Agreement in connection with the acquisition of any Facility with the proceeds of any subsequent Sale and Leaseback Transaction relating to such Facility shall not result in the permanent reduction of the amounts outstanding under the Amended Credit Agreement or correspondingly permanently reduce the commitments thereunder, or (ii) invest (or enter into a legally binding agreement to invest) all or a portion of such Net Cash Proceeds in properties and assets to replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in businesses of the Company or its Restricted Subsidiaries, as the case may be, existing on the Closing Date 94 or in businesses the same, similar or reasonably related thereto. If any such legally binding agreement to invest such Net Cash Proceeds is terminated, the Company may, within 90 days of such termination or within 12 months of such Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical contained in such clause (ii)) above. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in a manner that is not prohibited by the Indenture. The amount of such Net Cash Proceeds not so used as set forth above in this paragraph constitutes "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5 million, the Company will, within 30 days thereafter, make an offer to purchase (an "Excess Proceeds Offer") from all Holders of Notes and Additional Notes, if any, on a pro rata basis, in accordance with the procedures set forth in the Indenture, the maximum principal amount (expressed as a multiple of $1,000) of Notes and Additional Notes, if any, that may be purchased with the Excess Proceeds, at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued interest, if any, to the date such offer to purchase is consummated. To the extent that the aggregate principal amount of Notes and Additional Notes, if any, tendered pursuant to such offer to purchase is less than the Excess Proceeds, the Company may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes and Additional Notes, if any, validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and Additional Notes, if any, to be purchased will be selected on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds will be reset to zero. CERTAIN COVENANTS RESTRICTED PAYMENTS The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions: (a) declare or pay any dividend on, or make any distribution to holders of, any shares of the Capital Stock of the Company or any Restricted Subsidiary, other than (i) dividends or distributions payable solely in Qualified Equity Interests or (ii) dividends or distributions by a Restricted Subsidiary payable to the Company or another Wholly Owned Restricted Subsidiary; (b) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of Capital Stock, or any options, warrants or other rights to acquire such shares of Capital Stock, of the Company, any Restricted Subsidiary or any Affiliate of the Company (other than, in either case, any such Capital Stock owned by the Company or any of its Wholly Owned Restricted Subsidiaries); (c) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Pari Passu Indebtedness or Subordinated Indebtedness; and (d) make any Investment (other than a Permitted Investment) in any Person (such payments or other actions described in (but not excluded from) clauses (a) through (d) being referred to as "Restricted Payments"), unless at the time of, and immediately after giving effect to, the proposed Restricted Payment: (i) no Default or Event of Default has occurred and is continuing, (ii) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Disqualified Stock," and 95 (iii) the aggregate amount of all Restricted Payments made after the Closing Date does not exceed the sum of: (A) 50% of the aggregate Consolidated Net Income of the Company during the period (taken as one accounting period) from the first day of the Company's first fiscal quarter commencing after the Closing Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net Income is a loss, minus 100% of such amount); plus (B) 100% of the aggregate net cash proceeds received by the Company after the Closing Date from the issuance or sale (other than to a Subsidiary) of either (1) Qualified Equity Interests of the Company or (2) debt securities or Disqualified Stock that have been converted into or exchanged for Qualified Stock of the Company, together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions, so long as no Default or Event of Default has occurred and is continuing or would occur: (a) the payment of any dividend in cash or Qualified Equity Interests of the Company within 60 days after the date of declaration thereof, if at the declaration date such payment would not have been prohibited by the foregoing provisions; (b) the repurchase, redemption or other acquisition or retirement for value of any shares of Capital Stock of the Company, in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, Qualified Equity Interests of the Company; (c) the purchase, redemption, defeasance or other acquisition or retirement for value of any Pari Passu Indebtedness or Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, shares of Qualified Equity Interests of the Company; (d) the purchase, redemption, defeasance or other acquisition or retirement for value of Pari Passu Indebtedness or Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance or sale (other than to a Subsidiary) of, Pari Passu Indebtedness or Subordinated Indebtedness, respectively, so long as the Company or a Restricted Subsidiary would be permitted to refinance such original Pari Passu Indebtedness or Subordinated Indebtedness with such new Pari Passu Indebtedness or Subordinated Indebtedness pursuant to clause (iv) of the definition of Permitted Indebtedness; (e) the repurchase of any Subordinated Indebtedness at a purchase price not greater than 101% of the principal amount of such Subordinated Indebtedness in the event of a Change of Control in accordance with provisions similar to the "Change of Control" covenant; PROVIDED that, prior to or simultaneously with such repurchase, the Company has made the Change of Control Offer as provided in such covenant with respect to the Notes and has repurchased all Notes validly tendered for payment in connection with such Change of Control Offer; (f) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company, options on any such shares or related stock appreciation rights or similar securities held by officers or employees or former officers or employees (or their estates or beneficiaries under their estates) or by any employee benefit plan, upon death, disability, retirement or termination of employment or pursuant to the terms of any employee benefit plan or any other agreement under which such shares of stock or related rights were issued; PROVIDED that the aggregate 96 cash consideration paid for such purchase, redemption, acquisition, cancellation or other retirement of such shares of Capital Stock after the Closing Date does not exceed $500,000 in any fiscal year; and (g) Investments constituting Restricted Payments not to exceed $5 million at any one time outstanding. The actions described in clauses (b), (c), (e), (f) and (g) of this paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph but will reduce the amount that would otherwise be available for Restricted Payments under clause (iii) of the first paragraph of this covenant and the actions described in clauses (a) and (d) of the preceding paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph and will not reduce the amount that would otherwise be available for Restricted Payments under clause (iii) of the first paragraph of this covenant. For the purpose of making any calculations under the Indenture (i) if a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will be deemed to have made an Investment in an amount equal to the greater of the fair market value or net book value of the net assets of such Restricted Subsidiary at the time of such designation as determined by the Board, and (ii) any property transferred to or from an Unrestricted Subsidiary will be valued at fair market value at the time of such transfer, as determined by the Board. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined by the Board whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $5 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officer's certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required under "Certain Covenants--Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. If the aggregate amount of all Restricted Payments calculated under the foregoing provision includes an Investment in an Unrestricted Subsidiary or other Person that thereafter becomes a Restricted Subsidiary, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the lesser of (x) the net asset value of such Subsidiary at the time it becomes a Restricted Subsidiary and (y) the initial amount of such Investment. If an Investment resulted in the making of a Restricted Payment, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the amount of any net reduction in such Investment (resulting from the payment of interest or dividends, loan repayment, transfer of assets or otherwise, other than the redesignation of an Unrestricted Subsidiary or other Person as a Restricted Subsidiary), to the extent such net reduction is not included in the Company's Consolidated Net Income; PROVIDED that the total amount by which the aggregate amount of all Restricted Payments may be reduced may not exceed the lesser of (x) the cash proceeds received by the Company and its Restricted Subsidiaries in connection with such net reduction and (y) the initial amount of such Investment. In computing the Consolidated Net Income of the Company for purposes of the foregoing clause (iii)(A) of the first paragraph of this covenant, (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of the Indenture, such Restricted Payment will be deemed to have been 97 made in compliance with the Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK The Company will not, and will not permit any Restricted Subsidiary to, create, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of, or otherwise incur (collectively, "incur"), any Indebtedness (including Acquired Indebtedness and the issuance of Disqualified Stock), except that the Company and any Subsidiary Guarantors may incur Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for the immediately preceding four full fiscal quarters for which internal financial statements are available, taken as one accounting period, would have been equal to at least (i) 2.00 to 1.0 from the Closing Date through and including June 30, 2000 and (ii) 2.25 to 1.0 thereafter. In making the foregoing calculation for any four-quarter period that includes the Closing Date, pro forma effect will be given to the Offering, as if such transactions had occurred at the beginning of such four-quarter period. In addition (but without duplication), in making the foregoing calculation, pro forma effect will be given to: (i) the incurrence of such Indebtedness and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred and the application of such proceeds occurred at the beginning of such four-quarter period; (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company or its Restricted Subsidiaries since the first day of such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period; and (iii) the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any company, entity or business acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, as if such acquisition or disposition occurred at the beginning of such four-quarter period. In making a computation under the foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving credit facility will be computed based on the average daily balance of such Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at the option of the Company, a fixed or floating rate of interest, interest thereon will be computed by applying, at the option of the Company, either the fixed or floating rate, and (C) the amount of any Indebtedness that bears interest at a floating rate will be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligations applicable to such Indebtedness if such Hedging Obligations have a remaining term at the date of determination in excess of 12 months). Notwithstanding the foregoing, the Company may, and may permit its Restricted Subsidiaries to, incur the following Indebtedness ("Permitted Indebtedness"): (i) Indebtedness of the Company or any Subsidiary Guarantor under the Amended Credit Agreement (and the incurrence by any Subsidiary Guarantor of guarantees thereof) in an aggregate principal amount at any one time outstanding not to exceed $150 million, less any amounts applied to the permanent reduction of such credit facilities pursuant to the provisions of the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales;" (ii) Indebtedness represented by the Notes (other than the Additional Notes) and the Subsidiary Guarantees; (iii) Existing Indebtedness; (iv) the incurrence by the Company of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace, any Indebtedness that is permitted to be incurred under clause (ii) or (iii) above; (v) Indebtedness owed by the Company to any Wholly Owned Restricted Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary (PROVIDED that 98 such Indebtedness is held by the Company or such Restricted Subsidiary); PROVIDED, HOWEVER, that any Indebtedness of the Company owing to any such Restricted Subsidiary is unsecured and subordinated in right of payment from and after such time as the Notes shall become due and payable (whether at Stated Maturity, acceleration, or otherwise) to the payment and performance of the Company's obligations under the Notes; (vi) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; (vii) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (viii) either (A) Capitalized Lease Obligations of the Company or any Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests so long as (x) such Indebtedness is not secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets so acquired and (y) such Indebtedness is created within 60 days of the acquisition of the related property; PROVIDED that the aggregate amount of Indebtedness under clauses (A) and (B) does not exceed 5% of Consolidated Tangible Assets at any one time outstanding; (ix) Guarantees by any Restricted Subsidiary made in accordance with the provisions of the covenant described under the caption "--Guarantees of Indebtedness by Restricted Subsidiaries;" (x) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within two business days of incurrence; (xi) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self- insurance or similar requirements in the ordinary course of business; (xii) the incurrence of Non-Recourse Indebtedness by Permitted Joint Ventures; and (xiii) Indebtedness of the Company, any Subsidiary Guarantor or any Permitted Joint Venture not permitted by any other clause of this definition, in an aggregate principal amount not to exceed $15 million at any one time outstanding. LIENS (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Pari Passu Indebtedness or Subordinated Indebtedness of the Company on or with respect to any of its property or assets, including any shares of stock or Indebtedness of any Restricted Subsidiary, whether owned at the Closing Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (i) in the case of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien and (ii) in the case of any Lien securing Pari Passu Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to or PARI PASSU with such Lien. (b) The Company will not permit any Subsidiary Guarantor to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Pari Passu Indebtedness or Subordinated Indebtedness of such Subsidiary Guarantor on or with respect to such Subsidiary Guarantor's properties or assets, including any 99 shares of stock or Indebtedness of any other Restricted Subsidiary, whether owned at the date of the Indentures or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (i) in the case of any Lien securing Pari Passu Indebtedness of such Subsidiary Guarantor, each Subsidiary Guarantee of such Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds that is senior in priority to or PARI PASSU with such Lien and (ii) in the case of any Lien securing Subordinated Indebtedness of such Subsidiary Guarantor, each Subsidiary Guarantee of such Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make loans or advances to the Company or any other Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of: (i) any agreement in effect on the Closing Date; (ii) customary non-assignment provisions of any lease governing a leasehold interest of the Company or any Restricted Subsidiary; (iii) the refinancing or successive refinancing of Indebtedness incurred under the agreements in effect on the Closing Date, so long as such encumbrances or restrictions are no more restrictive than those contained in such original agreement; (iv) any agreement or other instrument of a Person acquired by the Company or any Restricted Subsidiary in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; (v) purchase money obligations for acquired property permitted under the covenant entitled "--Incurrence of Indebtedness and Issuance of Disqualified Stock" that impose restrictions of the nature described in clause (d) above on the property so acquired; (vi) any agreement for the sale of a Restricted Subsidiary or an asset that restricts distributions by that Restricted Subsidiary or transfers of such asset pending its sale; (vii) secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described above under the caption "--Liens" that limits the right of the debtor to dispose of the assets securing such Indebtedness; (viii) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; and (ix) Non-Recourse Indebtedness of any Permitted Joint Venture permitted to be incurred under the Indenture. LIMITATION ON LAYERING DEBT The Company and each Subsidiary Guarantor will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness or guarantee, as applicable, that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the Notes or such Subsidiary Guarantor's Subsidiary Guarantee, respectively. 100 MERGER, CONSOLIDATION OR SALE OF ASSETS The Company may not, in a single transaction or series of related transactions, consolidate or merge with or into (whether or not the Company is the surviving corporation), or directly and/or indirectly through its Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (determined on a consolidated basis for the Company and its Subsidiaries taken as a whole) in one or more related transactions to, another corporation, Person or entity unless: (a) either (i) the Company is the surviving corporation or (ii) in the case of a transaction involving the Company, the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (the "Surviving Entity") is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia and assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (b) immediately after giving effect to such transaction and treating any obligation of the Company in connection with or as a result of such transaction as having been incurred as of the time of such transaction, no Default or Event of Default has occurred and is continuing; (c) the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) could, at the time of such transaction and after giving PRO FORMA effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the first paragraph of "--Incurrence of Indebtedness and Issuance of Disqualified Stock;" (d) each Subsidiary Guarantor, unless it is the other party to the transaction described above, has by supplemental indenture confirmed that its Subsidiary Guarantee applies to the Surviving Entity's obligations under the Indenture and the Notes; (e) if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of the covenant described above under the caption "--Liens" are complied with; and (f) the Company delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such transaction complies with the requirements of the Indenture. The Indenture provides that no Subsidiary Guarantor may consolidate with or merge with or into any other Person or convey, sell, assign, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any other Person (other than the Company or another Subsidiary Guarantor) unless: (a) subject to the provisions of the following paragraph, the Person formed by or surviving such consolidation or merger (if other than such Subsidiary Guarantor) or to which such properties and assets are transferred assumes all of the obligations of such Subsidiary Guarantor under the Indenture and its Subsidiary Guarantee, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee, (b) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing and (c) the Subsidiary Guarantor delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such transaction complies with the requirements of the Indenture. 101 For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. In the event of any transaction described in and complying with the conditions listed in the first paragraph of this covenant in which the Company is not the continuing obligor under the Indenture, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, and thereafter the Company will, except in the case of a lease, be discharged from all its obligations and covenants under the Indenture and Notes. TRANSACTIONS WITH AFFILIATES The Company will not, and will not permit any Restricted to, directly or indirectly, enter into or suffer to exist any transaction with, or for the benefit of, any Affiliate of the Company ("Interested Persons"), unless (a) such transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could have been obtained in an arm's-length transaction with third parties who are not Interested Persons and (b) the Company delivers to the Trustee (i) with respect to any transaction or series of related transactions entered into after the Closing Date involving aggregate payments in excess of $1 million, a resolution of the Board set forth in an officers' certificate certifying that such transaction or transactions complies with clause (a) above and that such transaction or transactions have been approved by the Board (including a majority of the Disinterested Directors) of the Company and (ii) with respect to a transaction or series of related transactions involving aggregate payments equal to or greater than $10 million, a written opinion as to the fairness to the Company or such Restricted Subsidiary of such transaction or series of transactions from a financial point of view issued by an accounting, appraisal or investment banking firm, in each case of national standing. The foregoing covenant does not restrict: (A) transactions among the Company and/or its Restricted Subsidiaries; (B) the Company from paying reasonable and customary regular compensation and fees to directors of the Company or any Restricted Subsidiary who are not employees of the Company or any Restricted Subsidiary; (C) transactions permitted by the provisions of the covenant described under the caption "Certain Covenants--Restricted Payments;" (D) advances to employees for moving, entertainment and travel expenses and similar expenditures in the ordinary course of business and consistent with past practice; and (E) purchases of equipment, supplies and related services made on an arm's length basis in the ordinary course of business by the Company, any Restricted Subsidiary or any Permitted Joint Venture from any Affiliate. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES The Company (a) will not permit any Restricted Subsidiary to issue any Capital Stock (other than to the Company or a Wholly Owned Restricted Subsidiary) and (b) will not, and will not permit any Restricted Subsidiary to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted Subsidiary to any Person (other than the Company or a Wholly Owned Restricted Subsidiary); PROVIDED, HOWEVER, that this covenant will not prohibit (i) the sale or other disposition of all, but not less than all, of the issued and outstanding Capital Stock of a Restricted Subsidiary owned by the Company and its Restricted Subsidiaries in compliance with the other provisions of the Indenture, (ii) the sale or other 102 disposition of a portion of the issued and outstanding Capital Stock of an existing Wholly Owned Restricted Subsidiary if (A) as a result of such sale or disposition, such Wholly Owned Restricted Subsidiary becomes a Permitted Joint Venture and (B) at the time of such sale or disposition, the Company could make an Investment in the remaining Capital Stock held by it or one of its Restricted Subsidiaries in an amount equal to the amount of its remaining Investment in such existing Restricted Subsidiary pursuant to the covenant entitled "Restricted Payments," or (iii) the ownership by directors of director's qualifying shares or the ownership by foreign nationals of Capital Stock of any Restricted Subsidiary, to the extent mandated by applicable law. The Company will not permit any Restricted Subsidiary to issue any Preferred Stock. PAYMENTS FOR CONSENT The Indenture provides that neither the Company nor any of its Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES The Company will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any other manner become liable for the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for a guarantee of payment of the Notes by such Restricted Subsidiary on a senior subordinated basis and (b) with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee is subordinated to such Restricted Subsidiary's guarantee with respect to the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes, PROVIDED that the foregoing provision will not be applicable to any guarantee by any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. Any guarantee by a Restricted Subsidiary of the Notes pursuant to the preceding paragraph may provide by its terms that it will be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer to any Person not an Affiliate of the Company of all of the Company's and the Restricted Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the guarantee that resulted in the creation of such guarantee of the Notes, except a discharge or release by or as a result of payment under such guarantee. ISSUANCES OF GUARANTEES BY NEW RESTRICTED SUBSIDIARIES The Company will provide to the Trustee, on the date that any Person (other than a Foreign Subsidiary or Permitted Joint Ventures) becomes a Restricted Subsidiary, a supplemental indenture to the Indenture, executed by such new Restricted Subsidiary, providing for a full and unconditional guarantee on a senior subordinated basis by such new Restricted Subsidiary of the Company's obligations under the Notes and the Indenture to the same extent as that set forth in the Indenture. UNRESTRICTED SUBSIDIARIES (a) The Board may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company nor any Restricted 103 Subsidiary is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity, (iii) any Investment in such Subsidiary made as a result of designating such Subsidiary an Unrestricted Subsidiary will not violate the provisions of the covenant described under the caption "--Restricted Payments," (iv) neither the Company nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, with such Subsidiary other than those that might be obtained at the time from Persons who are not Affiliates of the Company, (v) neither the Company nor any Restricted Subsidiary has any obligation to subscribe for additional shares of Capital Stock or other equity interest in such Subsidiary, or to maintain or preserve such Subsidiary's financial condition or to cause such Subsidiary to achieve certain levels of operating results, and (vi) such Unrestricted Subsidiary has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer of the Company or any of its Restricted Subsidiaries. Notwithstanding the foregoing, the Company may not designate any of its Subsidiaries existing as of the Closing Date or any successor to any of them as an Unrestricted Subsidiary and may not sell, transfer or otherwise dispose of any properties or assets of any such Subsidiary to an Unrestricted Subsidiary, other than in the ordinary course of business. (b) The Board may designate any Unrestricted Subsidiary as a Restricted Subsidiary; PROVIDED that (i) no Default or Event of Default has occurred and is continuing following such designation and (ii) the Company would, at the time of making such designation and giving such pro forma effect as if such designation had been made at the beginning of the applicable four quarter period, have been permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption "Incurrence of Indebtedness and Issuance of Disqualified Stock" (treating any Indebtedness of such Unrestricted Subsidiary as the incurrence of Indebtedness by a Restricted Subsidiary). REPORTS Whether or not the Company is required to file reports with the Commission, the Company will file all such annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Section 13(a) or 15(d) under the Exchange Act. The Company will also be required (a) to supply to the Trustee and each Holder, or supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective Holder promptly upon written request. EVENTS OF DEFAULT AND REMEDIES The following are "Events of Default" under the Indenture: (a) default in the payment of any interest on any Note when it becomes due and payable, and continuance of such default for a period of 30 days (whether or not prohibited by the subordination provisions of the Indenture); (b) default in the payment of the principal of (or premium, if any, on) any Note when due (whether or not prohibited by the subordination provisions of the Indenture); (c) failure to perform or comply with the Indenture provisions described under the captions "--Repurchase at the Option of Holders--Change of Control," "--Repurchase at the Option of 104 Holders--Asset Sales," "--Certain Covenants--Restricted Payments," "Incurrence of Indebtedness and Issuance of Disqualified Stock" or "--Merger, Consolidation or Sale of Assets;" (d) default in the performance, or breach, of any covenant or agreement of the Company or any Subsidiary Guarantor contained in the Indenture or in any Subsidiary Guarantee (other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with elsewhere herein), and continuance of such default or breach for a period of 60 days after written notice has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes (and Additional Notes, if any) then outstanding; (e) (i) an event of default has occurred under any mortgage, bond, indenture, loan agreement or other document evidencing an issue of Indebtedness of the Company or any Restricted Subsidiary, which issue individually or in the aggregate has an aggregate outstanding principal amount of not less than $5 million, and such default has resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable or (ii) a default in any payment when due at final maturity of any such Indebtedness; (f) failure by the Company or any of its Restricted Subsidiaries to pay one or more final judgments the uninsured portion of which exceeds in the aggregate $5 million, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; (g) any Subsidiary Guarantee ceases to be in full force and effect or is declared null and void or any such Subsidiary Guarantor denies that it has any further liability under any Subsidiary Guarantee, or gives notice to such effect (other than by reason of the termination of the Indenture or the release of any such Subsidiary Guarantee in accordance with the Indenture); or (h) the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary. If an Event of Default (other than as specified in clause (h) above) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes (and Additional Notes, if any) then outstanding may, and the Trustee at the request of such Holders will, declare the principal of, and accrued interest on, all of the outstanding Notes immediately due and payable and, upon any such declaration, such principal and such interest will become due and payable immediately. If an Event of Default specified in clause (h) above occurs and is continuing, then the principal of and accrued interest on all of the outstanding Notes will IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration under the Indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes (and Additional Notes, if any), by written notice to the Company and the Trustee, may rescind such declaration and its consequences if: (i) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes, (B) all unpaid principal of (and premium, if any, on) any outstanding Notes that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, (C) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes and (D) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (ii) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived. No such rescission will affect any subsequent default or impair any right consequent thereon. No Holder has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless the Holders of at least 25% in aggregate principal amount of the outstanding Notes 105 (and Additional Notes, if any) have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding, the Trustee has failed to institute any such proceeding within 60 days after receipt of such notice, request and offer of indemnity and the Trustee, within such 60-day period, has not received directions inconsistent with such written request by Holders of a majority in aggregate principal amount of the outstanding Notes (and Additional Notes, if any). Such limitations do not apply, however, to a suit instituted by a Holder for the enforcement of the payment of the principal of, premium, if any, or interest on such Note on or after the respective due dates expressed in such Note. The Holders of not less than a majority in aggregate principal amount of the outstanding Notes and Additional Notes, if any, may, on behalf of the Holders of all of the Notes and Additional Notes, if any, waive any past defaults under the Indenture, except a default in the payment of the principal of (and premium, if any) or interest on any Note, or in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each Note outstanding. If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee will mail to each Holder notice of the Default or Event of Default within 90 days after the occurrence thereof. Except in the case of a Default or an Event of Default in payment of principal of (and premium, if any, on) or interest on any Notes, the Trustee may withhold the notice to the Holders if a committee of its trust officers in good faith determines that withholding such notice is in the interests of the Holders. The Company is required to furnish to the Trustee annual statements as to the performance by the Company and the Subsidiary Guarantors of their obligations under the Indenture and as to any default in such performance. The Company is also required to notify the Trustee within five days of any Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No past, present or future director, officer, employee, incorporator or stockholder of the Company or any Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or the Subsidiary Guarantors under the Notes, the Indenture or the Subsidiary Guarantees, as applicable, or any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, terminate the obligations of the Company and the Subsidiary Guarantors with respect to the outstanding Notes ("legal defeasance"). Such legal defeasance means that the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, except for (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of (and premium, if any, on) and interest on such Notes when such payments are due, (ii) the Company's obligations to issue temporary Notes, register the transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or agency for payments in respect of the Notes and segregate and hold such payments in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv) the legal defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to terminate the obligations of the Company and any Subsidiary Guarantor with respect to certain covenants set forth in the Indenture and described under "Certain Covenants" above, and any omission to comply with such obligations would not constitute a Default or an Event of Default with respect to the Notes ("covenant defeasance"). In order to exercise either legal defeasance or covenant defeasance: (a) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders, money in an amount, or U.S. Government Obligations (as defined in the Indenture) that through the scheduled payment of principal and interest thereon will 106 provide money in an amount, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of (and premium, if any, on) and interest on the outstanding Notes at maturity (or upon redemption, if applicable) of such principal or installment of interest; (b) no Default or Event of Default has occurred and is continuing on the date of such deposit or, insofar as an event of bankruptcy under clause (h) of "Events of Default" above is concerned, at any time during the period ending on the 91st day after the date of such deposit; (c) such legal defeasance or covenant defeasance may not result in a breach or violation of, or constitute a default under, the Indenture, the Amended Credit Agreement or any other material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound; (d) in the case of legal defeasance, the Company must deliver to the Trustee an opinion of counsel stating that the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or since the date hereof, there has been a change in applicable federal income tax law, to the effect, and based thereon such opinion must confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (e) in the case of covenant defeasance, the Company must have delivered to the Trustee an opinion of counsel to the effect that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (f) the Company must have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to either the legal defeasance or the covenant defeasance, as the case may be, have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer document and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Modifications and amendments of the Indenture and any Subsidiary Guarantee may be made by the Company, any affected Subsidiary Guarantor and the Trustee with the consent of the Holders of a majority in aggregate outstanding principal amount of the Notes (and Additional Notes, if any); PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the Holder of each outstanding Note affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (b) amend, change or modify the obligation of the Company to make and consummate an Excess Proceeds Offer with respect to any Asset Sale in accordance with the covenant described under the covenant entitled "Repurchase at the Option of the Holders--Asset Sales" or the obligation of the Company to make and consummate a Change of Control offer in the event of a Change of Control in 107 accordance with the covenant entitled "Repurchase at the Option of the Holders--Change of Control," including, in each case, amending, changing or modifying any definition relating thereto; (c) reduce the percentage in principal amount of outstanding Notes, the consent of whose Holders is required for any waiver of compliance with certain provisions of, or certain defaults and their consequences provided for under, the Indenture; (d) waive a default in the payment of principal of, or premium, if any, or interest on the Notes or reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults; (e) modify the ranking or priority of the Notes or the Subsidiary Guarantee of any Subsidiary Guarantor; or (f) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee or the Indenture other than in accordance with the terms of the Indenture. The Holders of a majority in aggregate principal amount of the Notes outstanding may waive compliance with certain restrictive covenants and provisions of the Indenture. Without the consent of any Holders, the Company and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental to the Indenture for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company in the Indenture and in the Notes; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to add additional Events of Defaults; or (4) to provide for uncertificated Notes in addition to or in place of the certificated Notes; or (5) to evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee; or (6) to secure the Notes; or (7) to cure any ambiguity, to correct or supplement any provision in the Indenture that may be defective or inconsistent with any other provision in the Indenture, or to make any other provisions with respect to matters or questions arising under the Indenture, PROVIDED that such actions pursuant to this clause do not adversely affect the interests of the Holders in any material respect; or (8) to comply with any requirements of the Commission in order to effect and maintain the qualification of the Indenture under the Trust Indenture Act. Notwithstanding the foregoing, neither the Company nor the Trustee may amend any provisions of the Indenture or the Notes concerning (i) the subordination of the Notes and the Subsidiary Guarantees or (ii) legal defeasance or covenant defeasance without, in either case, the prior written consent of the Agent Bank, acting on behalf of the Banks under the Amended Credit Agreement. CONCERNING THE TRUSTEE State Street Bank and Trust Company, N.A., the Trustee under the Indenture, is the initial paying agent and registrar for the Notes. The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. Under the Indenture, the Holders of a majority in outstanding principal amount of the Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. If an Event of Default has occurred and is continuing, the Trustee will exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and provisions of the Trust Indenture Act, incorporated by reference therein, contain limitations on the rights of the Trustee thereunder, should it become a creditor of the Company, to obtain 108 payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; PROVIDED, HOWEVER, that, if it acquires any conflicting interest (as defined), it must eliminate such conflict upon the occurrence of an Event of Default or else resign. BOOK-ENTRY, DELIVERY AND FORM Except as set forth below, the Exchange Notes will be issued in the form of a global note (the "Global Note"). The Global Note will be deposited with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of the Depositary or its nominee. Investors may hold their beneficial interests in the Global Note directly through the Depositary if they have an account with the Depositary or indirectly through organizations which have accounts with the Depositary. The Depositary is a limited-purpose trust company that was created to hold securities for its participating organizations (collectively, the "Participants" or the "Depositary's Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary's Participants include securities brokers and dealers (including the Initial Purchasers), banks and trust companies, clearing corporations and certain other organizations. Access to the Depositary's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants" or the "Depositary's Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depositary only through the Depositary's Participants or the Depositary's Indirect Participants. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Note, the Depositary will credit the accounts of Participants designated by the Initial Purchasers with portions of the principal amount of the Global Note and (ii) ownership of the Notes evidenced by the Global Note will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depositary (with respect to the interests of the Depositary's Participants), the Depositary's Participants and the Depositary's Indirect Participants. Prospective purchasers are advised that the laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to own, transfer or pledge Notes evidenced by the Global Note will be limited to such extent. Investors may hold their interests in the Global Note directly through Cedel or Euroclear, if they are participants in such systems, or indirectly through organizations which are participants in such systems. Investors may also hold such interests through organizations other than Cedel or Euroclear that are Participants in the DTC system. Cedel and Euroclear will hold such interests in the Global Note on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositaries, which in turn will hold such interests in the Global Note in customers' securities accounts in the depositaries' names on the books of DTC. So long as the Global Note Holder is the registered owner of any Notes, the Global Note Holder will be considered the sole Holder under the Indenture of any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the Global Note will not be considered the owners or Holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records of the Depositary or for maintaining, supervising or reviewing any records of the Depositary relating to the Notes. 109 Payments in respect of the principal of, premium, if any, and interest on any Notes registered in the name of the Global Note Holder on the applicable record date will be payable by the Trustee to or at the direction of the Global Note Holder in its capacity as the registered Holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the persons in whose names Notes, including the Global Note, are registered as the owners thereof for the purpose of receiving such payments. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Notes. The Company believes, however, that it is currently the policy of the Depositary to immediately credit the accounts of the relevant Participants with such payments, in amounts proportionate to their respective holdings of beneficial interests in the relevant security as shown on the records of the Depositary. Payments by the Depositary's Participants and the Depositary's Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary's Participants or the Depositary's Indirect Participants. Transfers between Participants in DTC will be effected in accordance with DTC rules and will be settled in immediately available funds. If a holder requires physical delivery of a Certificated Note for any reason, including to sell Notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder must transfer its interest in the Global Notes in accordance with the normal procedures of DTC and in accordance with the procedures set forth in the Indenture. CERTIFICATED NOTES If (i) the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in the form of Certificated Securities under the Indenture then, upon surrender by the Global Note Holder of the Global Notes, Certificated Notes will be issued to each person that the Global Note Holder and the Depositary identify as being the beneficial owner of the related Notes. Neither the Company nor the Trustee will be liable for any delay by the Global Note Holder or the Depositary in identifying the beneficial owners of Notes and the Company and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or the Depositary for all purposes. SAME-DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the Notes represented by the Global Note (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. With respect to Certificated Notes, the Company will make all payments of principal, premium, if any, and interest by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. Secondary trading in long-term notes and debentures of corporate issues is generally settled in clearinghouse or next-day funds. In contrast, Notes represented by the Global Note are eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Notes is, therefore, required by the Depositary to be settled in immediately available funds. The Company expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or Cedel participant purchasing an interest in the Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Cedel participant, during the securities settlement processing day (which must be a business day for Euroclear or Cedel) immediately following the settlement date of DTC. DTC has advised the Company that cash received in Euroclear or Cedel as a result of sales of interests in a 110 Global Note by or through a Euroclear or Cedel participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Cedel cash account only as of the business day for Euroclear or Cedel following DTC's settlement date. CERTAIN DEFINITIONS "Acquired Indebtedness" means Indebtedness of a Person (a) existing at the time such Person is merged with or into the Company or becomes a Subsidiary or (b) assumed in connection with the acquisition of assets from such Person. "Affiliate" means, with respect to any specified person, (a) any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 5% or more of such specified person's Capital Stock or any executive officer or director of any such specified person or other person or, with respect to any natural person, any person having a relationship with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Bank" means NationsBank, N.A. and its successors under the Amended Credit Agreement, in its capacity as agent. "Amended Credit Agreement" means the Credit Agreement, dated as of October 14, 1997, as amended as of November 17, 1997, December 19, 1997, March 23, 1998 and June 12, 1998, among the Company, the lenders named therein and NationsBank, N.A., as agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, as such facility may be amended, restated, supplemented, refinanced, extended or otherwise modified from time to time. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of merger, consolidation or similar arrangement) (collectively, a "transfer") by the Company or any Restricted Subsidiary other than in the ordinary course of business and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Shares of Capital Stock of any of the Company's Restricted Subsidiaries (which shall be deemed to include the sale, grant or conveyance of any interest in the income, profits or proceeds therefrom), in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (x) that have a fair market value in excess of $1 million or (y) for Net Cash Proceeds in excess of $1 million. For the purposes of this definition, the term "Asset Sale" does not include (a) any transfer of properties or assets (i) that is governed by the provisions of the Indenture described under "--Certain Covenants--Consolidation, Merger or Sale of Assets" and "-- Restricted Payments," (ii) between or among the Company and its Restricted Subsidiaries pursuant to transactions that do not violate any other provision of the Indenture or (iii) representing obsolete or permanently retired equipment and facilities or (b) the sale or exchange of equipment in connection with the purchase or other acquisition of other equipment, in each case used in the business of the Company or its Restricted Subsidiaries as in existence on the Closing Date or any business determined by the Board in its good faith judgment to be reasonably related thereto. "Banks" means the banks and other financial institutions that from time to time are lenders under the Amended Credit Agreement. "Board" means the Company's Board of Directors. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are authorized or obligated by law or executive order to close. 111 "Capital Stock" of any Person means any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such Person's equity interest (however designated), whether now outstanding or issued after the Closing Date. "Capitalized Lease Obligation" means, with respect to any Person, an obligation incurred or assumed under or in connection with any capital lease of real or personal property that, in accordance with GAAP, has been recorded as a capitalized lease. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) (other than Permitted Holders) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the voting power of all classes of Voting Stock of the Company; PROVIDED, HOWEVER, that upon any purchase and/or subsequent conversion by any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) (other than Permitted Holders), which at the time of such purchase and/or subsequent conversion neither owns nor is acquiring any shares of common stock of the Company, of any of the issued and outstanding shares of Series B Preferred Stock or Series C Preferred Stock, the number of shares of common stock which shall be deemed to be outstanding for the purpose of computing the percentage of the voting power of all classes of Voting Stock of the Company acquired by such "person" or "group" shall be determined on a basis that gives effect to the conversion of both (A) the shares of Series B Preferred Stock or Series C Preferred Stock, as applicable, that were purchased by such "person" or "group" and (B) the shares of Series B Preferred Stock or Series C Preferred Stock, as applicable, that continue to be owned by Permitted Holders after such purchase and/or conversion by such "person" or "group" (without requiring actual conversion of any of such shares of Series B Preferred Stock or Series C Preferred Stock by the holders thereof); (b) the Company, either individually or in conjunction with one or more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties of the Company and the Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries, to any person (other than the Company or a Restricted Subsidiary); (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors (i) whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (ii) elected or appointed by any of the Permitted Holders) cease for any reason to constitute a majority of the Board then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution, other than in a transaction that complies with the provisions described under "Certain Covenants-- Consolidation, Merger or Sale of Assets." "Closing Date" means the date on which the Notes are originally issued under the Indenture. "Consolidated EBITDA" means, for any period, the sum of, without duplication, Consolidated Net Income for such period, plus (or, in the case of clause (d) below, plus or minus) the following items to the extent included in computing Consolidated Net Income for such period (a) Fixed Charges for such period, plus (b) the provision for federal, state, local and foreign income taxes of the Company and its Restricted Subsidiaries for such period, plus (c) the aggregate depreciation and amortization expense of the Company and its Restricted Subsidiaries for such period, plus (d) any other non-cash charges for such period, and minus non-cash credits for such period, other than non-cash charges or credits resulting from changes in prepaid assets or accrued liabilities in the ordinary course of business; PROVIDED that fixed charges, income tax expense, depreciation and amortization expense and non-cash charges and credits of a Restricted 112 Subsidiary will be included in Consolidated EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income for such period. "Consolidated Net Income" means, for any period, the net income (or net loss) of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, adjusted to the extent included in calculating such net income or loss by excluding (a) any net after-tax extraordinary gains or losses (less all fees and expenses relating thereto), (b) any net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales, (c) the portion of net income (or loss) of any Person (other than the Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Restricted Subsidiary in cash during such period, (d) the net income (or loss) of any Person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination and (e) the net income (but not the net loss) of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is at the date of determination restricted, directly or indirectly, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal repayments or otherwise; PROVIDED that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Net Income will be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Net Income otherwise attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding common stock of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries divided by (2) the total number of shares of outstanding common stock of such Restricted Subsidiary on the last day of such period. "Consolidated Tangible Assets" means, as of the date of determination, the total assets, less goodwill and other intangibles, shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such a balance sheet is available, determined on a consolidated basis in accordance with GAAP. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior Indebtedness permitted under the Indenture the principal amount of which is $25 million or more and that has been specifically designated by the Company, in the instrument creating or evidencing such Senior Indebtedness or in an officers' certificate delivered to the Trustee, as "Designated Senior Indebtedness." "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board is required to deliver a resolution of the Board, to make a finding or otherwise take action under the Indenture, a member of the Board who does not have any material direct or indirect financial interest in or with respect to such transaction or series of transactions. "Disqualified Stock" means any class or series of Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise (i) is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the Notes, (ii) is redeemable at the option of the Holder thereof, at any time prior to such final Stated Maturity or (iii) at the option of the Holder thereof is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; PROVIDED that any Capital Stock that would not constitute Disqualified Stock but for provisions therein giving Holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to 113 the Holders of such Capital Stock than the provisions contained in the covenants described under the captions "Repurchase at the Option of Holders--Change of Control" and "--Asset Sales" described herein and such Capital Stock specifically provides that the issuer will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to the provisions contained in the covenants described under the captions "Repurchase at the Option of Holders--Change of Control" and "--Asset Sales." "Equity Offering" means a public or private offering of Capital Stock (other than Disqualified Stock) of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Indebtedness" means the Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Amended Credit Agreement) outstanding on the date of the Indenture and listed on a schedule to the Indenture, until such amounts are repaid. "Facility" means any premises, together with the diagnostic imaging and treatment equipment installed therein, used by the Company in the conduct of the business of providing diagnostic imaging and information, treatment and related management services. "Fixed Charges" means, for any period, without duplication, the sum of (a) the amount that, in conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on a consolidated statement of operations of the Company and its Restricted Subsidiaries for such period, including, without limitation, (i) amortization of debt discount, (ii) the net cost of interest rate contracts (including amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) amortization of debt issuance costs, and (v) the interest component of Capitalized Lease Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the Company and any Restricted Subsidiary (to any Person other than the Company and its Restricted Subsidiaries), computed on a tax effected basis, plus (c) all interest on any Indebtedness of any Person guaranteed by the Company or any of its Restricted Subsidiaries or secured by a lien on the assets of the Company or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that Fixed Charges will not include (i) any gain or loss from extinguishment of debt, including the write-off of debt issuance costs, and (ii) the fixed charges of a Restricted Subsidiary to the extent (and in the same proportion) that the net income of such Subsidiary was excluded in calculating Consolidated Net Income pursuant to clause (e) of the definition thereof for such period. "Fixed Charge Coverage Ratio" means, for any period, the ratio of Consolidated EBITDA for such period to Fixed Charges for such period. "Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a jurisdiction other than the United States or a state thereof or the District of Columbia and that has no material operations or assets in the United States. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, that are in effect on the Closing Date. "guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. 114 "Hedging Obligations" means, with respect to any Person, the obligations of such Person entered into in the ordinary course of business under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and other similar financial agreements or arrangements designed to protect such Person against, or manage the exposure of such Person to, fluctuations in interest rates, and (ii) forward exchange agreements, currency swap, currency option and other similar financial agreements or arrangements designed to protect such Person against, or manage the exposure of such Person to, fluctuations in foreign currency exchange rates. "Holder" means the Person in whose name a Note is, at the time of determination, registered on the Registrar's books. "Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (a) every obligation of such Person for money borrowed, (b) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (d) every obligation of such Person issued or assumed as the deferred purchase price of property or services, (e) the attributable value of every Capitalized Lease Obligation of such Person, (f) all Disqualified Stock of such Person valued at its maximum fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations of such Person under or in respect of Hedging Obligations, and (h) every obligation of the type referred to in clauses (a) through (g) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed. For purposes of this definition, the "maximum fixed repurchase price" of any Disqualified Stock that does not have a fixed repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness is required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Stock, such fair market value will be determined in good faith by the board of directors of the issuer of such Disqualified Stock. Notwithstanding the foregoing, trade accounts payable and accrued liabilities arising in the ordinary course of business and any liability for federal, state or local taxes or other taxes owed by such Person will not be considered Indebtedness for purposes of this definition. "Investment" in any Person means, (i) directly or indirectly, any advance, loan or other extension of credit (including, without limitation, by way of guarantee or similar arrangement) or capital contribution to such Person, the purchase or other acquisition of any stock, bonds, notes, debentures or other securities issued by such Person, the acquisition (by purchase or otherwise) of all or substantially all of the business or assets of such Person, or the making of any investment in such Person, (ii) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary. Investments exclude extensions of trade credit on commercially reasonable terms in accordance with normal trade practices. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon, or with respect to, any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. A Person will be deemed to own subject to a Lien any property that such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or cash equivalents, including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (a) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and 115 investment banks) related to such Asset Sale, (b) provisions for all taxes payable as a result of such Asset Sale, (c) payments made to retire Indebtedness where such Indebtedness is secured by the assets that are the subject of such Asset Sale, (d) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets that are subject to the Asset Sale and (e) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the seller after such Asset Sale, including pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-Recourse Indebtedness" means Indebtedness of a Permitted Joint Venture (i) as to which neither the Company nor any of its Restricted Subsidiaries (other than such Permitted Joint Venture), (a) provides any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor or otherwise), and (ii) the obligees of which will have recourse for repayment of the principal of and interest on such Indebtedness and any fees, indemnities, expense reimbursements or other amount of whatsoever nature accrued or payable in connection with such Indebtedness solely against the assets of such Permitted Joint Venture and not against any of the assets of the Company or its Restricted Subsidiaries (other than such Permitted Joint Venture). "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness that ranks PARI PASSU in right of payment to the Notes and (b) with respect to any Subsidiary Guarantee, Indebtedness that ranks PARI PASSU in right of payment to such Subsidiary Guarantee. "Permitted Business" means the Business conducted by the Company, its Restricted Subsidiaries and Permitted Joint Ventures as of the date of the Indenture and any and all diagnostic imaging and information businesses that in the good faith judgment of the Board are reasonably related thereto. "Permitted Holders" means (i) Carlyle Partners II, L.P., a Delaware limited partnership, Carlyle Partners III, L.P., a Delaware limited partnership, Carlyle International Partners II, L.P., a Cayman Islands exempted limited partnership, Carlyle International Partners III, L.P., a Cayman Islands exempted limited partnership, C/S International Partners, a Cayman Islands general partnership, State Board of Administration of Florida, a separate account maintained pursuant to an Investment Management Agreement dated as of September 6, 1996 among the State Board of Administration of Florida, Carlyle Investment Group, L.P. and Carlyle Investment Management, L.L.C., Carlyle Investment Group, L.P., a Delaware limited partnership, Carlyle-InSight International Partners, L.P., a Cayman Islands exempted limited partnership, and Carlyle-InSight Partners, L.P., a Delaware limited partnership, and their Affiliates (collectively, "Carlyle Affiliates") and (ii) General Electric Company, a New York corporation, and its Affiliates (collectively, "GE Affiliates"). "Permitted Investments" means any of the following: (a) Investments in (i) securities with a maturity of one year or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (PROVIDED that the full faith and credit of the United States is pledged in support thereof); (ii) certificates of deposit, Euro-dollar time deposits or acceptances with a maturity of one year or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus of not less than $500,000,000; (iii) any shares of money market mutual or similar funds having assets in excess of $500,000,000; (iv) repurchase obligations with a term not exceeding seven days for underlying securities of the types described in clauses (i) and (ii) above entered into with any financial institution meeting the qualifications specified in clause (ii) above; and (v) commercial paper with a maturity of 116 one year or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and having a rating (A) from Moody's Investors Service, Inc. of at least P-1 or (B) from Standard & Poor's Ratings Group of at least A-1; (b) Investments by the Company or any Wholly Owned Restricted Subsidiary in another Person, if as a result of such Investment (i) such other Person becomes a Restricted Subsidiary that is a Subsidiary Guarantor or (ii) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its assets to, the Company or a Restricted Subsidiary that is a Subsidiary Guarantor; (c) Investments by the Company or a Restricted Subsidiary in the Company or a Subsidiary Guarantor; (d) Investments in existence on the Closing Date; (e) promissory notes or other evidence of Indebtedness received as a result of Asset Sales permitted under the covenant entitled "Repurchase at the Option of Holders--Asset Sales;" (f) loans or advances to officers, directors and employees of the Company or any of its Restricted Subsidiaries made in the ordinary course of business after the date of the Indenture in an amount not to exceed $1 million in the aggregate at any one time outstanding; (g) any Investment by the Company or any Restricted Subsidiary of the Company in Permitted Joint Ventures made after the Closing Date having an aggregate fair market value, when taken together with all other Investments made pursuant to this clause (g) that are at the time outstanding, not exceeding in the aggregate 5% of the Consolidated Tangible Assets of the Company as of the last day of the most recent full fiscal quarter ending immediately prior to the date of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value); and (h) other Investments that do not exceed $20 million in the aggregate at any one time outstanding. "Permitted Joint Venture" means any joint venture, partnership or other Person designated by the Board, (i) at least 50% of whose Capital Stock with voting power under ordinary circumstances to elect directors (or Persons having similar or corresponding powers and responsibilities) is at the time owned (beneficially or directly) by the Company and/or by one or more Restricted Subsidiaries of the Company and if the Company owns more than 50% of the Capital Stock of the Permitted Joint Venture, such Permitted Joint Venture is a Restricted Subsidiary of the Company, (ii) all of whose Indebtedness is Non- Recourse Indebtedness, (iii) which is engaged in a Permitted Business, and (iv) in which any Investment made as a result of designating such Person a Permitted Joint Venture will not violate the provisions of the covenant described under the caption "--Restricted Payments"; provided that each of Berwyn Magnetic Resonance Center, LLC, Garfield Imaging Center, Ltd., MRI Associates, L.P., Tom's River Imaging Associates, L.P., St. John's Regional Imaging Center, LLC, Dublin Diagnostic Imaging, LLC, Buckhead Imaging, LLC, MedFinancial, LLC, Connecticut Lithotripsy LLC, Northern Indiana Oncology Center of Porter Memorial Hospital, LLC and Northwest Magnetic Imaging shall be deemed to be a Permitted Joint Venture. Any such designation (other than with respect to the Persons identified in the preceding sentence) shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution giving effect to such designation and an officer's certificate certifying that such designation complied with the foregoing provisions. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; 117 PROVIDED that: (i) the principal amount of such Permitted Refinancing Indebtedness does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded plus the lesser of the amount of any premium required to be paid in connection with such refinancings pursuant to the terms of such indebtedness or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary of the Company that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, partnership interests, participation, rights in or other equivalents (however designated) of such Person's preferred or preference stock, whether now outstanding or issued after the Closing Date, and including, without limitation, all classes and series of preferred or preference stock of such Person. "Qualified Equity Interest" means any Qualified Stock and all warrants, options or other rights to acquire Qualified Stock (but excluding any debt security that is convertible into or exchangeable for Capital Stock). "Qualified Stock" of any Person means any and all Capital Stock of such Person, other than Disqualified Stock. "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means any transaction or series of related transactions pursuant to which the Company or a Restricted Subsidiary sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, of such property or asset to the seller or transferor. "Senior Bank Debt" means the Obligations outstanding under the Amended Credit Agreement. "Senior Indebtedness" means (i) the Senior Bank Debt and any Hedging Obligations in respect thereof and (ii) any other Indebtedness permitted to be incurred by the Company or any Subsidiary Guarantor under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is subordinated in right of payment to any Indebtedness for money borrowed. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness will not include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness of the Company that is expressly subordinated in right of payment to any Senior Indebtedness of the Company or the Notes, (iii) Indebtedness of the Company that by operation of law is subordinate to any general unsecured obligations of the Company, (iv) Indebtedness of the Company to the extent incurred in violation of the Indenture, (v) any liability for federal, state or local taxes or other taxes, owed or owing by the Company, (vi) trade account payables owed or owing by the Company, (vii) amounts owed by the Company for compensation to employees or for services rendered to the Company, (viii) Indebtedness of the Company to any Restricted Subsidiary or any other Affiliate of the Company, (ix) Disqualified Stock of the Company and (x) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 of the United States Code is without recourse to the Company or any Restricted Subsidiary. 118 "Significant Subsidiary" means any Restricted Subsidiary of the Company that, together with its Subsidiaries, (a) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated net sales of the Company and its Subsidiaries, (b) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the most recently available consolidated financial statements of the Company for such fiscal year or (c) was organized or acquired after the beginning of such fiscal year and would have been a Significant Subsidiary if it had been owned during such entire fiscal year. "Stated Maturity" means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Subsidiary Guarantor that is subordinated in right of payment to the Notes or the Subsidiary Guarantees issued by such Subsidiary Guarantor, as the case may be. "Subsidiary" means any Person a majority of the equity ownership or Voting Stock of which is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company. "Subsidiary Guarantors" means, collectively, all Restricted Subsidiaries that are incorporated in the United States or a State thereof or the District of Columbia (other than Permitted Joint Ventures); PROVIDED that any Person that becomes an Unrestricted Subsidiary in compliance with the "Restricted Payments" covenant shall not be included in "Subsidiary Guarantors" after becoming an Unrestricted Subsidiary. "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the Board as an Unrestricted Subsidiary in accordance with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted Subsidiary. "Voting Stock" means any class or classes of Capital Stock pursuant to which the Holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes has, or might have, voting power by reason of the happening of any contingency). "Weighted Average Life" means, as of the date of determination with respect to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a) the sum of the products of (i) the number of years from the date of determination to the date or dates of each successive scheduled principal or liquidation value payment of such Indebtedness or Disqualified Stock, respectively, multiplied by (ii) the amount of each such principal or liquidation value payment by (b) the sum of all such principal or liquidation value payments. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of the outstanding voting securities (other than directors' qualifying shares or shares of foreign Restricted Subsidiaries required to be owned by foreign nationals pursuant to applicable law) of which are owned, directly or indirectly, by the Company. 119 DESCRIPTION OF PREFERRED STOCK Pursuant to the Recapitalization, the Company issued (i) to Carlyle, 25,000 shares of the Company's Convertible Preferred Stock, Series B (the "Series B Preferred Stock") and warrants to purchase 250,000 shares of the Company's common stock at the current exercise price of $10.00 per share and (ii) to GE, 7,000 shares of Series C Preferred Stock and an additional 20,953 shares of the Company's Convertible Preferred Stock, Series C (the "Series C Preferred Stock") in exchange for all of GE's shares of the Company's Convertible Preferred Stock, Series A. The Series B Preferred Stock and the Series C Preferred Stock (collectively, "Preferred Stock") rank equally and their terms are substantially the same. The Preferred Stock has a liquidation preference of $1,000 per share and ranks senior to all other classes of outstanding capital stock with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company. It will participate in any dividends paid with respect to the Company's common stock. There is no mandatory or optional redemption provision for the Preferred Stock. The 25,000 shares of Series B Preferred Stock is initially convertible, at the option of the holders thereof, into an aggregate of 2,985,075 shares of the Company's common stock, and the 27,953 shares of Series C Preferred Stock are initially convertible, at the option of the holders thereof, into an aggregate of 3,337,581 shares of the Company's common stock, in each case at an initial conversion price of $8.375 per share. The Preferred Stock may be converted in whole at any time, and may be converted in part substantially contemporaneously with the Board-approved sale of a holder's Preferred Stock to a third party, the consummation of a public offering of the Company's common stock and the consummation of a private sale of the Company's common stock after April 14, 1999. The Series B Preferred Stock and the Series C Preferred Stock may together be converted into the Company's Convertible Preferred Stock, Series D (the "Series D Preferred Stock") on or after October 22, 1998. As 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 each series of Preferred Stock is required before the Company may take certain actions including, but not limited to, amending its certificate of incorporation or bylaws, changing the number of directors or the manner in which directors are selected, incurring indebtedness in excess of $15 million in any fiscal year, issuing certain equity securities below the then current market price or the then applicable conversion price, acquiring equity interests or assets of entities for consideration equal to or greater than $15 million, and engaging in mergers for consideration equal to or greater than $15 million. The Preferred Stock votes with the Company's common stock on an as-if-converted basis on all matters except the election of directors, provided that the aggregate number of votes cast by GE and Carlyle does not exceed 37% of all votes entitled to be cast on such matters. Pursuant to the terms of the Recapitalization, the number of directors comprising the Board is currently fixed at nine. Six directors ("Common Stock Directors") are elected by the Company's 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 ("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 Company's 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 Company's common stockholders. As of June 1, 1998, the Board 120 consisted of eight directors, five of whom are Common Stock Directors and three of whom are Preferred Stock Directors. The Joint Director vacancy has not yet been filled. All of the Series B Preferred Stock and the Series C Preferred Stock may be converted at any time into 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 for a certain period of time, as further described below. 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 Company's common stock and will be convertible into 6,322,660 shares of the Company's common stock. Holders of the Preferred Stock 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 its common stock. Holders of the Preferred Stock are also entitled to certain demand and "piggyback" registration rights. Each of Carlyle and GE has agreed (i) not to transfer, sell, assign or pledge to any person other than an affiliate, or dispose of, any interest in any shares of Series B Preferred Stock or Series C Preferred Stock without the prior approval of the Board, in its sole discretion, and (ii) not to transfer, sell or assign to an affiliate any interest in any shares of Series B Preferred Stock or Series C Preferred Stock if such affiliate is engaged in the provision of diagnostic services to the health care industry. In addition, until the earlier to occur of April 14, 1999 or the conversion of the Preferred Stock into Series D Preferred Stock, each of Carlyle and GE has agreed not to transfer, sell or assign to any person any of the Company's common stock issuable upon conversion of the Preferred Stock (the "Conversion Shares") without the prior approval of a majority of the Board in its sole discretion, other than a transfer (i) to an affiliate, (ii) permitted under Rule 144 of the Securities Act, (iii) pursuant to a registered offering pursuant to the registration rights agreements with Carlyle and GE or (iv) pursuant to a transaction available to all stockholders of the Company on the same terms as to Carlyle or GE, as applicable, which has been approved by a majority of the Board. If the Preferred Stock is converted into Series D Preferred Stock prior to April 14, 1999, then until the second annual stockholders meeting after such conversion date, additional restrictions apply to the ability of GE or Carlyle to transfer Series D Preferred Stock or the common stock issuable upon the conversion thereof or to cause the Company to engage in certain transactions. The foregoing description of the rights, preferences and privileges of the Series B Preferred Stock as set forth in the Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B (the "Series B Certificate of Designation"), the Series C Preferred Stock as set forth in the Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C (the "Series C Certificate of Designation") and the Series D Preferred Stock as set forth in the Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D (the "Series D Certificate of Designation") does not purport to be complete and is subject to and qualified in its entirety by reference to the Series B Certificate of Designation, the Series C Certificate of Designation and the Series D Certificate of Designation, copies of which are filed with the Commission as Exhibits 3.2, 3.3 and 3.4, respectively, to the Company's Annual Report on Form 10-K for the year ended June 30, 1997. 121 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of certain United States federal income tax considerations to persons who acquired the Outstanding Notes on original issuance for cash and who hold the Exchange Notes subsequent to the Exchange Offer. It does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the Internal Revenue Code of 1986, as amended (the "Code"), proposed, temporary and final Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or different interpretations. This summary is not intended to be wholly applicable to all categories of investors, some of which, such as dealers in securities, banks, financial institutions, insurance companies and tax-exempt organizations, may be subject to special rules. In addition, this summary is limited to persons that will hold the Notes as a "capital asset" within the meaning of Section 1221 of the Code. Further, this summary does not address the effect of any applicable United States federal estate tax or any state, local or other tax laws. ACCORDINGLY, INVESTORS CONSIDERING THE PURCHASE OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY. The exchange of an Outstanding Note by a holder for an Exchange Note should not constitute a taxable exchange and thus should not result in income, gain or loss to holders of Notes who participate in the Exchange Offer or to the Company. Such holders should have the same adjusted basis and holding period in the Exchange Notes immediately after the exchange as the holders had in the Outstanding Notes immediately prior to the exchange. As used herein, the term "United States Holder" means a beneficial owner of the Outstanding Notes or Exchange Notes that is, for United States federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation or other entity created or organized under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which its subject to federal income taxation regardless of its source, or (iv) a trust subject to the primary supervision of a U.S. court and the control of one or more U.S. fiduciaries. A "Foreign Holder" is any holder of Outstanding Notes or Exchange Notes that is not a United States Holder. UNITED STATES HOLDERS STATED INTEREST. A United States Holder of a Note will be required to include interest on a Note in gross income for Federal income tax purposes in accordance with the holder's method of tax accounting. SALE, EXCHANGE OR REDEMPTION OF A NOTE. Upon a taxable sale, exchange or redemption of a Note, a United States Holder generally will recognize capital gain or loss equal to the difference between the amount realized (other than any amount received attributable to accrued interest on a Note that was not previously included in gross income, which amount will be treated as interest income) and the holder's tax basis in the Note. Such capital gain or loss will be long-term capital gain or loss if the Holder's holding period in the Note is more than one year at the time of such disposition. In general, in the case of a non-corporate United States Holder, capital gains recognized on Notes held (i) one year or less will be taxed at ordinary income tax rates, (ii) more than one year but 18 months or less will be taxed at a maximum rate of 28% and (iii) more than 18 months will be taxed at a maximum rate of 20%. In addition, holders should consult their own tax advisers regarding the availability and effect of a certain tax election to mark-to-market Notes held on January 1, 2001. FOREIGN HOLDERS Payments of principal and interest on the Notes to a Foreign Holder generally will not be subject to United States Federal withholding tax provided that (a) the holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote, (b) the holder is not a controlled foreign corporation that is related to the Company through stock 122 ownership and (c) either (1) the beneficial owner of the Note, under penalties of perjury, provides the Company or its agent with its name and address and certifies that it is not a United States person or (2) a securities clearing organization, bank, or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "financial institution") certifies to the Company or its agent, under penalties of perjury, that such a statement has been received from the beneficial owner by it or another financial institution and furnishes to the Company or its agent a copy thereof. A Foreign Holder that does not qualify for the exception from withholding tax described above would generally be subject to the United States withholding tax at a flat rate of 30% (or a lower applicable treaty rate) on payments of interest, unless the Foreign Holder's income from the Notes is effectively connected with a U.S. trade or business of the holder. A Foreign Holder generally will be taxed in the same manner as a United States corporation or resident with respect to such income if it is effectively connected with the conduct of a trade or business in the United States. Such effectively connected income received by a Foreign Holder which is a corporation may in certain circumstances be subject to an additional "branch profits tax" at a 30% rate or, if applicable, a lower treaty rate. A Foreign Holder generally will not be subject to United States Federal income or withholding tax on gain realized on the sale, exchange or redemption of the Notes unless (i) the holder is an individual who was present in the United States for 183 days or more during the taxable year and certain other requirements are met, or (ii) the gain is effectively connected with the conduct of a trade or business of the holder in the United States. The IRS recently issued Treasury Regulations, generally effective for payments made after December 31, 1998, concerning the withholding of tax and reporting for certain amounts paid to non-resident individuals and foreign corporations. Among other things, these Treasury Regulations may require Foreign Holders to furnish new certification of their foreign status after December 31, 1998. Prospective purchasers of Notes should consult their tax advisors concerning the applicability and effect of such Treasury Regulations on an investment in the Notes. INFORMATION REPORTING AND BACKUP WITHHOLDING In general, information reporting requirements will apply to payments of principal, premium, if any, and interest on a Note and payments of the proceeds of the sale of a Note to certain noncorporate United States Holders, and a 31% backup withholding tax may apply to such payment if the United States Holder (i) fails to furnish or certify his correct taxpayer identification number ("TIN") to the payor in the manner required, (ii) is notified by the IRS that he has failed to report payments of interest or dividends properly or (iii) under certain circumstances, fails to certify that he has not been notified by the IRS that he is subject to backup withholding for failure to report interest or dividend payments. The payment of interest on the Notes to Foreign Holders (or purported Foreign Holders) generally will not be subject to information reporting and backup withholding if the Company (or its paying agent) has received the certification described in (c) above under the caption "Foreign Holders" and neither the Company nor its paying agent has actual knowledge that the holder is a United States person. The proceeds paid to a Foreign Holder upon the sale of a Note by or through a United States office of a broker will be subject to information reporting and backup withholding unless the holder provides the certification described in (c) above or otherwise establishes an exception. The proceeds paid to a Foreign Holder upon the sale of a Note by or through a foreign office of a broker generally will not be subject to a backup withholding tax. However, such proceeds will be subject to information reporting if the broker is (i) a United States person, (ii) a "controlled foreign corporation" for United States federal income tax purposes, or (iii) a foreign person 50% or more of whose gross income for certain periods is effectively connected with the conduct of a trade or business in the United States, unless the broker has documentary evidence in its files that the holder is not a United States person and the broker has no knowledge to the contrary. 123 Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's United States Federal income tax liability provided the required information is furnished to the IRS. PLAN OF DISTRIBUTION The Exchange Offer is not being made to, nor will the Company accept tenders for exchange from, holders of Outstanding Notes in any jurisdiction in which the Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver this Prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer who holds Outstanding Notes acquired for its own account as a result of market-making activities or other trading activities (an "Exchanging Dealer") in connection with resales of Exchange Notes received in exchange for Outstanding Notes. For a period (the "Exchange Offer Registration Period") the longer of (A) the period until consummation of the Exchange Offer and (B) two years after the effectiveness of the Registration Statement (unless, in the case of (B), all resales of Exchange Notes covered by the Registration Statement have been made), the Company will make this Prospectus, as amended or supplemented, available to any Exchanging Dealer for use in connection with any such resale; provided, however, that the Company shall not be required to maintain the effectiveness of the Registration Statement for more than 60 days following the consummation of the Exchange Offer unless the Company has been notified in writing on or prior to the 60th day following the consummation of the Exchange Offer by one or more broker-dealers that such holder has received Exchange Notes as to which it will be required to deliver this Prospectus upon resale. In addition, until , 1998, (90 days after the date of this Prospectus),all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. The Company will not receive any proceeds from the exchange of Outstanding Notes for Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, or at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through broker-dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any person that participates in the distribution of such Exchange Notes may be deemed an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such broker-dealers may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed to pay all expenses incidental to the Exchange Offer other than commissions or concessions of any broker-dealers and will indemnify the holders of the Outstanding Notes (including Exchanging Dealers) participating in the Exchange Offer against certain liabilities, including liabilities under the Securities Act. By acceptance of this Exchange Offer, each broker-dealer that receives Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of notice from the Company of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; or (iii) the happening of any event that requires the 124 making of any changes in the Registration Statement or this Prospectus so that, as of such date, the Registration Statement or this Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein (in the case of this Prospectus, in light of the circumstances under which they were made) not misleading (which notice the Company agrees to advise to any broker-dealer that has provided in writing to the Company a telephone or facsimile number and address for notices), such broker-dealer will suspend the use of this Prospectus until the Company has amended or supplemented this Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to such broker-dealer or until it is advised is writing by the Company that the use of this Prospectus may be resumed and has received copies of any amendments or supplements thereto. If the Company gives any such notice to suspend the use of the Prospectus, it will extend the Exchange Offer Registration Period by the number of days during the period from and including the date of the giving of such notice to and including the date when broker-dealers shall have received (x) copies of the supplemented or amended Prospectus necessary to permit resales of Exchange Notes or (y) such advice in writing. LEGAL MATTERS Certain legal matters will be passed upon on behalf of the Company by Arent Fox Kintner Plotkin & Kahn, PLLC, Washington, D.C. EXPERTS The financial statements of InSight Health Services Corp. and subsidiaries as of June 30, 1997 and 1996, and for the year ended June 30, 1997 and for the six months ended June 30, 1996, included in this Registration Statement, have been audited by Arthur Andersen LLP, independent certified public accountants, as stated in their report appearing herein and have been so included in reliance upon the report of such firm upon their authority as experts in accounting and auditing. The consolidated statements of operations, stockholders' equity (deficit) and cash flows of Maxum Health Corp. and subsidiaries for each of the two years in the period ended December 31, 1995, included in this Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm upon their authority as experts in accounting and auditing. The financial statements of Signal Medical Services, Inc. as of December 31, 1997 and 1996 and for each of the years in the two-year period ended December 31, 1997, included in this Registration Statement, have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as stated in their report appearing herein and have been so included in reliance upon the report of such firm upon their authority as experts in accounting and auditing. The financial statements of Mobile Imaging Consortium as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, included in this Registration Statement, have been audited by Baker Newman & Noyes LLC, independent certified public accountants, as stated in their report appearing herein and have been so included in reliance upon the report of such firm upon their authority as experts in accounting and auditing. 125 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE ----------- Report of Independent Public Accountants............................................................ F-2 Report of Independent Public Accountants............................................................ F-3 Consolidated Balance Sheets as of June 30, 1997 and 1996............................................ F-4 Consolidated Statements of Operations for the Year Ended June 30, 1997, the Six Months Ended June 30, 1996 and the Years Ended December 31, 1995 and 1994........................................... F-6 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995, the Six Months Ended June 30, 1996 and the Year Ended June 30, 1997................................... F-7 Consolidated Statements of Cash Flows for the Year Ended June 30, 1997, the Six Months Ended June 30, 1996 and the Years Ended December 31, 1995 and 1994........................................... F-8 Notes to Consolidated Financial Statements.......................................................... F-9 Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited) and June 30, 1997............ F-31 Condensed Consolidated Statements of Operations (unaudited) for the Nine Months Ended March 31, 1998 and 1997.......................................................................................... F-33 Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 1998 and 1997..................................................................................... F-34 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended March 31, 1998 and 1997.......................................................................................... F-35 Notes to Condensed Consolidated Financial Statements (unaudited).................................... F-36
F-1 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of InSight Health Services Corp. and subsidiaries as of June 30, 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 (except with respect to the matter discussed in Note 15, as to which the date is July 29, 1998). F-2 INDEPENDENT AUDITOR'S REPORT 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 include 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 statement 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 1995 and 1994 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 F-3 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
JUNE 30, JUNE 30, 1997 1996 --------- --------- 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. F-4 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, JUNE 30, 1997 1996 ---------- ---------- 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, with a liquidation preference of $24,000 ................................................................ 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. F-5 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS YEAR ENDED 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 PARTNERSHIPS.......... 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. F-6 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------- -------------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT WARRANT CAPITAL --------- ------ ---------- --------- --------- ---------- BALANCE AT DECEMBER 31, 1993............ -- $-- 2,949,488 $ 29 $ 7 $19,679 Stock issued under employee purchase plan.................................. -- -- 3,927 -- -- 1 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 19,680 Stock issued under employee purchase plan.................................. -- -- 51,640 1 -- 13 Net loss................................ -- -- -- -- -- -- --------- ------ ---------- --------- --------- ---------- BALANCE AT DECEMBER 31, 1995............ -- -- 3,005,055 30 7 19,693 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 -- 3,644 Retirement of MHC's treasury stock...... -- -- -- -- -- (265) Reset the par value of InSight common stock issued in exchange for MHC'S common stock.......................... -- -- (1,644,723) (28) -- 28 Net loss................................ -- -- -- -- -- -- --------- ------ ---------- --------- --------- ---------- BALANCE AT JUNE 30, 1996................ 2,501,760 6,750 2,710,240 3 -- 23,100 Stock options exercised................. -- -- 4,485 -- -- -- Net income.............................. -- -- -- -- -- -- --------- ------ ---------- --------- --------- ---------- BALANCE AT JUNE 30, 1997................ 2,501,760 $6,750 2,714,725 $ 3 $ -- $23,100 --------- ------ ---------- --------- --------- ---------- --------- ------ ---------- --------- --------- ---------- STOCKHOLDER ACCUMULATED NOTE TREASURY DEFICIT RECEIVABLE STOCK TOTAL ----------- ----------- -------- ------- BALANCE AT DECEMBER 31, 1993............ $(23,307) $ (110) $ (155) $(3,857) Stock issued under employee purchase plan.................................. -- -- -- 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............ (19,151) -- (265) 300 Stock issued under employee purchase plan.................................. -- -- -- 14 Net loss................................ (4,319) -- -- (4,319) ----------- ----------- -------- ------- BALANCE AT DECEMBER 31, 1995............ (23,470) -- (265) (4,005) Issuance of Series A Preferred Stock and cancellation of common stock warrant............................... -- -- -- 3,368 Acquisition of IHC...................... -- -- -- 7,020 Retirement of MHC's treasury stock...... -- -- 265 -- Reset the par value of InSight common stock issued in exchange for MHC'S common stock.......................... -- -- -- -- Net loss................................ (979) -- -- (979) ----------- ----------- -------- ------- BALANCE AT JUNE 30, 1996................ (24,449) -- -- 5,404 Stock options exercised................. -- -- -- -- Net income.............................. 1,281 -- -- 1,281 ----------- ----------- -------- ------- BALANCE AT JUNE 30, 1997................ $(23,168) $ -- $ -- $ 6,685 ----------- ----------- -------- ------- ----------- ----------- -------- -------
The accompanying notes are an integral part of these consolidated financial statements. F-7 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS YEAR ENDED 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. F-8 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). F-9 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. MERGER (CONTINUED) 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. 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. F-10 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 7 to 19 Buildings.................................................... years Term of Leasehold improvements....................................... lease Computer and office equipment................................ 3 to 5 years Diagnostic and related equipment............................. 5 to 8 years Term of Equipment and vehicles under capital leases.................. lease
The Company capitalizes expenditures for improvements and major renewals. Maintenance, repairs and minor replacements are charged to operations as incurred. When assets are sold or otherwise disposed of, the cost and related 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): 6 to 20 Goodwill...................................................... 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. F-11 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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. F-12 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. F-13 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. F-14 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 --------- --------- --------- ---------
F-15 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. EQUIPMENT AND OTHER NOTES PAYABLE (CONTINUED) 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. 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 F-16 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LEASE OBLIGATIONS AND COMMITMENTS (CONTINUED) $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 F-17 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. CAPITAL STOCK (CONTINUED) 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)
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 3.23 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. F-18 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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% --------- ---------
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) ---------- ---------- $ -- $ -- ---------- ---------- ---------- ----------
F-19 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES (CONTINUED) 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. 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 F-20 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS (CONTINUED) 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 MONTHS YEARS ENDED YEAR ENDED ENDED DECEMBER 31, JUNE 30, JUNE 30, -------------------- 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. F-21 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS (CONTINUED) 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 F-22 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS (CONTINUED) 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. 13. SUPPLEMENTAL CASH FLOW INFORMATION The following is provided as supplemental information to the consolidated statements of cash flows (amounts in thousands):
SIX MONTHS YEARS ENDED YEAR ENDED 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, F-23 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENT (CONTINUED) 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 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 F-24 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENT (CONTINUED) 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. 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. 15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The Company's payment obligations under the Notes are guaranteed by certain of the Company's wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company's management has determined that they would not be material to investors. The following F-25 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) supplemental financial information sets forth, on an unconsolidated basis, balance sheets, statement of operations, and statement of cash flows information for the Company ("Parent Company Only"), for the Guarantor Subsidiaries and for the Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial information reflects the investments of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. The supplemental financial information is presented for the periods as of June 30, 1996 and 1997, and for the year ended June 30, 1997 only, as the Non-Guarantor Subsidiaries are not included in the consolidated financial statements prior to that date. F-26 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1997
PARENT COMPANY GUARANTOR NON-GUARANTOR (AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED - ---------------------------------- ----------- --------------- ------------------- --------------- ---------------- ASSETS Current assets: Cash and cash equivalents....... $ -- $ 5,845 $ 1,290 $ -- $ 7,135 Trade accounts receivable, net........................... -- 12,888 2,757 -- 15,645 Other receivables, net.......... -- 148 210 -- 358 Intercompany accounts receivable.................... 29,852 1,166 507 (31,525) -- Other current assets............ -- 1,485 69 -- 1,554 ----------- ------- ------ --------------- ------- Total current assets........ 29,852 21,532 4,833 (31,525) 24,692 Property and equipment, net....... -- 32,435 2,053 -- 34,488 Investment in partnerships........ -- 402 -- -- 402 Investment in consolidated subsidiaries.................... (23,167) 2,675 -- 20,492 -- Other assets...................... -- 5,468 -- -- 5,468 Intangible assets, net............ -- 32,527 745 -- 33,272 ----------- ------- ------ --------------- ------- $ 6,685 $ 95,039 $ 7,631 $ (11,033) $ 98,322 ----------- ------- ------ --------------- ------- ----------- ------- ------ --------------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment and other notes..................... $ -- $ 15,149 $ 313 $ -- $ 15,462 Accounts payable and other accrued expenses........................ -- 14,321 649 -- 14,970 Intercompany accounts payable..... -- 30,359 1,166 (31,525) -- ----------- ------- ------ --------------- ------- Total current liabilities... -- 59,829 2,128 (31,525) 30,432 Equipment and other notes, less current portion................. -- 56,904 829 -- 57,733 Other long-term liabilities....... -- 1,472 -- -- 1,472 Minority interest................. -- -- 2,000 -- 2,000 Stockholders' equity (deficit).... 6,685 (23,166) 2,674 20,492 6,685 ----------- ------- ------ --------------- ------- $ 6,685 $ 95,039 $ 7,631 $ (11,033) $ 98,322 ----------- ------- ------ --------------- ------- ----------- ------- ------ --------------- -------
F-27 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1996
PARENT COMPANY GUARANTOR NON-GUARANTOR (AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED - -------------------------------------- ----------- --------------- ------------------- --------------- ---------------- ASSETS Current assets: Cash and cash equivalents........... $ -- $ 5,554 $ 1,310 $ -- $ 6,864 Trade accounts receivable, net...... -- 10,491 2,425 -- 12,916 Other receivables, net.............. -- 693 280 -- 973 Intercompany accounts receivable.... 29,852 1,699 51 (31,602) -- Other current assets................ -- 1,623 85 -- 1,708 ----------- ------- ------ ------- ------- Total current assets............ 29,852 20,060 4,151 (31,602) 22,461 Property and equipment, net........... -- 27,918 1,934 -- 29,852 Investment in partnerships............ -- 359 -- -- 359 Investment in consolidated subsidiaries........................ (24,448) 1,767 -- 22,681 -- Other assets.......................... -- 749 -- -- 749 Intangible assets, net................ -- 16,140 825 -- 16,965 ----------- ------- ------ ------- ------- $ 5,404 $ 66,993 $ 6,910 $ (8,921) $ 70,386 ----------- ------- ------ ------- ------- ----------- ------- ------ ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment and other notes............................... $ -- $ 8,920 $ 303 $ -- $ 9,223 Accounts payable and other accrued expenses............................ -- 13,731 674 -- 14,405 Intercompany accounts payable......... -- 29,903 1,699 (31,602) -- ----------- ------- ------ ------- ------- Total current liabilities....... -- 52,554 2,676 (31,602) 23,628 Equipment and other notes, less current portion..................... -- 34,689 952 -- 35,641 Other long-term liabilities........... -- 4,198 -- -- 4,198 Minority interest..................... -- -- 1,515 -- 1,515 Stockholders' equity (deficit)........ 5,404 (24,448) 1,767 22,681 5,404 ----------- ------- ------ ------- ------- $ 5,404 $ 66,993 $ 6,910 $ (8,921) $ 70,386 ----------- ------- ------ ------- ------- ----------- ------- ------ ------- -------
F-28 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997
PARENT COMPANY GUARANTOR NON-GUARANTOR (AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED - -------------------------------------- ----------- --------------- ------------------ --------------- ---------------- Revenues.............................. $ -- $ 78,294 $ 14,769 $ -- $ 93,063 Costs of operations................... -- 67,505 12,832 -- 80,337 ----------- ------- ------- ------- ------- Gross profit........................ -- 10,789 1,937 -- 12,726 Corporate operating expenses.......... -- 7,431 -- -- 7,431 ----------- ------- ------- ------- ------- Income (loss) from company operations........................ -- 3,358 1,937 -- 5,295 Equity in earnings of unconsolidated partnerships........................ -- 468 -- -- 468 ----------- ------- ------- ------- ------- Operating income (loss)............. -- 3,826 1,937 -- 5,763 Interest expense, net................. -- 3,946 109 -- 4,055 ----------- ------- ------- ------- ------- Income (loss) before income taxes... -- (120) 1,828 -- 1,708 Provision for income taxes............ -- 427 -- -- 427 ----------- ------- ------- ------- ------- Income (loss) before equity in income (loss) of consolidated subsidiaries...................... -- (547) 1,828 -- 1,281 Equity in income (loss) of consolidated subsidiaries........... 1,281 1,828 (3,109) -- ----------- ------- ------- ------- ------- Net income (loss)................... $ 1,281 $ 1,281 $ 1,828 $ (3,109) $ 1,281 ----------- ------- ------- ------- ------- ----------- ------- ------- ------- -------
F-29 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1997
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------------- ------------------- --------------- ----------------- (AMOUNTS IN THOUSANDS) - -------------------------------------------------- OPERATING ACTIVITIES: Net income (loss).................. $ 1,281 $ 1,281 $ 1,828 $ (3,109) $ 1,281 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Total depreciation and amortization................... -- 9,501 370 -- 9,871 Amortization of deferred gain on debt restructure............... -- (1,047) -- -- (1,047) Gain on disposal of assets....... -- (113) -- -- (113) Equity in income (loss) of consolidated subsidiaries...... (1,281) (1,828) -- 3,109 -- Cash provided by (used in) changes in operating working capital: Receivables, net................. -- (1,402) (262) -- (1,664) Intercompany receivables, net.... -- 989 (989) -- -- Other current assets............. -- 141 16 -- 157 Accounts payable and other current liabilities............ -- (1,118) (25) -- (1,143) ----------- ------- ------ ------- ------- Net cash provided by operating activities................... -- 6,404 938 -- 7,342 ----------- ------- ------ ------- ------- INVESTING ACTIVITIES: Additions to property and equipment........................ -- (6,693) (409) -- (7,102) Acquisitions of imaging centers.... -- (18,566) -- -- (18,566) Proceeds from sales of assets...... -- 347 -- -- 347 Other.............................. -- (4,937) -- -- (4,937) ----------- ------- ------ ------- ------- Net cash used in investing activities................... -- (29,849) (409) -- (30,258) ----------- ------- ------ ------- ------- FINANCING ACTIVITIES: Payments on debt and capital lease obligations...................... -- (10,913) (113) -- (11,026) Proceeds from issuance of debt..... -- 33,728 -- -- 33,728 Other.............................. -- 921 (436) -- 485 ----------- ------- ------ ------- ------- Net cash provided by (used in) financing activities......... -- 23,736 (549) -- 23,187 ----------- ------- ------ ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ -- 291 (20) -- 271 CASH AND CASH EQUIVALENTS: Beginning of period................ -- 5,554 1,310 -- 6,864 ----------- ------- ------ ------- ------- End of period...................... $ -- $ 5,845 $ 1,290 $ -- $ 7,135 ----------- ------- ------ ------- ------- ----------- ------- ------ ------- -------
F-30 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) xxxxxxxxxxxxxxxxxxxxxx
MARCH 31, JUNE 30, 1998 1997 ----------- --------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................. $ 9,650 $ 7,135 Trade accounts receivable, net........................................................ 21,674 15,645 Other receivables, net................................................................ 330 358 Other current assets.................................................................. 2,149 1,554 ----------- --------- Total current assets.............................................................. 33,803 24,692 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $26,989 and $16,203, respectively................................................................... 46,745 34,488 INVESTMENT IN PARTNERSHIPS................................................................ 495 402 OTHER ASSETS.............................................................................. 2,471 5,468 INTANGIBLE ASSETS, net.................................................................... 43,273 33,272 ----------- --------- $ 126,787 $ 98,322 ----------- --------- ----------- ---------
The accompanying notes are an integral part of these condensed consolidated balance sheets. F-31 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30, 1998 1997 ----------- ---------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment and other notes........................................... $ 5,706 $ 15,462 Accounts payable and other accrued expenses............................................ 14,905 14,970 ----------- ---------- Total current liabilities.......................................................... 20,611 30,432 ----------- ---------- LONG-TERM LIABILITIES: Equipment and other notes, less current portion........................................ 67,781 57,733 Other long-term liabilities............................................................ 680 1,472 ----------- ---------- Total long-term liabilities........................................................ 68,461 59,205 ----------- ---------- MINORITY INTEREST........................................................................ 1,871 2,000 ----------- ---------- STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series A preferred stock, 2,501,760 shares outstanding at June 30, 1997...................................................................... -- 6,750 Convertible Series B preferred stock, 25,000 shares outstanding at March 31, 1998..................................................................... 23,923 -- Convertible Series C preferred stock, 27,953 shares outstanding at March 31, 1998..................................................................... 13,173 -- Common stock, $.001 par value, 25,000,000 shares authorized: 2,805,660* and 2,714,725 shares outstanding at March 31, 1998 and June 30, 1997, respectively................. 3 3 Additional paid-in capital............................................................. 23,366 23,100 Accumulated deficit.................................................................... (24,621) (23,168) ----------- ---------- Total stockholders' equity......................................................... 35,844 6,685 ----------- ---------- $ 126,787 $ 98,322 ----------- ---------- ----------- ----------
* Adjusted from 2,799,463 shares as set forth in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998, to reflect a reconciliation of the records of the Company and its transfer agent as of such date with respect to the exchange of common stock of IHC and MHC in the Merger and the issuance of the Company's common stock upon the exercise of certain options. The accompanying notes are an integral part of these condensed consolidated balance sheets. F-32 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 ---------- ---------- REVENUES: Contract services..................................................................... $ 39,186 $ 35,186 Patient services...................................................................... 43,855 31,153 Other................................................................................. 2,632 1,790 ---------- ---------- Total revenues...................................................................... 85,673 68,129 ---------- ---------- COSTS OF OPERATIONS: Costs of services..................................................................... 44,513 37,386 Provision of doubtful accounts........................................................ 1,525 1,116 Equipment leases...................................................................... 12,983 13,822 Depreciation and amortization......................................................... 10,670 7,203 ---------- ---------- Total costs of operations........................................................... 69,691 59,527 ---------- ---------- GROSS PROFIT............................................................................ 15,982 8,602 CORPORATE OPERATING EXPENSES............................................................ 6,510 5,343 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION...................................... 6,309 -- ---------- ---------- INCOME FROM COMPANY OPERATIONS.......................................................... 3,163 3,259 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS....................................... 480 364 ---------- ---------- OPERATING INCOME........................................................................ 3,643 3,623 INTEREST EXPENSE, net................................................................... 4,665 2,741 ---------- ---------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES......................................... (1,022) 882 PROVISION FOR INCOME TAXES.............................................................. 431 134 ---------- ---------- NET INCOME (LOSS)....................................................................... $ (1,453) $ 748 ---------- ---------- ---------- ---------- INCOME (LOSS) PER COMMON AND PREFERRED SHARE: Basic................................................................................. $ (0.19) $ 0.14 ---------- ---------- ---------- ---------- Diluted............................................................................... $ (0.19) $ 0.14 ---------- ---------- ---------- ---------- WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING: Basic................................................................................. 7,589,549 5,213,882 ---------- ---------- ---------- ---------- Diluted............................................................................... 7,589,549 5,444,308 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-33 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 ---------- ---------- REVENUES: Contract services..................................................................... $ 12,846 $ 11,596 Patient services...................................................................... 15,056 10,695 Other................................................................................. 657 742 ---------- ---------- Total revenues...................................................................... 28,559 23,033 ---------- ---------- COSTS OF OPERATIONS: Costs of services..................................................................... 14,745 12,647 Provision for doubtful accounts....................................................... 480 258 Equipment leases...................................................................... 3,981 4,732 Depreciation and amortization......................................................... 3,905 2,471 ---------- ---------- Total costs of operations........................................................... 23,111 20,108 ---------- ---------- GROSS PROFIT............................................................................ 5,448 2,925 CORPORATE OPERATING EXPENSES............................................................ 2,254 1,688 ---------- ---------- INCOME FROM COMPANY OPERATIONS.......................................................... 3,194 1,237 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS....................................... 156 120 ---------- ---------- OPERATING INCOME........................................................................ 3,350 1,357 INTEREST EXPENSE, net................................................................... 1,420 947 ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES................................................ 1,930 410 PROVISION FOR INCOME TAXES.............................................................. -- 30 ---------- ---------- NET INCOME.............................................................................. $ 1,930 $ 380 ---------- ---------- ---------- ---------- INCOME (LOSS) PER COMMON AND PREFERRED SHARE: Basic................................................................................. $ 0.21 $ 0.07 ---------- ---------- ---------- ---------- Diluted............................................................................... $ 0.20 $ 0.07 ---------- ---------- ---------- ---------- WEIGHTED AVERAGE NUMBER OF COMMON AND PREFERRED SHARES OUTSTANDING: Basic................................................................................. 9,075,693 5,216,485 ---------- ---------- ---------- ---------- Diluted............................................................................... 9,493,304 5,438,545 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-34 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 ---------- ---------- OPERATING ACTIVITIES: Net income (loss)....................................................................... $ (1,453) $ 748 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Total depreciation and amortization................................................... 10,786 7,360 Amortization of deferred gain on debt restructure..................................... (1,355) (797) Provision for supplemental service fee termination.................................... 6,309 -- Cash provided by (used in) changes in operating working capital: Receivables, net...................................................................... (4,720) (466) Other current assets.................................................................. (695) (490) Accounts payable and other current liabilities........................................ 1,189 281 ---------- ---------- Net cash provided by operating activities........................................... 10,061 6,636 ---------- ---------- INVESTING ACTIVITIES: Additions to property and equipment..................................................... (15,233) (2,407) Acquisitions of imaging centers......................................................... (12,890) (2,766) Other................................................................................... (988) 351 ---------- ---------- Net cash used in investing activities............................................... (29,111) (4,822) ---------- ---------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock............................................... 23,346 -- Stock options and warrants exercised.................................................... 266 -- Payment of loan fees.................................................................... (2,210) -- Payments on debt and capital lease obligations.......................................... (82,985) (7,727) Proceeds from issuance of debt.......................................................... 83,277 5,139 Other................................................................................... (129) 414 ---------- ---------- Net cash provided by (used in) financing activities................................. 21,565 (2,174) ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................... 2,515 (360) CASH AND CASH EQUIVALENTS: Beginning of period..................................................................... 7,135 6,864 ---------- ---------- End of period........................................................................... $ 9,650 $ 6,504 ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION: Interest paid........................................................................... $ 4,476 $ 1,969 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-35 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. MERGER AND RECAPITALIZATION InSight Health Services Corp. (InSight or 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, 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 (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 ten (10) shares of 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 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 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. At the effective time of the Merger, Maxum 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 was convertible into such number of shares of Common Stock representing approximately 48% of Common Stock outstanding at the effective time of the Merger (after giving effect to such conversion). Under an amended equipment service agreement, GE was also entitled to receive for ten years an annual supplemental service fee equal to 14% of the Company's pretax income, subject to certain adjustments. In connection with the Company's recapitalization described below, GE surrendered its rights under the amended equipment service agreement to receive the supplemental service fee. The Merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. MHC was treated as the acquiror for accounting purposes. On September 13, 1996, AHS changed its name to InSight Health Corp. (IHC). F-36 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. MERGER AND RECAPITALIZATION (CONTINUED) On October 14, 1997, InSight consummated a recapitalization (Recapitalization) pursuant to which (a) certain investors affiliated with TC Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank headquartered in Washington, D.C., made a cash investment of $25 million in the Company and received therefor (i) 25,000 shares of newly issued Convertible Preferred Stock, Series B of the Company, par value $0.001 per share (Series B Preferred Stock), initially convertible, at the option of the holders thereof, in the aggregate into 2,985,075 shares of Common Stock, and (ii) warrants (Carlyle Warrants) to purchase up to 250,000 shares of Common Stock at an exercise price of $10.00 per share; (b) GE (i) surrendered its rights under the amended equipment service agreement to receive supplemental service fee payments equal to 14% of pretax income in exchange for (i) the issuance of 7,000 shares of newly issued Convertible Preferred Stock, Series C of the Company, par value $0.001 per share (Series C Preferred Stock), initially convertible, at the option of GE, in the aggregate into 835,821 shares of Common Stock, (ii) warrants (GE Warrants) to purchase up to 250,000 shares of Common Stock at an exercise price of $10.00 per share, and (iii) exchanged all of its InSight Series A Preferred Stock for an additional 20,953 shares of Series C Preferred Stock, initially convertible, at the option of GE, in the aggregate into 2,501,760 shares of Common Stock; and (c) the Company executed a Credit Agreement with NationsBank, N.A. pursuant to which NationsBank, as agent and lender, provided a total of $125 million in senior secured credit financing (Bank Financing), including (i) a $50 million term loan facility consisting of a $20 million tranche with increasing amortization over a five-year period and a $30 million tranche with increasing amortization over a seven-year period, principally repayable in years 6 and 7, (ii) a $25 million revolving working capital facility with a five-year maturity, and (iii) a $50 million acquisition facility. On December 19, 1997, the Bank Financing was increased to a total of $150 million by converting $10 million of outstanding debt under the acquisition facility to the seven-year tranche (which was thereby increased to $40 million) and increasing the acquisition facility to $65 million. The terms of the Series B Preferred Stock and the Series C Preferred Stock (collectively, Preferred Stock) are substantially the same. The Preferred Stock has a liquidation preference of $1,000 per share. It will participate in any dividends paid with respect to the Common Stock. There is no mandatory or optional redemption provision for the Preferred Stock. The Preferred Stock is convertible 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 mergers for consideration equal to or greater than $15 million. The Preferred Stock will vote with the Common Stock on an as-if-converted basis on all matters, except the election of directors, subject to an aggregate maximum Preferred Stock percentage of 37% of all votes entitled to be cast on such matters. Assuming the conversion of all of the Series B Preferred Stock into Common Stock and the exercise of all of the Carlyle Warrants, Carlyle would own approximately 31% of the Common Stock of the Company, on a fully diluted basis. Assuming the conversion of all of the Series C Preferred Stock and the exercise of the GE Warrants, GE would own approximately 34% of the Common Stock of the Company, on a fully diluted basis. F-37 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. MERGER AND RECAPITALIZATION (CONTINUED) 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, originally purchased thereby, the holders of the Series B Preferred Stock will have the right to elect two Preferred Stock Directors and as long as Carlyle and certain affiliates thereof own an aggregate of at least 25% of such stock, such holders will have the right to elect one Preferred Stock Director. As long as GE and its affiliates own an aggregate of at least 25% of the Series C Preferred Stock, originally purchased thereby, GE will have the right to elect one Preferred Stock Director. If any such ownership percentage falls below the applicable threshold, the Preferred Stock Director(s) formerly entitled to be elected by Carlyle or GE, as the case may be, will be initially appointed by the Board, and will thereafter be elected by the common stockholders. The Board currently consists of eight directors, five of whom are Common Stock Directors and three of whom are Preferred Stock Directors. The vacancy created for the Joint Director has not yet been filled. At any time after October 22, 1998, all of the Series B Preferred Stock and the Series C Preferred Stock may be converted into a newly created Convertible Preferred Stock, Series D of the Company, par value $0.001 per share (Series D Preferred Stock). The Series D Preferred Stock allows the number of directors to be automatically increased to a number which would permit each of Carlyle and GE, by filling the newly created vacancies, to achieve representation on the Board proportionate to their respective common stock ownership percentages on an as-if-converted basis but would limit such representation to less than two thirds of the Board of Directors for a certain period of time. The Series D Preferred Stock has a liquidation preference of $0.001 per share but no mandatory or optional redemption provision. It will participate in any dividends paid with respect to the Common Stock and is convertible into 6,322,660 shares of Common Stock. Holders of the Preferred Stock also have a right of first offer with respect to future sales 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. 2. INTERIM FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial statements and do not include all of the information and disclosures required by generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included as part of the Company's Annual Report on Form 10-K for the period ended June 30, 1997 filed with the Securities and Exchange Commission (SEC) on October 14, 1997. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for fair presentation of results for the period have been included. The results of operations for the nine months ended March 31, 1998, are not necessarily indicative of the results to be achieved for the full fiscal year. F-38 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. INTERIM FINANCIAL STATEMENTS (CONTINUED) Certain reclassifications have been made to conform prior year amounts to the current year presentation. 3. INVESTMENTS IN PARTNERSHIPS Set forth below is the summarized income statement data of the Company's unconsolidated partnerships (amounts in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Net revenues........................................... $ 3,685 $ 3,211 $ 1,205 $ 1,059 Expenses............................................... 2,567 2,376 847 784 --------- --------- --------- --------- Net income............................................. $ 1,118 $ 835 $ 358 $ 275 --------- --------- --------- --------- --------- --------- --------- --------- Equity in earnings of partnerships..................... $ 480 $ 364 $ 156 $ 120 --------- --------- --------- --------- --------- --------- --------- ---------
Set forth below is the summarized combined financial data of the Company's three 50% or less, owned and controlled entities, which are consolidated (amounts in thousands):
MARCH 31, JUNE 30, 1998 1997 ----------- ----------- (UNAUDITED) Condensed Combined Balance Sheet Data: Current assets....................................................... $ 3,197 $ 2,596 Total assets......................................................... 4,494 4,288 Current liabilities.................................................. 1,149 727 Long-term debt....................................................... 240 424 Minority interest equity............................................. 1,699 1,702
NINE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Condensed Combined Statement of Operations Data: Total revenues........................................................... $ 4,988 $ 5,310 $ 1,340 $ 1,823 Costs of operations...................................................... 3,614 3,825 1,040 1,269 Provision for center profit distribution................................. 700 771 158 290 --------- --------- --------- --------- Gross profit............................................................. $ 674 $ 714 $ 142 $ 264 --------- --------- --------- --------- --------- --------- --------- ---------
The provision for center profit distribution shown above represents the minority interest in the income of these combined entities. 4. INCOME (LOSS) PER SHARE In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings Per Share (EPS). SFAS No. 128 replaces primary EPS and fully diluted EPS with basic EPS F-39 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. INCOME (LOSS) PER SHARE (CONTINUED) and diluted EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed in the same way as the previously used fully diluted EPS, except that the calculation now uses the average share price for the reporting period to compute dilution from options and warrants under the treasury stock method. The number of shares used in computing EPS is equal to the weighted average number of common and preferred shares outstanding during the respective period. Since the Preferred Stock has no stated dividend rate and participates in any dividends paid with respect to the Common Stock, the convertible amounts are included in the computation of basic EPS. Dilution relating to options and warrants are not included for the nine months ended March 31, 1998 due to their antidilutive effect. There were no adjustments to net income (loss) (the numerator) for purposes of computing EPS. A reconciliation of basic and diluted share computations is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Average common stock outstanding......................... 2,731,105 2,712,122 2,753,037 2,714,725 Effect of preferred stock................................ 4,858,444 2,501,760 6,322,656 2,501,760 ------------ ------------ ------------ ------------ Denominator for basic EPS................................ 7,589,549 5,213,882 9,075,693 5,216,485 Dilutive effect of stock options and warrants............ -- 230,426 417,611 222,060 ------------ ------------ ------------ ------------ 7,589,549 5,444,308 9,493,304 5,438,545 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION The Company's payment obligations under the Notes are guaranteed by certain of the Company's wholly-owned subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company's management has determined that they would not be material to investors. The following supplemental financial information sets forth, on an unconsolidated basis, balance sheet, statement of operations, and statement of cash flows information for the Company ("Parent Company Only"), for the Guarantor Subsidiaries and for the Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial information reflects the investments of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. F-40 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------------- ------------------ --------------- ---------------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents........ $ -- $ 6,910 $ 2,740 $ -- $ 9,650 Trade accounts receivable, net... -- 19,043 2,631 -- 21,674 Other receivables, net........... -- 190 140 -- 330 Intercompany accounts receivable..................... 130,664 4,851 -- (135,515) -- Other current assets............. -- 2,009 140 -- 2,149 ----------- --------------- ------- --------------- -------- Total current assets........... 130,664 33,003 5,651 (135,515) 33,803 Property and equipment, net........ -- 43,166 3,579 -- 46,745 Investments in partnerships........ -- 495 -- -- 495 Investments in consolidated subsidiaries..................... (24,620) 2,359 -- 22,261 -- Other assets....................... -- 2,471 -- -- 2,471 Intangible assets, net............. -- 42,464 809 -- 43,273 ----------- --------------- ------- --------------- -------- $ 106,044 $ 123,958 $ 10,039 $ (113,254) $ 126,787 ----------- --------------- ------- --------------- -------- ----------- --------------- ------- --------------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment and other notes...................... $ 4,218 $ 1,346 $ 142 $ -- $ 5,706 Accounts payable and other accrued expenses......................... -- 14,277 628 -- 14,905 Intercompany accounts payable...... -- 130,664 4,851 (135,515) -- ----------- --------------- ------- --------------- -------- Total current liabilities...... 4,218 146,287 5,621 (135,515) 20,611 Equipment and other notes, less current portion.................. 65,982 1,611 188 -- 67,781 Other long term liabilities........ -- 680 -- -- 680 Minority interest.................. -- -- 1,871 -- 1,871 Stockholders' equity (deficit)..... 35,844 (24,620) 2,359 22,261 35,844 ----------- --------------- ------- --------------- -------- $ 106,044 $ 123,958 $ 10,039 $ (113,254) $ 126,787 ----------- --------------- ------- --------------- -------- ----------- --------------- ------- --------------- -------- -- -- -- -- --
F-41 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR (AMOUNTS IN THOUSANDS) ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------------- ------------------ ----------------- ---------------- Revenues.......................... $ -- $ 74,511 $ 11,162 $ -- $ 85,673 Costs of operations............... -- 59,706 9,985 -- 69,691 ----------- ------- ------- ----- ------- Gross profit.................... -- 14,805 1,177 -- 15,982 Corporate operating expenses...... -- 6,510 -- -- 6,510 Provision for supplemental service fee termination................. -- 6,309 -- -- 6,309 ----------- ------- ------- ----- ------- Income (loss) from company operations...................... -- 1,986 1,177 -- 3,163 Equity in earnings of unconsolidated partnerships..... -- 480 -- -- 480 ----------- ------- ------- ----- ------- Operating income (loss)........... -- 2,466 1,177 -- 3,643 Interest expense, net............. -- 4,449 216 -- 4,665 ----------- ------- ------- ----- ------- Income (loss) before income taxes........................... -- (1,983) 961 -- (1,022) Provision for income taxes........ -- 431 -- -- 431 Income (loss) before equity in income (loss) of consolidated subsidiaries.................... -- (2,414) 961 -- (1,453) Equity in income (loss) of consolidated subsidiaries....... (1,453) 961 492 -- ----------- ------- ------- ----- ------- Net income (loss)................. $ (1,453) $ (1,453) $ 961 $ 492 $ (1,453) ----------- ------- ------- ----- ------- ----------- ------- ------- ----- -------
F-42 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1997
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------------- ------------------ --------------- ---------------- (AMOUNTS IN THOUSANDS) Revenues.......................... $ -- $ 57,297 $ 10,832 $ -- $ 68,129 Costs of operations............... -- 50,059 9,468 -- 59,527 ----------- ------- ------- ------- ------- Gross profit.................... -- 7,238 1,364 -- 8,602 Corporate operating expenses...... -- 5,343 -- -- 5,343 ----------- ------- ------- ------- ------- Income (loss) from company operations.................... -- 1,895 1,364 -- 3,259 Equity in earnings of unconsolidated partnerships..... -- 364 -- -- 364 ----------- ------- ------- ------- ------- Operating income (loss)......... -- 2,259 1,364 -- 3,623 Interest expense, net............. -- 2,657 84 -- 2,741 ----------- ------- ------- ------- ------- Income (loss) before income taxes......................... -- (398) 1,280 -- 882 Provision for income taxes........ -- 134 -- -- 134 ----------- ------- ------- ------- ------- Income (loss) before equity in income (loss) of consolidated subsidiary.................... -- (532) 1,280 -- 748 Equity in income (loss) of consolidated subsidiaries....... 748 1,280 (2,028) -- ----------- ------- ------- ------- ------- Net income (loss)............... $ 748 $ 748 $ 1,280 $ (2,028) $ 748 ----------- ------- ------- ------- ------- ----------- ------- ------- ------- -------
F-43 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- --------------- ------------------- ----------------- ----------------- (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss).................. $ (1,453) $ (1,453) $ 961 $ 492 $ (1,453) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Total depreciation and amortization................... -- 10,437 349 -- 10,786 Amortization of deferred gain on debt restructure............... -- (1,355) -- -- (1,355) Provision for supplemental service fee termination........ -- 6,309 -- -- 6,309 Equity in income (loss) of consolidated subsidiaries...... 1,453 (961) -- (492) -- Cash provided by (used in) changes in operating working capital: Receivables, net................. -- (4,916) 196 -- (4,720) Intercompany receivables, net.... (93,812) 89,620 4,192 -- -- Other current assets............. -- (624) (71) -- (695) Accounts payable and other current liabilities............ -- 1,210 (21) -- 1,189 ----------- --------------- ------- ------- -------- Net cash provided by operating activities................... (93,812) 98,267 5,606 -- 10,061 ----------- --------------- ------- ------- -------- INVESTING ACTIVITIES: Additions to property and equipment........................ -- (13,421) (1,812) -- (15,233) Acquisitions of imaging centers.... -- (12,890) -- -- (12,890) Other.............................. -- (861) (127) -- (988) ----------- --------------- ------- ------- -------- Net cash used in investing activities................... -- (27,172) (1,939) -- (29,111) ----------- --------------- ------- ------- -------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock............................ 23,346 -- -- -- 23,346 Stock options and warrants exercised........................ 266 -- -- -- 266 Payment of loan fees............... -- (2,210) -- -- (2,210) Payments on debt and capital lease obligations...................... (2,700) (79,337) (948) -- (82,985) Proceeds from issuance of debt..... 72,900 10,241 136 -- 83,277 Other.............................. -- 1,276 (1,405) -- (129) ----------- --------------- ------- ------- -------- Net cash provided by (used in) financing activities......... 93,812 (70,030) (2,217) -- 21,565 ----------- --------------- ------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ -- 1,065 1,450 -- 2,515 CASH AND CASH EQUIVALENTS: Beginning of period................ -- 5,845 1,290 -- 7,135 ----------- --------------- ------- ------- -------- End of period...................... $ -- $ 6,910 $ 2,740 $ -- $ 9,650 ----------- --------------- ------- ------- -------- ----------- --------------- ------- ------- --------
F-44 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS --------------- ----------------- --------------------- ----------------- (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss).................. $ 748 $ 748 $ 1,280 $ (2,028) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Total depreciation and amortization................... -- 7,087 273 -- Amortization of deferred gain on debt restructure............... -- (797) -- -- Equity in income (loss) of consolidated subsidiaries...... (748) (1,280) -- 2,028 Cash provided by (used in) changes in operating working capital: Receivables, net................. -- (221) (245) -- Intercompany receivables, net.... -- 326 (326) -- Other current assets............. -- (520) 30 -- Accounts payable and other current liabilities............ -- 492 (211) -- ----- ------ ------ ------- Net cash provided by operating activities................... -- 5,835 801 -- ----- ------ ------ ------- INVESTING ACTIVITIES: Additions to property and equipment........................ -- (2,307) (100) -- Acquisitions of imaging centers.... -- (2,766) -- -- Other.............................. -- 351 -- -- ----- ------ ------ ------- Net cash used in investing activities................... -- (4,722) (100) -- ----- ------ ------ ------- FINANCING ACTIVITIES: Payments on debt and capital lease obligations...................... -- (7,488) (239) -- Proceeds from issuance of debt..... -- 5,139 -- -- Other.............................. -- 766 (352) -- ----- ------ ------ ------- Net cash provided by (used in) financing activities......... -- (1,583) (591) -- ----- ------ ------ ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ -- (470) 110 -- CASH AND CASH EQUIVALENTS: Beginning of period................ -- 5,554 1,310 -- ----- ------ ------ ------- End of period...................... $ -- $ 5,084 $ 1,420 $ -- ----- ------ ------ ------- ----- ------ ------ ------- CONSOLIDATED ------------------- (AMOUNTS IN THOUSANDS OPERATING ACTIVITIES: Net income (loss).................. $ 748 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Total depreciation and amortization................... 7,360 Amortization of deferred gain on debt restructure............... (797) Equity in income (loss) of consolidated subsidiaries...... -- Cash provided by (used in) changes in operating working capital: Receivables, net................. (466) Intercompany receivables, net.... -- Other current assets............. (490) Accounts payable and other current liabilities............ 281 ------ Net cash provided by operating activities................... 6,636 ------ INVESTING ACTIVITIES: Additions to property and equipment........................ (2,407) Acquisitions of imaging centers.... (2,766) Other.............................. 351 ------ Net cash used in investing activities................... (4,822) ------ FINANCING ACTIVITIES: Payments on debt and capital lease obligations...................... (7,727) Proceeds from issuance of debt..... 5,139 Other.............................. 414 ------ Net cash provided by (used in) financing activities......... (2,174) ------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ (360) CASH AND CASH EQUIVALENTS: Beginning of period................ 6,864 ------ End of period...................... $ 6,504 ------ ------
F-45 SIGNAL MEDICAL SERVICES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----------- Independent Auditors' Report........................................................................ F-47 Balance Sheets as of December 31, 1997 and 1996..................................................... F-48 Statements of Income for the Years Ended December 31, 1997 and 1996................................. F-49 Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996................... F-50 Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............................. F-51 Notes to Financial Statements....................................................................... F-52 Balance Sheets (unaudited) as of March 31, 1998 and 1997............................................ F-60 Statements of Income and Retained Earnings (unaudited) for the Three Months Ended March 31, 1998 and 1997.............................................................................................. F-61 Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 1998 and 1997............. F-62 Notes to Financial Statements....................................................................... F-63
F-46 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Signal Medical Services, Inc.: We have audited the accompanying balance sheets of Signal Medical Services, Inc. as of December 31, 1997 and 1996, and the related statements of income, stockholders' equity and cash flows for the years then ended. 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 Signal Medical Services, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Hartford, Connecticut January 9, 1998 F-47 SIGNAL MEDICAL SERVICES, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS
1997 1996 ------------- ------------ Current assets: Cash and cash equivalents.......................................................... $ 1,847,000 667,000 Accounts receivables, net of allowance of $101,000 and $44,000..................... 3,219,000 2,388,000 Other receivables.................................................................. 52,000 11,000 Prepaid expenses and other assets.................................................. 93,000 90,000 ------------- ------------ Total current assets............................................................. 5,211,000 3,156,000 ------------- ------------ Property and equipment: Medical equipment.................................................................. 23,607,000 18,430,000 Furniture, fixtures and other equipment............................................ 390,000 291,000 ------------- ------------ 23,997,000 18,721,000 Less accumulated depreciation and amortization..................................... 10,762,000 7,112,000 ------------- ------------ Property and equipment, net...................................................... 13,235,000 11,609,000 ------------- ------------ Other assets, net.................................................................... 580,000 488,000 ------------- ------------ $ 19,026,000 15,253,000 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 627,000 425,000 Accrued compensation............................................................... 792,000 583,000 Accrued maintenance................................................................ 259,000 64,000 Other accrued expenses and other liabilities....................................... 869,000 838,000 Short-term borrowings.............................................................. -- 294,000 Current portion of long-term debt.................................................. 3,227,000 3,314,000 Current portion of capital lease obligation........................................ 309,000 -- ------------- ------------ Total current liabilities........................................................ 6,083,000 5,518,000 Long-term debt....................................................................... 3,712,000 4,447,000 Accrued taxes........................................................................ 1,008,000 771,000 Deferred income taxes................................................................ 801,000 389,000 Other liabilities.................................................................... 380,000 140,000 Long-term portion of capital lease obligation........................................ 1,545,000 -- ------------- ------------ Total liabilities................................................................ 13,529,000 11,265,000 ------------- ------------ Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares authorized, issued and outstanding, redeemable at $33.34 per share................. 2,000,000 2,000,000 Stockholders' equity: Common stock, $.01 par value, 110,000 shares authorized, 33,500 shares issued...... -- -- Additional paid-in capital......................................................... 156,000 156,000 Retained earnings.................................................................. 3,841,000 2,332,000 Less cost of 17,580 treasury shares.................................................. (500,000) (500,000) ------------- ------------ Total stockholders' equity....................................................... 3,497,000 1,988,000 ------------- ------------ Commitments and contingencies $ 19,026,000 15,253,000 ------------- ------------ ------------- ------------
See accompanying notes to financial statements. F-48 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------- ------------- Revenues........................................................................... $ 20,704,000 17,852,000 ------------- ------------- Operating costs and expenses: Operating costs.................................................................. 7,455,000 6,592,000 Selling, general and administrative.............................................. 2,701,000 2,257,000 Lease expense.................................................................... 3,697,000 3,140,000 Depreciation and amortization.................................................... 3,676,000 3,200,000 Interest expense, net of interest income of $27,000 and $26,000.................. 654,000 827,000 ------------- ------------- Total operating costs and expenses............................................. 18,183,000 16,016,000 ------------- ------------- Income before income taxes..................................................... 2,521,000 1,836,000 Income Taxes 1,012,000 735,000 ------------- ------------- Net Income..................................................................... $ 1,509,000 1,101,000 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-49 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
ADDITIONAL TOTAL COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK EQUITY ----------- ----------- ---------- ---------- ------------ Balance, December 31, 1995.......................... $ -- 156,000 1,231,000 (500,000) 887,000 Net Income.......................................... -- -- 1,101,000 -- 1,101,000 ----------- ----------- ---------- ---------- ------------ Balance, December 31, 1996.......................... -- 156,000 2,332,000 (500,000) 1,988,000 Net Income.......................................... -- -- 1,509,000 -- 1,509,000 ----------- ----------- ---------- ---------- ------------ Balance, December 31, 1997.......................... $ -- 156,000 3,841,000 (500,000) 3,497,000 ----------- ----------- ---------- ---------- ------------ ----------- ----------- ---------- ---------- ------------
See accompanying notes to financial statements. F-50 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------- ------------- Cash flows from operating activities: Net income........................................................................ $ 1,509,000 1,101,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................... 3,676,000 3,200,000 Change in assets and liabilities: Increase in accounts receivable............................................... (831,000) (288,000) Decrease (increase) in other receivables...................................... (41,000) 56,000 Increase in prepaid expenses and other current assets......................... (3,000) (39,000) Decrease (increase) in other assets........................................... 66,000 (84,000) Increase in accounts payable, accrued expenses and other liabilities.......... 1,526,000 1,029,000 ------------- ------------- Net cash provided by operating activities................................... 5,902,000 4,975,000 ------------- ------------- Cash flows used in investing activities: Additions to medical equipment, furniture and fixtures............................ (3,421,000) (2,918,000) Investment in joint ventures...................................................... (185,000) -- ------------- ------------- Net cash used in investing activities....................................... (3,606,000) (2,918,000) ------------- ------------- Cash flows used in financing activities: Net decrease in short-term borrowings............................................. (294,000) (156,000) Proceeds from long-term debt...................................................... 2,720,000 475,000 Repayment of long-term debt....................................................... (3,542,000) (3,151,000) ------------- ------------- Net cash used in financing activities....................................... (1,116,000) (2,832,000) ------------- ------------- Net increase (decrease) in cash and cash equivalents................................ 1,180,000 (775,000) Cash and cash equivalents, beginning of period...................................... 667,000 1,442,000 ------------- ------------- Cash and cash equivalents, end of period............................................ $ 1,847,000 667,000 ------------- ------------- ------------- ------------- Cash paid for income taxes.......................................................... $ 807,000 381,000 ------------- ------------- ------------- ------------- Cash paid for interest.............................................................. 599,000 850,000 ------------- ------------- ------------- ------------- Capital lease obligation incurred................................................... $ 1,854,000 -- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-51 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF BUSINESS Signal Medical Services, Inc. (the Company) provides fixed site and mobile magnetic resonance imaging (MRI), computer tomography (CT), general radiology and lithotripsy equipment and operations under contracts with hospitals and other health care providers throughout the United States. The Company's customer contracts at December 31, 1997 are primarily with health care providers in the northeastern and southeastern United States. During 1997, the Company developed and began operating several new ventures, which are jointly owned by the Company and its respective joint venture partners. These joint ventures include a medical billing and collection company, a mobile lithotripsy joint venture and a mobile x-ray and ultrasound company. The Company's investment in these joint ventures totaled $185,000 and is included in other assets. The Company also began managing two newly developed multi-modality imaging centers in which the Company expects to acquire a 50% ownership interest during the first quarter of 1998. The Company's ownership interest in these joint ventures varies from 35% to 60%, and the operating results of these joint ventures was not material to the Company's 1997 financial statements. (b) REVENUE RECOGNITION Revenues are recognized at the time equipment and related services are provided, generally on a fee-per-procedure or daily fee basis. (c) MEDICAL EQUIPMENT AND FURNITURE AND FIXTURES Medical equipment and furniture and fixtures are stated at cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: 2 to 7 Medical equipment...................................... years 2 to 5 Furniture, fixtures and other equipment................ years
Repairs and maintenance expenditures are charged to expense as incurred. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on the straight-line method over the term of the lease or estimated useful life of the equipment, whichever is shorter. Property acquired under capital leases consists of the following:
1997 1996 ------------ ------------ Medical Equipment....................................... $ 1,854,000 -- Accumulated Amortization................................ -- -- ------------ ------------ $ 1,854,000 -- ------------ ------------ ------------ ------------
(d) OTHER ASSETS Other assets include deferred financing costs and certain deferred costs incurred in connection with the Company's contracts with health care providers. These assets are being amortized using the straight-line method over the terms of the related debt and contracts which range from 5 to 7 years. Accumulated amortization amounted to $258,000 in 1997 and $178,000 in 1996. F-52 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. At December 31, 1997, cash and cash equivalents consisted primarily of cash invested in a money market account and overnight investment account. (f) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) USE OF ESTIMATES Management of the Company has made several estimates and assumptions relating to the reporting of certain assets, including the allowance for doubtful receivables, and liabilities and the disclosure of continent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The components of the allowance for doubtful receivables for the years ended December 31, 1997 and 1996 were as follows: Balance at January 1, 1996................................ $ 55,000 Charged to operating costs............................ -- Write-offs............................................ (11,000) --------- Balance at December 31, 1996.............................. 44,000 Charged to operating costs............................ 40,000 Write-offs............................................ -- Other................................................. 17,000 --------- Balance at December 31, 1997.............................. $ 101,000 --------- ---------
(h) RECLASSIFICATIONS Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 presentation. (i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the F-53 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amount by which the carrying amount of the assets exceed the fair value of the assets. Adoption of this Statement did not have any impact on the Company's financial position, results of operations, or liquidity. (2) LEASES The Company leases certain medical equipment, office space and fixed site MRI operating space. Future minimum lease commitments under noncancelable leases with a term of 12 months or more are as follows at December 31, 1997:
CAPITALIZED OPERATING LEASES LEASES ------------ ------------ 1998.............................................................. $ 446,000 $ 1,166,000 1999.............................................................. 432,000 1,062,000 2000.............................................................. 405,000 565,000 2001.............................................................. 378,000 341,000 2002.............................................................. 351,000 94,000 Thereafter........................................................ 322,000 -- ------------ ------------ Total minimum lease payments.................................... 2,334,000 $ 3,228,000 ------------ ------------ Amounts representing interest..................................... (480,000) ------------ Present value of net minimum payments........................... 1,854,000 Current portion................................................... (309,000) ------------ Long-term portion of capital lease obligation................. $ 1,545,000 ------------ ------------
Total operating lease expense for medical equipment amounted to $3,697,000 in 1997 and $3,140,000 in 1996. Other rent expense, which is included in selling, general and administrative expenses, totaled $125,000 for 1997 and $122,000 for 1996, respectively. (3) INCOME TAXES Income tax expense consisted of the following:
YEAR ENDED DECEMBER 31, 1997 CURRENT DEFERRED TOTAL - ---------------------------------------------------------- ---------- --------- ---------- U.S. Federal.............................................. $ 451,000 355,000 806,000 State and Local........................................... 149,000 57,000 206,000 ---------- --------- ---------- 600,000 412,000 1,012,000 ---------- --------- ---------- ---------- --------- ---------- YEAR ENDED DECEMBER 31, 1996 - ---------------------------------------------------------- U.S. Federal.............................................. 341,000 296,000 637,000 State and Local........................................... 70,000 28,000 98,000 ---------- --------- ---------- $ 411,000 324,000 735,000 ---------- --------- ---------- ---------- --------- ----------
F-54 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (3) INCOME TAXES (CONTINUED) Income tax expense differed from the amount computed by applying the U.S. federal income tax rate of 34% to pretax income in 1997 and 1996. As a result of the following:
1997 1996 ----------------------------- --------------------------- % OF PRETAX % OF PRETAX AMOUNT EARNINGS AMOUNT EARNINGS ------------ --------------- ---------- --------------- "Expected" tax expense....................................... $ 857,000 34% $ 624,000 34% State corporation taxes, net of federal tax benefit.......... 136,000 5% 65,000 4% Other........................................................ 19,000 1% 46,000 2% -- -- ------------ ---------- $ 1,012,000 40% $ 735,000 40% -- -- -- -- ------------ ---------- ------------ ----------
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ------------ ------------ Deferred tax assets: Allowance for doubtful receivables.................................................. $ 33,000 17,000 Option compensation expense......................................................... 43,000 43,000 Unamortized start-up and organization costs incurred prior to inception of business operations........................................................................ -- 5,000 Compensated absences, principally due to accrual for financial reporting purposes... 41,000 34,000 Alternative minimum tax credit carryforward......................................... -- 373,000 Net operating loss carryforwards.................................................... -- 27,000 Other liabilities................................................................... 346,000 190,000 State tax credit.................................................................... -- 34,000 Other............................................................................... 3,000 9,000 ------------ ------------ Total gross deferred tax assets................................................... 466,000 732,000 ------------ ------------ Deferred tax liabilities Medical equipment, furniture and fixtures, and other assets principally due to differences in depreciation and amortization.................................... 1,267,000 1,121,000 ------------ ------------ Total gross deferred tax liabilities.............................................. 1,267,000 1,121,000 ------------ ------------ Net deferred tax liability.......................................................... $ 801,000 389,000 ------------ ------------ ------------ ------------
Management has concluded that it is more likely than not that the Company will have sufficient taxable income of an appropriate character within the carryback and carryforward period permitted by current tax law to allow for the utilization of the deductible amounts generating the deferred tax asset and, therefore, no valuation allowance is required. (4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK On April 3, 1992, 60,000 shares of $.01 par value series A redeemable convertible cumulative preferred stock were issued to SMSI Holding, Inc., a wholly owned subsidiary of Anthem Blue Cross and Blue Shield of Connecticut, Inc. at $33.34 per share. Each share of series A preferred stock is convertible F-55 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (4) REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK (CONTINUED) into one share of common stock at any time after the date of issuance. In the event of a public offering of common stock by the Company, the preferred stock will automatically be converted into shares of common stock, provided that the offering price per share and gross proceeds from the offering are not less than $66.68 and $5,000,000 respectively. On or after April 1, 1997, the series A preferred stock is redeemable at $33.34 per share plus any unpaid dividends at the option of SMSI Holding, Inc. Upon liquidation, dissolution or winding up of the Company, the holders of the series A preferred stock shall be entitled to receive, before any distribution is made to the holders of common stock of the Company, a distribution of $33.34 per share plus any unpaid dividends. The series A preferred stock accumulates a dividend at an annual rate of $2.33 per share through March 31, 1994 and $3.00 per share from April 1, 1994 to March 31, 1997 payable upon a liquidation, dissolution or winding up, conversion or redemption, consolidation or merger of the Company. The amount of accumulated and unpaid series A preferred stock dividends was $820,000 at December 31, 1997. The holders of the series A preferred stock are entitled to one vote per share of common stock into which the preferred stock is convertible. (5) STOCKHOLDERS' EQUITY On April 3, 1992, 33,500 shares of $.01 par value common stock were issued to the founders of the Company. The Company has a fixed option plan. Under the 1994 Employee Stock Option Plan, the Company may grant options to its employees for up to 18,000 shares of common stock. The exercise price of each option equals the fair value of the Company's stock on the date of grant, and an option's maximum term is ten years. Options generally vest over a period of one to three years. At December 31, 1997, all options were fully vested. The Company has elected to adopt the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized for stock options issued. The impact on net income in 1997 and 1996 had the Company adopted FAS 123 would have been immaterial. Options granted, exercised and outstanding under this plan were as follows:
EXERCISE EXERCISE 1997 PRICE 1996 PRICE --------- ----------- --------- ----------- Outstanding at beginning of year........................................ 14,790 -- 13,790 $ 18.00 Granted................................................................. -- -- 1,000 83.00 Exercised............................................................... -- -- -- -- --------- --------- ----------- Outstanding at end of year.............................................. 14,790 14,790 --------- --------- --------- --------- Fair value of options granted during the year........................... $ -- $ 36.65 --------- --------- --------- ---------
The fair value of stock options granted during 1996 were estimated on the date of grant using the minimum value method with the following assumptions: risk-free interest rate of 6.0 percent, expected life of 10 years, and no dividends. F-56 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (6) RELATED PARTY TRANSACTION On April 3, 1992, the Company loaned $35,000, at an interest rate of 9%, to an officer and common stockholder of the Company. Interest is due April 1st of each year and 34% of the officer's annual bonus, if any, must be paid toward the outstanding principal balance. The remaining balance of the note December 31, 1997 and 1996 was $0 and $9,000, respectively, and is included in other receivables. The Company made advances to its employees and joint ventures which totaled approximately $32,000 and $21,000 as of December 31, 1997 and 1996, respectively. These advances are included in other receivables. (7) SHORT-TERM BORROWINGS The Company has a $1,500,000 line of credit from Anthem Blue Cross and Blue Shield of Connecticut, Inc. Borrowings under this line bear interest at the three-month LIBOR rate plus 2% (7.81% at December 31, 1997). The amounts outstanding at December 31, 1997 and 1996 were $0 and $294,000, respectively. The weighted average interest rate on the line of credit during 1997 and 1996 was 8.57%, respectively. F-57 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (8) LONG-TERM DEBT The following schedule summarizes long-term debt at December 31, 1997 and 1996:
1997 1996 ------------ ------------ Term notes with banks: $450,000, interest fixed at 7.90%; due in 48 equal monthly principal payments through May 1, 1997......................................................................... $ -- 38,000 $2,500,000, interest fixed at 7.90% through November 1998, variable thereafter; due in 84 equal monthly principal payments through December 1, 2000........................ 1,071,000 1,429,000 $3,000,000, interest fixed at 9.50%; due in 60 equal monthly principal payments through June 1, 1999................................................................ 900,000 1,500,000 $824,444, interest fixed at 9.65% through December 1, 1996, variable thereafter; due in 47 equal monthly principal payments through October 1, 1998...................... 176,000 386,000 $1,950,000, interest fixed at 9.95% through January 1, 1998, variable thereafter; due in 48 equal monthly principal payments through December 1, 1998..................... 487,000 975,000 $750,000, interest fixed at 9.40%; due in 36 equal monthly principal payments through January 10, 1998.................................................................... -- 250,000 $900,000, interest fixed at 9.40%; due in 35 equal monthly principal payments through January 10, 1998.................................................................... -- 308,000 $1,200,000, interest fixed at 8.75%; due in 48 equal monthly principal payments through September 11, 1999.......................................................... 525,000 825,000 $2,100,000, interest fixed at 8.40%; due in 48 equal monthly principal payments through December 14, 1999........................................................... 1,050,000 1,575,000 $475,000, interest fixed at 8.46%; due in 24 equal monthly principal payments through December 31, 1998................................................................... 237,000 475,000 $795,000, interest fixed at 8.95%; due in 60 equal monthly principal payments through February 28, 2002................................................................... 663,000 -- $950,000, interest fixed at 8.90%; due in 60 equal monthly principal payments through August 1, 2002...................................................................... 887,000 -- $975,000, interest fixed at 8.49%; due in 60 equal monthly principal payments through October 31, 2002.................................................................... 943,000 -- ------------ ------------ 6,939,000 7,761,000 Less current maturities............................................................... 3,227,000 3,314,000 ------------ ------------ $ 3,712,000 4,447,000 ------------ ------------ ------------ ------------
F-58 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (8) LONG-TERM DEBT (CONTINUED) Maturities of long-term debt are as follows: Year ending December 31: 1998........................................................... $3,227,000 1999........................................................... 1,951,000 2000........................................................... 901,000 2001........................................................... 544,000 2002........................................................... 316,000 Thereafter..................................................... -- --------- $6,939,000 --------- ---------
The term notes contain covenants which, among other things, require maintenance of certain ratios of liabilities to tangible net worth, debt service coverage and minimum levels of liquid investments and profitability. The term notes are secured by the medical equipment purchased with the note proceeds, the related service contacts with hospital customers and other assets of the Company. The Company has a $5,000,000 capital expenditure line of credit with a financial institution under which it finances equipment acquisitions on a long-term basis. Interest is at market rates determined at the time of each drawdown under the line. The unused portion of this line at December 31, 1997 was $5,000,000. (9) CONTINGENCIES The Company entered into an agreement in 1993 in which it became the guarantor of a loan between Citrus Memorial Health Foundation, Inc., a customer, and a bank. This loan had an outstanding principal balance of approximately $577,000 at December 31, 1997. In September 1994, the Company entered into a similar loan guarantee with Manchester Memorial Hospital and the same bank. This loan had an outstanding principal balance of approximately $1,027,000 at December 31, 1997. On December 29, 1997, the Company entered in an agreement under which it became a guarantor of a credit facility between Whitney Imaging Center, LLC (WIC) and Shoreline Imaging Center, LLC (SIC) as the borrowers and a bank. Proceeds from the credit facility are being used to finance the development of the two multi-modality imaging centers owned by WIC and SIC and managed by the Company. The credit facility is also guaranteed by the owners of WIC and SIC and is secured by the assets of WIC, SIC and their owners. The Company's guaranty is unsecured. The total amount committed by the bank under the credit facility is $2,450,000. Outstanding borrowings under the facility at December 31, 1997 totaled $1,319,000. In the event that the debtors default under these loans, the Company could become liable for all unpaid interest and principal. As of December 31, 1997, the debtors were current as to interest and principal payments under the loans. F-59 SIGNAL MEDICAL SERVICES, INC. BALANCE SHEETS MARCH 31, 1998 AND 1997 (UNAUDITED) ASSETS
1998 1997 ------------- ------------- Current assets: Cash and cash equivalents........................................................ $ 1,642,000 1,013,000 Accounts receivables, net........................................................ 3,397,000 2,571,000 Other receivables................................................................ 239,000 6,000 Prepaid expenses and other assets................................................ 121,000 139,000 ------------- ------------- Total current assets........................................................... 5,399,000 3,729,000 ------------- ------------- Property and equipment: Medical equipment, net........................................................... 12,174,000 10,705,000 Furniture, fixtures and other equipment, net..................................... 112,000 91,000 ------------- ------------- Property and equipment, net.................................................... 12,286,000 10,796,000 ------------- ------------- Other assets, net.................................................................. 660,000 546,000 ------------- ------------- $ 18,345,000 15,071,000 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................. $ 235,000 326,000 Accrued compensation............................................................. 516,000 371,000 Accrued maintenance.............................................................. 258,000 126,000 Other accrued expenses and other liabilities..................................... 1,112,000 778,000 Current portion of long-term debt................................................ 2,993,000 3,304,000 Current portion of capital lease obligation...................................... 309,000 -- ------------- ------------- Total current liabilities...................................................... 5,423,000 4,905,000 Long-term debt..................................................................... 3,130,000 4,391,000 Accrued taxes...................................................................... 1,307,000 838,000 Deferred income taxes.............................................................. 912,000 419,000 Other liabilities.................................................................. 139,000 176,000 Long-term portion of capital lease obligation...................................... 1,468,000 -- ------------- ------------- Total liabilities.............................................................. 12,379,000 10,729,000 ------------- ------------- Redeemable convertible cumulative preferred stock, $.01 par value, 60,000 shares authorized, issued and outstanding, redeemable at $33.34 per share............... 2,000,000 2,000,000 Stockholders' equity: Common stock..................................................................... -- -- Additional paid-in capital....................................................... 156,000 156,000 Retained earnings................................................................ 4,310,000 2,686,000 Less cost of treasury shares....................................................... (500,000) (500,000) ------------- ------------- Total stockholders' equity..................................................... 3,966,000 2,342,000 ------------- ------------- $ 18,345,000 15,071,000 ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-60 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ------------ ------------ Revenues.............................................................................. $ 5,622,000 $ 5,085,000 ------------ ------------ Operating costs and expenses: Operating costs..................................................................... 2,067,000 1,735,000 Selling, general and administrative................................................. 845,000 706,000 Lease expense....................................................................... 686,000 989,000 Depreciation and amortization....................................................... 1,058,000 888,000 Interest expense, net of interest income of $15,000 and $1,000...................... 171,000 178,000 ------------ ------------ Total operating costs and expenses................................................ 4,827,000 4,496,000 ------------ ------------ Income before income taxes........................................................ 795,000 589,000 Income Taxes.......................................................................... 326,000 235,000 ------------ ------------ Net Income........................................................................ $ 469,000 $ 354,000 ------------ ------------ Retained earnings, beginning of period................................................ 3,841,000 2,332,000 ------------ ------------ Retained earnings, end of period...................................................... 4,310,000 2,686,000 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. F-61 SIGNAL MEDICAL SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ------------ ------------ Cash flows from operating activities: Net income.......................................................................... $ 469,000 354,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................................... 1,058,000 888,000 Change in assets and liabilities: Increase in accounts receivable................................................. (178,000) (183,000) Decrease (increase) in other receivables........................................ (187,000) 5,000 Increase in prepaid expenses and other current assets........................... (28,000) (49,000) Decrease (increase) in other assets............................................. (82,000) (65,000) Decrease in accounts payable, accrued expenses and other liabilities............ (257,000) (176,000) ------------ ------------ Net cash provided by operating activities..................................... 795,000 774,000 ------------ ------------ Cash flows used in investing activities: Additions to medical equipment, furniture and fixtures.............................. (107,000) (68,000) ------------ ------------ Net cash used in investing activities......................................... (107,000) (68,000) ------------ ------------ Cash flows used in financing activities: Net decrease in short-term borrowings............................................... -- (294,000) Proceeds from long-term debt........................................................ -- 795,000 Repayment of long-term debt......................................................... (893,000) (861,000) ------------ ------------ Net cash used in financing activities......................................... (893,000) (360,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents.................................. (205,000) 346,000 Cash and cash equivalents, beginning of period........................................ 1,847,000 667,000 ------------ ------------ Cash and cash equivalents, end of period.............................................. $ 1,642,000 1,013,000 ------------ ------------ ------------ ------------ Cash paid for income taxes............................................................ $ 68,000 236,000 ------------ ------------ ------------ ------------ Cash paid for interest................................................................ 159,000 170,000 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. F-62 SIGNAL MEDICAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997 (1) BASIS OF PRESENTATION In the opinion of management, the financial information reflects all adjustments which are necessary to a fair presentation of the financial position, results of operations and cash flows for the interim periods presented and are of a normal recurring nature, unless otherwise disclosed in this report. The statements should be read in conjunction with the notes to the financial statements of Signal Medical Services, Inc. (the Company) as of and for the years ended December 31, 1997 and 1996. (2) ACQUISITION BY INSIGHT HEALTH SERVICES CORP. On May 18, 1998, the stock of the Company was acquired by InSight Health Services Corp., a leading provider of diagnostic imaging and related information services based in Newport Beach, California. The purchase price consisted of $46 million (subject to certain post-closing adjustments), including the assumption of indebtedness. (3) NEW PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (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 does not have a material impact on the Company. F-63 MOBILE IMAGING CONSORTIUM INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE ----------- Independent Auditors' Report........................................................................ F-65 Combined Balance Sheets as of December 31, 1996 and 1995............................................ F-66 Combined Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.................. F-67 Combined Statements of Partners' Capital Accounts for the Years Ended December 31, 1996, 1995 and 1994.............................................................................................. F-68 Combined Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.............. F-69 Notes to Financial Statements....................................................................... F-70 Combining Balance Sheet as of December 31, 1996..................................................... F-75 Combining Balance Sheet as of December 31, 1995..................................................... F-76 Combining Statement of Income for the Year Ended December 31, 1996.................................. F-77 Combining Statement of Income for the Year Ended December 31, 1995.................................. F-78 Combining Statement of Income for the Year Ended December 31, 1994.................................. F-79
F-64 INDEPENDENT AUDITORS' REPORT To the Partners Mobile Imaging Consortium--Maine Mobile Imaging Consortium--New Hampshire We have audited the accompanying combined balance sheets of Mobile Imaging Consortium, consisting of Mobile Imaging Consortium--Maine (a Maine limited partnership) and Mobile Imaging Consortium--New Hampshire (a Maine general partnership), as of December 31, 1996 and 1995, and the related combined statements of income, partners' capital accounts and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined 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 audits 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 combined financial position of Mobile Imaging Consortium as of December 31, 1996 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in accordance with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The combining details appearing in conjunction with the combined financial statements are presented for purposes of additional analysis and are not a required part of the basic combined financial statements. Such additional information has been subjected to the auditing procedures applied in our audits of the basic combined financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic combined financial statements taken as a whole. /s/ BAKER NEWMAN & NOYES -------------------------- January 20, 1997 Baker Newman & Noyes Limited Liability Company
F-65 MOBILE IMAGING CONSORTIUM COMBINED BALANCE SHEETS ASSETS
1996 1995 ------------ ------------ Cash and cash equivalents............................................................. $ 381,591 $ 972,134 Accounts receivable, net of contractual and bad debt allowances of $463,000 for 1996 and $260,000 for 1995 (note 3)...................................................... 1,350,324 1,069,537 Prepaid expenses and other current assets............................................. 177,340 164,131 ------------ ------------ Total current assets.............................................................. 1,909,255 2,205,802 Property and equipment: Leasehold improvements.............................................................. 2,501 2,501 Equipment........................................................................... 2,775,368 2,518,317 Equipment under capital leases (note 5)............................................. 4,106,512 3,743,960 Furniture and fixtures.............................................................. 7,592 7,592 ------------ ------------ 6,891,973 6,272,370 Less accumulated depreciation and amortization...................................... 5,201,323 4,026,953 ------------ ------------ Net property, plant and equipment................................................... 1,690,650 2,245,417 Other assets, net..................................................................... 12,386 38,374 ------------ ------------ $ 3,612,291 $ 4,489,593 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses................................................. $ 247,415 $ 338,644 Current portion of long-term debt (note 4)............................................ 131,017 208,993 Current portion of obligations under capital leases (note 5).......................... 1,077,732 766,813 ------------ ------------ Total current liabilities......................................................... 1,456,164 1,314,450 Long-term debt, less current portion (note 4)......................................... 67,555 -- Obligations under capital leases, less current portion (note 5)....................... 454,245 1,222,621 Commitments and contingencies (notes 9 and 10) Partners' capital..................................................................... 1,634,327 1,952,522 ------------ ------------ $ 3,612,291 $ 4,489,593 ------------ ------------ ------------ ------------
See accompanying notes. F-66 MOBILE IMAGING CONSORTIUM COMBINED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Revenue: Net scan revenue (note 7)............................................. $ 7,299,625 $ 6,499,166 $ 5,981,629 Interest.............................................................. 9,264 27,991 8,885 Other................................................................. 139,143 58,993 74,100 ------------ ------------ ------------ Total revenue....................................................... 7,448,032 6,586,150 6,064,614 Expenses: Payroll, fringe and related taxes..................................... 1,007,573 935,134 999,538 Management fees (note 8).............................................. 147,265 140,729 130,000 Hospital maintenance fees............................................. 141,175 129,247 115,554 Professional fees..................................................... 267,991 159,793 128,597 Tractor expenses...................................................... 83,583 64,631 65,573 Repairs and maintenance............................................... 509,285 472,797 479,196 Cryogens.............................................................. 116,777 110,527 109,000 Film and medical supplies............................................. 469,499 349,280 327,407 Insurance............................................................. 126,259 124,646 124,099 Utilities............................................................. 72,963 70,664 69,456 Rent.................................................................. 30,266 36,841 36,471 Property taxes........................................................ 53,316 88,006 86,969 Bad debts............................................................. 198,370 -- 125,387 Depreciation.......................................................... 1,174,370 1,282,300 1,289,777 Amortization.......................................................... 24,009 34,079 34,078 Interest.............................................................. 189,924 290,755 387,437 Other................................................................. 203,602 159,971 174,820 ------------ ------------ ------------ Total operating expenses............................................ 4,816,227 4,489,400 4,683,359 ------------ ------------ ------------ Net income.............................................................. $ 2,631,805 $ 2,096,750 $ 1,381,255 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. F-67 MOBILE IMAGING CONSORTIUM COMBINED STATEMENTS OF PARTNERS' CAPITAL ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GENERAL LIMITED GENERAL PARTNERS PARTNERS PARTNERS (MIC-ME) (MIC-ME) (MIC-NH) TOTAL ------------- ------------- ----------- ------------- Balance, December 31, 1993.............................. $ 603,184 $ 487,992 $ 264,141 $ 1,355,317 Net income.............................................. 756,610 521,074 103,571 1,381,255 Partner distributions (note 6).......................... (638,480) (442,320) (325,000) (1,405,800) ------------- ------------- ----------- ------------- Balance, December 31, 1994.............................. 721,314 566,746 42,712 1,330,772 Net income.............................................. 1,040,369 710,246 346,135 2,096,750 Partner distributions (note 6).......................... (710,000) (490,000) (275,000) (1,475,000) ------------- ------------- ----------- ------------- Balance, December 31, 1995.............................. 1,051,683 786,992 113,847 1,952,522 Net income.............................................. 1,334,745 906,496 390,564 2,631,805 Partner distributions (note 6).......................... (1,505,000) (1,020,000) (425,000) (2,950,000) ------------- ------------- ----------- ------------- Balance, December 31, 1996.............................. $ 881,428 $ 673,488 $ 79,411 $ 1,634,327 ------------- ------------- ----------- ------------- ------------- ------------- ----------- -------------
See accompanying notes. F-68 MOBILE IMAGING CONSORTIUM COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------- ------------- ------------- Cash flows from operating activities: Net income......................................................... $ 2,631,805 $ 2,096,750 $ 1,381,255 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................... 1,174,370 1,282,300 1,289,777 Amortization................................................... 24,009 34,079 34,078 Loss on disposal of asset...................................... -- 1,653 -- Changes in current assets and liabilities: Increase in accounts receivable.............................. (280,787) (209,038) (269,491) Increase in prepaid expenses and other current assets........ (13,209) (19,975) (67,583) Decrease in other assets..................................... 1,979 -- -- Increase (decrease) in accounts payable and accrued expenses................................................... (91,229) (15,580) 103,229 ------------- ------------- ------------- Net cash provided by operating activities.......................... 3,446,938 3,170,189 2,471,265 Cash flows from investing activities: Purchases of property and equipment................................ (257,051) (103,173) (48,611) Purchases of investments........................................... -- -- (255,068) Proceeds from sale of investments.................................. -- 255,068 -- ------------- ------------- ------------- Net cash provided (used) by investing activities................... (257,051) 151,895 (303,679 Cash flows from financing activities: Proceeds from issuance of long-term debt........................... 256,324 93,164 -- Principal payments of long-term debt............................... (266,745) (529,300) (393,694) Principal payments on capital lease obligations.................... (820,009) (689,084) (619,329) Distributions to partners.......................................... (2,950,000) (1,475,000) (1,405,800) ------------- ------------- ------------- Net cash used by financing activities.............................. (3,780,430) (2,600,220) (2,418,823) ------------- ------------- ------------- Net increase (decrease) in cash...................................... (590,543) 721,864 (251,237) Cash at beginning of year............................................ 972,134 250,270 501,506 ------------- ------------- ------------- Cash at end of year.................................................. $ 381,591 $ 972,134 $ 250,269 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental disclosures of cash flow information: Interest paid...................................................... $ 189,924 $ 294,107 $ 384,085 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental schedule of noncash investing and financing activities: Acquisition of property and equipment through obligations under capital leases................................................... $ 362,552 $ -- $ -- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes. F-69 MOBILE IMAGING CONSORTIUM NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES METHOD OF ACCOUNTING The combined financial statements are prepared on the accrual basis of accounting. The combined financial statements include the accounts of Mobile Imaging Consortium--Maine (A Maine Limited Partnership) and Mobile Imaging Consortium--New Hampshire (A Maine General Partnership). All transactions and balances between the two partnerships have been eliminated in combination. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is calculated using straight-line and accelerated methods over the estimated useful lives of the assets. Assets capitalized under capital lease obligations are amortized over the term of the related leases. ORGANIZATION COSTS Organization costs incurred in relation to the commencement of the respective Partnership's activities have been capitalized and are amortized over five years using the straight-line method. SYNDICATION COSTS Syndication costs incurred in forming the respective partnerships are deducted from partners' capital in the combined financial statements. INCOME TAXES No provision or benefit for income taxes has been included in the combined financial statements since any taxable income or loss passes through to, and is reportable by, the respective partners individually. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates related to contractual and bad debt allowances are especially significant. Actual results could differ from those estimates. 2. ORGANIZATION Mobile Imaging Consortium--Maine ("MIC-ME") is a limited partnership formed under the laws of the State of Maine in October, 1991. The Partnership operates two mobile magnetic resonance imaging systems which primarily serve hospitals throughout Maine. The general partners have exclusive responsibility for the control of all aspects of the Partnership's business. Mobile Imaging Consortium--New Hampshire ("MIC-NH") is a general partnership formed under the laws of the State of Maine in January, 1993. The Partnership operates a mobile magnetic resonance imaging system which primarily serves three hospitals in New Hampshire. F-70 MOBILE IMAGING CONSORTIUM NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 2. ORGANIZATION (CONTINUED) The two partnerships have similar general and limited partners. In addition, both partnerships are managed by the same management agent, Joseph J. Bean Associates. The management agent performs all recordkeeping functions on behalf of the partners. In addition, the management agent is responsible for allocating certain shared expenses incurred on behalf of both partnerships. 3. BUSINESS AND CREDIT CONCENTRATIONS Nearly all of the patients served by the Partnerships are from Maine or New Hampshire. No single patient accounted for more than five percent of the combined revenues for 1996, 1995, or 1994, and no account receivable from any patient exceeded five percent of total combined accounts receivable at December 31, 1996 and 1995. MIC-NH maintains contracts with three hospitals located in New Hampshire and generates all of its revenues under these contracts. The hospitals, in turn, charge the individual patients. Therefore, MIC-NH had receivable balances from only three parties as of December 31, 1996 and 1995. MIC-ME submits the charges for substantially all of its patients to third parties for full or partial payment. No single third-party payor accounted for more than ten percent of total combined accounts receivable at December 31, 1996 and 1995. 4. LONG-TERM DEBT
1996 1995 -------------- -------------- Long-term debt consists of the following: Variable rate note payable to a bank, due in monthly installments of principal and interest of $38,795 through May 1996; secured by equipment....................................... $ -- $ 157,235 7.16% note payable to a financial institution, due in monthly installments of $10,663 including principal and interest through May 1996......... -- 51,758 8.55% note payable to a financial institution, due in monthly installments of $7,776 including principal and interest through September 1998; secured by equipment............................ 151,170 -- 7.81% note payable to a financial institution, due in monthly installments of $9,792 including principal and interest through May 1996......... 47,402 -- -------------- -------------- 198,572 208,993 Less current installments of long-term debt....... (131,017) (208,993) -------------- -------------- $ 67,555 $ -- -------------- -------------- -------------- --------------
F-71 MOBILE IMAGING CONSORTIUM NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 4. LONG-TERM DEBT (CONTINUED) Principal installments of long-term debt are as follows as of December 31, 1996: 1997.............................................. $ 131,017 1998.............................................. 67,555 -------------- $ 198,572 -------------- --------------
5. LEASES The Partnership is obligated under several capital leases for equipment as follows: At December 31, 1996 and 1995, the gross amount of equipment and related accumulated amortization recorded under the capital leases is as follows:
1996 1995 ------------- ------------- Equipment....................................................... $ 4,106,512 $ 3,743,960 Less accumulated amortization................................... (2,711,410) (1,884,091) ------------- ------------- $ 1,395,102 $ 1,859,869 ------------- ------------- ------------- -------------
The future minimum capital lease payments as of December 31, 1996 are as follows: Future mininmum lease payments 1997............................................................ $1,182,024 1998............................................................ 482,467 --------- 1,664,491 Less imputed interest (weighted average rate of 10.1%).......... 132,514 Present value of future minimum lease payments.................. 1,531,997 Current portion of obligations under capital leases............. 1,077,732 --------- Long-term portion of obligations under capital leases........... $ 454,245 --------- ---------
The lease agreements generally provide for fair market value purchase options at the end of the lease terms. 6. PARTNERS' CAPITAL AND INCOME DISTRIBUTIONS The allocation of net income or losses and distributions of cash flow are in accordance with the terms of each respective partnership agreement. For MIC-NH, the five general partners are distributed their pro-rata share of net income or losses and distributions of cash flow. For MIC-ME, the four general partners, as a group, and the limited partners, share equally in the first $100,000 of net income or loss, allocated to the individual partners in each group based on their pro-rata ownership interest. Likewise, the first $100,000 of distributions of cash flow are allocated in this manner. Any income or losses or distributions of cash flow exceeding $100,000 are allocated 60% to the general partners and 40% to the limited partners. Allocations within each group of partners are based on each partners pro-rata ownership interest of the group. F-72 MOBILE IMAGING CONSORTIUM NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 7. NET SCAN REVENUE Net scan revenue consists of the following at December 31:
1996 1995 1994 ------------- ------------- ------------- Gross scan revenue............................... $ 8,888,277 $ 7,967,895 $ 6,984,102 Less contractual adjustments..................... (1,588,652) (1,468,729) (1,002,473) ------------- ------------- ------------- Net scan revenue................................. $ 7,299,625 $ 6,499,166 $ 5,981,629 ------------- ------------- ------------- ------------- ------------- -------------
8. RELATED PARTY TRANSACTIONS As noted in note 1, the financial statements include the accounts of MIC-ME and MIC-NH. Certain shared expenses, such as insurance and supplies, are incurred by MIC-ME and are charged to MIC-NH. These charges have been eliminated in the combination of the two entities in the accompanying financial statements. Charges from MIC-ME to MIC-NH for shared expenses were $48,000, $48,000, and $93,365 for the years ended December 31, 1996, 1995 and 1994, respectively. Joseph J. Bean Associates ("JBA") provides operational and financial management services to both Partnerships. JBA is a party related to the Partnerships through Joseph J. Bean, who either individually or through an interest in another entity, acts as a general or limited partner in both Partnerships. MIC-ME paid management fees of $90,159, $86,038, and $78,000 to JBA for the years ended December 31, 1996, 1995 and 1994, respectively. MIC-NH paid management fees of $57,106, $54,691, and $52,000 to JBA for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, the Partnerships lease office space from JBA under an operating lease agreement. The initial term of the lease is three years from May 1, 1996 to April 30, 1999. At that time the lease terms will automatically renew, unless notice of termination is executed, for a term of 22 months through February 28, 2001. The Partnerships have an option to renew the lease for an additional term of 10 years. Future lease payments for the remaining term of the lease, including the automatic renewal period, are as follows: 1997............................................... $ 24,839 1998............................................... 25,164 1999............................................... 19,691 2000............................................... 17,117 2001............................................... 2,871
9. COMMITMENTS AND CONTINGENCIES The Partnerships maintains several service contracts with hospitals located in Maine and New Hampshire as well as contracts with third-party agencies. The hospital service contracts have various lengths and payment terms. MIC-ME's contracts are primarily based on the hospital's referral of patients to the Partnership in return for compensation for the use of the hospital's physical facilities. MIC-NH's contracts generally stipulate charges directly to the hospital based on the volume of procedures performed. The Partnerships also maintain contracts with various third-party payors under which rates have been negotiated for service to patients who are insured by these parties. F-73 MOBILE IMAGING CONSORTIUM NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) It is anticipated that the hospital service contracts will be assumed by a successor entity pursuant to an agreement described in note 10. The contracts with third-party payors are expressly excluded from the agreement. MIC-ME is involved in a dispute with the City of Portland regarding jurisdiction for property tax assessment on the Partnership's mobile assets. The City of Portland contends that it has jurisdiction to assess property taxes based on the location of the Partnership's general offices. MIC-ME contends that the mobile assets are subject to taxes from the jurisdictions in which the assets are located on the assessment date, April 1. The outcome of this matter is uncertain as of December 31, 1996. The Partnership has estimated its potential liability in the event of an unfavorable outcome and has included such amounts in the accompanying financial statements. 10. SALE OF PARTNERSHIPS' ASSETS AND ASSUMPTION OF LIABILITIES In January, 1997 the Partnerships executed an Asset Purchase and Liabilities Assumption Agreement (the "Agreement") with InSight Health Corp. ("InSight"), a Delaware corporation. The Agreement stipulates that InSight will purchase all operational assets and goodwill with the exception of cash on hand, accounts receivable, and other items as specified in the Agreement. The Agreement also stipulates that InSight will have no rights or liabilities with regard to the property tax matter as described in note 9. Pursuant to the Agreement, the Partnerships are required to deposit collections of pre-sale accounts receivable into an escrow account up to $1,000,000 as indemnification for InSight. The escrow will be released to the Partnerships in equal amounts each quarter subsequent to the Agreement date, barring any claims made by InSight as described in the Agreement. The Agreement stipulates that InSight will assume substantially all liabilities, contracts, leases and operating agreements upon execution of the Agreement, except those as specifically documented in the Agreement or schedules thereto. Finally, the Agreement includes clauses which prohibit the corporate general partners and the individual limited partners of the Partnerships from competing with InSight in Maine and New Hampshire. The specific provisions dictate that the parties will not compete in the area of nuclear magnetic resonance imaging for a term of five years and in the area of CT scanning for a period of three years. The Agreement also includes consulting and non-compete provisions for Joseph J. Bean, individually, and Joseph J. Bean Associates, the management agent of the Partnerships. F-74 MOBILE IMAGING CONSORTIUM COMBINING BALANCE SHEET DECEMBER 31, 1996 ASSETS
COMBINED MIC-NEW DECEMBER 31, MIC-MAINE HAMPSHIRE ELIMINATIONS 1996 ------------ ------------ ------------ ------------ Cash and cash equivalents................................ $ 271,260 $ 110,331 $ -- $ 381,591 Accounts receivable, net................................. 1,220,066 130,258 -- 1,350,324 Prepaid expenses and other current assets................ 155,298 22,042 -- 177,340 Due from affiliates...................................... -- 1,315 (1,315) -- ------------ ------------ ------------ ------------ Total current assets................................... 1,646,624 263,946 (1,315) 1,909,255 Property and equipment: Leasehold improvements................................. 2,501 -- -- 2,501 Equipment.............................................. 2,664,599 110,769 -- 2,775,368 Equipment under capital leases......................... 1,944,195 2,162,317 -- 4,106,512 Furniture and fixtures................................. 7,592 -- -- 7,592 ------------ ------------ ------------ ------------ 4,618,887 2,273,086 -- 6,891,973 Less accumulated depreciation and amortization......... 3,714,639 1,486,684 -- 5,201,323 ------------ ------------ ------------ ------------ Net property and equipment............................. 904,248 786,402 -- 1,690,650 Other assets, net........................................ -- 12,386 -- 12,386 ------------ ------------ ------------ ------------ $ 2,550,872 $ 1,062,734 $ (1,315) $3,612,291 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses.................... $ 232,912 $ 14,503 $ -- $ 247,415 Due to affiliates........................................ 1,315 -- (1,315) -- Current portion of long-term debt........................ 114,900 16,117 -- 131,017 Current portion of capital lease obligations............. 532,156 545,576 -- 1,077,732 ------------ ------------ ------------ ------------ Total current liabilities.............................. 881,283 576,196 (1,315) 1,456,164 Long-term debt, less current portion..................... 67,555 -- -- 67,555 Obligations under capital leases, less current portion... 47,118 407,127 -- 454,245 Partners' capital........................................ 1,554,916 79,411 -- 1,634,327 ------------ ------------ ------------ ------------ $ 2,550,872 $ 1,062,734 $ (1,315) $3,612,291 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-75 MOBILE IMAGING CONSORTIUM COMBINING BALANCE SHEET DECEMBER 31, 1995 ASSETS
COMBINED MIC-NEW DECEMBER 31, MIC-MAINE HAMPSHIRE ELIMINATIONS 1996 ------------ ------------ ------------ ------------ Cash and cash equivalents................................ $ 780,033 $ 192,101 $ -- $ 972,134 Accounts receivable, net................................. 962,906 106,631 -- 1,069,537 Prepaid expenses and other current assets................ 139,881 24,250 -- 164,131 Due from affiliates...................................... 34,106 -- (34,106) -- ------------ ------------ ------------ ------------ Total current assets................................... 1,916,926 322,982 (34,106) 2,205,802 Property and equipment: Leasehold improvements................................. 2,501 -- -- 2,501 Equipment.............................................. 2,432,798 85,519 -- 2,518,317 Equipment under capital leases......................... 1,808,893 1,935,067 -- 3,743,960 Furniture and fixtures................................. 7,592 -- -- 7,592 ------------ ------------ ------------ ------------ 4,251,784 2,020,586 -- 6,272,370 Less accumulated depreciation and amortization......... 3,001,415 1,025,538 -- 4,026,953 ------------ ------------ ------------ ------------ Net property and equipment............................. 1,250,369 995,048 -- 2,245,417 Other assets, net........................................ 16,080 22,294 -- 38,374 ------------ ------------ ------------ ------------ $ 3,183,375 $ 1,340,324 $ (34,106) $4,489,593 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses.................... $ 303,520 $ 35,124 $ -- $ 338,644 Due to affiliates........................................ -- 34,106 (34,106) -- Current portion of long-term debt........................ 191,395 17,598 -- 208,993 Current portion of capital lease obligations............. 381,593 385,220 -- 766,813 ------------ ------------ ------------ ------------ Total current liabilities.............................. 876,508 472,048 (34,106) 1,314,450 Obligations under capital leases, less current portion... 468,192 754,429 -- 1,222,621 Partners' capital........................................ 1,838,675 113,847 -- 1,952,522 ------------ ------------ ------------ ------------ $ 3,183,375 $ 1,340,324 $ (34,106) $4,489,593 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-76 MOBILE IMAGING CONSORTIUM COMBINING STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996
COMBINED MIC-NEW DECEMBER 31, MIC-MAINE HAMPSHIRE ELIMINATIONS 1995 ------------ --------------- ------------ ------------ Revenue: Scan revenue........................................ $ 5,592,590 $ 1,707,035 $ -- $7,299,625 Interest............................................ 8,119 1,145 -- 9,264 Other............................................... 154,873 32,270 (48,000) 139,143 ------------ --------------- ------------ ------------ Total revenue..................................... 5,755,582 1,740,450 (48,000) 7,448,032 Expenses: Payroll, fringe and related taxes................... 746,493 261,080 -- 1,007,573 Management fees..................................... 90,159 57,106 -- 147,265 Hospital maintenance fees........................... 141,175 -- -- 141,175 Professional fees................................... 215,099 52,892 -- 267,991 Tractor expenses.................................... 68,702 14,881 -- 83,583 Repairs and maintenance............................. 334,216 175,069 -- 509,285 Cryogens............................................ 60,250 56,527 -- 116,777 Film and medical supplies........................... 458,991 10,508 -- 469,499 Insurance........................................... 84,785 41,474 -- 126,259 Utilities........................................... 71,719 49,244 (48,000) 72,963 Rent................................................ 30,266 -- -- 30,266 Property taxes...................................... 53,316 -- -- 53,316 Bad debts........................................... 198,370 -- -- 198,370 Depreciation........................................ 713,224 461,146 -- 1,174,370 Amortization........................................ 14,100 9,909 -- 24,009 Interest............................................ 92,603 97,321 -- 189,924 Other............................................... 140,873 62,729 -- 203,602 ------------ --------------- ------------ ------------ Total operating expenses.......................... 3,514,341 1,349,886 (48,000) 4,816,227 ------------ --------------- ------------ ------------ Net income.......................................... $ 2,241,241 $ 390,564 $ -- $2,631,805 ------------ --------------- ------------ ------------ ------------ --------------- ------------ ------------
F-77 MOBILE IMAGING CONSORTIUM COMBINING STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995
COMBINED MIC-NEW DECEMBER 31, MIC-MAINE HAMPSHIRE ELIMINATIONS 1995 ------------ --------------- ------------ ------------ Revenue: Scan revenue........................................ $ 4,863,716 $ 1,635,450 $ -- $6,499,166 Interest............................................ 24,999 2,992 -- 27,991 Other............................................... 105,192 1,801 (48,000) 58,9933 ------------ --------------- ------------ ------------ Total revenue..................................... 4,993,907 1,640,243 (48,000) 6,586,150 Expenses: Payroll, fringe and related taxes................... 709,021 266,113 -- 975,134 Management fees..................................... 86,038 54,691 -- 140,729 Hospital maintenance fees........................... 129,247 -- -- 129,247 Professional fees................................... 124,097 35,696 -- 159,793 Tractor expenses.................................... 64,631 -- -- 64,631 Repairs and maintenance............................. 311,408 161,389 -- 472,797 Cryogens............................................ 54,000 56,527 -- 110,527 Film and medical supplies........................... 333,859 15,421 -- 349,280 Insurance........................................... 82,143 42,503 -- 124,646 Utilities........................................... 69,575 49,089 (48,000) 70,664 Rent................................................ 36,841 -- -- 36,841 Property taxes...................................... 88,006 -- -- 88,006 Bad debts........................................... -- -- -- 198,370 Depreciation........................................ 863,542 418,758 -- 1,282,300 Amortization........................................ 24,170 9,909 -- 34,079 Interest............................................ 166,611 124,144 -- 290,755 Other............................................... 100,103 59,868 -- 159,971 ------------ --------------- ------------ ------------ Total operating expenses.......................... 3,243,292 1,294,108 (48,000) 4,489,400 ------------ --------------- ------------ ------------ Net income............................................ $ 1,750,615 $ 346,135 $ -- $2,096,750 ------------ --------------- ------------ ------------ ------------ --------------- ------------ ------------
F-78 MOBILE IMAGING CONSORTIUM COMBINING STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1994
COMBINED MIC-NEW DECEMBER 31, MIC-MAINE HAMPSHIRE ELIMINATIONS 1994 ------------ ------------ ------------ ------------ Revenue: Scan revenue........................................... $ 4,563,281 $ 1,418,348 $ -- $5,981,629 Interest............................................... 7,898 987 -- 8,885 Other.................................................. 167,465 -- (93,365) 74,100 ------------ ------------ ------------ ------------ Total revenue........................................ 4,738,644 1,419,335 (93,365) 6,064,614 Expenses: Payroll, fringe and related taxes...................... 728,913 270,625 -- 999,538 Management fees........................................ 78,000 52,000 -- 130,000 Hospital maintenance fees.............................. 115,554 -- -- 115,554 Professional fees...................................... 105,410 23,187 -- 128,597 Tractor expenses....................................... 65,573 -- -- 65,573 Repairs and maintenance................................ 342,652 136,544 -- 479,196 Cryogens............................................... 54,000 55,000 -- 109,000 Film and medical supplies.............................. 313,867 13,540 -- 327,407 Insurance.............................................. 81,863 42,236 -- 124,099 Rent................................................... 36,471 -- -- 36,471 Utilities.............................................. 68,253 49,203 (48,000) 69,456 Property Taxes......................................... 86,969 -- -- 86,969 Bad debts.............................................. 125,387 -- -- 125,387 Depreciation........................................... 892,060 397,717 -- 1,289,777 Amortization........................................... 24,170 9,908 -- 34,078 Interest............................................... 227,885 159,552 -- 387,437 Other.................................................. 113,933 106,252 (45,365) 174,820 ------------ ------------ ------------ ------------ Total operating expenses............................. 3,460,960 1,315,764 (93,365) 4,683,359 ------------ ------------ ------------ ------------ Net income............................................... $ 1,277,684 $ 103,571 $ -- $1,381,255 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
F-79 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE. ------------------------ TABLE OF CONTENTS
PAGE --------- Summary........................................ 1 Risk Factors................................... 13 Use of Proceeds................................ 22 Exchange Offer................................. 23 Capitalization................................. 29 Unaudited Pro Forma Combined Condensed Financial Statements.......................... 30 Selected Historical Consolidated Financial and Operating Data................................ 37 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 39 The Diagnostic Imaging Industry................ 52 Business....................................... 55 Management..................................... 68 Executive Compensation......................... 71 Security Ownership of Certain Beneficial Owners and Management................................ 76 Certain Relationships and Related Transactions.................................. 84 Description of Senior Credit Facilities........ 87 Description of Notes........................... 88 Description of Preferred Stock................. 120 Certain Federal Income Tax Considerations...... 122 Plan of Distribution........................... 124 Legal Matters.................................. 125 Experts........................................ 125 Index to InSight Health Services Corp. Consolidated Financial Statements............. F-1 Index to Signal Medical Services, Inc. Financial Statements.......................... F-46 Index to Mobile Imaging Consortium Financial Statements.................................... F-64
[LOGO] HEALTH SERVICES CORP. $100,000,000 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 -------------- PROSPECTUS -------------- ______, 1998 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Bylaws provide that the directors and officers of the Company may be indemnified and held harmless by the Company to the fullest extent permitted by the General Corporation Law of the State of Delaware against certain liabilities that those persons may incur in their capacities as directors or officers. The Company has also entered into indemnification agreements with each of its directors and executive officers. See "Executive Compensation--Indemnification Agreements." In addition, the Company's Certificate of Incorporation states that, to the fullest extent permitted by the General Corporation Law of the State of Delaware, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for a breach of fiduciary duty as a director. A policy of directors' and officers' liability insurance is maintained by the Company which insures directors and officers for losses as a result of claims against the directors and officers of the Company in their capacity as directors and officers and also reimburses the Company for payments made pursuant to the indemnity provisions described above. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- *3.1 Certificate of Incorporation of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (No. 333-02935), filed April 24, 1996. *3.2 Amended and Restated Bylaws of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K filed October 14, 1997. *3.3 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.4 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.5 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. 4.1 Indenture, dated as of June 1, 1998, by and among the Company, the Subsidiary Guarantors and State Street Bank and Trust Company, as Trustee (including forms of the Outstanding Notes and Exchange Notes). 4.2 Form of Outstanding Note (contained in Exhibit 4.1). 4.3 Form of Exchange Note (contained in Exhibit 4.1). 4.4 Purchase Agreement, dated as of June 9, 1998, by and among the Company, the Subsidiary Guarantors and the Initial Purchasers. 4.5 Registration Rights Agreement, dated as of June 12, 1998, by and among the Company, the Subsidiary Guarantors and the Initial Purchasers. +5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC as to the legality of the securities being registered. 10.1 InSight's 1998 Employee Stock Option Plan. 10.2 InSight's 1997 Management Stock Option Plan.
II-1
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.3 Credit Agreement dated as of October 14, 1997, as amended November 17, 1997, December 19, 1997, March 23, 1998 and amended and restated as of June 12, 1998, among the Company, the Subsidiary Guarantors (as defined therein), NationsBank, N.A., as Agent, and the Lenders (as defined therein). *10.4 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. *10.5 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. *10.6 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--New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. *10.7 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. *10.8 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. *10.9 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. *10.10 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. *10.11 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. *10.12 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. *10.13 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. *10.14 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. *10.15 AHS 1987 Stock Option Plan, previously filed and incorporated herein by reference from Post-Effective Amendment No. 4 on Form S-1 to AHS's Registration Statement (Registration No. 33-00088), filed September 5, 1985. *10.16 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.
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EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- *10.17 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. *10.18 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. *10.19 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 May 9, 1996. *10.20 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. *10.21 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. *10.22 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. *10.23 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. *10.24 Warrant Certificate No. S-1 dated August 14, 1996 in the name of Shattuck Hammond Partners, Inc., previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *10.25 Warrant Certificate No. L-1 dated March 11, 1997 in the name of Anthony J. LeVecchio, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *10.26 Form of Stock Option Agreement between InSight and non-employee directors of InSight relating to InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *10.27 Form of Stock Option Agreement between InSight and employees of InSight relating to InSight's 1996 Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *10.28 Agreement and Plan of Merger dated as of April 15, 1998 among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed May 13, 1998. *10.29 First Amendment to Agreement and Plan of Merger dated as of May 15, 1998 by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 2, 1998. *10.30 Second Amendment to Agreement and Plan of Merger dated as of May 18, 1998 by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 2, 1998. +12.1 Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries of the Company. +23.1 Consent of Arent Fox Kintner Plotkin & Kahn, PLLC (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP.
II-3
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 23.3 Consent of KPMG Peat Marwick LLP. 23.4 Consent of Deloitte & Touche LLP. 23.5 Consent of Baker Newman & Noyes LLC. 24.1 Powers of Attorney for the Company (contained on the signature pages of this Registration Statement). +25.1 Statement of Eligibility of Trustee on Form T-1. 99.1 Form of Letter of Transmittal. 99.2 Form of Notice of Guaranteed Delivery. 99.3 Form of Letters to DTC Participants. 99.4 Form of Letter to Clients and Form of Instruction to Book-Entry Transfer Participant.
- ------------------------ + to be filed by amendment * previously filed (B) FINANCIAL STATEMENT SCHEDULES The following financial statement schedule of the Company is filed herewith: Report of Independent Public Accountants II. Valuation and Qualifying Accounts ITEM 22. UNDERTAKINGS The undersigned Registrant hereby undertakes: (a) That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) That, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; II-4 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (d) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (e) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (f) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form (including information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request), within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means; and to arrange or provide for a facility in the United States for the purpose of responding to such requests; and (g) To supply by means of a post-effective amendment all information concerning a transaction and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, California, on July 31, 1998. INSIGHT HEALTH SERVICES CORP. By: /s/ E. LARRY ATKINS ----------------------------------------- Name: E. Larry Atkins Office: President and Chief Executive Officer
POWERS OF ATTORNEY Each person whose signature appears below constitutes and appoints each of E. Larry Atkins and Thomas V. Croal his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. II-6 Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ MICHAEL E. ASPINWALL - ------------------------------ Director July 31, 1998 Michael E. Aspinwall Director, President and /s/ E. LARRY ATKINS Chief Executive Officer - ------------------------------ (Principal Executive July 31, 1998 E. Larry Atkins Officer) /s/ GRANT R. CHAMBERLAIN - ------------------------------ Director July 31, 1998 Grant R. Chamberlain - ------------------------------ Director July 31, 1998 David W. Dupree - ------------------------------ Director, Chairman of the Frank E. Egger Board /s/ LEONARD H. HABAS - ------------------------------ Director July 31, 1998 Leonard H. Habas - ------------------------------ Director July 31, 1998 Ronald G. Pantello /s/ GLENN A. YOUNGKIN - ------------------------------ Director July 31, 1998 Glenn A. Youngkin Senior Executive Vice President, Chief /s/ THOMAS V. CROAL Operating Officer and - ------------------------------ Chief Financial Officer July 31, 1998 Thomas V. Croal (Principal Financial and Accounting Officer)
II-7 SIGNATURES Pursuant to the requirements of the Securities Act, as amended, each of the following registrants have duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, California, on July 31, 1998. INSIGHT HEALTH CORP. RADIOSURGERY CENTERS, INC. MAXUM HEALTH SERVICES CORP. QUEST FINANCIAL SERVICES, INC. MTS ENTERPRISES, INC. DIAGNOSTEMPS, INC. MAXUM HEALTH CORP. MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. NDDC, INC. DIAGNOSTIC SOLUTIONS CORP. MAXUM HEALTH SERVICES OF ARLINGTON, INC. MAXUM HEALTH SERVICES OF DALLAS, INC. OPEN MRI, INC. RADIOLOGY SERVICES CORP. MISSISSIPPI MOBILE TECHNOLOGY, INC. SIGNAL MEDICAL SERVICES, INC. By: /s/ E. LARRY ATKINS -------------------------------------------- E. Larry Atkins Sole Director (Principal Executive Officer) By: /s/ BRIAN G. DRAZBA -------------------------------------------- Brian G. Drazba Senior Vice President--Finance and Controller (Principal Financial and Accounting Officer)
II-8 POWERS OF ATTORNEY Each person whose signature appears below constitutes and appoints Brian G. Drazba his true and lawful attorney-in-fact and agent, he acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ E. LARRY ATKINS - ------------------------------ Sole Director (Principal July 31, 1998 E. Larry Atkins Executive Officer)
II-9 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 S-1 SCHEDULE II 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 CHARGED 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 $(19,305) $7,491 ------ ---------- -------- ---------- ------ ---------- -------- ----------
- ------------------------ (A) Write offs of uncollectible 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. S-2 EX-4.1 2 EXHIBIT 4.1 Exhibit 4.1 INDENTURE, dated as of June 1, 1998 among InSight Health Services Corp., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), the Subsidiary Guarantors (as hereinafter defined) and State Street Bank and Trust Company, N.A., a national banking association duly organized and existing under the laws of the United States of America, as trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of and issue of 9 5/8% Senior Subordinated Notes Due 2008 (herein called the "Initial Notes") and 9 5/8% Series B Senior Subordinated Notes Due 2008 (the "Exchange Notes" and, together with the Initial Notes, the "Notes") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. Each of the Subsidiary Guarantors has duly authorized its guarantee of the Notes, and to provide therefor each of them has duly authorized the execution and delivery of this Indenture. Upon the issuance of the Exchange Notes, if any, or the effectiveness of the Shelf Registration Statement (as defined herein), this Indenture will be subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. All things necessary have been done to make the Notes, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of the Company and the Subsidiary Guarantors, each in accordance with their respective terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. 2 For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Two, Eight, Ten and Twelve are defined in that Article. "Acquired Indebtedness" means Indebtedness of a Person (a) existing at the time such Person is merged with or into the Company or becomes a Subsidiary or (b) assumed in connection with the acquisition of assets from such Person. "Act", when used with respect to any Holder, has the meaning specified in Section 105. "Additional Notes" has the meaning specified in Section 312. "Affiliate" means, with respect to any specified person, (a) any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 5% or more of such specified person's Capital Stock or any executive officer or director of any such specified person or other person or, with respect to any natural person, any person having a relationship with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Bank" means NationsBank, N.A. and its successors under the Amended 3 Credit Agreement, in its capacity as agent. "Amended Credit Agreement" means the Credit Agreement, dated as of October 14, 1997, as amended as of November 17, 1997, December 19, 1997 and March 23, 1998 and to be amended as of the Closing Date, among the Company, the lenders named therein and NationsBank, N.A., as agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, as such facility may be amended, restated, supplemented, refinanced, extended or otherwise modified from time to time. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of merger, consolidation or similar arrangement) (collectively, a "transfer") by the Company or any Restricted Subsidiary other than in the ordinary course of business and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Shares of Capital Stock of any of the Company's Restricted Subsidiaries (which shall be deemed to include the sale, grant or conveyance of any interest in the income, profits or proceeds therefrom), in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (x) that have a fair market value in excess of $1 million or (y) for Net Cash Proceeds in excess of $1 million. For the purposes of this definition, the term "Asset Sale" does not include (a) any transfer of properties or assets (i) that is governed by Sections 801 and 1011, (ii) between or among the Company and its Restricted Subsidiaries pursuant to transactions that do not violate any other provision of the Indenture or (iii) representing obsolete or permanently retired equipment and facilities or (b) the sale or exchange of equipment in connection with the purchase or other acquisition of other equipment, in each case used in the business of the Company or its Restricted Subsidiaries as in existence on the Closing Date or any business determined by the Board in its good faith judgment to be reasonably related thereto. "Banks" means the banks and other financial institutions that from time to time are lenders under the Amended Credit Agreement. "Board" means the Company's Board of Directors. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are authorized or obligated by law or executive order to close. "Capital Stock" of any Person means any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such Person's equity interest (however designated), whether now outstanding or issued after the Closing Date. "Capitalized Lease Obligation" means, with respect to any Person, an obligation 4 incurred or assumed under or in connection with any capital lease of real or personal property that, in accordance with GAAP, has been recorded as a capitalized lease. "Cash Equivalent" means (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities not more than six months from the date of acquisition, (b) U.S. dollar denominated (or foreign currency fully hedged) time deposits, certificates of deposit, Eurodollar time deposits or Eurodollar certificates of deposit of (i) any domestic commercial bank of recognized standing having capital and surplus in excess of $500 million or (ii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "Approved Lender"), in each case with maturities of not more than six months from the date of acquisition, and (c) commercial paper issued by any Approved Lender (or by the parent company thereof) and maturing within six months of the date of acquisition. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) (other than Permitted Holders) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the voting power of all classes of Voting Stock of the Company; provided, however, that upon any purchase and/or subsequent conversion by any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) (other than Permitted Holders), which at the time of such purchase and/or subsequent conversion neither owns nor is acquiring any shares of Common Stock of the Company, of any of the issued and outstanding shares of Series B Preferred Stock or Series C Preferred Stock, the number of shares of Common Stock which shall be deemed to be outstanding for the purpose of computing the percentage of the voting power of all classes of Voting Stock of the Company acquired by such "person" or "group" shall be determined on a basis that gives effect to the conversion of both (A) the shares of Series B Preferred Stock or Series C Preferred Stock, as applicable, that were purchased by such "person" or "group" and (B) the shares of Series B Preferred Stock or Series C Preferred Stock, as applicable, that continue to be owned by Permitted Holders after such purchase and/or conversion by such "person" or "group" (without requiring actual conversion of any of such shares of Series B Preferred Stock or Series C Preferred Stock by the holders thereof); (b) the Company, either individually or in conjunction with one or more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties of the Company and the Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of 5 the Subsidiaries, to any person (other than the Company or a Restricted Subsidiary); (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors (i) whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (ii) elected or appointed by any of the Permitted Holders) cease for any reason to constitute a majority of the Board then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution, other than in a transaction that complies with the provisions described under Section 801. "Closing Date" means the date on which the Initial Notes are originally issued under this Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations and other equivalents (however designated, whether voting or non-voting) of such Person's Common Stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such Common Stock. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President, any Vice President, its Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated EBITDA" means, for any period, the sum of, without duplication, Consolidated Net Income for such period, plus (or, in the case of clause (d) below, plus or minus) the following items to the extent included in computing Consolidated Net Income for such period: (a) Fixed Charges for such period, plus (b) the provision for federal, state, local and foreign income taxes of the Company and its Restricted Subsidiaries for such period, plus (c) the aggregate depreciation and amortization expense of the Company and its Restricted Subsidiaries for such period, plus (d) any other non-cash charges for such period, and minus non-cash credits for such period, other than non-cash charges or credits resulting from changes in prepaid assets 6 or accrued liabilities in the ordinary course of business; provided that fixed charges, income tax expense, depreciation and amortization expense and non-cash charges and credits of a Restricted Subsidiary will be included in Consolidated EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income for such period. "Consolidated Net Income" means, for any period, the net income (or net loss) of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, adjusted to the extent included in calculating such net income or loss by excluding (a) any net after-tax extraordinary gains or losses (less all fees and expenses relating thereto), (b) any net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales, (c) the portion of net income (or loss) of any Person (other than the Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Restricted Subsidiary in cash during such period, (d) the net income (or loss) of any Person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination and (e) the net income (but not the net loss) of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is at the date of determination restricted, directly or indirectly, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal repayments or otherwise; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Net Income will be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Net Income otherwise attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding Common Stock of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries divided by (2) the total number of shares of outstanding Common Stock of such Restricted Subsidiary on the last day of such period. "Consolidated Tangible Assets" means, as of the date of determination, the total assets, less goodwill and other intangibles, shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such a balance sheet is available, determined on a consolidated basis in accordance with GAAP. "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at 61 Broadway, 15th Floor, New York, New York 10006, except that with respect to presentation of Notes for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust and agency business shall be conducted. "corporation" includes corporations, associations, companies and business trusts. 7 "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 309. "Depositary" means The Depository Trust Company, its nominees and successors. "Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior Indebtedness permitted under the Indenture the principal amount of which is $25 million or more and that has been specifically designated by the Company, in the instrument creating or evidencing such Senior Indebtedness or in an officers' certificate delivered to the Trustee, as "Designated Senior Indebtedness." "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board is required to deliver a resolution of the Board, to make a finding or otherwise take action under the Indenture, a member of the Board who does not have any material direct or indirect financial interest in or with respect to such transaction or series of transactions. "Disqualified Stock" means any class or series of Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise (i) is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the Notes, (ii) is redeemable at the option of the holder thereof, at any time prior to such final Stated Maturity or (iii) at the option of the holder thereof is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions therein giving holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than Sections 1015 and 1016 hereof, and such Capital Stock specifically provides that the issuer will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to the provisions contained in Sections 1015 and 1016 hereof. "Equity Offering" means a public or private offering of Capital Stock (other than Disqualified Stock) of the Company. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. 8 "Exchange Notes" has the meaning stated in the first recital of this Indenture and refers to any Exchange Notes containing terms substantially identical to the Initial Notes (except that such Exchange Notes shall not contain terms with respect to the interest rate step-up provision and transfer restrictions) that are issued and exchanged for the Initial Notes pursuant to the Registration Rights Agreement and this Indenture. "Exchange Offer" means the exchange offer that may be effected pursuant to the Registration Rights Agreement. "Exchange Offer Registration Statement" means the Exchange Offer Registration Statement as defined in the Registration Rights Agreement. "Existing Indebtedness" means the Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Amended Credit Agreement) outstanding on the Closing Date and listed on a schedule to this Indenture, until such amounts are repaid. "Facility" means any premises, together with the diagnostic imaging and treatment equipment installed therein, used by the Company in the conduct of the business of providing diagnostic imaging and information, treatment and related management services. "Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. "Fixed Charges" means, for any period, without duplication, the sum of (a) the amount that, in conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on a consolidated statement of operations of the Company and its Restricted Subsidiaries for such period, including, without limitation, (i) amortization of debt discount, (ii) the net cost of interest rate contracts (including amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) amortization of debt issuance costs, and (v) the interest component of Capitalized Lease Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the Company and any Restricted Subsidiary (to any Person other than the Company and its Restricted Subsidiaries), computed on a tax effected basis, plus (c) all interest on any Indebtedness of any Person guaranteed by the Company or any of its Restricted Subsidiaries or secured by a lien on the assets of the Company or any of its Restricted Subsidiaries; provided, however, that Fixed Charges will not include (i) any gain or loss from extinguishment of debt, including the write-off of debt issuance costs, and (ii) the fixed charges of a Restricted Subsidiary to the extent (and in the same proportion) that the net income of such Subsidiary was excluded in calculating Consolidated Net Income pursuant to clause (e) of the definition thereof for such period. "Fixed Charge Coverage Ratio" means, for any period, the ratio of Consolidated 9 EBITDA for such period to Fixed Charges for such period. "Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a jurisdiction other than the United States or a state thereof or the District of Columbia and that has no material operations or assets in the United States. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, that are in effect on the Closing Date. "guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person entered into in the ordinary course of business under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and other similar financial agreements or arrangements designed to protect such Person against, or manage the exposure of such Person to, fluctuations in interest rates, and (ii) forward exchange agreements, currency swap, currency option and other similar financial agreements or arrangements designed to protect such Person against, or manage the exposure of such Person to, fluctuations in foreign currency exchange rates. "Holder" means the Person in whose name a Note is, at the time of determination, registered on the Registrar's books. "Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (a) every obligation of such Person for money borrowed, (b) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (d) every obligation of such Person issued or assumed as the deferred purchase price of property or services, (e) the attributable value of every Capitalized Lease Obligation of such Person, (f) all Disqualified Stock of such Person valued at its maximum fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations of such Person under or in respect of Hedging Obligations, and (h) every obligation of the type referred to in clauses (a) through (g) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed. For purposes of this definition, the "maximum fixed repurchase price" of any Disqualified Stock that does not have a fixed repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness is required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair 10 market value of such Disqualified Stock, such fair market value will be determined in good faith by the board of directors of the issuer of such Disqualified Stock. Notwithstanding the foregoing, trade accounts payable and accrued liabilities arising in the ordinary course of business and any liability for federal, state or local taxes or other taxes owed by such Person will not be considered Indebtedness for purposes of this definition. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Initial Notes" has the meaning stated in the first recital of this Indenture. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Investment" in any Person means, (i) directly or indirectly, any advance, loan or other extension of credit (including, without limitation, by way of guarantee or similar arrangement) or capital contribution to such Person, the purchase or other acquisition of any stock, bonds, notes, debentures or other securities issued by such Person, the acquisition (by purchase or otherwise) of all or substantially all of the business or assets of such Person, or the making of any investment in such Person, (ii) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary. Investments exclude extensions of trade credit on commercially reasonable terms in accordance with normal trade practices. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon, or with respect to, any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. A Person will be deemed to own subject to a Lien any property that such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Maturity", when used with respect to any Note, means the date on which the principal of such Note or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents, including payments in respect of deferred payment 11 obligations when received in the form of, or stock or other assets when disposed for, cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (a) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment banks) related to such Asset Sale, (b) provisions for all taxes payable as a result of such Asset Sale, (c) payments made to retire Indebtedness where such Indebtedness is secured by the assets that are the subject of such Asset Sale, (d) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets that are subject to the Asset Sale and (e) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the seller after such Asset Sale, including pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-payment Event of Default" means any event (other than a Payment Event of Default) the occurrence of which entitles one or more Persons to accelerate the maturity of any Designated Senior Indebtedness. "Non-Recourse Indebtedness" means Indebtedness of a Permitted Joint Venture (i) as to which neither the Company nor any of its Restricted Subsidiaries (other than such Permitted Joint Venture), (a) provides any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor or otherwise), and (ii) the obligees of which will have recourse for repayment of the principal of and interest on such Indebtedness and any fees, indemnities, expense reimbursements or other amount of whatsoever nature accrued or payable in connection with such Indebtedness solely against the assets of such Permitted Joint Venture and not against any of the assets of the Company or its Restricted Subsidiaries (other than such Permitted Joint Venture). "Non-U.S. Person" means a Person that is not a "U.S. Person" as defined in Regulation S. "Notes" has the meaning stated in the first recital of this Indenture and more particularly means any Notes authenticated and delivered under this Indenture. For all purposes of this Indenture, the term "Notes" shall include any Exchange Notes to be issued and exchanged for any Notes pursuant to the Registration Rights Agreement and this Indenture and, for purposes of this Indenture, all Initial Notes and Exchange Notes shall vote together as one series of Notes under this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. 12 "Officers' Certificate" means a certificate signed by the Chairman, the Chief Executive Officer, President or any Vice President, and by the Chief Financial Officer, Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, or any Subsidiary Guarantor, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be acceptable to the Trustee. "Outstanding", when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (a) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; and (b) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (c) Notes, except to the extent provided in Sections 1202 and 1203, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Twelve; and (d) Notes which have been paid pursuant to Section 308 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands the Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the 13 pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor. "Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness that ranks pari passu in right of payment to the Notes and (b) with respect to any Subsidiary Guarantee, Indebtedness that ranks pari passu in right of payment to such Subsidiary Guarantee. "Paying Agent" means State Street Bank and Trust Company, N.A., and any successor (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Notes on behalf of the Company. "Payment Default" has the meaning specified in Section 501. "Payment Event of Default" has the meaning specified in Section 1403. "Permitted Business" means the Business conducted by the Company, its Restricted Subsidiaries and Permitted Joint Ventures as of the Closing Date and any and all diagnostic imaging and information businesses that in the good faith judgment of the Board are reasonably related thereto. "Permitted Holders" means (i) Carlyle Partners II, L.P., a Delaware limited partnership, Carlyle Partners III, L.P., a Delaware limited partnership, Carlyle International Partners II, L.P., a Cayman Islands exempted limited partnership, Carlyle International Partners III, L.P., a Cayman Islands exempted limited partnership, C/S International Partners, a Cayman Islands general partnership, State Board of Administration of Florida, a separate account maintained pursuant to an Investment Management Agreement dated as of September 6, 1996 among the State Board of Administration of Florida, Carlyle Investment Group, L.P. and Carlyle Investment Management, L.L.C., Carlyle Investment Group, L.P., a Delaware limited partnership, Carlyle-InSight International Partners, L.P., a Cayman Islands exempted limited partnership, and Carlyle-InSight Partners, L.P., a Delaware limited partnership, and their Affiliates (collectively, "Carlyle Affiliates") and (ii) General Electric Company, a New York corporation, and its Affiliates (collectively, "GE Affiliates"). "Permitted Investments" means any of the following: (a) Investments in (i) securities with a maturity of one year or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof); (ii) certificates of deposit, Euro-dollar time deposits or acceptances with a maturity of one year or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus of not less than $500,000,000; (iii) any shares of money market mutual or similar funds having assets in excess of $500,000,000; (iv) repurchase obligations with a term not exceeding 14 seven days for underlying securities of the types described in clauses (i) and (ii) above entered into with any financial institution meeting the qualifications specified in clause (ii) above; and (v) commercial paper with a maturity of one year or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and having a rating (A) from Moody's of at least P-1 or (B) from S&P of at least A-1; (b) Investments by the Company or any Wholly Owned Restricted Subsidiary in another Person, if as a result of such Investment (i) such other Person becomes a Restricted Subsidiary that is a Subsidiary Guarantor or (ii) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its assets to, the Company or a Restricted Subsidiary that is a Subsidiary Guarantor; (c) Investments by the Company or a Restricted Subsidiary in the Company or a Subsidiary Guarantor; (d) Investments in existence on the Closing Date; (e) promissory notes or other evidence of Indebtedness received as a result of Asset Sales permitted under Section 1016; (f) loans or advances to officers, directors and employees of the Company or any of its Restricted Subsidiaries made in the ordinary course of business after the Closing Date in an amount not to exceed $1 million in the aggregate at any one time outstanding; (g) any Investment by the Company or any Restricted Subsidiary of the Company in Permitted Joint Ventures made after the Closing Date having an aggregate fair market value, when taken together with all other Investments made pursuant to this clause (g) that are at the time outstanding, not exceeding in the aggregate 5% of the Consolidated Tangible Assets of the Company as of the last day of the most recent full fiscal quarter ending immediately prior to the date of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value); and (h) other Investments that do not exceed $20 million in the aggregate at any one time outstanding. "Permitted Joint Venture" means any joint venture, partnership or other Person designated by the Board, (i) at least 50% of whose Capital Stock with voting power under ordinary circumstances to elect directors (or Persons having similar or corresponding powers and responsibilities) is at the time owned (beneficially or directly) by the Company and/or by one or more Restricted Subsidiaries of the Company and if the Company owns more than 50% of the 15 Capital Stock of the Permitted Joint Venture, such Permitted Joint Venture is a Restricted Subsidiary of the Company, (ii) all of whose Indebtedness is Non-Recourse Indebtedness, (iii) which is engaged in a Permitted Business, and (iv) in which any Investment made as a result of designating such Person a Permitted Joint Venture will not violate Section 1011; provided that each of Berwyn Magnetic Resonance Center, LLC, Garfield Imaging Center, Ltd., MRI Associates, L.P., Tom's River Imaging Associates, L.P., St. John's Regional Imaging Center, LLC, Dublin Diagnostic Imaging, LLC, Buckhead Imaging, LLC, MedFinancial, LLC, Connecticut Lithotripsy LLC, Northern Indiana Oncology Center of Porter Memorial Hospital, LLC and Northwest Magnetic Imaging shall be deemed to be a Permitted Joint Venture. Any such designation (other than with respect to the Persons identified in the preceding sentence) shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution giving effect to such designation and an officer's certificate certifying that such designation complied with the foregoing provisions. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount of such Permitted Refinancing Indebtedness does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded plus the lesser of the amount of any premium required to be paid in connection with such refinancings pursuant to the terms of such indebtedness or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary of the Company that is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 308 in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the 16 same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" means, with respect to any Person, any and all shares, interests, partnership interests, participation, rights in or other equivalents (however designated) of such Person's preferred or preference stock, whether now outstanding or issued after the Closing Date, and including, without limitation, all classes and series of preferred or preference stock of such Person. "purchase money obligations" of any Person means any obligations of such Person to any seller or any other Person incurred or assumed to finance the construction and/or acquisition of real or personal property to be used in the business of such Person or any of its Subsidiaries in an amount that is not more than 100% of the cost of such property, and incurred within 90 days after the date of such construction or acquisition (excluding accounts payable to trade creditors incurred in the ordinary course of business); provided, however, that any Lien on such Indebtedness shall not extend to any property other than the property so acquired or constructed. "QIB" means a "Qualified Institutional Buyer" under Rule 144A. "Qualified Equity Interest" means any Qualified Stock and all warrants, options or other rights to acquire Qualified Stock (but excluding any debt security that is convertible into or exchangeable for Capital Stock). "Qualified Stock" of any Person means any and all Capital Stock of such Person, other than Disqualified Stock. "Redemption Date", when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Register" and "Note Registrar" have the respective meanings specified in Section 305. "Registrar" means State Street Bank and Trust Company and any successor authorized by the Company to act as Registrar. "Registration Rights Agreement" means the Registration Rights Agreement between the Company, the Subsidiary Guarantors and the Initial Purchasers named therein, dated as of June 12, 1998 relating to the Notes. "Registration Statement" means the Registration Statement as defined in the 17 Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Restricted Investment" means any Investment other than a Permitted Investment. "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. "Sale and Leaseback Transaction" means any transaction or series of related transactions pursuant to which the Company or a Restricted Subsidiary sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, of such property or asset to the seller or transferor. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder. "Senior Bank Debt" means the Obligations outstanding under the Amended Credit Agreement. "Senior Indebtedness" means (i) the Senior Bank Debt and any Hedging Obligations in respect thereof and (ii) any other Indebtedness permitted to be incurred by the Company or any Subsidiary Guarantor under the terms of this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is subordinated in right of payment to any Indebtedness for money borrowed. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness will not include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness of the Company that is expressly subordinated in right of payment to any Senior Indebtedness of the Company or the Notes, (iii) Indebtedness of the Company that by operation of law is subordinate to any general unsecured obligations of the Company, (iv) Indebtedness of the Company to the extent incurred in violation of this Indenture, (v) any liability for federal, state or local taxes or other taxes, owed or owing by the Company, (vi) trade account payables owed or owing by the Company, (vii) amounts owed by the Company for compensation to employees or for services rendered to the Company, (viii) Indebtedness of the Company to any Restricted Subsidiary or any other Affiliate of the Company, (ix) Disqualified Stock of the Company and (x) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 of the United States Code is without recourse to the Company or any Restricted Subsidiary. 18 "Series B Preferred Stock" means the Convertible Preferred Stock, Series B, par value $0.001 per share, of the Company, with the rights, preferences and privileges set forth in the Company's Certificate of Designation, Preferences and Rights of the Series B Preferred Stock. "Series C Preferred Stock" means the Convertible Preferred Stock, Series C, par value $0.001 per share, of the Company, with the rights, preferences and privileges set forth in the Company's Certificate of Designation, Preferences and Rights of the Series C Preferred Stock. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Restricted Subsidiary of the Company that, together with its Subsidiaries, (a) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated net sales of the Company and its Subsidiaries, (b) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the most recently available consolidated financial statements of the Company for such fiscal year or (c) was organized or acquired after the beginning of such fiscal year and would have been a Significant Subsidiary if it had been owned during such entire fiscal year. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill, Companies, and its successors "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 309. "Stated Maturity" means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Subsidiary Guarantor that is subordinated in right of payment to the Notes or the Subsidiary Guarantees issued by such Subsidiary Guarantor, as the case may be. "Subsidiary" means any Person a majority of the equity ownership or Voting Stock of which is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company. 19 "Subsidiary Guarantee" means with respect to each Subsidiary Guarantor, the unconditional guarantee by such Subsidiary Guarantor, pursuant to Article Thirteen. "Subsidiary Guarantors" means, collectively, all Restricted Subsidiaries that are incorporated in the United States or a State thereof or the District of Columbia (other than Permitted Joint Ventures); provided that any Person that becomes an Unrestricted Subsidiary in compliance with Section 1011 shall not be included in "Subsidiary Guarantors" after becoming an Unrestricted Subsidiary. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the Board as an Unrestricted Subsidiary in accordance with Section 1017 and (b) any Subsidiary of an Unrestricted Subsidiary. "U.S. Government Obligations" means (i) securities that are (a) direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (b) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof; and (ii) depositary receipts issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in clause (i) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest of the U.S. Government Obligation evidenced by such depositary receipt. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes has, or might have, voting power by reason of the happening of any contingency). 20 "Weighted Average Life" means, as of the date of determination with respect to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a) the sum of the products of (i) the number of years from the date of determination to the date or dates of each successive scheduled principal or liquidation value payment of such Indebtedness or Disqualified Stock, respectively, multiplied by (ii) the amount of each such principal or liquidation value payment by (b) the sum of all such principal or liquidation value payments. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of the outstanding voting securities (other than directors' qualifying shares or shares of foreign Restricted Subsidiaries required to be owned by foreign nationals pursuant to applicable law) of which are owned, directly or indirectly, by the Company. SECTION 102. Incorporation by Reference of Trust Indenture Act. (a) This Indenture is expressly made subject to the Trust Indenture Act as if this Indenture were, on the date hereof, subject to the Trust Indenture Act under the provisions of such statute and such provisions are incorporated by reference in this Indenture. (b) Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Notes. All other Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by reference in the Trust Indenture Act to another statute or defined by a rule of the Commission and not otherwise defined herein shall have the meanings assigned to them therein. SECTION 103. Compliance Certificates and Opinions. Upon any application or request by the Company and the Subsidiary Guarantors to the Trustee to take any action under any provision of this Indenture, the Company and the Subsidiary Guarantors shall furnish to the Trustee an Officers' Certificate stating that all 21 conditions precedent, if any, provided for in this Indenture (including any covenant compliance which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1008(a)) shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 104. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company and/or the Subsidiary Guarantors may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company or such Subsidiary Guarantor, as the case may be, stating that the information with respect to such factual matters is in the possession of the Company or such Subsidiary Guarantor, as the case may be, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations 22 with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 105. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in Person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee, the Company and the Subsidiary Guarantors, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of the signer's authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The principal amount and serial numbers of Notes held by any Person, and the date of holding the same, shall be proved by the Register. (d) If the Company or any Subsidiary Guarantor shall solicit from the Holders of Notes any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company or any such Subsidiary Guarantor (as the case may be), may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company or any such Subsidiary Guarantor (as the case may be) shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, 23 demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Notes shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company and/or the Subsidiary Guarantors in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 106. Notices, etc., to Trustee, Company and Subsidiary Guarantors. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder, the Company or any Subsidiary Guarantor shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (b) the Company by the Trustee, any Holder or any0 Subsidiary Guarantor shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660, Attention: General Counsel, or at any other address previously furnished in writing to the Trustee or such Subsidiary Guarantor (as the case may be) by the Company, or (c) any Subsidiary Guarantor by any Holder, the Trustee or the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to Subsidiary Guarantor addressed to it at 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660, Attention: General Counsel, or at any other address previously furnished in writing to the Trustee or the Company (as the case may be) by such Subsidiary Guarantor. 24 SECTION 107. Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company and the Subsidiary Guarantors shall bind their respective successors and assigns, whether so expressed or not. SECTION 110. Severability Clause. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any 25 Person, other than the parties hereto, any Paying Agent, any Note Registrar and their successors hereunder, and the Holders any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This Indenture and the Notes shall be governed by, and construed in accordance with, the law of the State of New York. Upon the issuance of the Exchange Notes, if any, or the effectiveness of the Shelf Registration Statement, this Indenture shall be subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 113. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, date established for payment of Defaulted Interest pursuant to Section 309, Stated Maturity or Maturity with respect to any Note shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, date established for payment of Defaulted Interest pursuant to Section 309, Stated Maturity or Maturity; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, date established for payment of Defaulted Interest pursuant to Section 309, Stated Maturity or Maturity, Change in Control Purchase Date or Asset Sale Purchase Date, as the case may be, to the next succeeding Business Day. SECTION 114. Conflict of Any Provision of Indenture with Trust Indenture Act. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Trust Indenture Act Sections 310 to 318, inclusive, or conflicts with any provision (an "incorporated provision") required by or deemed to be included in this Indenture by operation of such Trust Indenture Act Sections, such imposed duties or incorporated provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. ARTICLE TWO NOTE FORMS SECTION 201. Forms Generally. 26 The Initial Notes shall be known as the "95/8% Senior Subordinated Notes due 2008" and the Exchange Notes shall be known as the "95/8% Series B Senior Subordinated Notes due 2008", in each case, of the Company. The Notes and the Trustee's certificate of authentication shall be in substantially the form annexed hereto as Exhibit A. The Notes may have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have letters, notations or other marks of identification and such notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. The definitive Notes shall be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Notes, as evidenced by their execution of such Notes. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Initial Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of a permanent global Note substantially in the form set forth in Exhibit A (the "U.S. Global Note") deposited with, or on behalf of, the Depositary or with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Notes offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of a single permanent global Note in registered form substantially in the form set forth in Exhibit A (the "Offshore Global Note") deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount at maturity of the Offshore Global Note may from time to time be increased or decreased by adjustments made in the records of the Trustee, as custodian for the Depositary or its nominee, as herein provided. Initial Notes offered and sold to "accredited investors" (as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act) who are not QIBs (excluding non-U.S. Persons) shall initially be issued in the form of permanent certificated Notes ("U.S. Physical Notes") in registered form in substantially the form of Exhibit A hereto. Notes issued pursuant to Section 306 in exchange for or upon transfer of interests in the U.S. Global Note or the Offshore Global Note shall be in the form of U.S. Physical Notes or in the form of permanent 27 certificated Notes in registered form substantially in the form set forth in Exhibit A (the "Offshore Physical Note"). The Offshore Physical Notes and the U.S. Physical Notes are sometimes collectively herein referred to as the "Physical Notes". The Offshore Global Note and the U.S. Global Note are sometimes collectively referred to as the "Global Notes." SECTION 202. Restrictive Legends. Unless and until (i) an Initial Note is sold under an effective Registration Statement or (ii) an Initial Note is exchanged for an Exchange Note in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, (A) each U.S. Global Note and U.S. Physical Note shall bear the legend set forth below (the "Private Placement Legend") on the face thereof and (B) the Offshore Physical Notes and the Offshore Global Note shall bear the legend set forth below on the face thereof until at least 41 days after the Issue Date and receipt by the Company and the Trustee of a certificate substantially in the form of Exhibit A hereto: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) (THE "RESALE RESTRICTION TERMINATION DATE"), ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF 28 SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) PRIOR TO THE END OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR PURSUANT TO CLAUSES (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRANSFER AGENT. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. Each Global Note, whether or not an Initial Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. 29 ARTICLE THREE THE NOTES SECTION 301. Title and Terms. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to $100,000,000, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 304, 305, 306, 307, 308, 906, 1015, 1016 or 1108, pursuant to an Exchange Offer or pursuant to Section 312. The Initial Notes shall be known and designated as the "9 5/8% Senior Subordinated Notes Due 2008" and the Exchange Notes shall be known and designated as the "9 5/8% Series B Senior Subordinated Notes Due 2008" of the Company. Their Stated Maturity shall be June 15, 2008, and they shall bear interest at the rate of 9 5/8% per annum from June 12, 1998, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semiannually on June 15 and December 15 in each year, commencing December 15, 1998, until the principal thereof is paid or duly provided for, to the Person in whose name the Note (or any Predecessor Note) is registered at the close of business on the June 1 or December 1 next preceding such Interest Payment Date. The principal of (and premium, if any), and interest on the Notes shall be payable, and the Notes shall be exchangeable and transferable, at the office or agency of the Company in The City of New York maintained for such purposes (which initially shall be the office of the Trustee located at 61 Broadway, 15th Floor, New York, New York 10006) or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear on the Register; provided that all payments with respect to the U.S. Global Note and the U.S. Physical Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Notes that remain outstanding after the consummation of the Exchange Offer and Exchange Notes issued in connection with the Exchange Offer will be treated as a single class of securities under this Indenture. The Notes shall be redeemable as provided in Article Eleven. SECTION 302. Denominations. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof; provided that U.S. Physical Notes originally purchased by or transferred to institutional "accredited investors" (as defined in Rule 30 501(a), (1), (2), (3) or (7) under the Securities Act) who are not QIBs (excluding Non-U.S. Persons) will be subject to a minimum denomination of $250,000. SECTION 303. Execution, Authentication, Delivery and Dating. The Notes shall be executed on behalf of the Company by its Chairman, its President or a Vice President. The signature of any of these officers on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Initial Notes executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Initial Notes directing the Trustee to authenticate the Notes and certifying that all conditions precedent to the issuance of Notes contained herein have been fully complied with, and the Trustee in accordance with such Company Order shall authenticate and deliver such Initial Notes. On Company Order, the Trustee shall authenticate for original issue Exchange Notes in an aggregate principal amount not to exceed the sum of $100,000,000 plus the aggregate principal amount of any Additional Notes issued; provided that such Exchange Notes shall be issuable only upon the valid surrender for cancellation of Initial Notes of a like aggregate principal amount in accordance with an Exchange Offer pursuant to the Registration Rights Agreement. In each case, the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Company that it may reasonably request in connection with such authentication of Notes. Such order shall specify the amount of Notes to be authenticated and the date on which the original issue of Initial Notes or Exchange Notes is to be authenticated. Each Note shall be dated the date of its authentication. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for in Exhibit A duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from 31 such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Notes authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. If Notes shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section in exchange or substitution for or upon registration of transfer of any Notes, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Notes at the time Outstanding for Notes authenticated and delivered in such new name. SECTION 304. Temporary Notes. Pending the preparation of definitive Notes, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, 32 the Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Note Registrar") for the purpose of registering Notes and transfers of Notes as herein provided. Subject to the provisions of Section 307, upon surrender for registration of transfer of any Note at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, Notes may be exchanged for other Notes of any authorized denomination and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange (including an exchange of Initial Notes for Exchange Notes), the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive; provided that no exchange of Initial Notes for Exchange Notes shall occur until an Exchange Offer Registration Statement shall have been declared effective by the Commission and that the Initial Notes to be exchanged for the Exchange Notes shall be canceled by the Trustee. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Note Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Note Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment in certain circumstances of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 304, 906, 1015, 1016 or 1108 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the selection of Notes to be redeemed under Section 1104 and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 306. Book-Entry Provisions for Global Notes. 33 (a) Each Global Note initially shall (i) be registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"), (ii) be deposited with, or on behalf of, the Depositary or with the Trustee, as custodian for such Depositary, and (iii) bear legends as set forth in Section 202. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under any Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of any Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 307. In addition, U.S. Physical Notes or Offshore Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Note or the Offshore Global Note, respectively, if: (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for the applicable Global Note or the Depositary ceases to be a "Clearing Agency" registered under the Exchange Act and a successor depositary is not appointed by the Company within 90 days or (y) an Event of Default has occurred and is continuing and Holders of more than 25% in aggregate principal amount of the Notes at the time Outstanding represented by the Global Notes advise the Trustee through the Depositary in writing that the continuation of a book-entry system through the Depositary with respect to the Global Notes is no longer required. (c) Any beneficial interest in one of the Global Notes that is transferred to a person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. (d) In connection with any transfer pursuant to paragraph (b) of this Section of a beneficial interest in any Global Note to a beneficial owner who is required or permitted to hold a Physical Note, the Note Registrar shall reflect on its books and records the date and a decrease in the principal amount of the applicable Global Note in an amount equal to the principal amount of the beneficial interest in such Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, subject to the terms and 34 conditions of Section 307 hereof, one or more Physical Notes of like tenor and amount. (e) In connection with the transfer of the entire U.S. Global Note or Offshore Global Note to beneficial owners pursuant to paragraph (b) of this Section, the U.S. Global Note or Offshore Global Note, as the case may be, shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Note or Offshore Global Note, as the case may be, an equal aggregate principal amount of U.S. Physical Notes or Offshore Physical Notes, as the case may be, of authorized denominations. (f) Any U.S. Physical Note delivered in exchange for an interest in the U.S. Global Note pursuant to subsection (b) or (d) of this Section shall, unless such exchange is made on or after the Resale Restriction Termination Date and except as otherwise provided in Section 307, bear the applicable legend regarding transfer restrictions applicable to the U.S. Physical Note set forth in Section 202. (g) The registered Global Notes Holder may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. (h) Beneficial owners of interests in a Global Note may receive Physical Notes (which shall bear the Private Placement Legend if required by Section 202) in accordance with the procedures of the Depositary. In connection with the execution, authentication and delivery of such Physical Notes, the Registrar shall reflect on its books and records a decrease in the principal amount of the relevant Global Note equal to the principal amount of such Physical Notes and the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Notes having an equal aggregate principal amount. SECTION 307. Special Transfer Provisions. Unless and until (i) an Initial Note is sold under an effective Registration Statement, or (ii) an Initial Note is exchanged for an Exchange Note in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) Transfers to Non-QIB Institutional Accredited Investors. The following provisions shall apply with respect to the registration of any proposed transfer of an Initial Note to any institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Initial Note, whether or not 35 such Initial Note bears the Private Placement Legend, if (x) the requested transfer is at least two years after the original issue date of the Initial Notes or (y) the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a U.S. Physical Note or an interest in the U.S. Global Note to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of (i) U.S. Physical Notes, the Registrar shall register the transfer and the Company shall execute, and the Trustee shall authenticate and deliver one or more U.S. Physical Notes if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Initial Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Initial Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Initial Note for its own account or an account with respect to which it exercises sole investment discretion and that it, or the Person on whose behalf it is acting with respect to any such account, is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A or (ii) an interest in the U.S. Physical Note, the transfer of such interest may be effected only through the book-entry system maintained by the Depositary. (ii) If the proposed transferee is an Agent Member, and the Initial Notes to be transferred consist of U.S. Physical Notes, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the U.S. Physical Notes, as the case may be, to be transferred, and the Trustee shall cancel the U.S. 36 Physical Notes so transferred. (c) Transfers of Interests in the Offshore Global Note or Offshore Physical Notes to U.S. Persons. The following provisions shall apply with respect to any transfer of interests in the Offshore Global Note or Offshore Physical Notes to U.S. Persons: (i) prior to the removal of the Private Placement Legend from the Offshore Global Notes or Offshore Physical Notes pursuant to Section 202, the Note Registrar shall refuse to register such transfer; and (ii) after such removal pursuant to Section 202, the Note Registrar shall register the transfer of any such Note without requiring any additional certification. (d) Transfers to Non-U.S. Persons at Any Time. The following provisions shall apply with respect to any transfer of an Initial Note to a Non-U.S. Person: (i) Prior to July 22, 1998, the Registrar shall register any proposed transfer of an Initial Note to a Non-U.S. Person upon receipt of a certificate substantially in the form of Exhibit E hereto from the proposed transferor and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Temporary Certificates of like tenor and amount. (ii) On and after July 22, 1998, the Registrar shall register any proposed transfer to any Non-U.S. Person (x) if the Initial Note to be transferred is an Offshore Physical Note, (y) if the Initial Note to be transferred is a U.S. Physical Note or an interest in the U.S. Global Note, upon receipt of a certificate substantially in the form of Exhibit D from the proposed transferor and (z) in the case of either clause (x) or (y), the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (iii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the document, if any, required by paragraph (i), and (y) instructions in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (e) Private Placement Legend. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless either (i) the circumstances contemplated by paragraph (a)(i)(x) of this 37 Section 307 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (f) General. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall retain until such time as no Notes remain Outstanding copies of all letters, notices and other written communications received pursuant to Section 306 or this Section 307. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 308. Mutilated, Destroyed, Lost and Stolen Notes. If (i) any mutilated Note is surrendered to the Trustee or the Registrar, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, 38 destroyed, lost or stolen Notes. SECTION 309. Payment of Interest; Interest Rights Preserved. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company in The City of New York maintained for such purposes (which initially shall be the office of the Trustee located at 61 Broadway, 15th Floor, New York, New York 10006 pursuant to Section 1002 or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto pursuant to Section 310 as such address appears in the Register; provided that all payments with respect to the Global Note and Physical Notes the Holders of which have given wire transfer instructions to the Trustee (or other Paying Agent) by the Regular Record Date shall be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Notes (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 107, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose names the 39 Notes (or their respective Predecessor Notes) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. If the Company shall be required to pay any additional interest pursuant to the terms of the Registration Rights Agreement, it shall deliver an Officer's Certificate to the Trustee setting forth the new interest rate and the period for which such rate is applicable. SECTION 310. Persons Deemed Owners. Prior to the due presentment of a Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 309) interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 311. Cancellation. All Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Notes previously authenticated hereunder which the Company has not issued and sold, and all Notes so delivered shall be promptly canceled by the Trustee. If the Company shall so acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this 40 Section, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that canceled Notes be returned to it. SECTION 312. Issuance of Additional Notes. The Company may, subject to Article Ten of this Indenture, issue up to $75,000,000 aggregate principal amount of additional Notes having identical terms and conditions as the Notes offered hereby, except that interest may begin accruing from a date other than the Closing Date (the "Additional Notes"). Any Additional Notes will be part of the same issue as the Notes offered hereby and will vote on all matters with the Notes offered hereby. SECTION 313. Computation of Interest. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. Upon the request of the Company, this Indenture will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for herein or pursuant hereto) and the Trustee, at the expense of the Company, will execute proper instruments acknowledging satisfaction and discharge of this Indenture when: (a) either (i) all the Notes theretofore authenticated and delivered (other than mutilated, destroyed, lost or stolen Notes that have been replaced or paid and Notes that have been subject to defeasance under Article Twelve) have been delivered to the Trustee for cancellation or (ii) all Notes not theretofore delivered to the Trustee for cancellation (A) have become due and payable, (B) will become due and payable at maturity within one year or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (A), (B) or 41 (C) above, has irrevocably deposited or caused to be deposited with the Trustee funds in trust for the purpose in an amount sufficient to pay and discharge the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any, on) and interest on the Notes to the date of such deposit (in the case of Notes that have become due and payable) or to the Stated Maturity or redemption date, as the case may be; (b) the Company has paid or caused to be paid all sums payable under this Indenture by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided herein relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest on any Note when it becomes due and payable, and continuance of such default for a period of 30 days (whether or not 42 prohibited by Article 14); (b) default in the payment of the principal of (or premium, if any, on) any Note when due (whether or not prohibited by Article 14); (c) failure to perform or comply with Sections 801, 1010, 1011, 1015 and 1016; (d) default in the performance, or breach, of any covenant or agreement of the Company or any Subsidiary Guarantor contained in this Indenture or in any Subsidiary Guarantee (other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with elsewhere herein), and continuance of such default or breach for a period of 60 days after written notice has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes (and Additional Notes, if any) then outstanding; (e) (i) an event of default has occurred under any mortgage, bond, indenture, loan agreement or other document evidencing an issue of Indebtedness of the Company or any Restricted Subsidiary, which issue individually or in the aggregate has an aggregate outstanding principal amount of not less than $5 million, and such default has resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable or (ii) a default (a "Payment Default") in any payment when due at final maturity of any such Indebtedness; (f) failure by the Company or any of its Restricted Subsidiaries to pay one or more final judgments the uninsured portion of which exceeds in the aggregate $5 million, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; (g) any Subsidiary Guarantee ceases to be in full force and effect or is declared null and void or any such Subsidiary Guarantor denies that it has any further liability under any Subsidiary Guarantee, or gives notice to such effect (other than by reason of the termination of this Indenture or the release of any such Subsidiary Guarantee in accordance with this Indenture); or (h) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustments or composition of or in respect of the Company or any Significant Subsidiary under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such 43 decree or order unstayed and in effect for a period of 90 consecutive days; or (i) the institution by the Company or any Significant Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than as specified in Section 501(h) or 501(i) above) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes (and Additional Notes, if any) then outstanding may, and the Trustee at the request of such Holders will, declare the principal of, and accrued interest on, all of the outstanding Notes immediately due and payable and, upon any such declaration, such principal and such interest will become due and payable immediately. If an Event of Default specified in Section 501(h) or 501(i) above occurs and is continuing, then the principal of and accrued interest on all of the outstanding Notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration under this Indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes (and Additional Notes, if any), by written notice to the Company and the Trustee, may rescind such declaration and its consequences if: (i) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes, (B) all unpaid principal of (and premium, if any, on) any outstanding Notes that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, (C) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes and (D) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (ii) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived. No such rescission will affect any subsequent default or impair any right consequent thereon. 44 Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Notes because an Event of Default specified in Section 501(e) shall have occurred and be continuing and provided no judgment or decree for payment of the money due has been obtained by the Trustee, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 30 days after such declaration of acceleration in respect of the Notes, and no other Event of Default has occurred during such 30-day period which has not been cured or waived during such period. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company and each of the Subsidiary Guarantors covenants that if (a) default is made in the payment of any installment of interest on any Note when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Note at the Maturity thereof, the Company and each Subsidiary Guarantor, subject to Section 1305, will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate borne by the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company or any Subsidiary Guarantor, as the case may be, fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company, such Subsidiary Guarantor or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, such Subsidiary Guarantor or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial 45 proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes (including the Subsidiary Guarantors) or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of 46 judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and THIRD: The balance, if any, to the Company or any other obligors of the Notes, including the Subsidiary Guarantors, as their interests may appear, or as a court of competent jurisdiction may direct. SECTION 507. Limitation on Suits. No Holder of any of the Notes has any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder has previously given written notice to the Trustee of a continuing Event of Default, the Holders of at least 25% in aggregate principal amount of the outstanding Notes (and Additional Notes, if any) have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding, the Trustee has failed to institute any such proceeding within 60 days after receipt of such notice, request and offer of indemnity and the Trustee, within such 60-day period, has not received directions inconsistent with such written request from Holders of a majority in aggregate principal amount of the outstanding Notes (and Additional Notes, if any). Such limitations do not apply, however, to a suit instituted by a Holder of a Note for the enforcement of the payment of the principal of, premium, if any, or interest on such Note on or after the respective due dates expressed in such Note. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. 47 Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Twelve) and in such Note of the principal of (and premium, if any) and (subject to Section 309) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Subsidiary Guarantors, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 308, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of not less than a majority in principal amount of the Outstanding Notes (and Additional Notes, if any) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or 48 power conferred on the Trustee, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) the Trustee need not take any action which might conflict with law or this Indenture or involve it in personal liability or be unjustly prejudicial to the Holders not consenting. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the outstanding Notes (and Additional Notes, if any) may, by notice to the Trustee, on behalf of the Holders of all of the Notes, waive any existing Default or Event of Default and its consequences under this Indenture, except a continuing Default or Event of Default in the payment of the principal of (and premium, if any) or interest on any Note (except for such a default resulting from an acceleration that has been rescinded), or in respect of a covenant or provision that under this Indenture cannot be modified or amended without the consent of the Holder of each outstanding Note. Upon any such waiver, such Default or Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Stay or Extension Laws. The Company and each Subsidiary Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company and each Subsidiary Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 515. Waiver of Personal Liability of Directors, Officers, Employees and Stockholders. No director, officer, employee, incorporator or stockholder of the Company, as 49 such, shall have any liability for any obligations of the Company under the Notes or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. No director, officer, employee, incorporator or stockholder of any Subsidiary Guarantor, as such, shall have any liability for any obligations of such Subsidiary Guarantor under its Subsidiary Guarantee or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes and the Subsidiary Guarantees. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such waiver is against public policy. ARTICLE SIX THE TRUSTEE SECTION 601. Duties of Trustee. (a) If an Event of Default has occurred and is continuing and is actually known to the Trustee, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; 50 (ii) the Trustee shall not be liable for any error of judgment made in good faith by a responsible officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 512 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. SECTION 602. Notice of Defaults. If a Default or an Event of Default occurs and is continuing and is actually known to the Trustee, the Trustee shall mail to each Holder of the Notes notice of the Default or Event of Default within 90 days after the occurrence thereof. However, except in the case of a Default or an Event of Default in payment of principal of (and premium, if any, on) or interest on any Notes, the Trustee may withhold the notice to the Holders of the Notes if a committee of its trust officers in good faith determines that withholding such notice is in the interests of the Holders of the Notes. SECTION 603. Certain Rights of Trustee. Subject to the provisions of TIA Sections 315(a) through 315(d): (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting, pursuant to the terms of this Indenture or otherwise, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order with sufficient detail as may be requested by the Trustee and any resolution of the Board may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate and/or an Opinion of Counsel; 51 (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities (including fees and expenses of its agents and counsel) which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into, and may conclusively rely upon, the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (i) except during the continuance of an Event of Default, the Trustee need perform only those duties as are specifically set forth in this Indenture; and (j) the Trustee shall not be deemed to have notice or knowledge of any matter, including, without limitation, whether or not an Event of Default has occurred, unless an officer within the Corporate Trust Department of the Trustee has actual acknowledge thereof or unless written notice thereof is received by the Trustee at its Corporate Trust Office and such notice references the Notes, the Company or this Indenture. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of 52 such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 604. Trustee Not Responsible for Recitals or Issuance of Notes. The recitals contained herein and in the Notes, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company and the Subsidiary Guarantors, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture, the Notes or any Subsidiary Guarantee, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder and, upon the effectiveness of the Registration Statement, that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Notes or the proceeds thereof. SECTION 605. May Hold Notes. The Trustee, any Paying Agent, any Note Registrar or any other agent of the Company or of the Trustee, in its individual or other capacity, may become the owner or pledgee of Notes and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Note Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company or any Subsidiary Guarantor, as the case may be. SECTION 607. Compensation and Reimbursement. The Company agrees: (a) to pay to the Trustee (in its capacity as Trustee, Paying Agent and Registrar) from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), 53 except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Notes. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(i) or (j), the expenses (including the reasonable charges and expenses of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 608. Corporate Trustee Required; Eligibility. There shall be at all times a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1). The Trustee and each successor Trustee shall have (or its corporate parent shall have) a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of Federal, State, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. 54 SECTION 609. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 610. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 610 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the Outstanding Notes (and Additional Notes, if any), delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, except when the Trustee's duty to resign is stayed in accordance with the provisions of TIA Section 310(b), or (2) the Trustee shall cease to be eligible under Section 608 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation, winding-up or liquidation, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall 55 be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes (and Additional Notes, if any) delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Notes in the manner provided for in Section 107. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 610. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder subject to the retiring Trustee's rights as provided under the last sentence of Section 607. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 611. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same 56 effect as if such successor Trustee had itself authenticated such Notes. In case at that time any of the Notes shall not have been authenticated, any successor Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee. In all such cases such certificates shall have the full force and effect which this Indenture provides that the certificate of authentication of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE SECTION 701. Disclosure of Names and Addresses of Holders. Every Holder of Notes, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). SECTION 702. Reports by Trustee. Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Notes, the Trustee shall transmit to the Holders, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such May 15 if required by TIA Section 313(a). ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms. The Company shall not, in a single transaction or series of related transactions, consolidate or merge with or into (whether or not the Company is the surviving corporation), or directly and/or indirectly through its Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (determined on a consolidated basis for the Company and its Subsidiaries taken as a whole) in one or more related 57 transactions to, another corporation, Person or entity unless: (a) either (i) the Company is the surviving corporation or (ii) in the case of a transaction involving the Company, the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (the "Surviving Entity") is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia and assumes all the obligations of the Company under the Notes and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (b) immediately after giving effect to such transaction and treating any obligation of the Company in connection with or as a result of such transaction as having been incurred as of the time of such transaction, no Default or Event of Default has occurred and is continuing; (c) the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) could, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the first paragraph of Section 1010; (d) each Subsidiary Guarantor, unless it is the other party to the transaction described above, has by supplemental indenture confirmed that its Subsidiary Guarantee applies to the Surviving Entity's obligations under this Indenture and the Notes; (e) if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of Section 1014 are complied with; and (f) the Company delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction complies with the requirements of this Indenture. No Subsidiary Guarantor shall consolidate with or merge with or into any other Person or convey, sell, assign, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any other Person (other than the Company or another Subsidiary Guarantor) unless: (a) subject to the provisions of the following paragraph, the Person formed by or surviving such consolidation or merger (if other than such Subsidiary Guarantor) or to which such properties and assets are transferred assumes all of the obligations of such 58 Subsidiary Guarantor under this Indenture and its Subsidiary Guarantee, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee; (b) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing; and (c) the Subsidiary Guarantor delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction complies with the requirements of this Indenture. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. SECTION 802. Successor Substituted. In the event of any transaction described in and complying with the conditions listed in the first paragraph of Section 801 in which the Company is not the continuing obligor under this Indenture, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture, and thereafter the Company will, except in the case of a lease, be discharged from all its obligations and covenants under this Indenture and Notes. ARTICLE NINE SUPPLEMENTS AND AMENDMENTS TO INDENTURE AND SUBSIDIARY GUARANTEES SECTION 901. Without Consent of Holders. Without the consent of any Holders, the Company and any affected Subsidiary Guarantor, each when authorized by a Board Resolution, and the Trustee may amend or supplement this Indenture, the Notes or any Subsidiary Guarantee without the consent of any Holder of a Note: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company in this Indenture and in the Notes; or (2) to add to the covenants of the Company for the benefit of the Holders, or 59 to surrender any right or power herein conferred upon the Company; or (3) to add additional Events of Defaults; or (4) to provide for uncertificated Notes in addition to or in place of the Physical Notes; or (5) to evidence and provide for the acceptance of appointment under this Indenture by a successor Trustee; or (6) to secure the Notes; or (7) to cure any ambiguity, to correct or supplement any provision in this Indenture that may be defective or inconsistent with any other provision in this Indenture, or to make any other provisions with respect to matters or questions arising under this Indenture, provided, however that such actions pursuant to this clause do not adversely affect the interests of the Holders in any material respect; or (8) to comply with any requirements of the Commission in order to effect and maintain the qualification of this Indenture under the Trust Indenture Act. Notwithstanding the foregoing, neither the Company nor the Trustee may amend any provisions of the Indenture or the Notes concerning (i) the subordination of the Notes and the Subsidiary Guarantees or (ii) legal defeasance or covenant defeasance without, in either case, the prior written consent of the Agent Bank, acting on behalf of the Banks under the Amended Credit Agreement. SECTION 902. With Consent of Holders. With the consent of the Holders of not less than a majority in aggregate Outstanding principal amount of the Notes (and Additional Notes, if any) (including consents obtained in connection with a tender offer or exchange offer for the Notes), by Act of said Holders delivered to the Company, any affected Subsidiary Guarantor and the Trustee, the Company and the Subsidiary Guarantor, each when authorized by a Board Resolution, and the Trustee may amend or supplement in any manner this Indenture or any Subsidiary Guarantee or modify in any manner the rights of the Holders under this Indenture or any Subsidiary Guarantee; provided, however, that no such supplement, amendment or modification may, without the consent of the Holder of each Outstanding Note affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in 60 which any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (b) amend, change or modify the obligation of the Company to make and consummate an Excess Proceeds Offer with respect to any Asset Sale in accordance with the covenant described under Section 1016 or the obligation of the Company to make and consummate a Change of Control offer in the event of a Change of Control in accordance with Section 1015, including, in each case, amending, changing or modifying any definition relating thereto; (c) reduce the percentage in principal amount of Outstanding Notes, the consent of whose Holders is required for any waiver of compliance with certain provisions of, or certain defaults and their consequences provided for under, this Indenture; (d) waive a Default or Event of Default in the payment of principal of, or premium, if any, or interest on the Notes or reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of this Indenture or for waiver of certain Defaults or Events of Default; (e) modify the ranking or priority of the Notes or the Subsidiary Guarantee of any Subsidiary Guarantor; or (f) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee or this Indenture other than in accordance with the terms of this Indenture. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any amended or supplemental indenture, the Trustee shall, subject to this Section 903, join with the Company in the execution of such amended or supplemental indenture authorized or permitted by the terms of this Indenture. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The 61 Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustees own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Notes. SECTION 907. Notice of Supplemental Indentures. Promptly after the execution by the Company, any affected Subsidiary Guarantor and the Trustee of any supplemental indenture or Subsidiary Guarantee pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Note affected, in the manner provided for in Section 107, setting forth in general terms the substance of such supplemental indenture or Subsidiary Guarantee. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if any, and Interest. The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any) and interest on the Notes in accordance with the terms of the Notes and this Indenture. 62 SECTION 1002. Maintenance of Office or Agency. The Company will maintain in The City of New York, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Corporate Trust Office located at 61 Broadway, 15th Floor, New York, New York 10006 of the Trustee shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Note Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (or premium, if any) or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before each due date (but no later than 12:00 p.m. (New York City time) on such due date) of payments with respect to the principal of (or premium, if any) or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company will cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: 63 (a) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Company (or any other obligor upon the Notes) in the making of any payment of principal (and premium, if any) or interest; and (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on any Note and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall, subject to applicable escheatment laws, be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board shall determine that the preservation thereof is no longer desirable in the conduct of the business of the 64 Company and its Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1006. Maintenance of Properties. The Company will cause all properties owned by the Company or any Subsidiary or used or held for use in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. Insurance. The Company will at all times keep all of its and its Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties. SECTION 1008. Statement by Officers As to Default. (a) The Company and each Subsidiary Guarantor will deliver to the Trustee, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of compliance by the Company and such Subsidiary Guarantor with all conditions and covenants under this Indenture. For purposes of this Section 1008(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. 65 (b) When any Default has occurred and is continuing under this Indenture, or if the trustee for or the holder of any other evidence of Indebtedness of the Company or any Subsidiary Guarantor gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness in the principal amount of less than $2,000,000), the Company shall deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission an Officers' Certificate specifying such event, notice or other action within five days of becoming aware of its occurrence. SECTION 1009. Reports. Whether or not the Company is required to file reports with the Commission, so long as any Notes are outstanding, the Company will file all such annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Section 13(a) or 15(d) under the Exchange Act. The Company shall also be required (a) to supply to the Trustee and each Holder, or supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective Holder promptly upon written request. In addition, whether or not required by the rules and regulations of the Commission at any time after the Company files a registration statement with respect to the Exchange Offer or a Shelf Registration Statement, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, the Company has agreed that, for so long as any Notes remain outstanding, it will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information specified in Rule 144A(d)(4) under the Securities Act. SECTION 1010. Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, create, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of, or otherwise incur (collectively, "incur"), any Indebtedness (including Acquired Indebtedness and the issuance of Disqualified Stock), except that the Company and any Subsidiary Guarantors may incur Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for the immediately preceding four full fiscal quarters for which internal financial statements are available, taken as one accounting period, would have been equal to at least (i) 2.0 to 1.0 from the Closing Date through and including June 30, 2000 and (ii) 2.25 to 1.0 thereafter. 66 (b) In making the foregoing calculation for any four-quarter period that includes the Closing Date, pro forma effect will be given to the Offering, as if such transactions had occurred at the beginning of such four-quarter period. In addition (but without duplication), in making the foregoing calculation, pro forma effect will be given to: (i) the incurrence of such Indebtedness and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred and the application of such proceeds occurred at the beginning of such four-quarter period; (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company or its Restricted Subsidiaries since the first day of such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period; and (iii) the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any company, entity or business acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, as if such acquisition or disposition occurred at the beginning of such four-quarter period. In making a computation under the foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving credit facility will be computed based on the average daily balance of such Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at the option of the Company, a fixed or floating rate of interest, interest thereon will be computed by applying, at the option of the Company, either the fixed or floating rate, and (C) the amount of any Indebtedness that bears interest at a floating rate will be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligations applicable to such Indebtedness if such Hedging Obligations have a remaining term at the date of determination in excess of 12 months). (c) Notwithstanding the foregoing, the Company may, and may permit its Restricted Subsidiaries to, incur the following Indebtedness ("Permitted Indebtedness"): (i) Indebtedness of the Company or any Subsidiary Guarantor under the Amended Credit Agreement (and the incurrence by any Subsidiary Guarantor of guarantees thereof) in an aggregate principal amount at any one time outstanding not to exceed $150 million, less any amounts applied to the permanent reduction of such credit facilities pursuant to the provisions of Section 1016; (ii) Indebtedness represented by the Notes (other than the Additional Notes) and the Subsidiary Guarantees; 67 (iii) Existing Indebtedness; (iv) the incurrence by the Company of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace, any Indebtedness that is permitted to be incurred under clause (ii) or (iii) above; (v) Indebtedness owed by the Company to any Wholly Owned Restricted Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary (provided that such Indebtedness is held by the Company or such Restricted Subsidiary); provided, however, that any Indebtedness of the Company owing to any such Restricted Subsidiary is unsecured and subordinated in right of payment from and after such time as the Notes shall become due and payable (whether at Stated Maturity, acceleration, or otherwise) to the payment and performance of the Company's obligations under the Notes; (vi) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; (vii) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (viii) either (A) Capitalized Lease Obligations of the Company or any Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests so long as (x) such Indebtedness is not secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets so acquired and (y) such Indebtedness is created within 60 days of the acquisition of the related property; provided, however, that the aggregate amount of Indebtedness under clauses (A) and (B) does not exceed 5% of Consolidated Tangible Assets at any one time outstanding; (ix) Guarantees by any Restricted Subsidiary made in accordance with the provisions of Section 1022; (x) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two business days of incurrence; (xi) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted 68 Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (xii) the incurrence of Non-Recourse Indebtedness by Permitted Joint Ventures; and (xiii) Indebtedness of the Company, any Subsidiary Guarantor or any Permitted Joint Venture not permitted by any other clause of this definition, in an aggregate principal amount not to exceed $15 million at any one time outstanding. SECTION 1011. Limitation on Restricted Payments. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions: (a) declare or pay any dividend on, or make any distribution to holders of, any shares of the Capital Stock of the Company or any Restricted Subsidiary, other than (i) dividends or distributions payable solely in Qualified Equity Interests or (ii) dividends or distributions by a Restricted Subsidiary payable to the Company or another Wholly Owned Restricted Subsidiary; (b) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of Capital Stock, or any options, warrants or other rights to acquire such shares of Capital Stock, of the Company, any Restricted Subsidiary or any Affiliate of the Company (other than, in either case, any such Capital Stock owned by the Company or any of its Wholly Owned Restricted Subsidiaries); (c) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Pari Passu Indebtedness or Subordinated Indebtedness; and (d) make any Investment (other than a Permitted Investment) in any Person (such payments or other actions described in (but not excluded from) clauses (a) through (d) being referred to as "Restricted Payments"), unless at the time of, and immediately after giving effect to, the proposed Restricted Payment: (i) no Default or Event of Default has occurred and is continuing, (ii) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to 69 incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 1010, and (iii) the aggregate amount of all Restricted Payments made after the Closing Date does not exceed the sum of: (A) 50% of the aggregate Consolidated Net Income of the Company during the period (taken as one accounting period) from the first day of the Company's first fiscal quarter commencing after the Closing Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net Income is a loss, minus 100% of such amount); plus (B) 100% of the aggregate net cash proceeds received by the Company after the Closing Date from the issuance or sale (other than to a Subsidiary) of either (1) Qualified Equity Interests of the Company or (2) debt securities or Disqualified Stock that have been converted into or exchanged for Qualified Stock of the Company, together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions, so long as no Default or Event of Default has occurred and is continuing or would occur: (a) the payment of any dividend in cash or Qualified Equity Interests of the Company within 60 days after the date of declaration thereof, if at the declaration date such payment would not have been prohibited by the foregoing provisions; (b) the repurchase, redemption or other acquisition or retirement for value of any shares of Capital Stock of the Company, in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, Qualified Equity Interests of the Company; (c) the purchase, redemption, defeasance or other acquisition or retirement for value of any Pari Passu Indebtedness or Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, shares of Qualified Equity Interests of the Company; (d) the purchase, redemption, defeasance or other acquisition or retirement for value of Pari Passu Indebtedness or Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance or sale (other than to a 70 Subsidiary) of, Pari Passu Indebtedness or Subordinated Indebtedness, respectively, so long as the Company or a Restricted Subsidiary would be permitted to refinance such original Pari Passu Indebtedness or Subordinated Indebtedness with such new Pari Passu Indebtedness or Subordinated Indebtedness pursuant to clause (iv) of the definition of Permitted Indebtedness; (e) the repurchase of any Subordinated Indebtedness at a purchase price not greater than 101% of the principal amount of such Subordinated Indebtedness in the event of a Change of Control in accordance with provisions similar to Section 1015; provided, however, that prior to or simultaneously with such repurchase, the Company has made the Change of Control Offer as provided in Section 1015 with respect to the Notes and has repurchased all Notes validly tendered for payment in connection with such Change of Control Offer; (f) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company, options on any such shares or related stock appreciation rights or similar securities held by officers or employees or former officers or employees of the Company or of any Restricted Subsidiary (or their estates or beneficiaries under their estates) or by any employee benefit plan, upon death, disability, retirement or termination of employment or pursuant to the terms of any employee benefit plan or any other agreement under which such shares of stock or related rights were issued; provided, however, that the aggregate cash consideration paid for such purchase, redemption, acquisition, cancellation or other retirement of such shares of Capital Stock after the Closing Date does not exceed $500,000 in any fiscal year; and (g) Investments constituting Restricted Payments not to exceed $5 million at any one time outstanding. The actions described in clauses (b), (c), (e), (f) and (g) of the second paragraph of this Section 1011 will be Restricted Payments that will be permitted to be taken in accordance with this Section 1011 but will reduce the amount that would otherwise be available for Restricted Payments under clause (d)(iii) of the first paragraph of this Section 1011 and the actions described in clauses (a) and (d) of the second paragraph of this Section 1011 will be Restricted Payments that will be permitted to be taken in accordance with this Section 1011 and will not reduce the amount that would otherwise be available for Restricted Payments under clause (d)(iii) of the first paragraph of this Section 1011. For the purpose of making any calculations under this Indenture (i) if a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will be deemed to have made an Investment in an amount equal to the greater of the fair market value or net book value of the net assets of such Restricted Subsidiary at the time of such designation as determined by the Board, and (ii) any property transferred to or from an Unrestricted Subsidiary will be valued at fair market value at the time of such transfer, as determined by the Board. The amount of all 71 Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined by the Board whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $5 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required under this Section 1011 were computed, together with a copy of any fairness opinion or appraisal required by this Indenture. If the aggregate amount of all Restricted Payments calculated under the foregoing provision includes an Investment in an Unrestricted Subsidiary or other Person that thereafter becomes a Restricted Subsidiary, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the lesser of (x) the net asset value of such Subsidiary at the time it becomes a Restricted Subsidiary and (y) the initial amount of such Investment. If an Investment resulted in the making of a Restricted Payment, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the amount of any net reduction in such Investment (resulting from the payment of interest or dividends, loan repayment, transfer of assets or otherwise, other than the redesignation of an Unrestricted Subsidiary or other Person as a Restricted Subsidiary), to the extent such net reduction is not included in the Company's Consolidated Net Income; provided that the total amount by which the aggregate amount of all Restricted Payments may be reduced may not exceed the lesser of (x) the cash proceeds received by the Company and its Restricted Subsidiaries in connection with such net reduction and (y) the initial amount of such Investment. In computing the Consolidated Net Income of the Company for purposes of the foregoing clause (d)(iii)(A) of the first paragraph of this Section 1011, (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment will be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. 72 SECTION 1012. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries. The Company (a) shall not permit any Restricted Subsidiary to issue any Capital Stock (other than to the Company or a Wholly Owned Restricted Subsidiary) and (b) shall not, and shall not permit any Restricted Subsidiary to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted Subsidiary to any Person (other than the Company or a Wholly Owned Restricted Subsidiary); provided, however, that this covenant will not prohibit (i) the sale or other disposition of all, but not less than all, of the issued and outstanding Capital Stock of a Restricted Subsidiary owned by the Company and its Restricted Subsidiaries in compliance with the other provisions of this Indenture, (ii) the sale or other disposition of a portion of the issued and outstanding Capital Stock of an existing Wholly Owned Subsidiary if (A) as a result of such sale or disposition such Wholly Owned Restricted Subsidiary becomes a Permitted Joint Venture and (B) at the time of such sale or disposition, the Company could make an Investment in the remaining Capital Stock held by it or one of its Restricted Subsidiaries in an amount equal to the amount of its remaining Investment in such existing Restricted Subsidiary pursuant to Section 1011, or (iii) the ownership by directors of director's qualifying shares or the ownership by foreign nationals of Capital Stock of any Restricted Subsidiary, to the extent mandated by applicable law. The Company shall not permit any Restricted Subsidiary to issue any Preferred Stock. SECTION 1013. Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into or suffer to exist any transaction with, or for the benefit of, any Affiliate of the Company ("Interested Persons"), unless (a) such transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could have been obtained in an arm's length transaction with third parties who are not Interested Persons and (b) the Company delivers to the Trustee (i) with respect to any transaction or series of related transactions entered into after the Closing Date involving aggregate payments in excess of $1.0 million, a resolution of the Board set forth in an officers' certificate certifying that such transaction or transactions comply with clause (a) above and that such transaction or transactions have been approved by the Board (including a majority of the Disinterested Directors) of the Company and (ii) with respect to a transaction or series of related transactions involving aggregate payments equal to or greater than $10 million, a written opinion as to the fairness to the Company or such Restricted Subsidiary of such transaction or series of transactions from a financial point of view issued by an accounting, appraisal or investment banking firm, in each case of national standing. The foregoing covenant will not restrict: (A) transactions among the Company and/or its Restricted Subsidiaries; 73 (B) the Company from paying reasonable and customary regular compensation and fees to directors of the Company or any Restricted Subsidiary who are not employees of the Company or any Restricted Subsidiary; (C) transactions permitted by Section 1011; (D) advances to employees for moving, entertainment and travel expenses and similar expenditures in the ordinary course of business and consistent with past practice; and (E) purchases of equipment, supplies and related services made on an arm's length basis in the ordinary course of business by the Company, any Restricted Subsidiary or any Permitted Joint Venture from any Affiliate. SECTION 1014. Limitation on Liens. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Pari Passu Indebtedness or Subordinated Indebtedness of the Company on or with respect to any of its property or assets, including any shares of stock or indebtedness of any Restricted Subsidiary, whether owned at the Closing Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless: (i) in the case of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien; and (ii) in the case of any Lien securing Pari Passu Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to or pari passu with such Lien. (b) The Company shall not permit any Subsidiary Guarantor to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Pari Passu Indebtedness or Subordinated Indebtedness of such Subsidiary Guarantor on or with respect to such Subsidiary Guarantor's properties or assets, including any shares of stock or Indebtedness of any other Restricted Subsidiary, whether owned at the Closing Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless: (i) in the case of any Lien securing Pari Passu Indebtedness of such Subsidiary Guarantor, each Subsidiary Guarantee of such Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds that is senior in priority to or pari passu with such Lien; and 74 (ii) in the case of any Lien securing Subordinated Indebtedness of such Subsidiary Guarantor, each Subsidiary Guarantee of such Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien. SECTION 1015. Purchase of Notes upon a Change of Control. (a) If a Change of Control occurs at any time, then each Holder shall have the right to require that the Company purchase such Holder's Notes and Additional Notes, if any, in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to the offer described below (the "Change of Control Offer") and the other procedures set forth in this Indenture. (b) Within 30 days following any Change of Control, the Company shall notify the Trustee thereof and give written notice of such Change of Control to each Holder of Notes and Additional Notes by first-class mail, postage prepaid, at its address appearing in the security register, stating, among other things: (i) the purchase price and the purchase date, which will be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed or such later date as is necessary to comply with requirements under the Exchange Act; (ii) that any Note or Additional Note not tendered will continue to accrue interest; (iii) that, unless the Company defaults in the payment of the purchase price, any Notes or Additional Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control purchase date; (iv) that Holders electing to have any Note purchased pursuant to the Change of Control Offer will be required to surrender such Note, together with the form entitled "Option to the Holder to Elect Purchase" on the reverse side of such Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on this Business Day immediately preceding the Change of Control Payment Date; (v) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Change of Control Payment Date, a facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vi) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes 75 surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. (c) The Company shall comply with the applicable tender offer rules including Rule-14e under the Exchange Act, and any other applicable securities laws and regulations in connection with a Change of Control Offer. To the extent that provisions of any applicable securities laws or regulations conflict with provisions of this Section 1015, the Company shall comply with such securities laws and regulations and shall not be deemed to have breached its obligations under this Section 1015 by virtue thereof. (d) The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and purchases all the Notes validly tendered and not withdrawn under such Change of Control Offer. SECTION 1016. Limitation on Certain Asset Sales. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the consideration received by the Company or such Restricted Subsidiary for such Asset Sale is not less than the fair market value of the assets sold evidenced by a resolution of the board of directors of such entity set forth in an Officers' Certificate delivered to the Trustee and (ii) the consideration received by the Company or the relevant Restricted Subsidiary in respect of such Asset Sale consists of at least 75% cash or Cash Equivalents (for purposes of this clause (ii), cash and Cash Equivalents includes (a) the principal amount of any Indebtedness for money borrowed (as reflected in the Company's consolidated balance sheet) of the Company or any Restricted Subsidiary that is assumed by any transferee of any such assets or other property in such Asset Sale, but only to the extent that such assumption is effected on a basis under which there is no further recourse to the Company or any of its Restricted Subsidiaries with respect to such Indebtedness, and (b) any securities, notes or other obligations received by the Company or such Restricted Subsidiary from such transferee that are converted within 90 days of consummation of the related Asset Sale by the Company or such Restricted Subsidiary into cash and Cash Equivalents (to the extent of the net cash proceeds or the Cash Equivalents (net of related costs) received upon such conversion)). (b) If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may, at its option, within 12 months after such Asset Sale, (i) apply all or a portion of the Net Cash Proceeds to the permanent reduction of amounts outstanding under the Amended Credit Agreement (and to correspondingly reduce the commitments, if any, with respect thereto) or to the permanent repayment of other Senior Indebtedness of the Company or a Restricted Subsidiary, provided that the repayment of any Indebtedness incurred under the Amended Credit Agreement in connection with the acquisition of any Facility with the proceeds of any subsequent Sale and Leaseback Transaction relating to such Facility shall not result in the 76 permanent reduction of the amounts outstanding under the Amended Credit Agreement or correspondingly permanently reduce the commitments thereunder, or (ii) invest (or enter into a legally binding agreement to invest) all or a portion of such Net Cash Proceeds in properties and assets to replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the businesses of the Company or its Restricted Subsidiaries, as the case may be, existing on the Closing Date or in businesses the same, similar or reasonably related thereto. If any such legally binding agreement to invest such Net Cash Proceeds is terminated, the Company may, within 90 days of such termination or within 12 months of such Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical contained in such clause (ii)) above. Pending the final application of any such Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such Net Proceeds in a manner that is not prohibited by this Indenture. The amount of such Net Cash Proceeds not so used as set forth above in this paragraph shall constitute "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $5 million, the Company will, within 30 days thereafter, make an offer to purchase (an "Excess Proceeds Offer") from all Holders of Notes and Additional Notes, if any, on a pro rata basis, in accordance with the procedures set forth in this Indenture, the maximum principal amount (expressed as a multiple of $1,000) of Notes and Additional Notes, if any, that may be purchased with the Excess Proceeds, at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued interest, if any, to the date such offer to purchase is consummated. To the extent that the aggregate principal amount of Notes and Additional Notes, if any, tendered pursuant to such offer to purchase is less than the Excess Proceeds, the Company may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes and Additional Notes, if any, validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and Additional Notes, if any, to be purchased will be selected on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds will be reset to zero. SECTION 1017. Unrestricted Subsidiaries. (a) The Board may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company nor any Restricted Subsidiary is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity, (iii) any Investment in such Subsidiary made as a result of designating such Subsidiary an Unrestricted Subsidiary will not violate the provisions of Section 1011, (iv) neither the Company nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, with such Subsidiary other than those that might be obtained at the time from Persons who are not Affiliates of the Company, (v) neither the Company nor any Restricted Subsidiary 77 has any obligation to subscribe for additional shares of Capital Stock or other equity interest in such Subsidiary, or to maintain or preserve such Subsidiary's financial condition or to cause such Subsidiary to achieve certain levels of operating results, and (vi) such Unrestricted Subsidiary has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not an executive officer of the Company or any of its Restricted Subsidiaries. Notwithstanding the foregoing, the Company may not designate any of its Subsidiaries existing as of the Closing Date or any successor to any of them as an Unrestricted Subsidiary and may not sell, transfer or otherwise dispose of any properties or assets of any such Subsidiary to an Unrestricted Subsidiary, other than in the ordinary course of business. (b) The Board may designate any Unrestricted Subsidiary as a Restricted Subsidiary; provided, however that (i) no Default or Event of Default has occurred and is continuing following such designation and (ii) the Company could, at the time of making such designation and giving such pro forma effect as if such designation had been made at the beginning of the applicable four quarter period, incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the first paragraph of Section 1010 (treating any Indebtedness of such Unrestricted Subsidiary as the incurrence of Indebtedness by a Restricted Subsidiary). SECTION 1018. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make loans or advances to the Company or any other Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of: (i) any agreement in effect on the Closing Date; (ii) customary non-assignment provisions of any lease governing a leasehold interest of the Company or any Restricted Subsidiary; (iii) the refinancing or successive refinancing of Indebtedness incurred under the agreements in effect on the Closing Date, so long as such encumbrances or restrictions are no more restrictive than those contained in such original agreement; (iv) any agreement or other instrument of a Person acquired by the Company or any Restricted Subsidiary in existence at the time of such acquisition (but not created 78 in contemplation thereof), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; (v) purchase money obligations for acquired property permitted under Section 1010 that impose restrictions of the nature described in clause (d) above on the property so acquired; (vi) any agreement for the sale of a Restricted Subsidiary or an asset that restricts distributions by that Restricted Subsidiary or transfers of such asset pending its sale; (vii) secured Indebtedness otherwise permitted to be incurred pursuant to Section 1014 that limits the right of the debtor to dispose of the assets securing such Indebtedness; (viii) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; and (ix) Non-Recourse Indebtedness of any Permitted Joint Venture permitted to be incurred under the Indenture. SECTION 1019. Waiver of Certain Covenants. The Company or any Subsidiary Guarantor may omit in any particular instance to comply with any term, provision or condition set forth in Section 803 or Sections 1007 through 1022, inclusive, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Notes (and Additional Notes, if any), by Act of such Holders, waive such compliance in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 1020. Payment for Consent. Neither the Company nor any of its Restricted Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. 79 SECTION 1021. Limitation on Layering Debt. The Company and each Subsidiary Guarantor will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness or guarantee, as applicable, that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the Notes or such Subsidiary Guarantor's Subsidiary Guarantee, respectively. SECTION 1022. Limitation on Guarantees of Indebtedness by Restricted Subsidiaries. The Company shall not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any other manner become liable for the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for a guarantee of payment of the Notes by such Restricted Subsidiary on a senior subordinated basis and (b) with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee is subordinated to such Restricted Subsidiary's guarantee with respect to the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes, provided, however, that the foregoing provision will not be applicable to any guarantee by any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. Any guarantee by a Restricted Subsidiary of the Notes pursuant to the preceding paragraph may provide by its terms that it will be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer to any Person not an Affiliate of the Company of all of the Company's and the Restricted Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by this Indenture) or (ii) the release or discharge of the guarantee that resulted in the creation of such guarantee of the Notes, except a discharge or release by or as a result of payment under such guarantee. ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. Right of Redemption. (a) The Notes may be redeemed at the option of the Company, at any time as a whole or from time to time in part, at any time on or after June 15, 2003, on not less than 30 nor more than 60 days' prior notice to the Holders at the following Redemption Prices (expressed as percentages of principal amount) together with accrued and unpaid interest, if any, to the 80 Redemption Date (subject to the right of holders of record in the relevant record date to receive interest due on an interest payment date), if redeemed during the 12-month period beginning on June 15 of the years indicated below. Redemption Year Price 2003.......................................................104.8125% 2004 ......................................................103.2083% 2005 .....................................................101.6042% 2006 and thereafter ......................................100.0000% (b) In addition, at any time or from time to time on or before June 15, 2001, the Company may redeem, on one or more occasions, up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes on one or more occasions with the net proceeds of one or more Equity Offerings at a redemption price equal to 109.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant record date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date); provided that, immediately after giving effect to such redemption, at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes remains outstanding; provided further that such redemptions shall occur within 60 days of the date of closing of each Equity Offering. (c) The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 1102. Applicability of Article. Redemption of Notes at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Notes pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Notes to be redeemed pursuant to Section 1104. SECTION 1104. Selection by Trustee of Notes to Be Redeemed. 81 If less than all the Notes (or Additional Notes, if any) are to be redeemed, selection of Notes for redemption shall be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal of Notes; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than $1,000. The Company shall notify the Trustee of any national securities exchange on which the Notes may be listed. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given in the manner provided for in Section 107 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price and the amount of accrued interest to the Redemption Date payable as provided in Section 1107, if any, (3) if less than all Outstanding Notes are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular Notes to be redeemed, (4) in case any Note is to be redeemed in part only, the notice which relates to such Note shall state that on and after the Redemption Date, upon surrender of such Note, the Holder will receive, without charge, a new Note or Notes of authorized denominations for the principal amount thereof remaining unredeemed, (5) that on the Redemption Date the Redemption Price (and accrued interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and 82 payable upon each such Note, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date, (6) the place or places, if applicable, where such Notes are to be surrendered for payment of the Redemption Price and accrued interest, if any, and (7) the CUSIP number. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and accrued interest on, all the Notes which are to be redeemed on that date. SECTION 1107. Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such at the close of business on the relevant Regular Record Dates according to their terms and the provisions of Section 309. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Notes. SECTION 1108. Notes Redeemed in Part. Any Note which is to be redeemed only in part shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such 83 Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. ARTICLE TWELVE LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company Option to Effect Legal Defeasance or Covenant Defeasance. The Company may, at its option and at any time, with respect to the Notes, elect to have either Section 1202 or Section 1203 be applied to all Outstanding Notes (and Additional Notes, if any) upon compliance with the conditions set forth below in this Article Twelve. SECTION 1202. Legal Defeasance and Discharge. Upon the Company's exercise under Section 1201 of the option applicable to this Section 1202, the Company and the Subsidiary Guarantors shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes (and Additional Notes, if any) and the Subsidiary Guarantees on the date the conditions set forth in Section 1204 are satisfied (hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Notes (and Additional Notes, if any) and the Subsidiary Guarantees, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1205 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Notes (and Additional Notes, if any) to receive payments in respect of the principal of (and premium, if any, on) and interest on such Notes when such payments are due from the trust described in Section 1204, (B) the Company's obligations under Sections 304, 305, 308, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee and (D) this Article Twelve. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 1202 notwithstanding the prior exercise of its option under Section 1203 with respect to the Notes. SECTION 1203. Covenant Defeasance. Upon the Company's exercise under Section 1201 of the option applicable to this 84 Section 1203, the Company and any Subsidiary Guarantor shall be released from its obligations under any covenant contained in Section 801 and Section 803 and in Sections 1006 through 1018 and Sections 1021 and 1022 with respect to the Outstanding Notes (and Additional Notes, if any) on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such Covenant Defeasance means that, with respect to the Outstanding Notes (and Additional Notes, if any), the Company and any Subsidiary Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Sections 501(c) and (d) but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. SECTION 1204. Conditions to Legal Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 1202 or Section 1203 to the Outstanding Notes (and Additional Notes, if any): (a) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders, money in an amount, or U.S. Government Obligations that through the scheduled payment of principal and interest thereon will provide money in an amount, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of (and premium, if any, on) and interest on the Outstanding Notes (and Additional Notes, if any) at maturity (or upon redemption, if applicable) of such principal or installment of interest; (b) no Default or Event of Default has occurred and is continuing on the date of such deposit or, insofar as an event of bankruptcy under Section 501(h) is concerned, at any time during the period ending on the 91st day after the date of such deposit; (c) such legal defeasance or covenant defeasance may not result in a breach or violation of, or constitute a default under, this Indenture or any material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound; (d) in the case of legal defeasance, the Company must deliver to the Trustee an Opinion of Counsel stating that the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or, since the Closing Date, there has been a change in applicable federal income tax law, to the effect, and based thereon such 85 opinion must confirm, that the Holders of the Outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (e) in the case of covenant defeasance, the Company must have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (f) the Company must have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the legal defeasance or the covenant defeasance, as the case may be, have been complied with. SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in respect of the Outstanding Notes (and Additional Notes, if any) shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental Obligations deposited pursuant to Section 1204 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Notes (and Additional Notes, if any). Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1204 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance, as applicable, in accordance with this Article. 86 SECTION 1206. Reinstatement. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 1205 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 1202 or 1203, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1205; provided, however, that if the Company makes any payment of principal of (or premium, if any) or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE THIRTEEN GUARANTEES SECTION 1301. Subsidiary Guarantees. Each Subsidiary Guarantor hereby jointly and severally, fully, unconditionally and irrevocably guarantees the Notes and obligations of the Company hereunder and thereunder, and guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee on behalf of such Holder, that: (a) the principal of (and premium, if any) and interest on the Notes will be paid in full when due, whether at Stated Maturity, by acceleration, call for redemption or otherwise (including, without limitation, the amount that would become due but for the operation of the automatic stay under Section 362(a) of the Federal Bankruptcy Code), together with interest on the overdue principal, if any, and interest on any overdue interest, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or of any such other obligations, the same will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise, subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 1306 hereof. Each of the Subsidiary Guarantees shall be a guarantee of payment and not of collection. Each Subsidiary Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise 87 constitute a legal or equitable discharge or defense of a Subsidiary Guarantor. Each Subsidiary Guarantor hereby waives the benefits of diligence, presentment, demand for payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company or any other Person, protest, notice and all demands whatsoever and covenants that the Subsidiary Guarantee of such Subsidiary Guarantor will not be discharged as to any Note except by complete performance of the obligations contained in such Note and such Subsidiary Guarantee or as provided for in this Indenture. Each of the Subsidiary Guarantors hereby agrees that, in the event of a default in payment of principal (or premium, if any) or interest on such Note, whether at its Stated Maturity, by acceleration, call for redemption, purchase or otherwise, legal proceedings may be instituted by the Trustee on behalf of, or by, the Holder of such Note, subject to the terms and conditions set forth in this Indenture, directly against each of the Subsidiary Guarantors to enforce such Subsidiary Guarantor's Subsidiary Guarantee without first proceeding against the Company or any other Subsidiary Guarantor. Each Subsidiary Guarantor agrees that if, after the occurrence and during the continuance of an Event of Default, the Trustee or any of the Holders are prevented by applicable law from exercising their respective rights to accelerate the maturity of the Notes, to collect interest on the Notes, or to enforce or exercise any other right or remedy with respect to the Notes, such Subsidiary Guarantor will pay to the Trustee for the account of the Holders, upon demand therefor, the amount that would otherwise have been due and payable had such rights and remedies been permitted to be exercised by the Trustee or any of the Holders. If any Holder or the Trustee is required by any court or otherwise to return to the Company or any Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or any Subsidiary Guarantor, any amount paid by any of them to the Trustee or such Holder, the Subsidiary Guarantee of each of the Subsidiary Guarantors, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Subsidiary Guarantor further agrees that, as between each Subsidiary Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Five hereof for the purposes of the Subsidiary Guarantee of such Subsidiary Guarantor, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article Five hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by each Subsidiary Guarantor for the purpose of the Subsidiary Guarantee of such Subsidiary Guarantor. SECTION 1302. Execution and Delivery of Subsidiary Guarantee. To further evidence the Subsidiary Guarantee set forth in Section 1301, each Subsidiary Guarantor hereby agrees that such Subsidiary Guarantee, substantially in the form included in Exhibit C of this Indenture, shall be endorsed on each Note authenticated and delivered by the Trustee. Such Subsidiary Guarantee shall be executed by manual or facsimile signature on behalf of each Subsidiary Guarantor by its Chairman, any Vice Chairman, its 88 President or a Vice President and attested by its Secretary or Assistant Secretary, and shall have been duly authorized by all requisite corporate action. The validity and enforceability of any Subsidiary Guarantee shall not be affected by the fact that it is not affixed to any particular Note. Each Subsidiary Guarantor hereby agrees that its respective Subsidiary Guarantee set forth in Section 1301 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Subsidiary Guarantee set forth in this Indenture on behalf of the Subsidiary Guarantors. SECTION 1303. Severability. In case any provision of any Subsidiary Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1304. Seniority of Subsidiary Guarantees. The obligations of each Subsidiary Guarantor to the Holders of Notes and to the Trustee pursuant to such Subsidiary Guarantor's Subsidiary Guarantee and this Indenture are unsecured senior subordinated obligations of such Subsidiary Guarantor ranking pari passu in right of payment with all existing and future senior subordinated obligations of such Subsidiary Guarantor. SECTION 1305. Limitation of Subsidiary Guarantor's Liability. Each Subsidiary Guarantor and by its acceptance hereof each Holder confirms that it is the intention of all such parties that the guarantee by each Subsidiary Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law or the provisions of its local law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holders and such Subsidiary Guarantor hereby irrevocably agree that the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee shall be limited to the maximum amount that will not, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to Section 1306 hereof, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee constituting such fraudulent transfer or conveyance. SECTION 1306. Contribution. 89 In order to provide for just and equitable contribution among the Subsidiary Guarantors, the Subsidiary Guarantors agree, inter se, that in the event any payment or distribution is made by any Subsidiary Guarantor (a "Funding Guarantor") under a Subsidiary Guarantee, such Funding Guarantor shall be entitled to a contribution from all other Subsidiary Guarantors in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's obligations with respect to the Notes or any other Subsidiary Guarantor's obligations with respect to the Subsidiary Guarantee of such Subsidiary Guarantor. "Adjusted Net Assets" of such Subsidiary Guarantor at any date shall mean the lesser of (x) the amount by which the fair value of the property of such Subsidiary Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Subsidiary Guarantee of such Subsidiary Guarantor at such date and (y) the amount by which the present fair salable value of the assets of such Subsidiary Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Subsidiary Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), excluding debt in respect of the Subsidiary Guarantee of such Subsidiary Guarantor, as they become absolute and matured. SECTION 1307. Release of a Subsidiary Guarantor. (a) A Subsidiary Guarantor will be deemed automatically and unconditionally released and discharged from all of its obligations under its Subsidiary Guarantee without any further action on the part of the Trustee or any Holder of the Notes upon a sale or other disposition to a Person not an Affiliate of the Company of all of the Capital Stock of, or all or substantially all of the assets of, such Subsidiary Guarantor, by way of merger, consolidation or otherwise, which transaction is carried out in accordance with Section 801 and 1016, so long as (a) no Default or Event of Default shall have occurred and be continuing at the time of, or would occur after giving effect on a pro forma basis to, such release and (b) the Company is permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test set forth in subsection (a) of Section 1010 on the date on which such release occurs; provided that any such termination shall occur (x) only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure any Indebtedness of the Company shall also terminate upon such sale, disposition or release and (y) only if the Trustee is furnished with written notice of such release together with an Officers' Certificate from such Subsidiary Guarantor to the effect that all of the conditions to release in this Section 1307(a) have been satisfied. (b) Any Subsidiary Guarantor that is designated by the Board as an Unrestricted Subsidiary in accordance with the terms of this Indenture may, at such time, at the option of the Board, be released and relieved of its obligations under its Subsidiary Guarantee. 90 The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officers' Certificate certifying as to the compliance with this Section 1307. Any Subsidiary Guarantor not so released shall remain liable for the full amount of principal of and interest on the Notes as provided in its Subsidiary Guarantee. (c) Concurrently with the Legal Defeasance of the Notes under Section 1202 hereof, or the Covenant Defeasance of the Notes under Section 1203 hereof, the Subsidiary Guarantors shall be released from all their obligations under their Subsidiary Guarantees under this Article Thirteen. SECTION 1308. Benefits Acknowledged. Each Subsidiary Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that its guarantee and waivers pursuant to its Subsidiary Guarantee are knowingly made in contemplation of such benefits. SECTION 1309. Issuance of Subsidiary Guarantees by Certain New Restricted Subsidiaries. The Company shall provide to the Trustee, on the date that any Person (other than a Foreign Subsidiary or Permitted Joint Venture) becomes a Restricted Subsidiary, a supplemental indenture to this Indenture, executed by such new Restricted Subsidiary, providing for a full and unconditional guarantee on a senior subordinated basis by such new Restricted Subsidiary of the Company's obligations under the Notes and this Indenture to the same extent as that set forth in this Indenture. ARTICLE FOURTEEN SUBORDINATION SECTION 1401. Notes Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder, by its acceptance thereof, likewise covenants and agrees, for the benefit of the Holders, from time to time, of Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Notes and the payment of the principal of (and premium, if any) and interest on each and all of the Notes are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full in cash of all Senior Indebtedness, whether outstanding on the Closing Date or thereafter incurred; provided, however, that the Notes, the Indebtedness represented thereby and the payment of the principal of (and premium, if any) and interest on the Notes in all respects shall rank equally with, or prior 91 to, all existing and future unsecured indebtedness (including, without limitation, Indebtedness) of the Company that is subordinated to Senior Indebtedness. SECTION 1402. Payment over by the Company of Proceeds upon Dissolution, etc. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshaling of the Company's assets and liabilities, (1) the holders of Senior Indebtedness of the Company shall be entitled to receive payment in full in cash or Cash Equivalents of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness) before the Holders will be entitled to receive any payment in respect of any Obligations with respect to the Notes, and until all Obligations with respect to Senior Indebtedness are paid in full in cash or Cash Equivalents, any distribution to which the Holders would be entitled shall be made to the holders of Senior Indebtedness (except that Holders may receive securities that are subordinated at least to the same extent as the Notes to Senior Indebtedness ("Permitted Junior Securities") and any securities issued in exchange for Senior Indebtedness and Holders may recover payments made from the trust described in Section 1204); and (2) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or any Holder shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, in respect of principal of (and premium, if any) or interest on the Notes before all Senior Indebtedness is paid in full or payment thereof provided for (such provision with respect to Senior Indebtedness under the Amended Credit Agreement being satisfactory to each Lender), and if such fact shall at or prior to the time of such payment or distribution, have been made known to the Trustee or such Holder, as the case may be, by the Agent Bank, then and in such event such payment or distribution (other than a payment or distribution in the form of Permitted Junior Securities or out of the trust described in Section 1204) shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance, 92 transfer or lease of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or lease such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions set forth in Article Eight. SECTION 1403. Suspension of Payment on Notes When Senior Indebtedness of the Company in Default. (a) Unless Section 1402 shall be applicable, the Company shall not make any payment upon or in respect of the Notes (except in such Permitted Junior Securities or from the trust described in Section 1204) if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace (a "Payment Event of Default") which is notified to the Trustee in writing from the Company, the Agent or any other representative of holders of Designated Senior Indebtedness, or (ii) any Non-payment Event of Default occurs and is continuing with respect to Designated Senior Indebtedness which permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Agent Bank or the holders or the representative of the holders of any Designated Senior Indebtedness. (b) Payments on the Notes may and shall be resumed (a) in the case of a Payment Event of Default, upon the date on which such default is cured or waived and (b) in case of a Non-payment Event of Default, the earlier of the date on which such Non-payment Event of Default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced by a Payment Blockage Notice unless and until (i) 360 days have elapsed since the first day of the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Notes that have come due have been paid in full in cash. No Non-payment Event of Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such default has been cured or waived for a period of not less than 90 days. SECTION 1404. Payment Over by Subsidiary Guarantors of Proceeds Upon Dissolution, etc. 93 Upon any distribution to creditors of any Subsidiary Guarantor in a liquidation or dissolution of such Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to such Subsidiary Guarantor or its property, an assignment for the benefit of creditors or any marshaling of such Subsidiary Guarantor's assets and liabilities, (1) the holders of Senior Indebtedness of such Subsidiary Guarantor shall be entitled to receive indefeasible payment in full in cash or cash equivalents of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness) before the Holders will be entitled to receive any payment with respect to the respective Subsidiary Guarantee, and until all Obligations with respect to Senior Indebtedness of such Subsidiary Guarantor and Senior Indebtedness of the Company are paid in full in cash or cash equivalents, any distribution to which the Holders would be entitled shall be made to the holders of such Senior Indebtedness (except that Holders may receive (i) Capital Stock of such Subsidiary Guarantor (other than Disqualified Stock) and (ii) Permitted Junior Securities and any securities issued in exchange for such Senior Indebtedness); and (2) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or any Holder shall have received any payment or distribution of assets of such Subsidiary Guarantor of any kind or character, whether in cash, property or securities, in respect of principal of (and premium, if any) or interest on the Notes before all Senior Indebtedness of such Subsidiary Guarantor is paid in full or payment thereof provided for (such provision with respect to Senior Indebtedness under the Amended Credit Agreement being satisfactory to each Lender), and if such fact shall at or prior to the time of such payment or distribution, have been made known to the Trustee or such Holder, as the case may be, by the Agent Bank, then and in such event such payment or distribution (other than a payment or distribution in the form of Permitted Junior Securities) shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of such Subsidiary for application to the payment of all Senior Indebtedness of such Subsidiary Guarantor remaining unpaid, to the extent necessary to pay all such Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The consolidation of any Subsidiary Guarantor with, or the merger of any Subsidiary Guarantor into, another Person or the liquidation or dissolution of any Subsidiary Guarantor following the conveyance, transfer or lease of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of 94 creditors or marshaling of assets and liabilities of such Subsidiary Guarantor for the purposes of this Section if the Person formed by such consolidation or into which such Subsidiary Guarantor is merged or the Person which acquires by conveyance, transfer or lease such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions set forth in Article Eight. SECTION 1405. Suspension of Payment on Subsidiary Guarantees When Senior Indebtedness of Subsidiary Guarantor in Default. (a) Unless Section 1404 shall be applicable, a Subsidiary Guarantor shall not make any payment upon or in respect of such Subsidiary Guarantor's Subsidiary Guarantee (except in such Permitted Junior Securities) if (i) a Payment Event of Default on Designated Senior Indebtedness of such Subsidiary Guarantor or Designated Senior Indebtedness of the Company occurs and is continuing beyond any applicable period of grace which is notified to the Trustee in writing from such Subsidiary Guarantor, the Agent or any other representative of holders of Designated Senior Indebtedness, or (ii) any Non-payment Event of Default occurs and is continuing with respect to Designated Senior Indebtedness of such Subsidiary Guarantor or Designated Senior Indebtedness of the Company which permits holders of the Designated Senior Indebtedness of such Subsidiary Guarantor or Designated Senior Indebtedness of the Company as to which such default relates to accelerate its maturity and the Trustee receives a Payment Blockage Notice from the Agent Bank or the holders or the representative of the holders of such Designated Senior Indebtedness. (b) Payments on the Subsidiary Guarantees may and shall be resumed (a) in the case of a Payment Event of Default, upon the date on which such default is cured or waived and (b) in case of a Non-payment Event of Default, the earlier of the date on which such Nonpayment Event of Default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced by a Payment Blockage Notice unless and until (i) 360 days have elapsed since the first day of the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal, premium, if any, and interest on the Notes that have become due and payable have been paid in full. No Non-payment Event of Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice, unless such default has been cured or waived for a period of not less than 90 days. SECTION 1406. Payment Permitted If No Default. 95 Nothing contained in this Article or elsewhere in this Indenture, in any of the Notes or in any Subsidiary Guarantee shall prevent the Company or any Subsidiary Guarantors, as applicable, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company or any Subsidiary Guarantor referred to in Section 1402 or 1404 or under the conditions described in Section 1403 or 1405, from making payments at any time of principal of (and premium, if any, on) or interest on the Notes or under a Subsidiary Guarantee, as applicable. SECTION 1407. Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the Holders shall be subrogated (equally and ratably with the holders of all indebtedness of the Company or any Subsidiary Guarantor which by its express terms is subordinated to Senior Indebtedness of the Company or such Subsidiary Guarantor to the same extent as the Notes or the Subsidiary Guarantees are subordinated and which is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Notes shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders or the Trustee, shall, as among the Company, the Subsidiary Guarantors, their respective creditors other than holders of Senior Indebtedness, and the Holders of the Notes, be deemed to be a payment or distribution by the Company or any Subsidiary Guarantor to or on account of the Senior Indebtedness. SECTION 1408. Provisions Solely to Define Relative Rights. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Notes on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall (a) impair, as between the Company, or any Subsidiary Guarantor as applicable, and the Holders, the obligation of the Company or such Subsidiary Guarantor, which is absolute and unconditional, to pay to the Holders the principal of (and premium, if any) and interest on the Notes as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company or any Subsidiary Guarantor of the Holders and creditors of the Company or such Subsidiary Guarantor other than the holders of Senior Indebtedness; or (c) prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness. SECTION 1409. Trustee to Effectuate Subordination. 96 Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 1410. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or any Subsidiary Guarantor, or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company or any Subsidiary Guarantor with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this Section, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Notes, without incurring responsibility to the Holders and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any Person liable in any manner for the collection of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company, any Subsidiary Guarantor and any other Person. SECTION 1411. Notice to Trustee. (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Notes. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Notes, unless and until the Trustee shall have received written notice thereof from the Company, the Agent or a holder of Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to TIA Sections 315(a) through 315(d), shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Trustee shall not have received the notice provided for in this Section at least three Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Note), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the 97 purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. (b) Subject to TIA Sections 315(a) through 315(d), the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 1412. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to TIA Sections 315(a) through 315(d), and the Holders shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 1413. Rights of Trustee As a Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1414. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been 98 appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1413 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 1415. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Notes pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article Five. SECTION 1416. Trust Moneys Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from cash or the proceeds of U.S. Government Obligations held in trust under Article Twelve hereof by the Trustee (or other qualifying trustee) and which were deposited in accordance with the terms of Article Twelve hereof and not in violation of Section 1403 hereof for the payment of principal of (and premium, if any) and interest on the Notes shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article Fourteen, and none of the Holders shall be obligated to pay over any such amount to the Company or any holder of Senior Indebtedness or any other creditor of the Company. SECTION 1417. Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. 99 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, as of the day and year first above written. INSIGHT HEALTH SERVICES CORP. By: -------------------------------------------- Name: Title: INSIGHT HEALTH CORP. By: -------------------------------------------- Name: Title: RADIOLOGY SERVICES CORP. By: -------------------------------------------- Name: Title: OPEN MRI, INC. By: -------------------------------------------- Name: Title: MAXUM HEALTH CORP. By: -------------------------------------------- Name: Title: 100 SIGNAL MEDICAL SERVICES, INC. By: -------------------------------------------- Name: Title: QUEST FINANCIAL SERVICES, INC. By: -------------------------------------------- Name: Title: RADIOSURGERY CENTERS, INC. By: -------------------------------------------- Name: Title: MAXUM HEALTH SERVICES CORP. By: -------------------------------------------- Name: Title: MTS ENTERPRISES, INC. By: -------------------------------------------- Name: Title: DIAGNOSTEMPS, INC. 101 By: -------------------------------------------- Name: Title: MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: -------------------------------------------- Name: Title: MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: -------------------------------------------- Name: Title: MAXUM HEALTH SERVICES OF DALLAS, INC. By: -------------------------------------------- Name: Title: NDDC, INC. By: -------------------------------------------- Name: Title: DIAGNOSTIC SOLUTIONS CORP. 102 By: -------------------------------------------- Name: Title: MISSISSIPPI MOBILE TECHNOLOGY, INC. By: -------------------------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY, N.A., as Trustee By: -------------------------------------------- Name: Title: Exhibit A [FACE OF NOTE] INSIGHT HEALTH SERVICES CORP. 9 5/8% [Series B]** Senior Subordinated Note Due 2008 CUSIP [_________] No. [_______] $100,000,000 INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to [___________], or its registered assigns, the principal sum of ONE HUNDRED MILLION DOLLARS ($100,000,000), on June 15, 2008. [Initial Interest Rate: 9 5/8% per annum.]* [Interest Rate: 9 5/8% per annum.]** Interest Payment Dates: June 15 and December 15 of each year commencing December 15, 1998. Regular Record Dates: June 1 and December 1 of each year. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. - ---------- * Include only for Initial Notes. ** Include only for Exchange Notes. A-1 IN WITNESS WHEREOF, the Company has caused this Note to be executed. Date: June , 1998 INSIGHT HEALTH SERVICES CORP. --- By: ------------------------------- Title: Attest: ------------------------------- A-2 Form of Trustee's Certificate of Authentication This is one of the 9 5/8% [Series B]** Senior Subordinated Notes due 2008 described in the within-mentioned Indenture. Date: June __, 1998 STATE STREET BANK AND TRUST COMPANY, N.A., as Trustee By: ----------------------------------- Authorized Signatory - ---------- ** Include only for Exchange Notes. A-3 [REVERSE SIDE OF NOTE] INSIGHT HEALTH SERVICES CORP. 9 5/8% [Series B]** Senior Subordinated Note due 2008 1. Principal and Interest. The Company will pay the principal of this Note on June 15, 2008. The Company promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate of [9 5/8% per annum (subject to adjustment as provided below)]* [9 5/8% per annum, except that interest accrued on this Note pursuant to the penultimate paragraph of this Section 1 for periods prior to the consummation of the Exchange Offer (as such term is defined in the Registration Rights Agreement referred to below) will accrue at the rate or rates borne by the Notes from time to time during such periods].** Interest will be payable semiannually on each Interest Payment Date, commencing December 15, 1998 to the Holders of record of the Notes (or any predecessor Notes) at the close of business on June 1, or December 1, immediately preceding the applicable Interest Payment Date. If (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 60th calendar day following the Closing Date or (b) the Exchange Offer Registration Statement is not declared effective on or prior to the 150th calendar day following the Closing Date or the Exchange Offer is not consummated on or prior to the 180th calendar day following the Closing Date (except as otherwise set forth in the Registration Rights Agreement (as defined below)) or (c) a Shelf Registration Statement is not declared effective when required, the Company shall pay liquidated damages ("Liquidated Damages") to each Holder of Notes with respect to the first 30-day period following the 60-day period referred to in clause (a) above or the first 90-day period following the periods referred to in clauses (b) or (c) above in an amount equal to $0.05 per week per $1,000 principal amount of Notes held by such Holder. The amount of Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Notes at the beginning of each subsequent 30-day period in the case of - -------- * Include only for Initial Notes. ** Include only for Exchange Notes. A-4 clause (a) above or 90-day period in the case of clauses (b) and (c) above, up to a maximum amount of Liquidated Damages of $0.30 per week per $1,000 principal amount of Notes. Upon the filing of the Exchange Offer Registration Statement, the effectiveness of the Exchange Offer Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, Liquidated Damages will cease to accrue from the date of such filing, consummation or effectiveness, as the case may be; provided, however, that, if, after the date such Liquidated Damages cease to accrue, a different event specified in clause (a), (b) or (c) above occurs, Liquidated Damages may again commence accruing pursuant to the foregoing provisions. Interest on this Note will accrue from the most recent date to which interest has been paid [on this Note or the Note surrendered in exchange herefor]** or, if no interest has been paid, from June 12, 1998; provided that, if there is no existing default in the payment of interest and if this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum equal to the rate of interest applicable to the Notes. 2. Method of Payment. The Company will pay interest (except defaulted interest) on the principal amount of the Notes on each June 15 and December 15 (each an "Interest Payment Date") to the persons who are Holders (as reflected in the Register at the close of business on the June 1 or December 1 immediately preceding the applicable Interest Payment Date), in each case, even if the Note is canceled on registration of transfer or registration of exchange after such record date. The principal of (and premium, if any), and interest on this Note shall be payable, and this Note shall be exchangeable and transferable, at the office or agency of the Company in The City of New York maintained for such purposes (which initially shall be the Corporate Trust Office of the Trustee located at 61 Broadway, 15th Floor, New York, New York 10006) or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear on the Register; provided that all payments with respect to this Note, the Holders of which have given wire transfer instructions to the Company, will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. - -------------------- ** Include only for Exchange Notes. A-5 3. Paying Agent and Registrar. Initially, the Trustee will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar upon written notice thereto. The Company, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-registrar. 4. Subsidiary Guarantees. This Note is initially entitled to the benefits of the Subsidiary Guarantees made by the Subsidiary Guarantors as described in the Indenture and may thereafter be entitled to Subsidiary Guarantees made by other Subsidiary Guarantors for the benefit of the Holders of this Note. Each present Subsidiary Guarantor has, and each future Subsidiary Guarantor will, irrevocably and unconditionally, jointly and severally, guarantee on a senior subordinated basis the punctual payment when due, whether at Stated Maturity, by acceleration, in connection with a Change of Control Offer (as defined below), an Asset Sale or redemption, or otherwise, of all obligations of the Company under the Indenture and this Note, whether for payment of principal of, premium, if any, or interest, if any, on the Notes, expenses, indemnification or otherwise. A Subsidiary Guarantor shall be released from its Subsidiary Guarantee upon the terms and subject to the conditions set forth in the Indenture. 5. Subordination. This Note and the Subsidiary Guarantees are subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all existing and future Senior Indebtedness. Each of the Company and the Subsidiary Guarantors agrees, and each Holder by accepting a Note agrees, to the subordination provisions set forth in the Indenture, authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purposes. 6. Indenture; Limitations. The Company issued the Notes under an Indenture dated as of June 1, 1998, (the "Indenture"), between the Company, the Subsidiary Guarantors named therein and State Street Bank and Trust Company, N.A., as trustee (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are general unsecured obligations of the Company. A-6 7. Redemption. Optional Redemption. The Notes may be redeemed at the option of the Company, in whole or in part, at any time and from time to time on or after June 15, 2003 at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the 12-month period beginning June 15 of each of the years set forth below: Redemption Year Price 2003...................................104.8125% 2004 ..................................103.2083% 2005 .................................101.6042% 2006 and thereafter ..................100.0000% In addition, at any time or from time to time prior to June 15, 2001, the Company may redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes on one or more occasions with the net proceeds of one or more Equity Offerings at a Redemption Price equal to 109.625% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date (subject to the right of Holders of record on the relevant record date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date); provided that, immediately after giving effect to such redemption, at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes remains outstanding; provided further that such redemptions shall occur within 60 days of the date of closing of each Equity Offering. Notice of a redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder to be redeemed at such Holder's last address as it appears in the Register. Notes in original denominations larger than $1,000 may be redeemed in part in integral multiples of $1,000. On and after the Redemption Date, interest will cease to accrue on Notes or portions of Notes called for redemption, unless the Company defaults in the payment of the Redemption Price. 8. Repurchase upon a Change in Control and Asset Sales. (a) If a Change of Control occurs at any time, then each Holder of Notes or Additional Notes shall have the right to require that the Company purchase such Holder's Notes A-7 or Additional Notes, as applicable, in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of the principal amount of such Notes or Additional Notes, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to any such offer as is described in the Indenture (a "Change of Control Offer") and (b) upon Asset Sales, the Company may be obligated to make offers to purchase Notes with a portion of the Net Cash Proceeds of such Asset Sales at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase in accordance with the procedures set forth in the Indenture. 9. Denominations; Transfer; Exchange. The Notes are in registered form without coupons, in denominations of $1,000 and multiples of $1,000 in excess thereof; provided that Certificated Notes originally purchased by or transferred to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who are not "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) will be subject to a minimum denomination of $250,000. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption (except the unredeemed portion of any Note being redeemed in part). Also, it need not register the transfer or exchange of any Notes for a period of 15 days before a selection of Notes to be redeemed is made. 10. Persons Deemed Owners. A Holder may be treated as the owner of a Note for all purposes. 11. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 12. Discharge Prior to Redemption or Maturity. If the Company irrevocably deposits, or causes to be deposited, with the Trustee A-8 money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes to redemption or maturity, the Company will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof. 13. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency. 14. Restrictive Covenants. The Indenture contains certain covenants, including, without limitation, covenants with respect to the following matters: (i) Indebtedness; (ii) Restricted Payments; (iii) issuances and sales of Restricted Subsidiary Capital Stock; (iv) transactions with Affiliates; (v) Liens; (vi) certain Asset Sales; (vii) dividends and other payment restrictions affecting Restricted Subsidiaries; (viii) mergers and certain transfers of assets. Within 120 days after the end of each fiscal year, the Company must report to the Trustee on compliance with such limitations. 15. Successor Persons. When a successor Person assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor Person will be released from those obligations. 16. Remedies for Events of Default. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of not less than 25% in principal amount of the Notes then outstanding may declare all the Notes to be immediately due and payable. If a bankruptcy or insolvency default with respect to the Company or any of its Significant Subsidiaries occurs and is continuing, the Notes automatically become immediately due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may A-9 direct the Trustee in its exercise of any trust or power. 17. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may make loans to, accept deposits from, perform services for, and otherwise deal with, the Company and its Affiliates as if it were not the Trustee. 18. No Recourse Against Certain Others. No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. No director, officer, employee, incorporator or stockholder of any Subsidiary Guarantor, as such, shall have any liability for any obligations of such Subsidiary Guarantor under its Subsidiary Guarantee or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes and the Subsidiary Guarantees. 19. Authentication. This Note shall not be valid until the Trustee manually signs the certificate of authentication on the other side of this Note. 20. Governing Law. The Notes shall be governed by, and construed in accordance with, the law of the State of New York. 21. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to InSight Health Services Corp., 4400 A-10 MacArthur Blvd., Suite 800, Newport Beach, California 92660, Attention: General Counsel. [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. (Please print or typewrite name and address including zip code of assignee) the within Note and all rights thereunder, hereby irrevocably constituting and appointing attorney to transfer such Note on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES EXCEPT PERMANENT OFFSHORE PHYSICAL CERTIFICATES] In connection with any transfer of this Note occurring prior to the date which is the earlier of the date of an effective Registration Statement or June 12, 2000 the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ] (a)this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. or [ ] (b)this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 307 of the Indenture shall have been satisfied. A-11 Date: _________________________________ Signature to be guaranteed by an institution that is a member of the Signature Guarantee Medallion Program. NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee: TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: _____________________________ NOTICE: To be executed by an executive officer A-12 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 1015 or Section 1016 of the Indenture, check the Box: [ ]. If you wish to have a portion of this Note purchased by the Company pursuant to Section 1015 or Section 1016 of the Indenture, state the amount (in original principal amount) below: $ ---------------------. Date: Your Signature: (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: A-13 Exhibit B Form of Certificate to Be Delivered upon Termination of Distribution Compliance Period On or after July 22, 1998 InSight Health Services Corp. 4400 MacArthur Boulevard Suite 800 Newport Beach, California 92660 Re: InSight Health Services Corp. (the "Company") 9 5/8% Senior Subordinated Notes due 2008 (the "Notes") Ladies and Gentlemen: Capitalized terms used herein without definitions shall have the meanings ascribed thereto in the Indenture dated as of June 1, 1998 between you and State Street Bank and Trust Company, N.A., as trustee. This letter relates to U.S. $__________ principal amount at maturity of Notes represented by the Offshore Global Note. Pursuant to Section 202 of the Indenture, we hereby certify that (1) we are the beneficial owner of such principal amount of Notes represented by the Offshore Global Note and (2) we are a Person outside the United States to whom the Notes could be transferred in accordance with Rule 904 of Regulation S promulgated under the Securities Act. Accordingly, you are hereby requested to issue an Offshore Physical Note representing the undersigned's interest in the principal amount of Notes represented by the Offshore Global Note, all in the manner provided by the Indenture. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Holder] By: A-14 Exhibit C FORM OF SUBSIDIARY GUARANTEE Each Subsidiary Guarantor hereby jointly and severally, absolutely, unconditionally and irrevocably guarantees the Notes and obligations of the Company hereunder and thereunder, and guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee on behalf of such Holder, that: (a) the principal of (and premium, if any) and interest on the Notes will be paid in full when due, whether at Stated Maturity, by acceleration, call for redemption or otherwise (including, without limitation, the amount that would become due but for the operation of the automatic stay under Section 362(a) of the Federal Bankruptcy Code), together with interest on the overdue principal, if any, and interest on any overdue interest, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or of any such other obligations, the same will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise, subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 1306 of the Indenture. The obligations of the Subsidiary Guarantors to the Holders of the Notes and to the Trustee on behalf of the Holders pursuant to this Subsidiary Guarantee and the Indenture are expressly set forth in Article Thirteen of the Indenture, and reference is hereby made to such Indenture for the precise terms of this Subsidiary Guarantee. The terms of Article Thirteen of the Indenture are incorporated herein by reference. This is a continuing guarantee and shall remain in full force and effect and shall be binding upon each Subsidiary Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's obligations under the Notes and the Indenture and shall inure to the benefit of the successors and assigns of the Trustee on behalf of the Holders and the Holders of Notes and, in the event of any transfer or assignment of rights by any Holder of Notes or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a guarantee of payment and not a guarantee of collection. In certain circumstances more fully described in the Indenture, any Subsidiary Guarantor may be released from its liability under this Subsidiary Guarantee, and any such release will be effective whether or not noted herein. This Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Notes upon which this Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. IN WITNESS WHEREOF, each Subsidiary Guarantor has caused its Subsidiary Guarantee to be duly executed. Date: June __, 1998 INSIGHT HEALTH CORP. By: Name: Title: RADIOLOGY SERVICES CORP. By: Name: Title: OPEN MRI, INC. By: Name: Title: MAXUM HEALTH CORP. By: Name: Title: SIGNAL MEDICAL SERVICES, INC. By: Name: Title: QUEST FINANCIAL SERVICES, INC. By: Name: Title: RADIOSURGERY CENTERS, INC. By: Name: Title: MAXUM HEALTH SERVICES CORP. By: Name: Title: MTS ENTERPRISES, INC. By: Name: Title: DIAGNOSTEMPS, INC. By: Name: Title: MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: Name: Title: MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: Name: Title: MAXUM HEALTH SERVICES OF DALLAS, INC. By: Name: Title: NDDC, INC. By: Name: Title: DIAGNOSTIC SOLUTIONS CORP. By: Name: Title: MISSISSIPPI MOBILE TECHNOLOGY, INC. By: Name: Title: Each, a Subsidiary Guarantor By: Name: Title: Exhibit D Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Institutional Accredited Investors [Date] InSight Health Services Corp. 4400 MacArthur Boulevard Suite 800 Newport Beach, California 92660 c/o STATE STREET BANK AND TRUST COMPANY 61 Broadway, 15th Floor New York, New York 10006 Attention: Corporate Trust Department Re: InSight Health Services Corp., (the "Company") 9 5/8 % Senior Subordinated Notes due 2008 (the "Notes") Ladies and Gentlemen: In connection with our proposed purchase of $[____________] aggregate principal amount of the Notes: 1. We understand that the Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Notes to offer, sell or otherwise transfer such Notes prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Notes, or any predecessor thereto (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) for so long as the Notes are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales to non-U.S. Persons that occur outside the United States within the meaning of Regulations S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring the Notes for its own account or for the account of such an institutional "accredited investor" for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property and the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Notes is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) or Rule 501 under the Securities Act and that it is acquiring such Notes for investment purposes and not for distribution in violation of the Securities Act. We acknowledge that the Company and the Trustee reserve the right prior to any offer, sale or other transfer prior to the Resale Restriction Termination Date of the Notes pursuant to clauses (d), (e) and (f) above to require the delivery of an Opinion of Counsel, certifications and/or other information satisfactory to the Company and the Trustee. 2. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) purchasing for our own account or for the account of such an institutional "accredited investor," and we are acquiring the Notes for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 3. We are acquiring the Notes purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. 4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By: (NAME OF PURCHASER) Date: Upon transfer, the Notes should be registered in the name of the new beneficial owner as follows: Name: Address: Taxpayer ID Number: Exhibit E Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S [Date] InSight Health Services Corp. 4400 MacArthur Boulevard Suite 800 Newport Beach, California 92660 c/o c/o STATE STREET BANK AND TRUST COMPANY 61 Broadway, 15th Floor New York, New York 10006 Attention: Corporate Trust Department Re: InSight Health Services Corp. (the "Company") 9 5/8% Senior Subordinated Notes Due 2008 (the "Notes") Ladies and Gentlemen: In connection with our proposed sale of $[_________] aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended, and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States and the proposed transferee is a Non-U.S. Person (as defined in the Indenture pursuant to which the Notes were issued); (2) either (a) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933, as amended. In addition, if the sale is made during a distribution compliance period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: Authorized Signature INSIGHT HEALTH SERVICES CORP. Issuer, THE SUBSIDIARY GUARANTORS NAMED HEREIN, Guarantors and STATE STREET BANK AND TRUST COMPANY, N.A. Trustee -------------------- Indenture Dated as of June 1, 1998 --------------------- $100,000,000 9 5/8% Senior Subordinated Notes Due 2008 INSIGHT HEALTH SERVICES CORP. Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of June 1, 1998
Trust Indenture Act Section Indenture Section Section 310(a)(1) 607 (a)(2) 607 (b) 608 Section 312(c) 701 Section 314(a) 703 (a)(4) 1008(a) (c)(1) 103 (c)(2) 103 (e) 103 Section 315(b) 601 Section 316(a)(last sentence) 101 ("Outstanding") (a)(1)(A) 502, 512 (a)(1)(B) 513 (b) 508 (c) 105(d) Section 317(a)(1) 503 (a)(2) 504 (b) 1003 Section 318(a) 114
- ---------- Note: This reconciliation and tie shall not, for any purpose be deemed part of the Indenture TABLE OF CONTENTS
Page PARTIES......................................................................................................... 1 RECITALS OF THE COMPANY......................................................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION............................................................................................2 SECTION 101. Definitions................................................................................2 Acquired Indebtedness...........................................................................2 Act.............................................................................................2 Additional Notes................................................................................2 Affiliate.......................................................................................2 Agent Bank......................................................................................3 Amended Credit Agreement........................................................................3 Asset Sale......................................................................................3 Banks .......................................................................................3 Board .......................................................................................3 Board Resolution................................................................................4 Business Day....................................................................................4 Capital Stock...................................................................................4 Capitalized Lease Obligation....................................................................4 Cash Equivalent.................................................................................4 Change of Control...............................................................................4 Closing Date....................................................................................5 Commission......................................................................................5 Common Stock....................................................................................5 Company .......................................................................................6 Company Request" or "Company Order..............................................................6 Consolidated EBITDA.............................................................................6 Consolidated Net Income.........................................................................6 Consolidated Tangible Assets....................................................................7 Corporate Trust Office..........................................................................7 Corporation.....................................................................................7 Default .......................................................................................7 Defaulted Interest..............................................................................7 Depositary......................................................................................7
- -------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.
Page Designated Senior Indebtedness..................................................................7 Disinterested Director..........................................................................7 Disqualified Stock..............................................................................7 Equity Offering.................................................................................8 Event of Default................................................................................8 Exchange Act....................................................................................8 Exchange Notes..................................................................................8 Exchange Offer..................................................................................8 Exchange Offer Registration Statement...........................................................8 Existing Indebtedness...........................................................................8 Facility .......................................................................................8 Federal Bankruptcy Code.........................................................................9 Fixed Charges...................................................................................9 Fixed Charge Coverage Ratio.....................................................................9 Foreign Subsidiary..............................................................................9 Generally Accepted Accounting Principles" or "GAAP..............................................9 Guarantee.......................................................................................9 Hedging Obligations.............................................................................9 Holder.........................................................................................10 Indebtedness...................................................................................10 Indenture......................................................................................10 Initial Notes..................................................................................10 Interest Payment Date..........................................................................10 Investment.....................................................................................10 Lien...........................................................................................11 Maturity.......................................................................................11 Moody's........................................................................................11 Net Cash Proceeds..............................................................................11 Non-payment Event of Default...................................................................12 Non-Recourse Indebtedness......................................................................12 Non-U.S. Person................................................................................12 Notes..........................................................................................12 Obligations....................................................................................12 Officers' Certificate..........................................................................12 Opinion of Counsel.............................................................................12 Outstanding....................................................................................12 Pari Passu Indebtedness........................................................................13 Paying Agent...................................................................................13 Payment Default................................................................................14
Page Payment Event of Default.......................................................................14 "Permitted Business" means the Business conducted by the Company, its Restricted Sub..............................................................................14 Permitted Holders..............................................................................14 Permitted Investments..........................................................................14 Permitted Joint Venture........................................................................15 Permitted Refinancing Indebtedness.............................................................16 Person ......................................................................................16 Predecessor Note...............................................................................16 Preferred Stock................................................................................16 Purchase money obligations.....................................................................17 QIB ......................................................................................17 Qualified Equity Interest......................................................................17 Qualified Stock................................................................................17 Redemption Date................................................................................17 Redemption Price...............................................................................17 Register and Note Registrar....................................................................17 Registrar......................................................................................17 Registration Rights Agreement..................................................................17 Registration Statement.........................................................................17 Regular Record Date............................................................................18 Regulation S...................................................................................18 Restricted Investment..........................................................................18 Restricted Subsidiary..........................................................................18 Rule 144A......................................................................................18 Sale and Leaseback Transaction.................................................................18 Securities Act.................................................................................18 Senior Bank Debt...............................................................................18 Senior Indebtedness............................................................................18 Shelf Registration Statement...................................................................19 Significant Subsidiary.........................................................................19 S&P............................................................................................19 Special Record Date............................................................................19 Stated Maturity................................................................................19 Subordinated Indebtedness......................................................................19 Subsidiary.....................................................................................20 Subsidiary Guarantee...........................................................................20 Subsidiary Guarantors..........................................................................20 Trust Indenture Act or TIA.....................................................................20
Page Trustee ......................................................................................20 Unrestricted Subsidiary........................................................................20 U.S. Government Obligations....................................................................20 Voting Stock...................................................................................21 Weighted Average Life..........................................................................21 Wholly Owned Restricted Subsidiary.............................................................21 SECTION 102. Incorporation by Reference of Trust Indenture Act.........................................21 SECTION 103. Compliance Certificates and Opinions......................................................22 SECTION 104. Form of Documents Delivered to Trustee....................................................22 SECTION 105. Acts of Holders...........................................................................23 SECTION 106. Notices, etc., to Trustee, Company and Subsidiary Guarantors..............................24 SECTION 107. Notice to Holders; Waiver.................................................................25 SECTION 108. Effect of Headings and Table of Contents..................................................26 SECTION 109. Successors and Assigns....................................................................26 SECTION 110. Severability Clause.......................................................................26 SECTION 111. Benefits of Indenture.....................................................................26 SECTION 112. Governing Law.............................................................................26 SECTION 113. Legal Holidays............................................................................26 SECTION 114. Conflict of Any Provision of Indenture with Trust Indenture Act...........................27 ARTICLE TWO NOTE FORMS...........................................................................................27 SECTION 201. Forms Generally...........................................................................27 SECTION 202. Restrictive Legends.......................................................................28 ARTICLE THREE THE NOTES..........................................................................................30 SECTION 301. Title and Terms...........................................................................30 SECTION 302. Denominations.............................................................................31 SECTION 303. Execution, Authentication, Delivery and Dating............................................31 SECTION 304. Temporary Notes...........................................................................33 SECTION 305. Registration, Registration of Transfer and Exchange.......................................33 SECTION 306. Book-Entry Provisions for Global Notes....................................................34 SECTION 307. Special Transfer Provisions...............................................................36 SECTION 308. Mutilated, Destroyed, Lost and Stolen Notes...............................................39 SECTION 309. Payment of Interest; Interest Rights Preserved............................................40 SECTION 310. Persons Deemed Owners.....................................................................41 SECTION 311. Cancellation..............................................................................42 SECTION 312. Issuance of Additional Notes..............................................................42 SECTION 313. Computation of Interest...................................................................42 ARTICLE FOUR SATISFACTION AND DISCHARGE..........................................................................42 SECTION 401. Satisfaction and Discharge of Indenture...................................................42
Page SECTION 402. Application of Trust Money................................................................43 ARTICLE FIVE REMEDIES............................................................................................44 SECTION 501. Events of Default.........................................................................44 SECTION 502. Acceleration of Maturity; Rescission and Annulment........................................45 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee...........................46 SECTION 504. Trustee May File Proofs of Claim..........................................................47 SECTION 505. Trustee May Enforce Claims Without Possession of Notes....................................48 SECTION 506. Application of Money Collected............................................................48 SECTION 507. Limitation on Suits.......................................................................49 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.................................................................................49 SECTION 509. Restoration of Rights and Remedies........................................................49 SECTION 510. Rights and Remedies Cumulative............................................................50 SECTION 511. Delay or Omission Not Waiver..............................................................50 SECTION 512. Control by Holders........................................................................50 SECTION 513. Waiver of Past Defaults...................................................................51 SECTION 514. Waiver of Stay or Extension Laws..........................................................51 SECTION 515. Waiver of Personal Liability of Directors, Officers, Employees and Stockholders...............................................................51 ARTICLE SIX THE TRUSTEE..........................................................................................52 SECTION 601. Duties of Trustee.........................................................................52 SECTION 602. Notice of Defaults........................................................................53 SECTION 603. Certain Rights of Trustee.................................................................53 SECTION 604. Trustee Not Responsible for Recitals or Issuance of Notes.................................55 SECTION 605. May Hold Notes............................................................................55 SECTION 606. Money Held in Trust.......................................................................55 SECTION 607. Compensation and Reimbursement............................................................55 SECTION 608. Corporate Trustee Required; Eligibility...................................................56 SECTION 609. Resignation and Removal; Appointment of Successor.........................................57 SECTION 610. Acceptance of Appointment by Successor....................................................58 SECTION 611. Merger, Conversion, Consolidation or Succession to Business...............................59 ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE...............................................................59 SECTION 701. Disclosure of Names and Addresses of Holders..............................................59 SECTION 702. Reports by Trustee........................................................................59
Page ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE.......................................................................................60 SECTION 801. Company May Consolidate, etc., Only on Certain Terms......................................60 SECTION 802. Successor Substituted.....................................................................61 ARTICLE NINE SUPPLEMENTS AND AMENDMENTS TO INDENTURE AND SUBSIDIARY GUARANTEES...............................................................................62 SECTION 901. Without Consent of Holders................................................................62 SECTION 902. With Consent of Holders...................................................................63 SECTION 903. Execution of Supplemental Indentures......................................................64 SECTION 904. Effect of Supplemental Indentures.........................................................64 SECTION 905. Conformity with Trust Indenture Act.......................................................64 SECTION 906. Reference in Notes to Supplemental Indentures.............................................65 SECTION 907. Notice of Supplemental Indentures.........................................................65 ARTICLE TEN COVENANTS............................................................................................65 SECTION 1001. Payment of Principal, Premium, if any, and Interest......................................65 SECTION 1002. Maintenance of Office or Agency..........................................................65 SECTION 1003. Money for Note Payments to Be Held in Trust..............................................66 SECTION 1004. Corporate Existence......................................................................67 SECTION 1005. Payment of Taxes and Other Claims........................................................68 SECTION 1006. Maintenance of Properties................................................................68 SECTION 1007. Insurance................................................................................68 SECTION 1008. Statement by Officers As to Default......................................................68 SECTION 1009. Reports..................................................................................69 SECTION 1010. Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock...................................................................................69 SECTION 1011. Limitation on Restricted Payments........................................................72 SECTION 1012. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries............................................................................76 SECTION 1013. Limitation on Transactions with Affiliates...............................................76 SECTION 1014. Limitation on Liens......................................................................77 SECTION 1015. Purchase of Notes upon a Change of Control...............................................78 SECTION 1016. Limitation on Certain Asset Sales........................................................80 SECTION 1017. Unrestricted Subsidiaries................................................................81 SECTION 1018. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries.......................................................82 SECTION 1019. Waiver of Certain Covenants..............................................................83 SECTION 1020. Payment for Consent......................................................................83 SECTION 1021. Limitation on Layering Debt..............................................................83
Page SECTION 1022. Limitation on Guarantees of Indebtedness by Restricted Subsidiaries............................................................................84 ARTICLE ELEVEN REDEMPTION OF NOTES...............................................................................84 SECTION 1101. Right of Redemption......................................................................84 SECTION 1102. Applicability of Article.................................................................85 SECTION 1103. Election to Redeem; Notice to Trustee....................................................85 SECTION 1104. Selection by Trustee of Notes to Be Redeemed.............................................86 SECTION 1105. Notice of Redemption.....................................................................86 SECTION 1106. Deposit of Redemption Price..............................................................87 SECTION 1107. Notes Payable on Redemption Date.........................................................87 SECTION 1108. Notes Redeemed in Part...................................................................88 ARTICLE TWELVE LEGAL DEFEASANCE AND COVENANT DEFEASANC...........................................................88 SECTION 1201. Company Option to Effect Legal Defeasance or Covenant Defeasance.............................................................................88 SECTION 1202. Legal Defeasance and Discharge...........................................................88 SECTION 1203. Covenant Defeasance......................................................................89 SECTION 1204. Conditions to Legal Defeasance or Covenant Defeasance....................................89 SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions...........................................90 SECTION 1206. Reinstatement............................................................................91 ARTICLE THIRTEEN GUARANTEES......................................................................................91 SECTION 1301. Subsidiary Guarantees....................................................................91 SECTION 1302. Execution and Delivery of Subsidiary Guarantee...........................................93 SECTION 1303. Severability.............................................................................93 SECTION 1304. Seniority of Subsidiary Guarantees.......................................................93 SECTION 1305. Limitation of Subsidiary Guarantor's Liability...........................................94 SECTION 1306. Contribution.............................................................................94 SECTION 1307. Release of a Subsidiary Guarantor........................................................95 SECTION 1308. Benefits Acknowledged....................................................................95 SECTION 1309. Issuance of Subsidiary Guarantees by Certain New Restricted Subsidiaries............................................................................96 ARTICLE FOURTEEN SUBORDINATION...................................................................................96 SECTION 1401. Notes Subordinate to Senior Indebtedness.................................................96 SECTION 1402. Payment over by the Company of Proceeds upon Dissolution, etc........................................................................96 SECTION 1403. Suspension of Payment on Notes When Senior Indebtedness of the Company in Default......................................................................97 SECTION 1404. Payment Over by Subsidiary Guarantors of Proceeds Upon Dissolution, etc........................................................................98
Page SECTION 1405. Suspension of Payment on Subsidiary Guarantees When Senior Indebtedness of Subsidiary Guarantor in Default........................................100 SECTION 1406. Payment Permitted If No Default.........................................................100 SECTION 1407. Subrogation to Rights of Holders of Senior Indebtedness.................................101 SECTION 1408. Provisions Solely to Define Relative Rights.............................................101 SECTION 1409. Trustee to Effectuate Subordination.....................................................102 SECTION 1410. No Waiver of Subordination Provisions...................................................102 SECTION 1411. Notice to Trustee.......................................................................102 SECTION 1412. Reliance on Judicial Order or Certificate of Liquidating Agent..................................................................................103 SECTION 1413. Rights of Trustee As a Holder of Senior Indebtedness; Preservation of Trustee's Rights.......................................................103 SECTION 1414. Article Applicable to Paying Agents.....................................................104 SECTION 1415. No Suspension of Remedies...............................................................104 SECTION 1416. Trust Moneys Not Subordinated...........................................................104 SECTION 1417. Trustee Not Fiduciary for Holders of Senior Indebtedness................................104
EXHIBITS
Page Exhibit A - Form of Note........................................................................................A-1 Exhibit B - Form of Certificate to Be Delivered upon Termination of Restricted Period...........................B-1 Exhibit C - Form of Subsidiary Guarantee........................................................................C-1 Exhibit D - Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Institutional Accredited Investors .....................................................D-1 Exhibit E - Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S...........................................................................E-1
SCHEDULES Schedule I - Existing Indebtedness EX-4.4 3 EXHIBIT 4.4 CONFORMED COPY INSIGHT HEALTH SERVICES CORP. $100,000,000 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 PURCHASE AGREEMENT June 9, 1998 NationsBanc Montgomery Securities LLC NationsBank Corporate Center 100 North Tryon Street Charlotte, North Carolina 28255 Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Sutro & Co. Incorporated 11150 Santa Monica Blvd. Los Angeles, CA 90025 Ladies and Gentlemen: InSight Health Services Corp., a Delaware corporation (the "Company"), proposes to issue and sell (the "Initial Placement") to NationsBanc Montgomery Securities LLC, Morgan Stanley & Co. Incorporated and Sutro & Co. Incorporated (the "Initial Purchasers" and, individually, each an "Initial Purchaser") $100,000,000 aggregate principal amount of its 9 5/8% Senior Subordinated Notes Due 2008 (the "Notes"). The Notes are to be fully and unconditionally guaranteed on an unsecured, senior subordinated basis (the "Note Guarantees") by all existing and future United States subsidiaries of the Company (other than Permitted Joint Ventures) (each such existing guarantor, a "Guarantor" and collectively, the "Guarantors"). The Notes are to be issued under an indenture (the "Indenture") dated as of June 1, 1998 between the Company, the Guarantors and State Street Bank and Trust Company, N.A., as trustee (the "Trustee"). This Purchase Agreement (this "Agreement"), the Notes, the Note Guarantees, the Indenture, the Registration Rights Agreement, dated as of June 12, 1998, among the Company, the Guarantors and the Initial Purchasers (the "Registration Rights Agreement") and the Credit Agreement, dated as of October 14, 1997, as amended as of November 17, 1997, December 19, 1997 and March 23, 1998 (the "Credit Agreement") and to be amended (as described in the Final Memorandum) concurrently with the issuance of the Notes (the "Fourth Amendment"), among the Company, the lenders named therein and NationsBank, N.A., as agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith (the "Amended Credit Agreement") are herein collectively referred to as the "Transaction Documents." The sale of the Notes to the Initial Purchasers will be made without registration of the Notes under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon exemptions from the registration requirements of the Securities Act. You have advised the Company that you will offer and sell the Notes purchased by you hereunder in accordance with Section 4 hereof as soon as you deem advisable. The Notes will have the benefit of certain registration rights, pursuant to the Registration Rights Agreement. In connection with the sale of the Notes, the Company and the Guarantors have prepared a preliminary offering memorandum, dated May 20, 1998 (the "Preliminary Memorandum"), and a final offering memorandum, dated June 9, 1998 (the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Company, the Guarantors and the Notes. The Company and the Guarantors hereby confirm that they have authorized the use of the Preliminary Memorandum and the Final Memorandum, and any amendment or supplement thereto, in connection with the offer and sale of the Notes by the Initial Purchasers. Unless stated to the contrary, all references herein to the Final Memorandum are to the Final Memorandum at the Execution Time (as defined below) and are not meant to include any amendment or supplement subsequent to the Execution Time. The Notes are being issued for purposes of refinancing certain indebtedness outstanding under the Credit Agreement and for general corporate purposes. Prior to the Closing Date, the Company will execute an amendment to the Credit Agreement as described in the Final Memorandum. Capitalized terms used herein without definition shall have their respective meanings set forth in the Final Memorandum. 1. Representations and Warranties. The Company represents and warrants to the Initial Purchasers that: (a) The Preliminary Memorandum, at the date thereof, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Final Memorandum, at the date hereof, does not, and at the Closing Date (as defined below) will not (or, if amended or supplemented, the Final Memorandum as amended or supplemented at the date of any such amendment or supplement and at the Closing Date, will not), contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to the information contained in or omitted from the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of the Initial Purchasers specifically for inclusion therein. (b) Neither the Company, nor any "Affiliate" (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")) of the Company or any person acting on its or their behalf (other than the Initial Purchasers, as to which no representation is made) has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration of the Notes under the Securities Act. (c) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf (other than the Initial Purchasers, as to which no representation is made) has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Notes in the United States. (d) The Notes satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (e) With respect to those Notes sold in reliance upon Regulation S, (i) none of the Company, its Affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation or warranty) has engaged or will engage in any directed selling efforts within the meaning of Regulation S and (ii) each of the Company and its Affiliates and any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation or warranty) has complied and will comply with the offering restrictions set forth in Regulation S. (f) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without taking account of any exemption arising out of the number of holders of the securities of the Company. (g) Neither the Company nor any of its Affiliates has paid or agreed to pay to any person any compensation for soliciting another to purchase any securities of the Company (except as contemplated by this Agreement). (h) Assuming that the representations and warranties of the Initial Purchasers contained in Section 4 hereof are true and correct in all material respects and that the Initial Purchasers comply in all material respects with all of their covenants and agreements contained herein, it is not required in connection with the offer, sale and delivery of the Notes in the manner contemplated by this Agreement and the Final Memorandum to register any of such securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). (i) The Company has been advised by the National Association of Securities Dealers, Inc. (the "NASD") Private Offerings, Resales and Trading through Automated Linkages market ("PORTAL") that the Notes have been designated PORTAL eligible securities in accordance with the rules and regulations of the NASD. (j) The consolidated financial statements (including the notes thereto) and schedules of the Company and its subsidiaries and Signal Medical Services, Inc., a Delaware corporation ("Signal") and its subsidiaries, each set forth in the Final Memorandum, present fairly in all material respects the financial position, results of operations and cash flows of the Company and its subsidiaries and Signal and its subsidiaries, respectively, as of the dates and for the periods specified therein; since the date of the latest of such financial statements, there has been no change or any development or event involving a prospective change which has had a material adverse effect on (i) the business, operations, properties, assets, liabilities, net worth, condition (financial or otherwise) or prospects of the Company and its subsidiaries (including Signal and its subsidiaries), taken as a whole, or (ii) the ability of the Company to perform any of its obligations under the Transaction Documents (a "Material Adverse Effect"); such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise expressly noted in the Final Memorandum); the other financial and statistical information and data (other than market-related information) set forth in the Final Memorandum (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements, except as otherwise stated therein; and the statistical and marketrelated data included in the Final Memorandum are based on or derived from sources which the Company believes to be reliable and accurate and are based upon assumptions and qualifications which the Company considers reasonable and appropriate in all material respects. (k) The pro forma financial statements (including the notes thereto) and the other pro forma financial information included in the Final Memorandum (i) comply as to form in all material respects with the applicable requirements of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and (iii) have been properly computed on the bases described therein; the assumptions used in the preparation of the pro forma financial data and other pro forma financial information included in the Final Memorandum are reasonable in all material respects and the adjustments used therein are appropriate in all material respects to give effect to the transactions or circumstances referred to therein. (l) Subsequent to the respective dates as of which information is given in the Preliminary Memorandum and the Final Memorandum, and except in each case as described in or contemplated by the Preliminary Memorandum or the Final Memorandum, as the case may be, (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company and its subsidiaries have not purchased any of their outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on their capital stock; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company or its subsidiaries. (m) Each of the Company and its corporate subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized with full power (corporate and other) to own or lease its properties, conduct its business as described in the Final Memorandum and to enter into each Transaction Document to which it is a party and carry out the terms and provisions of each such Transaction Document to be carried out by it; the Company and each of its corporate subsidiaries is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect. (n) Each of the subsidiaries of the Company that are limited partnerships or limited liability companies are and, as of the Closing Date, will be duly formed, validly existing and in good standing as a limited partnership or limited liability company, as the case may be, under the laws of the jurisdiction of its organization or formation, as the case may be, and each has all requisite limited liability company or partnership power and authority, as the case may be, under such laws to own, lease and operate its properties and conduct its business as described in the Final Memorandum; and each is and, as of the Closing Date, will be duly qualified to transact business and in good standing in each other jurisdiction which requires such qualification, whether by reason of the ownership or leasing of property or the conduct of business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect. (o) The Company has the authorized, and, as of March 31, 1998 issued and outstanding capitalization as set forth in the Final Memorandum under the caption "Capitalization." All of the issued shares of capital stock of the Company have been duly authorized, validly issued, fully paid and nonassessable and were not issued in violation of any preemptive or similar rights. (p) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire from the Company any shares of capital stock of, or other ownership interest in, the Company or any of its subsidiaries except pursuant to existing stock option plans, a warrant to purchase 15,000 shares of the Company's common stock held by Anthony LeVecchio and as otherwise disclosed in the Final Memorandum. (q) The issued shares of capital stock of each of the Company's corporate subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and, except for directors' qualifying shares and except as otherwise set forth in the Final Memorandum, are owned of record and beneficially by the Company, either directly or through wholly owned subsidiaries, free and clear of any pledge, lien, encumbrance, security interest, restriction on voting or transfer, preemptive rights or claim of any third party. No subsidiary of the Company is prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Final Memorandum. (r) Neither the Company nor any of its subsidiaries is (i) in violation of its charter or bylaws (or similar organizational documents), (ii) in breach or violation of any law, ordinance, governmental or administrative rule or regulation or court decree or (iii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which its respective properties may be bound, except to the extent that any such breach or violation in the case of (ii) or any such default in the case of (iii) would not have a Material Adverse Effect. (s) The issuance, offering and sale of the Notes to the Initial Purchasers pursuant to this Agreement, the delivery of the Notes under this Agreement, the compliance by the Company and the Guarantors with the provisions of each of the Transaction Documents to which it is a party and the consummation of the other transactions herein and therein contemplated do not (i) require the consent, approval, authorization, order, registration or qualification of or with any governmental authority or court, except such as may be required under state securities or blue sky laws or except as may be contemplated by the Registration Rights Agreement or except to the extent that the absence or failure to obtain such consent, approval, authorization, order, registration or qualification would not have a Material Adverse Effect, or (ii) conflict with, result in a breach or violation of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any material contract, loan agreement, note, indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party, or by which the Company or any of its subsidiaries or any of their respective properties is bound, or the charter or by-laws of the Company or any of its subsidiaries or any statute, rule or regulation or any judgment, order or decree of any governmental authority or court or arbitrator applicable to the Company or any of its subsidiaries, except to the extent that any such conflict, breach, violation or default would not have a Material Adverse Effect (other than with respect to the Charter and by-laws of the Company and the Guarantors) or except for such consents that have already been obtained. (t) The Company and its subsidiaries possess all certificates, authorizations and permits (including environmental permits) issued by the appropriate federal, state or foreign regulatory authorities or bodies necessary to conduct their respective businesses, except for those the lack of which would not cause a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, is reasonably likely to result in a Material Adverse Effect. Without limiting the generality of the foregoing, all facilities owned or operated as continuing operations by the Company or its subsidiaries (the "Company Facilities"), to the extent described in the Final Memorandum, (i) are certified for participation or enrollment in the Medicare and Medicaid programs, except where failure to do so, singly or in the aggregate, would not have a Material Adverse Effect, (ii) have a current and valid provider contract with the Medicare and Medicaid programs, except where failure to have such contract, singly or in the aggregate, would not have a Material Adverse Effect, and (iii) are in substantial compliance with the terms and conditions of participation of such programs and have received all approvals or qualifications necessary for capital reimbursement of the Company's assets except, in each case, where the failure to be so certified, to have such contracts, to be in such compliance or to have such approvals or qualifications, singly or in the aggregate, would not have a Material Adverse Effect. Except as set forth in the Final Memorandum, neither the Company nor any of its subsidiaries has received notice from the regulatory authorities which enforce the statutory or regulatory provisions in respect of the Medicare or Medicaid programs of any pending or threatened investigations, surveys (other than routine surveys) or decertification proceedings, and the Company has reasonably concluded that no such investigations, surveys or other proceedings which are pending threatened or imminent are likely to have a Material Adverse Effect. (u) No legal or governmental proceedings or investigations are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are not described in the Final Memorandum, and no such proceedings or investigations, to the best knowledge of the Company, have been threatened against the Company or any of its subsidiaries, or with respect to any of their respective properties, except in each case for such proceedings or investigations that, singly or in the aggregate, are not reasonably likely to result in a Material Adverse Effect. (v) The Company and each of its subsidiaries have valid title in fee simple to all items of real property and title to all personal property owned by each of them, in each case free and clear of any pledge, lien, encumbrance, security interest or other defect or claim of any third party, except (i) such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary to an extent that such interference would have a Material Adverse Effect, and (ii) permitted liens set forth in the Final Memorandum. Any real property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as do not materially interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary. (w) This Agreement has been duly authorized, executed and delivered by the Company. (x) The Registration Rights Agreement, the Amended Credit Agreement and the Indenture have been duly authorized by all necessary actions of the Company and, when duly executed and delivered by the Company (and its subsidiaries, as applicable) and the other parties thereto, will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers, or (ii) general principles of equity, whether considered at law or in equity, and except as the enforceability of rights of indemnification or contribution may be limited by or under federal or state securities laws or public policy. (y) The Notes and the Note Guarantees have been duly authorized by all necessary action for issuance and sale pursuant to this Agreement and, when the Notes are executed, authenticated, issued and delivered in the manner provided for in the Indenture and sold and paid for as provided in this Agreement, the Notes will constitute legal, valid and binding obligations of the Company and the Guarantors, respectively, entitled to the benefits of the Indenture and enforceable against the Company and the Guarantors, respectively, in accordance with their terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers, or (ii) general principles of equity, whether considered at law or in equity, and except as the enforceability of rights of indemnification or contribution may be limited by or under federal or state securities laws or public policy. (z) Arthur Andersen LLP ("Arthur Andersen"), which has audited certain financial statements of the Company and its consolidated subsidiaries and delivered its reports with respect to the audited consolidated financial statements of the Company in the Final Memorandum, are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations thereunder. KPMG Peat Marwick LLP ("KPMG Peat"), which has audited certain financial statements of Signal and its consolidated subsidiaries and delivered its reports with respect to the consolidated audited financial statements of Signal in the Final Memorandum, are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations thereunder. (aa) Each of the Company and Signal and each of their respective subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (bb) Neither the Company nor any of its subsidiaries is now or, after giving effect to the issuance of the Notes and the consummation of the transactions contemplated by the Final Memorandum will be (i) insolvent, (ii) left with unreasonably small capital with which to engage in its anticipated businesses or (iii) incurring debts beyond its ability to pay such debts as they become due. (cc) The Company and its subsidiaries own or otherwise possess the right to use all patents, trademarks, service marks, trade names and copyrights, all applications and registrations for each of the foregoing, and all other proprietary rights and confidential information used in the conduct of their respective businesses as currently conducted, except to the extent the absence thereof would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice, or is otherwise aware, of any infringement of or conflict with the rights of any third party with respect to any of the foregoing which, singly or in the aggregate, is reasonably likely to result in a Material Adverse Effect. (dd) The Company and its subsidiaries are insured by insurers of recognized financial responsibility (or by appropriate self-insurance) against such losses and risks and in such amounts as are prudent and customary in the businesses and in the locations in or at which they are engaged; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (ee) ERISA: (i) Definitions: "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) that for purposes of Title IV of ERISA is a member of the controlled group of the Company, or under common control with the Company, within the meaning of Section 414 of the Internal Revenue Code. "ERISA Event" means (a)(i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC, or (ii) the requirements of subsection (1) of Section 4043(b) of ERISA are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of the Company or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by the Company or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, such Plan. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Company or any ERISA Affiliate and at least one trade or business (whether or not incorporated) other than the Company and the ERISA Affiliates or (b) was so maintained and in respect of which the Company or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "PBGC" means the Pension Benefit Guaranty Corporation. "Plan" means a Single Employer Plan or a Multiple Employer Plan. "Single Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Company or any ERISA Affiliate and no trade or business (whether or not incorporated) other than the Company and the ERISA Affiliates or (b) was so maintained and in respect of which the Company or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Underfunding" means, with respect to any Plan, the excess, if any, of the "projected benefit obligations" (within the meaning of Statement of Financial Accounting Standards 87) under such Plan (determined using the actuarial assumptions used for purposes of calculating funding requirements in the most recent actuarial report for such plan) over the fair market value of the assets held under the Plan. "Withdrawal Liability" has the meaning specified in Part I of Subtitle E of Title IV of ERISA. (ii) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan. (iii) The aggregate Underfunding with respect to all Plans which have any Underfunding does not exceed $100,000. (iv) Neither the Company nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability. (v) Neither the Company nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (ff) There is (i) no unfair labor practice complaint pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or more significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, and (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against it or any of its subsidiaries which, in the case of (i) or (ii) is likely to result in a Material Adverse Effect. (gg) The Company has filed all foreign, federal, state and local tax returns that are required to be filed, except insofar as the failure to file such returns, singly or in the aggregate, would not have a Material Adverse Effect, or has requested extensions thereof and in each case has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest. (hh) Neither of the Company nor any Affiliate of the Company has taken, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to cause or result in, stabilization or manipulation (as such terms are defined under the Exchange Act) of the price of any security of the Company to facilitate the sale or resale of the Notes. (ii) Except as disclosed in the Final Memorandum, and except as would not individually or in the aggregate have a Material Adverse Effect (i) the Company and each of its subsidiaries are in compliance with all applicable Environmental Laws (as defined below), (ii) the Company and each of its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are in compliance with their requirements, (iii) there are no pending or, to the best knowledge of the Company, threatened Environmental Claims (as defined below) against the Company or any of its subsidiaries and (iv) the Company and each of its subsidiaries do not have knowledge of any circumstances with respect to any of their respective properties or operations that could reasonably be anticipated to form the basis of an Environmental Claim against the Company or any of its subsidiaries or any of their respective properties or operations and the business operations relating thereto that would have a Material Adverse Effect. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means, with respect to any person, any federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any published judicial or administrative interpretation thereof including any judicial or administrative order, consent decree or judgment binding on such person or any of its subsidiaries, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any such governmental authority. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (jj) The Company has reasonably concluded that any and all costs and liabilities incurred or reasonably expected to be incurred pursuant to any Environmental Law (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and potential liabilities to third parties) would not, singly or in the aggregate, have a Material Adverse Effect. (kk) Each certificate signed by any officer of the Company and delivered to the Initial Purchasers or their counsel shall be deemed to be a representation and warranty by the Company to the Initial Purchasers as to the matters covered thereby. (ll) The Note Guarantees by the subsidiaries have been duly authorized by each of the Guarantors, and, when executed, will conform in all material respects to the description thereof in the Final Memorandum, will be valid and binding obligations of each of the Guarantors, will be entitled to the benefits of the Indenture and will be enforceable in accordance with their terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers, or (ii) general principles of equity, whether considered at law or in equity, and except as the enforceability of rights of indemnification or contribution may be limited by or under federal or state securities laws or public policy. (mm) The sale of the Notes to the Initial Purchasers does not constitute a "prohibited transaction" (as defined in the Employee Retirement Income Security Act of 1974, as amended). 2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company agrees to sell to the Initial Purchasers, and each Initial Purchaser agrees, severally and not jointly, to purchase from the Company at a purchase price of 97.25% of the principal amount thereof the principal amount of Notes set forth opposite such Initial Purchaser's name in Schedule I attached here. 3. Delivery and Payment. Delivery of and payment for the Notes shall be made at 10:00 a.m. New York City time, on June 12, 1998, or such later date as the Initial Purchasers shall designate (but in no event later than June 19, 1998), which later date and time may be postponed by agreement between the Initial Purchasers and the Company (such date and time of delivery and payment for the Notes being herein called the "Closing Date"). Delivery of the Notes shall be made to the Initial Purchasers against payment by the Initial Purchasers of the purchase price thereof to or upon the order of the Company in immediately available funds or such other manner of payment as may be agreed by the Company and the Initial Purchasers. Delivery of the Notes shall be made at such location as the Initial Purchasers shall reasonably designate not later than 1:00 p.m. on the business day prior to the Closing Date and payment for the Notes shall be made at the offices of Shearman & Sterling ("Counsel for the Initial Purchasers"), 599 Lexington Avenue, New York, New York, with any transfer taxes payable in connection with the transfer of the Notes fully paid, against payment of the purchase price therefor. Certificates for the Notes shall be registered in such names and in such denominations as the Initial Purchasers may request not less than two full business days in advance of the Closing Date. The Company agrees to have the Notes available for inspection, checking and packaging by the Initial Purchasers in New York, New York, not later than 1:00 p.m. on the business day prior to the Closing Date. 4. Offering of Notes by the Initial Purchasers. Each Initial Purchaser, severally and not jointly, represents and warrants to and agrees with the Company that: (a) It and any person acting on its behalf has not solicited any offer to purchase, offered or sold, and will not solicit any offer to purchase, offer or sell, any Notes except to those it reasonably believes to be (i) "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) and that, in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of such Notes is aware that such sale is being made in reliance on Rule 144A, (ii) other institutional "accredited investors" (as defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D) that, prior to their purchase of the Notes, deliver to the Initial Purchaser a letter containing the representations and agreements set forth in the form of Annex A to the Final Memorandum or (iii) non-U.S. persons outside the United States to whom offers and sales of the Notes may be made in reliance on Regulation S under the Securities Act. (b) Neither it nor any person acting on its behalf has made or will make offers or sales of the Notes in the United States by means of any form of general solicitation or general advertising (within the meaning of Regulation D) in the United States. (c) The Notes offered and sold by the Initial Purchasers in reliance on Regulation S have been and will be offered and sold only in offshore transactions (within the meaning of Regulation S) and without any directed selling efforts (as defined in Regulation S) within the United States, and the sale of such Notes in reliance on Regulation S is not part of a plan or scheme to avoid the registration provisions of the Act. It and any person acting on its behalf has complied and will comply, in all material respects, with the offering restrictions set forth in Regulation S. (d) The Initial Purchasers' acquisition of the Notes does not constitute a "prohibited transaction" (as defined in the Employee Retirement Income Security Act of 1974, as amended). (e) It and any person acting on its behalf will offer the Notes for the initial resale to investors only upon the terms and conditions set forth in this Agreement and in the Final Memorandum. (f) Unless prohibited by applicable law, it will furnish to each person to whom it offers any Notes a copy of the Preliminary Memorandum (as amended or supplemented) or the Final Memorandum (as amended or supplemented) and it will furnish to each person to whom it sells any Notes a copy of the Final Memorandum (as amended or supplemented). (g) (i) It has not offered or sold and will not offer or sell any Notes to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 of Great Britain with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document in connection with the issue of the notes to a person who is of a kind described in Article 8 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2) Order 1996 of Great Britain or is a person to whom such document may otherwise lawfully be issued or passed on. 5. Agreements. The Company agrees with each Initial Purchaser that: (a) The Company will furnish to each Initial Purchaser and to counsel for the Initial Purchasers, without charge, during the period referred to in paragraph (c) below, as many copies of the Final Memorandum and any amendments and supplements thereto as they may reasonably request. The Company will pay the expenses of printing of all documents relating to the Offering and will reimburse the Initial Purchasers for payment of the required PORTAL filing fee. (b) The Company will not amend or supplement the Final Memorandum unless the Initial Purchasers shall previously have been advised thereof and shall not have objected thereto in writing within five business days after being furnished a copy thereof. (c) Prior to the consummation of the exchange offer made pursuant to the Registration Rights Agreement or the effectiveness of an applicable shelf registration statement if, in the reasonable judgment of the Initial Purchasers, the Initial Purchasers or any of their Affiliates are required to deliver an offering memorandum in connection with sales of, or market-making activities with respect to, the Notes, (A) the Company will periodically amend or supplement the Final Memorandum so that the information contained in the Final Memorandum complies with the requirements of Rule 144A of the Securities Act, (B) the Company will amend or supplement the Final Memorandum when necessary to reflect any material changes in the information provided therein so that the Final Memorandum will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing as of the date the Final Memorandum is so delivered, not misleading and (C) the Company will provide the Initial Purchasers with copies of each such amended or supplemented Final Memorandum, as the Initial Purchasers may reasonably request. The Company hereby expressly acknowledges that the indemnification and contribution provisions of Section 8 hereof are specifically applicable and relate to each offering memorandum, registration statement, prospectus, amendment or supplement referred to in this Section 5(c). (d) The Company will arrange for the qualification of the Notes for sale by the Initial Purchasers under the laws of such jurisdictions as the Initial Purchasers may reasonably designate and will maintain such qualifications in effect as long as required for the sale of the Notes. Notwithstanding the foregoing, the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or to file general consent to service of process or to subject itself to taxation in any jurisdiction in which it is not otherwise subject. The Company will promptly advise the Initial Purchasers of the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (e) Whenever the Company publishes or makes available to the public (by filing with any regulatory authority or securities exchange or by publishing a press release or otherwise) any information that could reasonably be expected to be material in the context of the offer and sale of Notes under this Agreement, the Company shall immediately notify the Initial Purchasers as to the nature of such information or event. Until the third anniversary of the Closing Date, the Company will notify the Initial Purchasers of (i) any decrease in the rating of the Notes or any other debt securities of the Company by any nationally recognized statistical rating organization (as defined in Rule 436(g) under the Securities Act) or (ii) any notice given of any intended or potential decrease in any such rating or of a possible change in any such rating which does not indicate the direction of the possible change, promptly after the Company becomes aware of any such decrease or notice. For a period of two years after the Closing Date, the Company will also deliver to the Initial Purchasers, as soon as available and to the extent individually prepared, and without request, copies of its latest annual report and quarterly statement and any reports of its auditors thereon. (f) Neither the Company, any of its Affiliates, nor any person acting on its or their behalf other than the Initial Purchasers, as to which no agreement is made, will, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Notes under the Securities Act (other than pursuant to the Registration Rights Agreement). (g) Neither the Company, any of its Affiliates, nor any person acting on its or their behalf other than the Initial Purchasers, as to which no agreement is made, will engage, in connection with the offering of the Notes, (i) in any form of general solicitation or general advertising (within the meaning of Regulation D) or (ii) in any public offering within the meaning of Section 4(2) of the Securities Act. (h) So long as any of the Notes are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company will, during any period in which it is not subject to and in compliance with Section 13 or 15(d) of the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser, any information required to be provided by Rule 144A(d)(4) under the Securities Act. Such information, at the date of its provision by the Company to such holders or prospective purchasers, will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. This covenant is intended to be for the benefit of the holders and the prospective purchasers designated by such holders from time to time of such restricted securities. (i) The Company will cooperate with the Initial Purchasers and use its best efforts to permit the Notes (i) to be eligible for clearance and settlement through The Depository Trust Company and (ii) to be designated PORTAL-eligible securities in accordance with the rules and regulations of the NASD. (j) The Company will not, until 180 days following the Closing Date, without the prior written consent of the Initial Purchasers, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any debt securities issued or guaranteed by the Company (other than the Notes). (k) The Company will apply the net proceeds from the sale of the Notes as set forth in the Final Memorandum under the caption "Use of Proceeds." 6. Conditions to the Obligations of the Initial Purchasers. The obligations of the Initial Purchasers to purchase the Notes shall be subject to the accuracy in all material respects of the representations and warranties on the part of the Company contained herein at the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time"), and at the Closing Date as specified in Section 6(e), to the accuracy in all material respects of the statements of the Company made in any certificates pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder at or prior to the Closing Date and to the following additional conditions: (a) The Company shall have entered into a Registration Rights Agreement with the Initial Purchasers substantially in the form attached hereto as Exhibit A. (b) The Company shall have furnished to the Initial Purchasers the opinion of Arent Fox, Counsel for the Company, dated the Closing Date, substantially to the effect that: (i) the Company is a corporation validly existing and in good standing under the laws of Delaware and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect; (ii) each of the Guarantors is a corporation validly existing and in good standing under the laws of the jurisdiction in which it is chartered or organized and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect; (iii) the Company has the authorized, and, to such counsel's knowledge, as of March 31, 1998 issued and outstanding capitalization as set forth in the Final Memorandum under the caption "Capitalization." All of the issued shares of capital stock of the Company have been duly authorized and, to such counsel's knowledge, have been validly issued and are fully paid and nonassessable and were not, to such counsel's knowledge, issued in violation of any preemptive or similar rights; (iv) the issued shares of capital stock of each of the Guarantors have been duly authorized and, to such counsel's knowledge, have been validly issued and are fully paid and nonassessable and, except for directors qualifying shares and as otherwise set forth in the Final Memorandum are owned of record by the Company, either directly or through wholly owned subsidiaries, free and clear, to such counsel's knowledge, of any pledge, lien, encumbrance, security interest, restriction on voting or transfer, preemptive rights or claim of any third party; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the Registration Rights Agreement and the Indenture have been duly authorized, executed and delivered by the Company and the Guarantors and constitute legal, valid and binding obligations of the Company and the Guarantors, enforceable against the Company in accordance with their terms, except as the same may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders; (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing; or (C) other customary limitations or qualifications stated by such counsel in the Opinion and reasonably satisfactory to counsel for Initial Purchasers; (vii) the Notes and the Note Guarantees have been duly authorized and, when the Notes are executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers pursuant to this Agreement, will constitute legal, valid and binding obligations of the Company and the Guarantors, respectively, entitled to the benefits of the Indenture and enforceable against the Company and the Guarantors, respectively, in accordance with their terms, except as may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders; (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing; or (C) other customary limitations or qualifications stated by such counsel in the Opinion and reasonably satisfactory to counsel for Initial Purchasers; (viii) the statements set forth under the headings "Description of Senior Credit Facilities," "Description of Preferred Stock," "Description of Notes," "Certain United States Federal Tax Considerations for Non-United States Holders," and "Notice to Investors" in the Final Memorandum, insofar as such statements constitute summaries of the law, documents and proceedings referred to therein, fairly summarize the matters referred to therein; (ix) to the knowledge of such counsel, there are no pending or threatened legal or governmental proceedings to which the Company is a party that would be required under the Securities Act to be described in a registration statement or a prospectus delivered at the time of the confirmation of the sale of an offering of securities registered under the Securities Act that are not described in the Final Memorandum, or, to such counsel's knowledge that seek to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Notes to the Initial Purchasers; (x) assuming that the representations and warranties of the Initial Purchasers are true and correct in all material respects and that they comply, in all material respects, with all of their covenants and agreements contained herein, no registration of the Notes under the Securities Act is required, and no qualification of the Indenture under the Trust Indenture Act is necessary, for the offer and sale by the Initial Purchasers of the Notes in the manner contemplated by this Agreement; and (xi) the Company is not an "investment company" within the meaning of the Investment Company Act without taking account of any exemption arising out of the number of holders of securities of the Company. In addition, such counsel shall also state that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Initial Purchasers at which the contents of the Final Memorandum and related matters were discussed, and no facts have come to the attention of such counsel that lead such counsel to believe that the Final Memorandum, as of its date or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and other financial data included therein). All references in this Section 6(b) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the Closing Date. (c) The Initial Purchasers shall have received from Marilyn U. MacNivenYoung, General Counsel for the Company, an opinion, dated the Closing Date, substantially to the effect that: (i) the statements set forth under the headings "Risk Factors -Government Regulation," "-- Reimbursement of Health Care Costs," "-- Risk Inherent in the Provision of Diagnostic Imaging Services," "-- Potential Control by GE and Carlyle,""Business -- Government Regulation," "Legal Proceedings," and "Certain Relationships and Related Transactions" in the Final Memorandum, insofar as such statements constitute summaries of the legal matters, documents and proceedings referred to therein, fairly summarize the matters referred to therein; (ii) that the Company and each of its subsidiaries has such permits, licenses, franchises and authorizations (collectively, "Authorizations") from all regulatory or governmental officials, bodies or tribunals as are necessary to own, lease and operate its respective properties and to conduct its business in the manner described in the Final Memorandum and such certifications, accreditations, and eligibility to participate in the Medicare and Medicaid programs as and to the extent described in the Final Memorandum and that, to such counsel's knowledge, the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such Authorizations, certifications, accreditations or eligibility and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof except where such revocation or termination would not have a Material Adverse Effect; (iii) the issuance, offering and sale and delivery of the Notes to the Initial Purchasers pursuant to this Agreement, the delivery of the Notes under this Agreement, the compliance by the Company and the Guarantors with the other provisions of this Agreement and the provisions of the Registration Rights Agreement, the Indenture and the Notes and the consummation of the other transactions herein and therein contemplated and the consummation of the other transactions contemplated hereby and in the Final Memorandum do not (i) to such counsel's knowledge, require the consent, approval, authorization, order, registration or qualification of or with any governmental authority or court, except such as may be required under state securities or blue sky laws or except as may be contemplated by the Registration Rights Agreement or (ii) (a) violate, result in a breach or violation of, or constitute a default under the charter or by-laws of the Company or any of the subsidiaries of the Company or, (b) result in a breach or violation of, or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to (1) any contract, loan agreement, note, indenture, mortgage, deed of trust, lease or other agreement or instrument filed by the Company with the Commission, or, (2) to such Counsel's knowledge, any statute, rule or regulation or any judgment, order or decree of any governmental authority or court or arbitrator applicable to the Company or any of the subsidiaries of the Company. In addition, such counsel shall also state that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Initial Purchasers at which the contents of the Final Memorandum and related matters were discussed, and no facts have come to the attention of such counsel that lead such counsel to believe that the Final Memorandum, as of its date or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and other financial data included therein). (d) The Initial Purchasers shall have received from Shearman & Sterling, counsel for the Initial Purchasers such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Notes and other related matters as the Initial Purchasers may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters; (e) (i) the representations and warranties on the part of the Company and in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company shall have complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; (ii) since the date of the most recent financial statements included in the Final Memorandum, there shall have been no change nor any development or event involving a prospective change constituting a Material Adverse Effect; and (iii) the Company shall have furnished to the Initial Purchasers a certificate of the Company signed by the chief executive officer and the principal financial or accounting officer of the Company dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Final Memorandum, any amendment or supplement to the Final Memorandum and this Agreement and to the effect set forth in clauses (i) and (ii) above. (f) At the Execution Time and at the Closing Date, Arthur Andersen, independent accountants for the Company, shall have furnished to the Initial Purchasers a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Initial Purchasers, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act, and the applicable rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants (the "AICPA"), and otherwise satisfactory in form and substance to the Initial Purchasers and Counsel to the Initial Purchasers. (g) At the Execution Time and at the Closing Date, KPMG Peat, independent accountants for Signal, shall have furnished to the Initial Purchasers a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Initial Purchasers, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act, and the applicable rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the AICPA and otherwise satisfactory in form and substance to the Initial Purchasers and Counsel to the Initial Purchasers. (h) The Notes shall have been designated PORTAL-eligible securities in accordance with the rules and regulations of the NASD. (i) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Final Memorandum losses or interferences with their businesses, taken as a whole, from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Final Memorandum or (ii) since such date, there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company or its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Final Memorandum, the effect of which, in any such case described in clause (i) or (ii), is, in the reasonable judgment of the Initial Purchasers, so material and adverse as to make it impracticable or inadvisable to proceed with the offering or the delivery of the Notes being delivered on the Closing Date on the terms and in the manner contemplated herein and in the Final Memorandum. (j) Subsequent to the execution and delivery of this Agreement, there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or The Nasdaq National Market, or in the over-the-counter market shall have been suspended or materially limited, or minimum prices shall have been established on such exchange; (ii) a banking moratorium shall have been declared by federal or New York State authorities; (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States; or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the reasonable judgment of the Initial Purchasers, impracticable or inadvisable to proceed with the offering or delivery of the Notes being delivered on the Closing Date on the terms and in the manner contemplated herein and in the Final Memorandum. (k) None of the issuance and sale of the Notes pursuant to this Agreement or any of the other transactions contemplated by any of the Transaction Documents or the Final Memorandum shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued or any action, suit or proceeding shall have been commenced with respect to this Agreement or any of the other transactions contemplated by the Final Memorandum, before any court or governmental authority. (l) Subsequent to the Execution Time, there shall not have been any decrease in the rating of any of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act) or any notice given of any intended or potential decrease in any such rating or of a possible change in any such rating that does not indicate the direction of the possible change. (m) The Fourth Amendment shall have been duly executed and delivered by the parties thereto. (n) Prior to the Closing Date, the Company shall have furnished to the Initial Purchasers such further information, certificates and documents as the Initial Purchasers may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Initial Purchasers and counsel for the Initial Purchasers, this Agreement and all obligations of the Initial Purchasers hereunder may be canceled at the Closing Date by the Initial Purchasers. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. The documents required to be delivered by this Section 6 will be delivered at the office of Counsel for the Initial Purchasers, at 599 Lexington Avenue, New York, New York, on the Closing Date. 7. Payment of Expenses. Whether or not the transactions contemplated by this Agreement are consummated, the Company will pay all expenses incident to the performance of its obligations under this Agreement, including the fees and disbursements of its accountants and counsel, the cost of printing and delivery of the Preliminary Memorandum, the Final Memorandum, all amendments thereof and supplements thereto, this Agreement and all other documents relating to the offering, the cost of preparing, printing, packaging and delivering the Notes, the fees and disbursements, including fees of counsel incurred in compliance with Section 5(d), the fees and disbursements of the Trustee, the fees of any agency that rates the Notes and the fees and expenses incurred in connection with the admission of the Notes for trading in the PORTAL system. If the sale of the Notes provided for herein is not consummated because any condition to the obligations of the Initial Purchasers set forth in Section 6 hereof is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof other than by reason of default by any of the Initial Purchasers in the purchase of and payment for the Notes on the Closing Date, the Company will reimburse the Initial Purchasers upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Notes. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Initial Purchaser, the directors, officers, employees and agents of each Initial Purchaser and each person who controls any Initial Purchaser within the meaning of either the Securities Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Memorandum, the Final Memorandum or any information provided by the Company or any of its Affiliates or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agree to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission (i) made in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Initial Purchasers specifically for inclusion therein or (ii) made in the Preliminary Memorandum if a copy of the Final Memorandum was not delivered by or on behalf of the Initial Purchasers to the person asserting any claim against any of the Initial Purchasers, the Final Memorandum was required by law to have been so delivered by the Initial Purchasers and the untrue statement contained in or omission from such Preliminary Memorandum was corrected in the Final Memorandum. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Initial Purchaser, severally and jointly, agrees to indemnify and hold harmless the Company, its directors, its officers, its employees, its agents and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to such Initial Purchaser, but only with reference to written information relating to such Initial Purchaser furnished to the Company by or on behalf of such Initial Purchaser specifically for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). This indemnity agreement will be in addition to any liability that such Initial Purchaser may otherwise have. The Company acknowledges that the statements set forth in the last paragraph of the cover page, the first paragraph on page ii and the information in the third paragraph, the fifth paragraph, the seventh paragraph and the ninth paragraph under the heading "Plan of Distribution" in the Preliminary Memorandum and the Final Memorandum constitute the only information furnished in writing by or on behalf of the Initial Purchasers for inclusion in the Preliminary Memorandum or the Final Memorandum (or any amendment or supplement thereto). (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party and the indemnifying party shall not have appointed separate counsel reasonably acceptable to the indemnified party to represent the indemnified party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed within a reasonable time after they are incurred and billed but in no event to exceed forty-five days after such date, provided that reasonable supporting documentation is furnished to the indemnifying party. Such firm shall be designated in writing by NationsBanc Montgomery Securities LLC in the case of parties indemnified pursuant to paragraph (a) above and by the Company in the case of parties indemnified pursuant to paragraph (b) above. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent (not to be unreasonably withheld), but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment to the extent required by paragraph (a) or (b) above, as applicable. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the third and fourth sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least five business days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company, on the one hand, and each Initial Purchaser severally and not jointly, on the other, agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively, "Losses") to which the Company, on the one hand, and the Initial Purchasers, on the other, may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and by such Initial Purchaser, on the other, from the offering of the Notes; provided, however, that in no case shall any Initial Purchaser be responsible for any amount in excess of the purchase discount or commission applicable to the Notes purchased by such Initial Purchaser hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company, on the one hand and each Initial Purchaser, on the other, shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company, on the one hand, and of such Initial Purchaser, on the other, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by such Initial Purchaser shall be deemed to be equal to the total purchase discounts and commissions received by such Initial Purchaser from the Company in connection with the purchase of the Notes hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or such Initial Purchaser. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take into account the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls an Initial Purchaser within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of such Initial Purchaser shall have the same rights to contribution as such Initial Purchaser, and each person who controls the Company within the meaning of either the Securities Act or Exchange Act and each officer, director, employee and agent of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). 9. Default by an Initial Purchaser. If any Initial Purchaser shall fail to purchase and pay for any of the Notes agreed to be purchased by such Initial Purchaser hereunder and such failure to purchase shall constitute a default in the performance of its obligations under this Agreement, the remaining Initial Purchasers shall be obligated severally to take up and pay for the Notes which the defaulting Initial Purchaser agreed but failed to purchase; provided, however, that in the event that the aggregate principal amount of Notes which the defaulting Initial Purchaser agreed but failed to purchase shall exceed 10% of the aggregate principal amount of Notes set forth in Schedule I hereto, the remaining Initial Purchasers shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Notes, and if the non-defaulting Initial Purchasers do not purchase all the Notes, this Agreement will terminate without liability to the non-defaulting Initial Purchasers or the Company. In the event of a default by any Initial Purchaser as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding seven days, as the non-defaulting Initial Purchasers shall determine in order that the required changes in the Final Memorandum or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Initial Purchaser of its liability, if any, to the Company or any non-defaulting Initial Purchaser for damages occasioned by its default hereunder. 10. Termination. This Agreement shall be subject to termination in the absolute discretion of the Initial Purchasers, by notice given to the Company prior to delivery of and payment for the Notes, if prior to such time any of the events described in Section 6(j) or 6(k) shall have occurred or if the Initial Purchasers shall decline to purchase the Notes for any reason permitted under this Agreement. 11. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company, or their officers and of the Initial Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Initial Purchasers or the Company or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Notes. The provisions of Sections 7, 8 and 9 hereof shall survive the termination or cancellation of this Agreement. 12. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Initial Purchasers, will be mailed, delivered or telecopied and confirmed to it at 767 Fifth Avenue, Floor 12A, New York, New York 10153, Attention: David Stith, or, if sent to the Company, will be mailed, delivered or telecopied and confirmed to the Company at 4400 MacArthur Blvd., Suite 800, Newport Beach, California 92660, Attention: General Counsel. 13. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors. In addition, the indemnification and contribution provisions in Section 8 hereof are for the benefit of the directors, officers, employees, agents and controlling persons referred to in Section 8 hereof, and no other person will have any right or obligation hereunder. 14. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York. 15. Business Day. For purposes of this Agreement, "business day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York, New York are authorized or obligated by law, executive order or regulation to close. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. If the foregoing correctly states the agreement between the Company and the Initial Purchasers, please sign and return to us the enclosed duplicate hereof, whereupon this Agreement and your acceptance shall represent a binding agreement between the Company and the Initial Purchasers. Very truly yours, INSIGHT HEALTH SERVICES CORP. By: Name: Title: INSIGHT HEALTH CORP. By: Name: Title: RADIOLOGY SERVICES CORP. By: Name: Title: OPEN MRI, INC. By: Name: Title: MAXUM HEALTH CORP. By: Name: Title: SIGNAL MEDICAL SERVICES, INC. By: Name: Title: QUEST FINANCIAL SERVICES, INC. By: Name: Title: RADIOSURGERY CENTERS, INC. By: Name: Title: MAXUM HEALTH SERVICES CORP. By: Name: Title: MTS ENTERPRISES, INC. By: Name: Title: DIAGNOSTEMPS, INC. By: Name: Title: MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: Name: Title: MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: Name: Title: MAXUM HEALTH SERVICES OF DALLAS, INC. By: Name: Title: NDDC, INC. By: Name: Title: DIAGNOSTIC SOLUTIONS CORP. By: Name: Title: MISSISSIPPI MOBILE TECHNOLOGY, INC. By: Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: Name: Title: MORGAN STANLEY & CO. INCORPORATED By: Name: Title: SUTRO & CO. INCORPORATED By: Name: Title: Schedule I
Principal Amount of Name of Initial Purchaser Notes to be Purchased - ------------------------- --------------------- NationsBanc Montgomery Securities LLC $ 65,000,000 Morgan Stanley & Co. Incorporated 25,000,000 Sutro & Co. Incorporated 10,000,000 -------------- Total $100,000,000
Exhibit A Registration Rights Agreement EX-4.5 4 EXHIBIT 4.5 1 Exhibit 4.5 EXECUTION COPY INSIGHT HEALTH SERVICES CORP. $100,000,000 95/8% SENIOR SUBORDINATED NOTES DUE 2008 REGISTRATION RIGHTS AGREEMENT June 12, 1998 NationsBanc Montgomery Securities LLC NationsBank Corporate Center 100 North Tryon Street Charlotte, North Carolina 28255-0001 Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Sutro & Co. Incorporated 11150 Santa Monica Blvd. Los Angeles, CA 90025 Ladies and Gentlemen: InSight Health Services Corp., a Delaware corporation (the "Company"), proposes to issue and sell (the "Initial Placement") to NationsBanc Montgomery Securities, Inc., Morgan Stanley & Co. Incorporated and Sutro & Co. Incorporated (the "Initial Purchasers" and, individually, each an "Initial Purchaser") upon terms set forth in a purchase agreement dated June 9, 1998 (the "Purchase Agreement") among the Company, the Initial Purchasers and the Subsidiary Guarantors named therein, its 95/8% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are to be fully and unconditionally guaranteed jointly and severally on an unsecured, senior subordinated basis by all existing and future United States subsidiaries of the Company (other than Permitted Joint Ventures) (each such existing guarantor, a "Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement and purchase the Notes and in satisfaction of a condition to your obligations under the Purchase Agreement, the Company and the Subsidiary Guarantors agree with you for the benefit of the holders from time to time of the Notes (including the Initial Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as follows: 2 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Affiliate" of any specified person means any other person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Closing Date" has the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Company" has the meaning set forth in the preamble hereto. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Notes" means debt securities issued by the Company and guaranteed by the Subsidiary Guarantors, identical in all material respects to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from June 12, 1998 and (ii) the liquidated damages provisions and the transfer restrictions pertaining to the Notes will be modified or eliminated, as appropriate, in the Exchange Notes), to be issued under the Indenture. "Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Notes, a like principal amount of Exchange Notes. "Exchange Offer Registration Period" means the longer of (A) the period until the consummation of the Exchange Offer and (B) two years after effectiveness of the Exchange Offer Registration Statement, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement; provided, however, that in the event that all resales of Exchange Notes (including, subject to the time periods set forth herein, any resales by Exchanging Dealers) covered by such Exchange Offer Registration Statement have been made, the Exchange Offer Registration Statement need not remain continuously effective for the period set forth in clause (B) above. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Securities Act with respect to the Exchange 3 Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchanging Dealer" means any Holder (which may include the Initial Purchasers) that is a broker-dealer, electing to exchange Notes acquired for its own account as a result of market-making activities or other trading activities for Exchange Notes. "Final Memorandum" has the meaning set forth in the Purchase Agreement. "Holder" has the meaning set forth in the preamble hereto. "Indenture" means the indenture relating to the Notes and the Exchange Notes, dated as of June 1, 1998, among the Company and all existing and future subsidiaries of the Company (other than Permitted Joint Ventures), as Subsidiary Guarantors, and State Street Bank and Trust Company, N.A., as trustee, as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the terms thereof. "Initial Placement" has the meaning set forth in the preamble hereto. "Initial Purchasers" has the meaning set forth in the Purchase Agreement. "Losses" has the meaning set forth in Section 6(d) hereto. "Majority Holders" means the Holders of a majority of the aggregate principal amount of Notes registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering under a Shelf Registration Statement. "Notes" has the meaning set forth in the preamble hereto. "Permitted Joint Ventures" has the meaning set forth in the Indenture. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A under the Securities Act), as amended or supplemented by 4 any prospectus supplement, with respect to the terms of the offering of any portion of the Notes or the Exchange Notes covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Purchase Agreement" has the meaning set forth in the preamble hereto. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Notes or the Exchange Notes (including the Subsidiary Guarantees thereon) pursuant to the provisions of this Agreement, amendments and supplements to such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto, and all material incorporated by reference therein. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof, which covers some or all of the Notes or Exchange Notes, as applicable (including the Subsidiary Guarantees thereon), on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Subsidiary Guarantees" has the meaning set forth in the Purchase Agreement. "Subsidiary Guarantors" has the meaning set forth in the preamble hereto. "Trustee" means the trustee with respect to the Notes or Exchange Notes, as applicable, under the Indenture. "underwriter" means any underwriter of Notes in connection with an offering thereof under a Shelf Registration Statement. 2. Exchange Offer; Resales of Exchange Notes by Exchanging Dealers; Private Exchange. (a) The Company and the Subsidiary Guarantors shall prepare and, on or 5 prior to the 60th calendar day following the Closing Date, shall file with the Commission the Exchange Offer Registration Statement with respect to the Exchange Offer. The Company and the Subsidiary Guarantors shall use their best efforts (i) to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to the 150th calendar day following the Closing Date and remain effective until the closing of the Exchange Offer and (ii) to consummate the Exchange Offer on or prior to the 180th calendar day following the Closing Date. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Subsidiary Guarantors shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder electing to exchange Notes for Exchange Notes (assuming that such Holder (x) is not an "affiliate" of the Company within the meaning of the Securities Act, (y) is not a broker-dealer that acquired the Notes in a transaction other than as a part of its market-making or other trading activities and (z) if such Holder is not a broker-dealer, acquires the Exchange Notes in the ordinary course of such Holder's business, is not participating in the distribution of the Exchange Notes and has no arrangements or understandings with any person to participate in the distribution of the Exchange Notes) to resell such Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Exchange Offer, the Company shall mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents, stating, in addition to such other disclosures as are required by applicable law: (i) that the Exchange Offer is being made pursuant to this Agreement and that all Notes validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange; (iii) that any Note not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement; (iv) that Holders electing to have a Note exchanged pursuant to the Exchange Offer will be required to surrender such Note, together with the enclosed letters of transmittal, to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice prior to the close of business on the last day of acceptance for exchange; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last day of acceptance for exchange, by sending to the institution and at the address (located in the Borough of Manhattan, The City of New 6 York) specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for exchange and a statement that such Holder is withdrawing its election to have such Notes exchanged; and shall keep the Exchange Offer open for acceptance for not less than 30 days and not more than 45 days (or longer if required by applicable law) after the date notice thereof is mailed to the Holders; utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; and comply in all respects with all applicable laws relating to the Exchange Offer. (d) As soon as practicable after the close of the Exchange Offer, the Company shall: (i) accept for exchange all Notes duly tendered and not validly withdrawn pursuant to the Exchange Offer; (ii) deliver to the Trustee for cancellation all Notes so accepted for exchange; and (iii) cause the Trustee promptly to authenticate and deliver to each Holder Exchange Notes equal in principal amount to the Notes of such Holder so accepted for exchange. (e) The Initial Purchasers, the Company and the Subsidiary Guarantors acknowledge that, pursuant to interpretations by the staff of the Commission of Section 5 of the Securities Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any Exchange Notes received by such Exchanging Dealer pursuant to the Exchange Offer in exchange for Notes acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company and the Subsidiary Guarantors shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and in Annex D hereto in the letter of transmittal delivered pursuant to the Exchange Offer; and (ii) use its best efforts to keep the Exchange Offer Registration Statement continuously effective under the Securities Act during the Exchange Offer Registration Period for delivery of the prospectus included therein by Exchanging Dealers in connection with sales of Exchange Notes received pursuant to the Exchange Offer, as contemplated by Section 4(h) below; provided, however, that the Company shall not be required to maintain the effectiveness of the Exchange Offer Registration Statement for 7 more than 60 days following the consummation of the Exchange Offer unless the Company has been notified in writing on or prior to the 60th day following the consummation of the Exchange Offer by one or more Exchanging Dealers that such Holder has received Exchange Notes as to which it will be required to deliver a prospectus upon resale. (f) In the event that the Initial Purchasers determine that they are not eligible to participate in the Exchange Offer with respect to the exchange of Notes constituting any portion of an unsold allotment, upon the effectiveness of the Shelf Registration Statement as contemplated by Section 3 hereof and at the request of the Initial Purchasers, the Company shall issue and deliver to the Initial Purchasers, or to the party purchasing Exchange Notes registered under the Shelf Registration Statement from the Initial Purchasers, in exchange for such Notes, a like principal amount of Exchange Notes. The Company shall use its best efforts to cause the CUSIP Service Bureau to issue the same CUSIP number for such Exchange Notes as for Exchange Notes issued pursuant to the Exchange Offer. (g) The Company and the Subsidiary Guarantors shall use their best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that (i) the Exchange Offer does not violate applicable law or any applicable interpretation of the staff of the Commission, (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially impair the ability of the Company to proceed with the Exchange Offer, and no material adverse development shall have occurred in any existing action or proceeding with respect to the Company and (iii) all governmental approvals shall have been obtained, which approvals the Company deems necessary for the consummation of the Exchange Offer. The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Notes in the Exchange Offer. 3. Shelf Registration. If (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Exchange Offer as contemplated by Section 2 hereof, or (ii) for any reason other than those specified in clause (i) above, the Exchange Offer is not consummated within 180 days of the Closing Date unless the Exchange Offer has commenced, in which case, the Exchange Offer is not consummated within 30 days after the date on which the Exchange Offer was commenced, or (iii) any Initial Purchaser so requests with respect to Notes held by it within 120 days following consummation of the Exchange Offer, or (iv) any Holder (other than the Initial Purchasers) is not eligible to participate in the Exchange Offer or has participated in the Exchange Offer and has received Exchange Notes that are not freely tradeable (for reasons other than outlined in Section 2(d) and so notifies the 8 Company within 60 days of becoming aware of such restrictions or (v) in the case where the Initial Purchasers participate in the Exchange Offer or acquire Exchange Notes pursuant to Section 2(f) hereof, the Initial Purchasers do not receive freely tradeable Exchange Notes in exchange for Notes constituting any portion of an unsold allotment (it being understood that, for purposes of this Section 3, (x) the requirement that the Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Securities Act in connection with sales of Exchange Notes acquired in exchange for such Notes shall result in such Exchange Notes being not "freely tradeable" and (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of Exchange Notes acquired in the Exchange Offer in exchange for Notes acquired as a result of market-making activities or other trading activities shall not result in such Exchange Notes being not "freely tradeable"), the following provisions shall apply: (a) The Company and the Subsidiary Guarantors shall, as promptly as practicable, file with the Commission a Shelf Registration Statement relating to the offer and sale of the Notes or the Exchange Notes, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement and Rule 415 under the Securities Act, provided that, with respect to Exchange Notes received by the Initial Purchasers in exchange for Notes constituting any portion of an unsold allotment, the Company and the Subsidiary Guarantors may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company and the Subsidiary Guarantors shall use their best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act as promptly as possible on or prior to 45 days after filing such Shelf Registration Statement pursuant to this Section 3 and to keep such Shelf Registration Statement continuously effective in order to permit the Prospectus contained therein to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the Commission or such shorter period that will terminate when all the Notes or Exchange Notes, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Notes covered thereby not being able to offer and sell such Notes during that period, unless (i) such action is required by applicable law, (ii) the Company complies with this Agreement or (iii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations 9 hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 4(l) hereof, if applicable. (c) No Holder may include any of its Notes in any Shelf Registration Statement pursuant to this Agreement unless and until such holder furnishes to the Company in writing, within 20 business days after receipt of a request therefor, such information as required by the rules and practices of the Commission for use in connection with any Shelf Registration Statement or Prospectus or preliminary prospectus included therein. No Holder shall be entitled to Liquidated Damages pursuant to Section 5(b) hereof unless and until such Holder shall have provided all such required information. Each Holder as to which any Shelf Registration Statement is being effected will be required to agree to furnish promptly to the Company all information required to be disclosed in order to make information previously furnished to the Company by such Holder not materially misleading. 4. Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: (a) The Company and the Subsidiary Guarantors shall prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such representatives of the Company and the Subsidiary Guarantors as shall be reasonably requested by the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, the Majority Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Initial Purchaser or its counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall reasonably object, except for any amendment or supplement or document (a copy of which has been previously furnished to the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Majority Holders and their counsel)) which counsel to the Company and the Subsidiary Guarantors shall advise the Company and the Subsidiary Guarantors is required in order to comply with applicable law; each of the Initial Purchasers agrees that, if it receives timely notice and drafts under this clause (a), it will not take actions or make objections pursuant to this clause (a) such 10 that the Company and the Subsidiary Guarantors are unable to comply with their obligations under Section 2. (b) The Company and the Subsidiary Guarantors shall: (i) use their best efforts to prepare any Registration Statement and any amendment thereto and any Prospectus contained therein and any amendment or supplement thereto to comply in all material respects with the Securities Act and the rules and regulations thereunder; (ii) use their best efforts to prepare any Registration Statement and any amendment thereto such that it does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) use their best efforts to prepare any Prospectus forming part of any Registration Statement, including any amendment or supplement to such Prospectus, such that it does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise the Initial Purchasers and, in the case of a Shelf Registration Statement, the Holders of Notes covered thereby, and, if requested by the Initial Purchasers or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) During the Shelf Registration Period or the Exchange Offer Registration Period, as applicable, the Company shall advise the Initial Purchasers and, in the case of a Shelf Registration Statement, the Holders of Notes covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer that has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by the Initial Purchasers or any such Holder or Exchanging Dealer, confirm such advice in writing: 11 (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the Registration Statement or the Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company and the Subsidiary Guarantors shall use their best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of Notes covered by any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto. (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Notes covered by any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Notes in connection with the offering and sale of the Notes covered by the Prospectus or any amendment or supplement thereto. (g) The Company shall furnish to each Exchanging Dealer that so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, any documents incorporated by reference therein and, if the Exchanging Dealer so requests in writing, all exhibits thereto. (h) The Company shall, during the Exchange Offer Registration Period, 12 promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of Exchange Notes received by it pursuant to the Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as provided in Section 2(e) above. (i) Each Holder of Notes and each Exchange Dealer agrees by its acquisition of such Notes or Exchange Notes to be sold by such Exchange Dealer, as the case may be, that, upon actual receipt of any notice from the Company of the happening of any event of the kind described in paragraphs (c)(2)(i), (c)(2)(ii), or (c)(2)(iii) of this Section 4, such Holder will forthwith discontinue disposition of such Notes covered by such Registration Statement or Prospectus or Exchange Notes to be sold by such Holder or Exchange Dealer, as the case may be, until such Holder's or Exchange Dealer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(l) hereof, or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. In the event that the Company shall give any such notice, the Exchange Offer Registration Period shall be extended by the number of days during such periods from and including the date of the giving of such notice to and including the date when each seller of Exchange Notes covered by such Registration Statement or Exchange Notes to be sold by such Exchange Dealer, as the case may be, shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 4(l) hereof or (y) the advice in writing. (j) Prior to the Exchange Offer or any other offering of Notes pursuant to any Registration Statement, the Company and the Subsidiary Guarantors shall register or qualify or cooperate with the Holders of Notes included therein and their respective counsel in connection with the registration or qualification of such Notes for offer and sale under the securities or blue sky laws of such states as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such states of the Notes covered by such Registration Statement; provided, however, that the Company and the Subsidiary Guarantors will not be required to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not then so qualified, to file any general consent to service of process or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (k) The Company shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Notes to be sold pursuant to any Registration Statement free of any restrictive legends and in denominations of $1,000 13 or an integral multiple thereof and registered in such names as Holders may request prior to sales of Notes pursuant to such Registration Statement. (l) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) of this Section 4, the Company and the Subsidiary Guarantors shall promptly prepare and file a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or any other required document so that, as thereafter delivered to purchasers of the Notes included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and, in the case of a Shelf Registration Statement, notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event. Notwithstanding the foregoing, the Company shall not be required to amend or supplement a Shelf Registration Statement, any related Prospectus or any document incorporated therein by reference, for a period not to exceed an aggregate of 30 days in any calendar year, if (i) an event occurs and is continuing as a result of which the Shelf Registration would, in the Company's good faith judgment, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and (ii) the Company determines in its good faith judgment that the disclosure of such event at such time would have a material adverse effect on the business, operations, or prospects of the Company or the disclosure otherwise related to a pending material business transaction that has not yet been publicly disclosed. (m) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Notes or Exchange Notes, as the case may be, registered under such Registration Statement, and provide the Trustee with certificates for such Notes or Exchange Notes, in a form eligible for deposit with The Depository Trust Company. (n) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement meeting the requirements of Rule 158 under the Securities Act. (o) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), in a timely manner. (p) The Company may require each Holder of Notes to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Notes as the Company may from time to time 14 reasonably require for inclusion in such Registration Statement. (q) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters, if any, and Majority Holders reasonably agree should be included therein, and shall make all required filings of such Prospectus supplement or post-effective amendment promptly upon notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (r) In the case of any Shelf Registration Statement, the Company and the Subsidiary Guarantors shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or to facilitate the registration or the disposition of any Notes included therein, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 6 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any) with respect to all parties to be indemnified pursuant to Section 6. (s) In the case of any Shelf Registration Statement, the Company and the Subsidiary Guarantors shall: (i) subject to having received reasonable confidentiality assurance, make reasonably available for inspection by the Holders of Notes to be registered thereunder, any underwriter participating in any disposition pursuant to such Shelf Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and any of its subsidiaries; (ii) cause the Company's and the Subsidiary Guarantors' officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations and make such representatives of the Company and the Subsidiary Guarantors as shall be reasonably requested by the Initial Purchasers or Managing Underwriters, if any, available for discussion of any such Registration Statement; provided, however, that all such non-public information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, (provided that the Company must be given prior written notice of such disclosure) or such information becomes available to the public generally or through a third party without an accompanying obligation of 15 confidentiality other than as a result of a disclosure of such information by any such Holder, underwriter, attorney, accountant or agent; (iii) make such representations and warranties to the Holders of Notes registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them; (iv) use its best efforts to obtain opinions of counsel to the Company and the Subsidiary Guarantors and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in similar underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) use its best efforts to obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company and the Subsidiary Guarantors (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the underwriters, if any, and use reasonable efforts to have such letter addressed to the selling Holders of Notes registered thereunder (to the extent consistent with Statement on Auditing Standards No. 72 of the American Institute of Certified Public Accountants (AICPA) ("SAS 72")), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with similar underwritten offerings, or if the provision of such "cold comfort" letters is not permitted by SAS No. 72 or if requested by the Initial Purchasers or their counsel in lieu of a "cold comfort" letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35 of the AICPA, covering matters requested by the Initial Purchasers or their counsel; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, and customarily delivered in similar offerings, including those to evidence compliance with Section 4(k) and with any conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(s) shall be performed at (A) the effectiveness of such Shelf Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. 16 (t) The Company and the Subsidiary Guarantors shall, in the case of a Shelf Registration, use their best efforts to cause all Notes to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed if requested by the Majority Holders, to the extent such Notes satisfy applicable listing requirements. (u) The Company and the Subsidiary Guarantors shall use their best efforts to cause the Exchange Notes or Notes, as the case may be, to be rated by two nationally recognized statistical rating organizations (as such term is defined in Rule 436(g)(2) under the Securities Act). 5. Registration Expenses; Remedies. (a) The Company and the Subsidiary Guarantors shall bear all expenses incurred in connection with the performance of their obligations under Sections 2, 3 and 4 hereof, including without limitation: (i) all Commission, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Notes in no event to exceed $5,000), (iii) all expenses of any persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, if any, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the reasonable fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and the Subsidiary Guarantors and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Initial Purchasers) and in the case of any Exchange Offer Registration Statement, the reasonable fees and expenses of counsel to the Initial Purchasers acting in connection therewith and (viii) the fees and disbursements of the independent public accountants of the Company and the Subsidiary Guarantors, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Notes by a Holder. (b) The Notes provide that if (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 60th calendar day following the Closing Date or (b) the Exchange Offer Registration Statement is not declared effective on or prior to the 150th calendar day following the Closing Date or the Exchange Offer is not consummated on or prior to the 180th calendar day following the Closing Date or (c) a Shelf Registration 17 Statement is not declared effective when required, the Company shall pay liquidated damages ("Liquidated Damages") to each Holder of Notes with respect to the first 30-day period following the 60-day period referred to in clause (a) above or the first 90-day period following the periods referred to in clauses (b) or (c) above in an amount equal to $0.05 per week per $1,000 principal amount of Notes held by such Holder. The amount of Liquidated Damages shall increase by an additional $0.05 per week per $1,000 principal amount of Notes at the beginning of each subsequent 30-day period in the case of clause (a) above or 90-day period in the case of clauses (b) or (c) above, up to a maximum amount of Liquidated Damages of $0.30 per week per $1,000 principal amount of Notes. Upon the filing of the Exchange Offer Registration Statement, the effectiveness of the Exchange Offer Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, Liquidated Damages shall cease to accrue from the date of such filing, consummation or effectiveness, as the case may be; provided, however, that, if after the date such Liquidated Damages cease to accrue, a different event specified in clause (a), (b) or (c) above occurs, Liquidated Damages may again commence accruing pursuant to the foregoing provisions. (c) Without limiting the remedies available to the Initial Purchasers and the Holders, the Company and the Subsidiary Guarantors acknowledge that any failure by the Company and the Subsidiary Guarantors to comply with their respective obligations under Sections 2 and 3 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Subsidiary Guarantors' obligations under Sections 2 and 3 hereof. 6. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company and each Subsidiary Guarantor jointly and severally agree to indemnify and hold harmless each Holder of Notes covered thereby (including the Initial Purchasers and, with respect to any Prospectus delivery as contemplated by Sections 2(e) and 4(h) hereof, each Exchanging Dealer) the directors, officers, employees and agents of such Holder and each person who controls such Holder within the meaning of either the Securities Act or the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or 18 other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage or liability (or action in respect thereof); provided, however, that the Company and each Subsidiary Guarantor will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such indemnified party specifically for inclusion therein; provided further, however, that the Company and each Subsidiary Guarantor will not be liable in any case with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto to the extent that any such loss, claim, damage or liability (or action in respect thereof) resulted from the fact that any indemnified party sold Notes or Exchange Notes to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented, if the Company had previously complied with the provisions of Section 4(c)(2) and 4(f) or 4(h) hereof and if the untrue statement contained in or omission from such preliminary Prospectus or Prospectus was corrected in the Prospectus as then amended or supplemented. This indemnity agreement will be in addition to any liability that the Company or any Subsidiary Guarantor may otherwise have. The Company and each Subsidiary Guarantor also agree jointly and severally to indemnify or contribute to Losses of, as provided in Section 6(d) hereof, any underwriters of Notes registered under a Shelf Registration Statement, their employees, officers, directors and agents and each person who controls such underwriters on the same basis as that of the indemnification of the Initial Purchasers and the selling Holders provided in this Section 6(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(q) hereof. (b) Each Holder of Notes covered by a Registration Statement (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated by Sections 2(e) and 4(h) hereof, each Exchanging Dealer) severally (with respect to each of the Holders (other than the Initial Purchasers)) and jointly and severally (with respect to the Initial Purchasers) agrees to indemnify and hold harmless (i) the Company and each Subsidiary Guarantor, (ii) each of the directors of the Company and each Subsidiary Guarantor, (iii) each of the officers of the Company and the Subsidiary Guarantors who signs such Registration Statement and (iv) each Person who controls the Company or any Subsidiary Guarantor within the meaning of either the Securities Act or the Exchange Act to the same extent as the foregoing indemnity from the Company and each Subsidiary Guarantor to each such Holder, but only with respect to written information furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability that any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of 19 notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve the indemnifying party from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses, and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel (including local counsel) of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party and the indemnifying party shall not have appointed separate counsel reasonably acceptable to the indemnified party to represent the indemnified party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed within a reasonable time after they are incurred and billed but in no event to exceed forty-five days after such date, provided that reasonable supporting documentation is furnished to the indemnified party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this 20 Section 6 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending the same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement that resulted in such Losses; provided, however, that in no case shall any Initial Purchaser or any subsequent Holder of any Note or Exchange Note be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Note, or in the case of an Exchange Note, applicable to the Note that was exchangeable into such Exchange Note, as set forth on the cover page of the Final Memorandum, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the Notes purchased by such underwriter under the Registration Statement that resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and the Subsidiary Guarantors shall be deemed to be equal to the sum of (x) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (y) the total amount of additional interest (such interest accruing 180 days following the Closing Date) that the Company was not required to pay as a result of registering the Notes covered by the Registration Statement that resulted in such losses. Benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Notes or Exchange Notes, as applicable, registered under the Securities Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement that resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation that did not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6, each person who controls a Holder within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such 21 Holder, and each person who controls the Company or any Subsidiary Guarantor within the meaning of either the Securities Act or the Exchange Act, each officer of the Company or any Subsidiary Guarantor who shall have signed the Registration Statement and each director of the Company and each Subsidiary Guarantor shall have the same rights to contribution as the Company and each Subsidiary Guarantor, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 6 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any Subsidiary Guarantor or any of the officers, directors or controlling persons referred to in Section 6 hereof, and will survive the sale by a Holder of Notes covered by a Registration Statement. 7. Miscellaneous. (a) No Inconsistent Agreement. The Company and the Subsidiary Guarantors have not, as of the date hereof, entered into, nor shall any of them, on or after the date hereof, enter into, any agreement that conflicts with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Notes (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of Exchange Notes); provided that, with respect to any matter that directly or indirectly affects the rights of the Initial Purchasers hereunder, the Company shall obtain the written consent of the Initial Purchasers. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Notes are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of Notes being sold rather than registered under such Registration Statement. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 7(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to NationsBanc Montgomery Securities LLC; 23 (ii) if to the Initial Purchasers, at NationsBanc Montgomery Securities LLC, 767 Fifth Avenue, Floor 12A, New York, New York 10153, Attention: David Stith; and (iii) if to the Company or any Subsidiary Guarantor, InSight Health Services Corp., 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660, Attention: General Counsel. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchasers, on the one hand, or the Company or any Subsidiary Guarantor, on the other, by notice to the other party or parties may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company or any Subsidiary Guarantor thereto, subsequent Holders of Notes and/or Exchange Notes. The Company and the Subsidiary Guarantors hereby agree to extend the benefits of this Agreement to any Holder of Notes and/or Exchange Notes and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) Notes Held by the Company, Etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Notes or Exchange Notes is required 24 hereunder, Notes or Exchange Notes, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Notes or Exchange Notes if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Notes or Exchange Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 25 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Subsidiary Guarantors and you. Very truly yours, INSIGHT HEALTH SERVICES CORP. By: Name: Title: INSIGHT HEALTH CORP. By: Name: Title: RADIOLOGY SERVICES CORP. By: Name: Title: OPEN MRI, INC. By: Name: Title: MAXUM HEALTH CORP. By: Name: Title: SIGNAL MEDICAL SERVICES, INC. 26 By: Name: Title: QUEST FINANCIAL SERVICES, INC. By: Name: Title: RADIOSURGERY CENTERS, INC. By: Name: Title: MAXUM HEALTH SERVICES CORP. By: Name: Title: MTS ENTERPRISES, INC. By: Name: Title: DIAGNOSTEMPS, INC. By: Name: 27 Title: MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: Name: Title: MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: Name: Title: MAXUM HEALTH SERVICES OF DALLAS, INC. By: Name: Title: NDDC, INC. By: Name: Title: DIAGNOSTIC SOLUTIONS CORP. By: Name: Title: 28 MISSISSIPPI MOBILE TECHNOLOGY, INC. By: Name: Title: The foregoing Agreement is hereby accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: Name: Title: MORGAN STANLEY & CO. INCORPORATED By: Name: Title: SUTRO & CO. INCORPORATED By: Name: Title: 29 ANNEX A Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business one year after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." 30 ANNEX B Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." 31 ANNEX C Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business one year after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until such date all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. ANNEX D If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Notes, it represents that the Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-10.1 5 EX-10.1 Exhibit 10.1 INSIGHT HEALTH SERVICES CORP. 1998 EMPLOYEE STOCK OPTION PLAN InSight Health Services Corp., a Delaware corporation ("Corporation") sets forth herein the terms of the InSight Health Services Corp. 1998 Employee Stock Option Plan (the "Plan") as follows: 1. PURPOSE The Plan is intended to advance the interests of the Corporation by providing the individuals listed in Attachment 1 hereto ("Optionees") an inducement essential to enter into executive employment agreements with the Corporation and 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 individuals to remain in the employ of the Corporation, or any of its subsidiaries. Options granted under the Plan ("Options") shall not constitute "incentive stock options" within the meaning of section 422 of the Internal Revenue Code of 1986, as amended from time to time ("Code"). 2. ADMINISTRATION Except as otherwise specifically provided herein, the Plan shall be administered by the Compensation Committee ("Committee") of the Board of Directors ("Board") of the Corporation, which shall have the full power and authority to take all actions, and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 5 below) entered into hereunder, and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Committee to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder; provided however, that the Committee may not alter, amend or modify the express provisions of the Plan. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final, binding and conclusive. The Board may remove members, add members, and fill vacancies on the Committee from time to time, all in accordance with the Corporation's Certificate of Incorporation and Amended and Restated Bylaws, and with applicable law. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. 3. COMMON STOCK The stock that may be issued pursuant to Options granted under the Plan shall be shares of common stock, par value $0.001 per share, of the Corporation ("Common Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Common Stock that may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate 250,000 shares, which number of shares is subject to adjustment as hereinafter provided in Section 12 below. 1998 EMPLOYEE STOCK OPTION PLAN PAGE 1 4. EFFECTIVE DATE AND TERM OF THE PLAN The Plan shall be effective as of the date on which the merger described in that certain Agreement and Plan of Merger dated as of April 15, 1998, by and among the Corporation, SMSI Acquisition Company, Signal Medical Services, Inc.. and its stockholders becomes effective ("Effective Date") and shall continue in effect for a term of ten (10) years. Any Options outstanding under the Plan on such date shall continue to be exercisable pursuant to their terms, except as otherwise provided herein. 5. GRANT OF OPTIONS Subject to the terms and conditions of the Plan, each Optionee is hereby granted as of the Effective Date, Options to purchase such number of shares of the Common Stock listed on Attachment 1 hereto at a purchase price of $ _____ per share, on the terms and conditions set forth in the written agreements ("Option Agreements"), to be executed by the Corporation and by the Optionee, in the form of Attachment 2 hereto. 6. TERM AND EXERCISE OF OPTIONS (a) Method of Exercise and Payment. An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at its principal office, addressed to the attention of the Corporate Secretary, of written notice of exercise in the form attached to the Option Agreement as Exhibit A, which notice shall specify the number of shares with respect to which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. The minimum number of shares of Common Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of 100 shares or the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Common Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) with the consent of the Committee, through the tender to the Corporation of shares of Common Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their Fair Market Value (as defined below) on the date of exercise; or (iii) by a combination of the methods described in (i) and (ii). If shares of Common Stock are surrendered by an officer of the Corporation (as the term "officer" is defined in Section 10(c) below) for payment and the Common Stock surrendered was acquired pursuant to an Option of the Corporation, then six (6) months must have elapsed since the date of grant of such Option. The payment in full of the Option Price need not accompany the written notice of exercise provided the notice of exercise directs that the Common Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Corporation as the agent for the individual exercising the Option and, at the time such Common Stock certificate or certificates are delivered, the broker shall tender to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price for the shares of Common Stock purchased pursuant to the exercise of the Option plus the amount (if any) of federal and/or other taxes which the Corporation, may, in its judgment, be required to withhold with respect to the exercise of the Option. Any attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option and the payment in full of the Option Price of the shares of Common Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a Common Stock certificate or certificates evidencing his ownership of such shares. An individual holding or exercising an Option shall have none of the rights of a stockholder until the shares of Common Stock covered thereby are fully paid and issued to him, and except as provided in Section 12 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. (b) Fair Market Value. "Fair Market Value" means the value of each share of Common Stock subject to the Plan determined as follows: If on the date of exercise the Common Stock is listed on an 1998 EMPLOYEE STOCK OPTION PLAN PAGE 2 established national or regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, or is publicly traded on an established securities market, the Fair Market Value of the Common Stock shall be the closing price of the Common Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on the date of exercise or on the trading day immediately preceding the date of exercise if the date of exercise is not a trading day (or, if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day), or, if no sale of the Common Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Common Stock is not listed on such an exchange, quoted on such Stock Market or traded on such a market, Fair Market Value shall be determined by the Committee in good faith. (c) Withholding. The Corporation shall have the right to withhold, or require an Optionee to remit to the Corporation, an amount sufficient to satisfy any applicable federal, state, local or foreign withholding tax requirements imposed with respect to the exercise of Options. Subject to the consent of the Committee which may be withheld in its sole and absolute discretion, and to the extent permissible under applicable tax, securities, and other laws, an Optionee may (a) have shares of Common Stock otherwise issuable to the Optionee hereunder withheld, or (b) tender to the Corporation previously acquired shares of Common Stock, having a Fair Market Value sufficient to satisfy all or part of the Optionee's federal, state and local tax obligations associated with the exercise of Options. 7. TRANSFERABILITY OF OPTIONS During the lifetime of an Optionee to whom an Option is granted, only such Optionee (or, in the event of legal incapacity or incompetency, the Optionee's guardian or legal representative) may exercise the Option. No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will, the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in section 414 of the Code, or such other transfers as may be permitted by the Committee and no Option shall be pledged or hypothecated (by operation of law or otherwise), or subject to execution, attachment or similar process. 8. TERMINATION OF EMPLOYMENT Upon the termination of the employment of an Optionee with the Corporation or a subsidiary of the Corporation, other than by reason of the death or "permanent and total disability" (within the meaning of section 22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee pursuant to the Plan shall terminate thirty (30) days after the date of such termination of employment, unless otherwise provided pursuant to the Option Agreement. A leave of absence or leave on military or government service approved by the Committee shall not constitute a termination of employment for purposes of the Plan. For purposes of the Plan, a termination of employment with the Corporation or a subsidiary of the Corporation shall not be deemed to occur if the Optionee is immediately thereafter employed with the Corporation or any subsidiary of the Corporation. 9. USE OF PROCEEDS The proceeds received by the Corporation from the sale of Common Stock pursuant to Options granted under the Plan shall constitute general funds of the Corporation. 10. REQUIREMENTS OF LAW (a) Violations of Law. The Corporation shall not be required to sell or issue any shares of Common Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or the Corporation of any provisions of any law or regulation of any 1998 EMPLOYEE STOCK OPTION PLAN PAGE 3 governmental authority, including without limitation any federal or state securities laws or regulations. Specifically in connection with the Securities Act of 1933, as amended ("1933 Act"), upon exercise of any Option, unless a registration statement under the 1933 Act is in effect with respect to the shares of Common Stock covered by such Option, the Corporation shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to it that the holder of such Option may acquire such shares pursuant to an exemption from registration under the 1933 Act. Any determination in this connection by the Committee shall be final, binding and conclusive. The Corporation may, but shall in no event be obligated to, register any securities covered hereby pursuant to the 1933 Act. The Corporation shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares of Common Stock pursuant thereto to comply with any law or regulation of any governmental authority, except the Corporation shall timely file for registration, on Form S-8 under the 1933 Act, of the shares of Common Stock to be issued upon exercise of the Options granted under the Plan. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Common Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. (b) Compliance with Rule 16b-3. The Plan is intended to comply with Rule 16b-3 or its successor rule., promulgated under the Securities Exchange Act of 1934 ("1934 Act"). With respect to persons subject to Section 16 of the 1934 Act, any provision of the Plan or action of the Committee that is inconsistent with such Rule shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. (c) Holding Period for Officers. With respect to Options granted to officers of the Corporation (as the term "officer" is defined in the rules promulgated under Section 16 of the 1934 Act) and except as may be approved by the Committee, at least six (6) months must elapse from the date of grant of the Option and (i) any disposition of the Option (not including its exercise), or (ii) any disposition of the underlying Common Stock. 11. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend or terminate the Plan; provided however, that no amendment, suspension or termination of the Plan by the Board may, without the consent of the holder of the Option, adversely affect any rights or obligations under any Option theretofore granted under the Plan. 1998 EMPLOYEE STOCK OPTION PLAN PAGE 4 12. EFFECT OF CHANGES IN CAPITALIZATION (a) Changes in Common Stock. If the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Corporation by reason of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease affecting such outstanding shares generally that is effected without receipt of consideration by the Corporation, occurring after the Effective Date, the number and kinds of shares for the purchase of which Options may be granted under the Plan shall be adjusted proportionately and accordingly by the Committee. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate ownership interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. If there is a distribution payable in the capital stock of a subsidiary corporation of the Corporation ("Spin-off Shares"), to the extent consistent with Treasury Regulation section 1.425-1(a)(6) or the corresponding provision of any subsequent regulation, each outstanding Option shall thereafter additionally pertain to the number of Spin-off Shares that would have been received in such distribution by a stockholder of the Corporation who owned a number of shares of Common Stock equal to the number of shares that are subject to the Option at the time of such distribution, and the aggregate Option Price of the Option shall be allocated between the Spin-off Shares and the Common Stock in proportion to the relative Fair Market Values of a Spin-off Share and a share of Common Stock immediately after the distribution of Spin-off Shares. (b) Reorganization in Which the Corporation Is the Surviving Corporation. If the Corporation shall be the surviving corporation in any reorganization, merger, or consolidation of the Corporation with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. (c) Reorganization in Which the Corporation Is Not the Surviving Corporation; Sale of Assets or Stock. Upon the dissolution or liquidation of the Corporation, or upon a merger, consolidation or reorganization of the Corporation with one or more other corporations in which the Corporation is not the surviving corporation, or upon a sale of substantially all of the assets of the Corporation to another corporation, or upon any transaction (including, without limitation, a merger or reorganization in which the Corporation is the surviving corporation) approved by the Board which results in any person or entity owning eighty percent or more of the combined voting power of all classes of stock of the Corporation, the Plan and all Options outstanding hereunder shall terminate, except to the extent provision is made in writing in connection with such transaction for the continuation of the Plan and/or the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, to preserve the then excess, if any, of the aggregate Fair Market Value of the shares subject to Options over the purchase price for the shares under the Options, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each individual holding an Option shall have the right, immediately prior to the occurrence of such termination and during such period occurring prior to such termination as the Board in its sole discretion shall determine and designate, to exercise such Option in whole or in part, whether or not such Option was otherwise exercisable at the time such termination occurs 1998 EMPLOYEE STOCK OPTION PLAN PAGE 5 and without regard to any installment limitation on exercise imposed pursuant to the Option Agreement. The Board shall send written notice of an event that will result in such a termination to all individuals who hold Options not later than the time at which the Corporation gives notice thereof to its stockholders. Notwithstanding the foregoing, the occurrence of any event described in this Section 12(c) which also constitutes a Change of Control (as defined below) shall cause the exercisability in full of all Options whether or not (i) all conditions to exercise have been satisfied and (ii) the Plan is terminated pursuant to this Section 12(c). (d) Adjustments. Adjustments under this Section 12 related to stock or securities of the Corporation shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. No fractional shares of Common Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) No Limitations on the Corporation. The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 13. CHANGE OF CONTROL "Change of Control" means the Corporation or its stockholders enter into an agreement or agreements, in one or a series of related transactions, to dispose of, whether by sale, exchange, merger, consolidation, reorganization, recapitalization, dissolution or liquidation (a) not less than 80% of the assets of the Corporation or (b) a portion of the outstanding Common Stock such that after the transaction or transactions one person or "group" (as defined by the Securities and Exchange Commission) owns, of record or beneficially, 50% or more of the outstanding capital stock of the Corporation, or the right (by whatever means) or the voting power to elect 50% or more of the directors of the Corporation. 14. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ of the Corporation or any subsidiary of the Corporation, or to interfere in any way with the right and authority of the Corporation or any subsidiary of the Corporation either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and the Corporation or any subsidiary of the Corporation. 15. NONEXCLUSIVITY OF THE PLAN The adoption of the Plan shall not be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 16. GOVERNING LAW THE VALIDITY, INTERPRETATION AND EFFECT OF THE PLAN, AND THE RIGHTS OF ALL PERSONS HEREUNDER, SHALL BE GOVERNED BY AND DETERMINED IN ACCORDANCE WITH THE LAWS OF DELAWARE, OTHER THAN THE CHOICE OF LAW RULES THEREOF. 1998 EMPLOYEE STOCK OPTION PLAN PAGE 6 17. HEADINGS The headings herein are for convenience only and shall not be used in interpreting the Plan. 1998 EMPLOYEE STOCK OPTION PLAN PAGE 7 ATTACHMENT 1
Optionee Name Number of Option Shares - ------------- ----------------------- Brian P. Stone 107,160 Thomas W. Crucitti 74,600 David M. Karchner 68,240
1998 EMPLOYEE STOCK OPTION PLAN PAGE 8 EX-10.2 6 EX-10.2 Exhibit 10.2 INSIGHT HEALTH SERVICES CORP. 1997 MANAGEMENT STOCK OPTION PLAN InSight Health Services Corp., a Delaware corporation ("Corporation") sets forth herein the terms of the InSight Health Services Corp. 1997 Management Stock Option Plan ("Plan") as follows: 1. PURPOSE The Plan is intended to advance the interests of the Corporation by providing the individuals listed in Attachment 1 hereto ("Optionees") 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 individuals to remain in the employ of the Corporation, or any of its subsidiaries. Options granted under the Plan ("Options") shall not constitute "incentive stock options" within the meaning of section 422 of the Internal Revenue Code of 1986, as amended from time to time ("Code"). 2. ADMINISTRATION Except as otherwise specifically provided herein, the Plan shall be administered by the Compensation Committee ("Committee") of the Board of Directors ("Board") of the Corporation, which shall have the full power and authority to take all actions, and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 5 below) entered into hereunder, and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Committee to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder; provided however, that the Committee may not alter, amend or modify the express provisions of the Plan. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final, binding and conclusive. The Board may remove members, add members, and fill vacancies on the Committee from time to time, all in accordance with the Corporation's Certificate of Incorporation and Amended and Restated Bylaws, and with applicable law. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. 3. COMMON STOCK The stock that may be issued pursuant to Options granted under the Plan shall be shares of common stock, par value $0.001 per share, of the Corporation ("Common Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Common Stock that may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate 500,000 shares, which number of shares is subject to adjustment as hereinafter provided in Section 12 below. 4. EFFECTIVE DATE AND TERM OF THE PLAN The Plan became effective upon its adoption by the Board on November 7, 1997 ("Effective Date") and shall continue in effect for a term of ten (10) years. Any Options outstanding under the Plan on such date shall continue to be exercisable pursuant to their terms, except as otherwise provided herein. 1997 MANAGEMENT STOCK OPTION PLAN PAGE 1 5. GRANT OF OPTIONS Subject to the terms and conditions of the Plan, each Optionee is hereby granted as of the Effective Date, Options to purchase such number of shares of the Common Stock listed on Attachment 1 hereto at a purchase price ("Option Price") of $8.375 per share, on the terms and conditions set forth in the written agreements ("Option Agreements"), executed by the Corporation and by the Optionee, in the form of Attachment 2 hereto. The Option Price is greater than the Fair Market Value (as defined in Section 6(b)) as of the Effective Date. 6. TERM AND EXERCISE OF OPTIONS (a) Method of Exercise and Payment. An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at its principal office, addressed to the attention of the Corporate Secretary, of written notice of exercise in the form attached to the Option Agreement as Exhibit A, which notice shall specify the number of shares with respect to which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. The minimum number of shares of Common Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of 100 shares or the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Common Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) with the consent of the Committee, through the tender to the Corporation of shares of Common Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their Fair Market Value (as defined below) on the date of exercise; or (iii) by a combination of the methods described in (i) and (ii). If shares of Common Stock are surrendered by an officer of the Corporation (as the term "officer" is defined in Section 10(c) below) for payment and the Common Stock surrendered was acquired pursuant to an Option of the Corporation, then six (6) months must have elapsed since the date of grant of such Option. The payment in full of the Option Price need not accompany the written notice of exercise provided the notice of exercise directs that the Common Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Corporation as the agent for the individual exercising the Option and, at the time such Common Stock certificate or certificates are delivered, the broker shall tender to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price for the shares of Common Stock purchased pursuant to the exercise of the Option plus the amount (if any) of federal and/or other taxes which the Corporation, may, in its judgment, be required to withhold with respect to the exercise of the Option. Any attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option and the payment in full of the Option Price of the shares of Common Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a Common Stock certificate or certificates evidencing his ownership of such shares. An individual holding or exercising an Option shall have none of the rights of a stockholder until the shares of Common Stock covered thereby are fully paid and issued to him, and except as provided in Section 12 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. (b) Fair Market Value. "Fair Market Value" means the value of each share of Common Stock subject to the Plan determined as follows: If on the date of exercise the Common Stock is listed on an established national or regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, or is publicly traded on an established securities market, the Fair Market Value of the Common Stock shall be the closing price of the Common Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on the date of exercise or on the trading day immediately preceding the date of exercise if the date of exercise is not a trading day (or, if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or 1997 MANAGEMENT STOCK OPTION PLAN PAGE 2 between the high and low sale prices on such trading day), or, if no sale of the Common Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Common Stock is not listed on such an exchange, quoted on such Stock Market or traded on such a market, Fair Market Value shall be determined by the Committee in good faith. (c) Withholding. The Corporation shall have the right to withhold, or require an Optionee to remit to the Corporation, an amount sufficient to satisfy any applicable federal, state, local or foreign withholding tax requirements imposed with respect to the exercise of Options. Subject to the consent of the Committee which may be withheld in its sole and absolute discretion, and to the extent permissible under applicable tax, securities, and other laws, an Optionee may (a) have shares of Common Stock otherwise issuable to the Optionee hereunder withheld, or (b) tender to the Corporation previously acquired shares of Common Stock, having a Fair Market Value sufficient to satisfy all or part of the Optionee's federal, state and local tax obligations associated with the exercise of Options. 7. TRANSFERABILITY OF OPTIONS During the lifetime of an Optionee to whom an Option is granted, only such Optionee (or, in the event of legal incapacity or incompetency, the Optionee's guardian or legal representative) may exercise the Option. No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will, the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in section 414 of the Code, or such other transfers as may be permitted by the Committee, and no Option shall be pledged or hypothecated (by operation of law or otherwise), or subject to execution, attachment or similar process. 8. TERMINATION OF EMPLOYMENT Upon the termination of the employment of an Optionee with the Corporation or a subsidiary of the Corporation, other than by reason of the death or "permanent and total disability" (within the meaning of section 22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee pursuant to the Plan shall terminate three (3) months after the date of such termination of employment, unless otherwise provided pursuant to the Option Agreement. A leave of absence or leave on military or government service approved by the Committee shall not constitute a termination of employment for purposes of the Plan. For purposes of the Plan, a termination of employment with the Corporation or a subsidiary of the Corporation shall not be deemed to occur if the Optionee is immediately thereafter employed with the Corporation or any subsidiary of the Corporation. 9. USE OF PROCEEDS The proceeds received by the Corporation from the sale of Common Stock pursuant to Options granted under the Plan shall constitute general funds of the Corporation. 10. REQUIREMENTS OF LAW (a) Violations of Law. The Corporation shall not be required to sell or issue any shares of Common Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or the Corporation of any provisions of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Specifically in connection with the Securities Act of 1933, as amended ("1933 Act"), upon exercise of any Option, unless a registration statement under the 1933 Act is in effect with respect to the shares of Common Stock covered by such Option, the Corporation shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to it that the holder of such Option may acquire such shares pursuant to an exemption from registration under the 1933 Act. Any determination in this connection by the 1997 MANAGEMENT STOCK OPTION PLAN PAGE 3 Committee shall be final, binding and conclusive. The Corporation may, but shall in no event be obligated to, register any securities covered hereby pursuant to the 1933 Act. The Corporation shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares of Common Stock pursuant thereto to comply with any law or regulation of any governmental authority, except the Corporation shall timely file for registration, on Form S-8 under the 1933 Act, the shares of Common Stock to be issued upon exercise of the Options granted under the Plan. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Common Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. (b) Compliance with Rule 16b-3. The Plan is intended to comply with Rule 16b-3 or its successor rule, promulgated under the Securities Exchange Act of 1934 ("1934 Act"). With respect to persons subject to Section 16 of the 1934 Act, any provision of the Plan or action of the Committee that is inconsistent with such Rule shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. (c) Holding Period for Officers. With respect to Options granted to officers of the Corporation (as the term "officer" is defined in the rules promulgated under Section 16 of the 1934 Act) and except as may be approved by the Committee, at least six (6) months must elapse from the date of grant of the Option and (i) any disposition of the Option (not including its exercise), or (ii) any disposition of the underlying Common Stock. 11. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend or terminate the Plan; provided however, that no amendment, suspension or termination of the Plan by the Board may, without the consent of the holder of the Option, adversely affect any rights or obligations under any Option theretofore granted under the Plan. 12. EFFECT OF CHANGES IN CAPITALIZATION (a) Changes in Common Stock. If the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Corporation by reason of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease affecting such outstanding shares generally that is effected without receipt of consideration by the Corporation, occurring after the Effective Date, the number and kinds of shares for the purchase of which Options may be granted under the Plan shall be adjusted proportionately and accordingly by the Committee. In addition, the number and kind of shares for which Options are outstanding shall be adjusted proportionately and accordingly so that the proportionate ownership interest of the holder of the Option immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. If there is a distribution payable in the capital stock of a subsidiary corporation of the Corporation ("Spin-off Shares"), to the extent consistent with Treasury Regulation section 1.425-1(a)(6) or the corresponding provision of any subsequent regulation, each outstanding Option shall thereafter additionally pertain to the number of Spin-off Shares that would have been received in such distribution by a stockholder of the Corporation who owned a number of shares of Common Stock equal to the number of shares that are subject to the Option at the time of such distribution, and the aggregate Option Price of the Option shall be allocated between the Spin-off Shares and 1997 MANAGEMENT STOCK OPTION PLAN PAGE 4 the Common Stock in proportion to the relative Fair Market Values of a Spin-off Share and a share of Common Stock immediately after the distribution of Spin-off Shares. (b) Reorganization in Which the Corporation Is the Surviving Corporation. If the Corporation shall be the surviving corporation in any reorganization, merger, or consolidation of the Corporation with one or more other corporations, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. (c) Reorganization in Which the Corporation Is Not the Surviving Corporation; Sale of Assets or Stock. Upon the dissolution or liquidation of the Corporation, or upon a merger, consolidation or reorganization of the Corporation with one or more other corporations in which the Corporation is not the surviving corporation, or upon a sale of substantially all of the assets of the Corporation to another corporation, or upon any transaction (including, without limitation, a merger or reorganization in which the Corporation is the surviving corporation) approved by the Board which results in any person or entity owning eighty percent (80%) or more of the combined voting power of all classes of stock of the Corporation, the Plan and all Options outstanding hereunder shall terminate, except to the extent provision is made in writing in connection with such transaction for the continuation of the Plan and/or the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, to preserve the then excess, if any, of the aggregate Fair Market Value of the shares subject to Options over the purchase price for the shares under the Options, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each individual holding an Option shall have the right, immediately prior to the occurrence of such termination and during such period occurring prior to such termination as the Board in its sole discretion shall determine and designate, to exercise such Option in whole or in part, whether or not such Option was otherwise exercisable at the time such termination occurs and without regard to any installment limitation on exercise imposed pursuant to the Option Agreement. The Board shall send written notice of an event that will result in such a termination to all individuals who hold Options not later than the time at which the Corporation gives notice thereof to its stockholders. Notwithstanding the foregoing, the occurrence of any event described in this Section 12(c) which also constitutes a Change of Control (as defined below) shall cause the exercisability in full of all Options whether or not (i) all conditions to exercise have been satisfied and (ii) the Plan is terminated pursuant to this Section 12(c). (d) Adjustments. Adjustments under this Section 12 related to stock or securities of the Corporation shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. No fractional shares of Common Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. (e) No Limitations on the Corporation. The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 1997 MANAGEMENT STOCK OPTION PLAN PAGE 5 13. CHANGE OF CONTROL If a Change of Control (as defined below) occurs, all Options shall be exercisable in full regardless of whether all conditions of exercise have been satisfied. A "Change of Control" shall be deemed to occur (i) at such time as any person (as defined in the Section 13(d)(3) of the 1934 Act, but excluding General Electric Company ("GE") and the entities to whom shares of the Corporation's Convertible Preferred Stock, Series B ("Series B Preferred Stock") were initially issued ("Carlyle"), and successors and permitted assigns of GE and Carlyle, individually and collectively) at any time shall directly or indirectly acquire more than forty percent (40%) of the voting power of the Common Stock, (ii) at such time as during any one (1) year period, individuals who at the beginning of such period constitute the Board (together with any new directors (i) whose election by such Board or whose nomination for election by the stockholders of the Corporation was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (ii) elected or appointed by Carlyle, GE or their successors and permitted assigns) cease to constitute at least a majority of such Board (provided, however, that a change in directors upon a Type B Event Date (as defined in the Corporation's Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B ("Series B Certificate of Designation")) shall not be deemed to cause a Change of Control pursuant to this clause (ii), (iii) upon consummation of a merger or consolidation of the Corporation into or with another Person (as defined below) in which the stockholders of the Corporation immediately prior to the consummation of such transaction shall own fifty percent (50%) or less of the voting securities of the surviving corporation (or the parent corporation of the surviving corporation where the surviving corporation 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 the Corporation, 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 Corporation shall be deemed to occur solely by reason of (x) the ownership of the Corporation's capital stock by any of Carlyle, TC Group, L.L.C., any investor in any entity comprising Carlyle or TC Group, L.L.C. as of October 14, 1997, GE or its Affiliates (as defined in the Series B Certificate of Designation), (y) the conversion of shares of Series B Preferred Stock into either the Corporation's Convertible Preferred Stock, Series D ("Series D Preferred Stock") (and any change in the Board incident thereto) or Common Stock, or (z) the conversion of shares of Series D Preferred Stock into Common Stock. "Person" means any corporation, partnership, limited partnership, limited liability partnership, joint venture, association, limited liability company, joint-stock company, trust or unincorporated organization. 14. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ of the Corporation or any subsidiary of the Corporation, or to interfere in any way with the right and authority of the Corporation or any subsidiary of the Corporation either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and the Corporation or any subsidiary of the Corporation. 15. NONEXCLUSIVITY OF THE PLAN The adoption of the Plan shall not be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 1997 MANAGEMENT STOCK OPTION PLAN PAGE 6 16. GOVERNING LAW THE VALIDITY, INTERPRETATION AND EFFECT OF THE PLAN, AND THE RIGHTS OF ALL PERSONS HEREUNDER, SHALL BE GOVERNED BY AND DETERMINED IN ACCORDANCE WITH THE LAWS OF DELAWARE, OTHER THAN THE CHOICE OF LAW RULES THEREOF. 17. HEADINGS The headings herein are for convenience only and shall not be used in interpreting the Plan. 1997 MANAGEMENT STOCK OPTION PLAN PAGE 7 ATTACHMENT 1
Optionee Name Number of Option Shares - ------------- ----------------------- E. Larry Atkins 150,000 Thomas V. Croal 140,000 Glenn P. Cato 80,000 Michael A. Boylan 50,000 Robert N. LaDouceur 50,000 Michael D. Cragin 30,000
1997 MANAGEMENT STOCK OPTION PLAN PAGE 8 EX-10.3 7 EXHIBIT 10.3 Exh. 10.3 [EXECUTION COPY] FOURTH AMENDMENT AND RESTATEMENT OF CREDIT AGREEMENT Dated as of June 12, 1998 among INSIGHT HEALTH SERVICES CORP., as Borrower, CERTAIN SUBSIDIARIES OF THE BORROWER FROM TIME TO TIME PARTY HERETO, as Guarantors, THE SEVERAL LENDERS FROM TIME TO TIME PARTY HERETO AND NATIONSBANK, N. A., as Agent TABLE OF CONTENTS
SECTION 1 DEFINITIONS............................................................................................1 1.1 Definitions..........................................................................................1 1.2 Computation of Time Periods.........................................................................22 1.3 Accounting Terms....................................................................................32 SECTION 2 CREDIT FACILITIES.....................................................................................23 2.1 Revolving Loans.....................................................................................23 2.2 Letter of Credit Subfacility........................................................................24 2.3 Acquisition Loans...................................................................................28 2.4 Tranche A Term Loan.................................................................................30 SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES........................................................31 3.1 Default Rate........................................................................................31 3.2 Extension and Conversion............................................................................32 3.3 Prepayments.........................................................................................32 3.4 Termination and Reduction of Committed Amounts......................................................34 3.5 Fees................................................................................................35 3.6 Capital Adequacy....................................................................................36 3.7 Limitation on Eurodollar Loans......................................................................36 3.8 Illegality..........................................................................................37 3.9 Requirements of Law.................................................................................37 3.10 Treatment of Affected Loans........................................................................38 3.11 Taxes..............................................................................................38 3.12 Compensation.......................................................................................38 3.13 Pro Rata Treatment.................................................................................39 3.14 Sharing of Payments................................................................................40 3.15 Payments, Computations, Etc........................................................................41 3.16 Evidence of Debt...................................................................................42 3.17 Mandatory Assignment...............................................................................43 SECTION 4 GUARANTY..............................................................................................43 4.1 The Guaranty........................................................................................43 4.2 Obligations Unconditional...........................................................................43 4.3 Reinstatement.......................................................................................44 4.4 Certain Additional Waivers..........................................................................44 4.5 Remedies............................................................................................44 4.6 Rights of Contribution..............................................................................45 4.7 Continuing Guarantee................................................................................45 SECTION 5 CONDITIONS............................................................................................46 5.1 Closing Conditions..................................................................................46 5.2 Conditions to all Extensions of Credit..............................................................47 SECTION 6 REPRESENTATIONS AND WARRANTIES........................................................................48 6.1 Financial Condition.................................................................................48 6.2 No Material Change..................................................................................48 6.3 Organization and Good Standing......................................................................48 6.4 Power; Authorization; Enforceable Obligations.......................................................49 6.5 No Conflicts........................................................................................49 6.6 No Default..........................................................................................49 6.7 Ownership...........................................................................................49 6.8 Indebtedness........................................................................................49 6.9 Litigation..........................................................................................49 6.10 Taxes..............................................................................................50 6.11 Compliance with Law................................................................................50 6.12 ERISA..............................................................................................50 6.13 Subsidiaries.......................................................................................51
i
6.14 Governmental Regulations, Etc......................................................................51 6.15 Purpose of Loans and Letters of Credit.............................................................52 6.16 Environmental Matters..............................................................................52 6.17 Intellectual Property..............................................................................52 6.18 Solvency...........................................................................................53 6.19 Investments........................................................................................53 6.20 Location of Collateral.............................................................................53 6.21 Disclosure.........................................................................................53 6.22 No Burdensome Restrictions.........................................................................53 6.23 Brokers' Fees......................................................................................53 6.24 Labor Matters......................................................................................53 6.25 Nature of Business.................................................................................53 6.26 Year 2000 Compliance...............................................................................53 SECTION 7 AFFIRMATIVE COVENANTS.................................................................................54 7.1 Information Covenants...............................................................................54 7.2 Preservation of Existence and Franchises............................................................56 7.3 Books and Records...................................................................................56 7.4 Compliance with Law.................................................................................56 7.5 Payment of Taxes and Other Indebtedness.............................................................56 7.6 Insurance...........................................................................................56 7.7 Maintenance of Property.............................................................................57 7.8 Performance of Obligations..........................................................................57 7.9 Use of Proceeds.....................................................................................57 7.10 Audits/Inspections.................................................................................57 7.11 Financial Covenants................................................................................58 7.12 Additional Credit Parties..........................................................................59 7.13 Pledged Assets.....................................................................................59 7.14 Upstreaming of Income from Joint Ventures..........................................................60 7.15 Further Assurances.................................................................................60 SECTION 8 NEGATIVE COVENANTS....................................................................................61 8.1 Indebtedness........................................................................................61 8.2 Liens...............................................................................................62 8.3 Nature of Business..................................................................................62 8.4 Consolidation, Merger, Dissolution, etc.............................................................62 8.5 Asset Dispositions..................................................................................63 8.6 Investments.........................................................................................63 8.7 Restricted Payments.................................................................................63 8.8 Prepayments of Indebtedness, etc....................................................................64 8.9 Transactions with Affiliates........................................................................64 8.10 Fiscal Year; Organizational Documents..............................................................64 8.11 Limitation on Restricted Actions...................................................................64 8.12 Ownership of Subsidiaries..........................................................................65 8.13 Sale Leasebacks....................................................................................65 8.14 Capital Expenditures...............................................................................65 8.15 No Further Negative Pledges........................................................................65 8.16 Operating Lease Obligations........................................................................65 8.17 No Foreign Subsidiaries............................................................................66 8.18 Joint Venture Operations...........................................................................66 SECTION 9 EVENTS OF DEFAULT.....................................................................................66 9.1 Events of Default...................................................................................66 9.2 Acceleration; Remedies..............................................................................68 SECTION 10 AGENCY PROVISIONS....................................................................................68 10.1 Appointment, Powers and Immunities.................................................................68 10.2 Reliance by Agent..................................................................................69 10.3 Defaults...........................................................................................69
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10.4 Rights as a Lender.................................................................................69 10.5 Indemnification....................................................................................69 10.6 Non-Reliance on Agent and Other Lenders............................................................70 10.7 Successor Agent....................................................................................70 SECTION 11 MISCELLANEOUS........................................................................................70 11.1 Notices............................................................................................70 11.2 Right of Set-Off; Adjustments......................................................................71 11.3 Benefit of Agreement...............................................................................72 11.4 No Waiver; Remedies Cumulative.....................................................................73 11.5 Expenses; Indemnification..........................................................................73 11.6 Amendments, Waivers and Consents...................................................................74 11.7 Counterparts.......................................................................................75 11.8 Headings...........................................................................................75 11.9 Survival...........................................................................................75 11.10 Governing Law; Submission to Jurisdiction; Venue..................................................75 11.11 Severability......................................................................................76 11.12 Entirety..........................................................................................76 11.13 Binding Effect; Termination; Acknowledgement......................................................76 11.14 Source of Funds...................................................................................77 11.15 Conflict..........................................................................................77 11.16 Confidentiality...................................................................................77
iii SCHEDULES
Schedule 1.1A Joint Ventures Schedule 1.1B Investments Schedule 1.1C Liens Schedule 1.1D GE Equipment Schedule 2.1(a) Lenders Schedule 3.3(b)(vii) Special Asset Dispositions Schedule 5.2(c) Form of Legal Opinion of McDermott, Will & Emery Schedule 5.1(d) Corporate Structure Schedule 6.1(c) Absence of Undisclosed Liabilities Schedule 6.4 Required Consents, Authorizations, Notices and Filings Schedule 6.9 Litigation Schedule 6.12 ERISA Schedule 6.13 Subsidiaries Schedule 6.15 Funded Indebtedness to be Refinanced Schedule 6.16 Environmental Disclosures Schedule 6.17 Intellectual Property Schedule 6.20(a)(i) Primary Real Properties Schedule 6.20(a)(ii) Secondary Real Properties Schedule 6.20(b) Collateral Locations Schedule 6.20(c) Chief Executive Offices/Principal Places of Business Schedule 6.23 Broker's Fees Schedule 7.6 Insurance Schedule 8.1 Indebtedness Schedule 8.16 Existing Operating Leases
EXHIBITS
Exhibit 1.1A Form of Pledge Agreement Exhibit 1.1B Form of Security Agreement Exhibit 1.1C Form of Subordination Agreement Exhibit 2.1(b)(i) Form of Notice of Borrowing Exhibit 2.1(e) Form of Revolving Note Exhibit 2.3(e) Form of Acquisition Loan Note Exhibit 2.4(f) Form of Tranche A Term Note Exhibit 3.2 Form of Notice of Extension/Conversion Exhibit 7.1(c) Form of Officer's Compliance Certificate Exhibit 7.12 Form of Joinder Agreement Exhibit 11.3(b) Form of Assignment and Acceptance
i FOURTH AMENDMENT AND RESTATEMENT OF CREDIT AGREEMENT THIS FOURTH AMENDMENT AND RESTATEMENT OF CREDIT AGREEMENT, dated as of June 12, 1998 (the "Amendment"), is by and among INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Borrower"), the Guarantors (as defined herein), the Lenders (as defined herein) and NATIONSBANK, N. A., as Agent for the Lenders (in such capacity, the "Agent"). W I T N E S S E T H WHEREAS, the Borrower, the Guarantors, the Lenders and the Agent entered into that certain Credit Agreement dated as of October 14, 1997 as amended by the First Amendment to Credit Agreement dated as of November 17, 1997, the Second Amendment to Credit Agreement dated as of December 19, 1997 and the Third Amendment to Credit Agreement dated as of March 23, 1998 (the "Existing Credit Agreement"); WHEREAS, the parties to the Existing Credit Agreement have agreed upon a fourth amendment to the Existing Credit Agreement and for ease of reference have agreed to set forth the entire agreement evidenced by the Existing Credit Agreement as amended by such fourth amendment in this Amendment as a single document; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS 1.1 Definitions. As used in this Credit Agreement, the following terms shall have the meanings specified below unless the context otherwise requires: "Acquisition", by any Person, means an acquisition by such Person, to the extent not constituting a capital expenditure under GAAP, of all or a majority of the Capital Stock or all or substantially all of the Property of another Person, whether or not involving a merger or consolidation with such Person. "Acquisition Loan Commitment" means, with respect to each Lender, the commitment of such Lender in an aggregate principal amount at any time outstanding of up to such Lender's Acquisition Loan Commitment Percentage of the Acquisition Loan Committed Amount, to make Acquisition Loans in accordance with the provisions of Section 2.3(a). "Acquisition Loan Commitment Percentage" means, for any Lender, the percentage identified as its Acquisition Loan Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "Acquisition Loan Committed Amount" shall have the meaning assigned to such term in Section 2.3(a). "Acquisition Loan Unused Fee" shall have the meaning assigned to such term in Section 3.5(a)(ii). "Acquisition Loan Unused Fee Calculation Period" shall have the meaning assigned to such term in Section 3.5(a)(ii). "Acquisition Loans" shall have the meaning assigned to such term in Section 2.3(a). "Acquisition Note" or "Acquisition Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Acquisition Loans provided pursuant to Section 2.3(e), individually or 1 collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Additional Credit Party" means each Person that becomes a Guarantor after the Closing Date by execution of a Joinder Agreement. "Adjusted Base Rate" means the Base Rate plus the Applicable Percentage. "Adjusted Eurodollar Rate" means the Eurodollar Rate plus the Applicable Percentage. "Affiliate" means, with respect to any Person, any other Person (i) directly or indirectly controlling or controlled by or under direct or indirect common control with such Person or (ii) directly or indirectly owning or holding five percent (5%) or more of the Capital Stock in such Person. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agency Services Address" means NationsBank, N. A., NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency Services, or such other address as may be identified by written notice from the Agent to the Borrower. "Agent" shall have the meaning assigned to such term in the heading hereof, together with any successors or assigns. "Agent's Fee Letter" means that certain letter agreement, dated as of [April __, 1998], between the Agent and the Borrower, as amended, modified, restated or supplemented from time to time. "Agent's Fees" shall have the meaning assigned to such term in Section 3.5(c). "Amendment No. 4 Effective Date" means the date the conditions set forth in Section 5.1 have been satisfied. "Applicable Lending Office" means, for each Lender, the office of such Lender (or of an Affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Borrower by written notice as the office by which its Eurodollar Loans are made and maintained. "Applicable Percentage" means, for purposes of calculating the applicable interest rate for any day for any Revolving Loan, any Acquisition Loan or any Tranche A Term Loan, the applicable rate of the Revolving Unused Fee for any day for purposes of Section 3.5(a)(i), the applicable rate of the Acquisition Loan Unused Fee for any day for purposes of Section 3.5(a)(ii), the applicable rate of the Standby Letter of Credit Fee for any day for purposes of Section 3.5(b)(i) or the applicable rate of the Trade Letter of Credit Fee for any day for purposes of Section 3.5(b)(ii), the appropriate applicable percentage corresponding to the Senior Leverage Ratio in effect as of the most recent Calculation Date:
Applicable Applicable Applicable Applicable Percentage Senior Percentage Percentage Applicable Percentage Applicable for Pricing Leverage For Base For Percentage for Trade Percentage Acquisition Level Ratio Rate Loans Eurodollar For Standby Letter of for Loan Unused Loans Letter of Credit Fee Revolving Fees Credit Fee Unused Fees - -------- --------- ------------ ------------ ------------ ---------- ------------- -------------- Revolving Revolving Loans, Loans, Acquisition Acquisition Loans and Loans and Tranche A Tranche A Term Loans Term Loans ------------ ------------- 2 I less than 0.75% 1.75% 1.75% 0.875% 0.375% 0.50% or equal to 2.00 to 1.00 II greater than 1.00% 2.00% 2.00% 1.00% 0.50% 0.50% 2.00 to 1.00 but less than 2.00 to 1.00 III greater than 1.25% 2.25% 2.25% 1.125% 0.50% 0.50% 2.50 to 1.00
The Applicable Percentages shall be determined and adjusted quarterly on the date (each a "Calculation Date") five Business Days after the date by which the Borrower is required to provide the officer's certificate in accordance with the provisions of Section 7.1(c) for the most recently ended fiscal quarter of the Consolidated Parties; provided, however, that (i) the initial Applicable Percentages shall be based on Pricing Level I (as shown above) and shall remain at Pricing Level I until the earlier of (i) the Calculation Date occurring on September 30, 1998 or (ii) the date of any Permitted Acquisition, and, thereafter, the Pricing Level shall be determined by the Senior Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Consolidated Parties preceding the applicable Calculation Date, and (ii) if the Borrower fails to provide the officer's certificate to the Agency Services Address as required by Section 7.1(c) for the last day of the most recently ended fiscal quarter of the Consolidated Parties preceding the applicable Calculation Date, the Applicable Percentage from such Calculation Date shall be based on Pricing Level III until such time as an appropriate officer's certificate is provided, whereupon the Pricing Level shall be determined by the Senior Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Consolidated Parties preceding such Calculation Date. Each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentages shall be applicable to all existing Loans as well as any new Loans made or issued. "Application Period", in respect of any Asset Disposition, shall have the meaning assigned to such term in Section 8.5. "Asset Disposition" means the disposition of any or all of the assets (including without limitation the Capital Stock of a Subsidiary) of any Consolidated Party, whether by sale, lease, transfer or otherwise, other than (a) the sale of inventory in the ordinary course of business for fair consideration, (b) the sale or disposition of machinery and equipment no longer used or useful in the conduct of such Person's business and (c) any Equity Transaction. "Asset Disposition Prepayment Event" means, with respect to any Asset Disposition other than an Excluded Asset Disposition, the failure of the Borrower to apply (or cause to be applied) the Net Cash Proceeds of such Asset Disposition to the purchase, acquisition or construction of Eligible Assets during the Application Period for such Asset Disposition. "Bankruptcy Code" means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time. "Bankruptcy Event" means, with respect to any Person, the occurrence of any of the following with respect to such Person: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or ordering the winding up or liquidation of its affairs; or (ii) there shall be commenced against such Person an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action 3 shall remain undismissed, undischarged or unbonded for a period of ninety (90) consecutive days; or (iii) such Person shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or make any general assignment for the benefit of creditors; or (iv) such Person shall be unable to, or shall admit in writing its inability to, pay its debts generally as they become due. "Base Rate" means, for any day, the rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus one-half of one percent (0.5%) and (b) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Loan" means any Loan bearing interest at a rate determined by reference to the Base Rate. "Borrower" means the Person identified as such in the heading hereof, together with any permitted successors and assigns. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina or New York, New York are authorized or required by law to close, except that, when used in connection with a Eurodollar Loan, such day shall also be a day on which dealings between banks are carried on in U.S. dollar deposits in London, England. "Calculation Date" has the meaning set forth in the definition of "Applicable Percentage" set forth in this Section 1.1. "Capital Lease" means, as applied to any Person, any lease of any Property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Capital Stock" means (i) in the case of a corporation, capital stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (iii) in the case of a partnership, partnership interests (whether general or limited), (iv) in the case of a limited liability company, membership interests and (v) 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. "Cash Equivalents" means (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) U.S. dollar denominated time deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "Approved Bank"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States of America in which any Credit Party shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by 4 reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d). "Central Coast" means a direct or indirect Subsidiary of the Borrower to be created subsequent to the Closing Date for the purpose of operating a diagnostic imaging center project in California. "Certificates of Designation" means a collective reference to the Series B Certificate of Designation and the Series C Certificate of Designation. "Change of Control" means any of the following events: without the prior written consent of the Required Lenders, (a) either the Sponsor or GE shall transfer any Capital Stock in the Borrower in a manner that requires approval of the Borrower's Board of Directors pursuant to Section 6.14 of the Sponsor Investment Agreement or Section 6.14 of the GE Investment Agreement, (b) any Person other than the Sponsor or GE or two or more Persons other than the Sponsor or GE acting in concert shall have acquired beneficial ownership, directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, control over, 33% or more of the Capital Stock of the Borrower, (c) during any period of up to 24 consecutive months commencing after the Closing Date, individuals who at the beginning of such 24 month period were directors of the Borrower (together with any new director (i) whose election by the Borrower's Board of Directors or whose nomination for election by the Borrower's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved or (ii) appointed by the Sponsor and/or GE) cease for any reason to constitute a majority of the directors of the Borrower then in office, (d) the occurrence of (i) a breach by the Sponsor of Section 6.14 of the Sponsor Investment Agreement or (ii) a breach by GE of Section 6.14 of the GE Investment Agreement or (e) the occurrence of a "Change of Control" under and as defined in the Subordinated Note Indenture. As used herein, "beneficial ownership" shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934. "Closing Date" means October 14, 1997. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. "Collateral" means a collective reference to the collateral which is identified in, and at any time will be covered by, the Collateral Documents. "Collateral Documents" means a collective reference to the Security Agreement, the Pledge Agreement, the Mortgage Instruments and such other documents executed and delivered in connection with the attachment and perfection of the Agent's security interests and liens arising thereunder, including without limitation, UCC financing statements and patent and trademark filings. "Commitment" means (i) with respect to each Lender, the Revolving Commitment of such Lender, the Acquisition Loan Commitment of such Lender and the Tranche A Term Loan Commitment of such Lender and (ii) with respect to the Issuing Lender, the LOC Commitment. "Consolidated Capital Expenditures" means, for any period, all capital expenditures of the Consolidated Parties on a consolidated basis for such period, as determined in accordance with GAAP, excluding capital expenditures incurred in connection with the buyout of existing Operating Leases set forth on Schedule 8.16 hereto. "Consolidated Cash Interest Expense" means, for any period, cash interest expense (including the amortization of debt discount and premium, the interest component under Capital Leases and the implied interest component under Synthetic Leases) of the Consolidated Parties on a consolidated basis for such period, as determined in accordance with GAAP; provided, however, that, notwithstanding anything to the 5 contrary set forth in this Credit Agreement, (i) for any calculation as of the fiscal quarter ending March 31, 1998 for the twelve-month period then ended, Consolidated Cash Interest Expense shall be determined based on Consolidated Cash Interest Expense for the one-quarter period then ended multiplied by 4, (ii) for any calculation as of the fiscal quarter ending June 30, 1998 for the twelve-month period then ended, Consolidated Cash Interest Expense shall be determined based on Consolidated Cash Interest Expense for the two-quarter period then ended multiplied by 2 and (iii) for any calculation as of the fiscal quarter ending September 30, 1998 for the twelve-month period then ended, Consolidated Cash Interest Expense shall be determined based on Consolidated Cash Interest Expense for the three-quarter period then ended multiplied by 1.33. "Consolidated Cash Taxes" means, for any period, the aggregate of all taxes of the Consolidated Parties on a consolidated basis for such period, as determined in accordance with GAAP, to the extent the same are paid in cash during such period. "Consolidated EBITDA" means, for any period, the sum of (i) Consolidated Net Income for such period, plus (ii) an amount which, in the determination of Consolidated Net Income for such period, has been deducted for (A) Consolidated Interest Expense, (B) total federal, state, local and foreign income, value added and similar taxes, (C) depreciation and amortization expense and (D) minority interests (provided that minority interests shall not constitute more than 10% of Consolidated EBITDA for any period), all as determined in accordance with GAAP. "Consolidated EBITDAR" means, for any period, the sum of (i) Consolidated EBITDA for such period, plus (ii) an amount which, in the determination of Consolidated Net Income for such period, has been deducted for Consolidated Rental Expense, all as determined in accordance with GAAP. "Consolidated Interest Expense" means, for any period, interest expense (including the amortization of debt discount and premium, the interest component under Capital Leases and the implied interest component under Synthetic Leases) of the Consolidated Parties on a consolidated basis for such period, as determined in accordance with GAAP; provided, however, that, notwithstanding anything to the contrary set forth in this Credit Agreement, (i) for any calculation as of the fiscal quarter ending March 31, 1998 for the twelve-month period then ended, Consolidated Interest Expense shall be determined based on Consolidated Interest Expense for the one-quarter period then ended multiplied by 4, (ii) for any calculation as of the fiscal quarter ending June 30, 1998 for the twelve-month period then ended, Consolidated Interest Expense shall be determined based on Consolidated Interest Expense for the two-quarter period then ended multiplied by 2 and (iii) for any calculation as of the fiscal quarter ending September 30, 1998 for the twelve-month period then ended, Consolidated Interest Expense shall be determined based on Consolidated Interest Expense for the three-quarter period then ended multiplied by 1.33. "Consolidated Net Income" means, for any period, net income (excluding extraordinary, unusual items and gains or losses on Asset Dispositions) after taxes for such period of the Consolidated Parties on a consolidated basis, as determined in accordance with GAAP. "Consolidated Parties" means a collective reference to the Borrower and its Subsidiaries, and "Consolidated Party" means any one of them. "Consolidated Rental Expense" means, for any period, rental expense under Operating Leases of the Consolidated Parties on a consolidated basis for such period, as determined in accordance with GAAP. "Consolidated Scheduled Funded Debt Payments" means, as of the end of each fiscal quarter of the Consolidated Parties, for the Consolidated Parties on a consolidated basis, the sum of all scheduled payments of principal on Funded Indebtedness (other than Funded Indebtedness retired in connection with the Recapitalization) for the applicable period ending on such date (including the principal component of payments due on Capital Leases during the applicable period ending on such date); it being understood that Scheduled Funded Debt Payments shall not include voluntary prepayments or the mandatory prepayments required pursuant to Section 3.3. 6 "Consolidated Total Assets" means, at any time, total assets of the Consolidated Parties on a consolidated basis at such time, as determined in accordance with GAAP. "Consolidated Working Capital" means, at any time, the excess of (a) the sum of all amounts (other than cash, Cash Equivalents and bank overdrafts) that would, in conformity with GAAP, be set forth opposite the caption "total current assets" (or any like caption) on a consolidated balance sheet of the Consolidated Parties at such time over (ii) the sum of all amounts that would, in conformity with GAAP, be set forth opposite the caption "total current liabilities" (or any like caption) on a consolidated balance sheet of the Consolidated Parties at such time, but excluding (a) the current portion of any Funded Indebtedness, and (b) the current portion of deferred income taxes. "Continue", "Continuation", and "Continued" shall refer to the continuation pursuant to Section 3.2 hereof of a Eurodollar Loan from one Interest Period to the next Interest Period. "Convert", "Conversion", and "Converted" shall refer to a conversion pursuant to Section 3.2 or Sections 3.7 through 3.12, inclusive, of a Base Rate Loan into a Eurodollar Loan. "Credit Agreement" means the Existing Credit Agreement as amended and restated by this Amendment. "Credit Documents" means a collective reference to this Credit Agreement, the Notes, the LOC Documents, each Joinder Agreement, the Agent's Fee Letter, the Collateral Documents and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto (in each case as the same may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time), and "Credit Document" means any one of them. "Credit Parties" means a collective reference to the Borrower and the Guarantors, and "Credit Party" means any one of them. "Credit Party Obligations" means, without duplication, (i) all of the obligations of the Credit Parties to the Lenders (including the Issuing Lender) and the Agent, whenever arising, under this Credit Agreement, the Notes, the Collateral Documents or any of the other Credit Documents (including, but not limited to, any interest accruing after the occurrence of a Bankruptcy Event with respect to any Credit Party, regardless of whether such interest is an allowed claim under the Bankruptcy Code) and (ii) all liabilities and obligations, whenever arising, owing from the Borrower to any Lender, or any Affiliate of a Lender, arising under any Hedging Agreement. "Debt Issuance" means the issuance of any Indebtedness for borrowed money by any Consolidated Party. "Default" means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" means, at any time, any Lender that (a) has failed to make a Loan or purchase a Participation Interest required pursuant to the term of this Credit Agreement within one Business Day of when due, (b) other than as set forth in (a) above, has failed to pay to the Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement within one Business Day of when due, unless such amount is subject to a good faith dispute or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or with respect to which (or with respect to any of assets of which) a receiver, trustee or similar official has been appointed. "Dollars" and "$" means dollars in lawful currency of the United States of America. "Domestic Subsidiary" means, with respect to any Person, any Subsidiary of such Person which is incorporated or organized under the laws of any State of the United States or the District of Columbia. 7 "Effective Date" means the date on which the conditions set forth in Section 5.2 of the Existing Credit Agreement to the making of the initial Loans and/or the issuance of the initial Letter of Credit, as applicable,were fulfilled (or waived in the sole discretion of the Lenders) and on which the initial Loans were made and/or the initial Letters of Credit were issued. "Eligible Assets" means another business or any substantial part of another business or other long-term assets, in each case, in, or used or useful in, the same or a similar line of business as the Consolidated Parties were engaged in on the Closing Date or any reasonable extensions or expansions thereof. "Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender; (iii) any Approved Fund; and (iv) any other Person approved by the Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 11.3, the Borrower (such approval not to be unreasonably withheld or delayed by the Borrower and such approval to be deemed given by the Borrower if no objection is received by the assigning Lender and the Agent from the Borrower within five Business Days after notice of such proposed assignment has been provided by the assigning Lender to the Borrower); provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee. For the purposes of this definition, "Approved Fund" shall mean, with respect to any Lender that is a fund that invests in bank loans, any other fund that invests in bank loans which is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "Environmental Laws" means any and all lawful and applicable Federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "Equity Issuance" means any issuance by any Consolidated Party to any Person which is not a Credit Party of (a) shares of its Capital Stock, (b) any shares of its Capital Stock pursuant to the exercise of options or warrants or (c) any shares of its Capital Stock pursuant to the conversion of any debt securities to equity. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA Affiliate" means an entity which is under common control with any Consolidated Party within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes the Borrower and which is treated as a single employer under Sections 414(b) or (c) of the Code. "ERISA Event" means (i) with respect to any Plan, the occurrence of a Reportable Event or the substantial cessation of operations (within the meaning of Section 4062(e) of ERISA); (ii) the withdrawal by any Consolidated Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan; (iii) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (iv) the institution of proceedings to terminate or the actual termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (vi) the complete or partial withdrawal of any Consolidated Party or any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for imposition of a lien under Section 302(f) of ERISA exist with respect to any Plan; or (vii) the adoption of an amendment to any Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA. 8 "Eurodollar Loan" means any Loan that bears interest at a rate based upon the Eurodollar Rate. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the quotient obtained by dividing (a) the Interbank Offered Rate for such Eurodollar Loan for such Interest Period by (b) 1 minus the Eurodollar Reserve Requirement for such Eurodollar Loan for such Interest Period. "Eurodollar Reserve Requirement" means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Eurodollar Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Requirement. "Event of Default" means such term as defined in Section 9.1. "Excess Cash Flow" means, with respect to any fiscal year period of the Consolidated Parties on a consolidated basis, an amount equal to (a) Consolidated EBITDA for such period minus (b) Consolidated Capital Expenditures for such period minus (c) Consolidated Cash Interest Expense for such period minus (d) Federal, state and other income taxes actually paid by the Consolidated Parties on a consolidated basis during such period minus (e) Consolidated Scheduled Funded Debt Payments made during such period minus (f) total consideration (including any assumption of liabilities (other than current working capital liabilities not constituting Indebtedness), but excluding consideration consisting of any Capital Stock of the Borrower), fees and expenses actually paid by the Consolidated Parties on a consolidated basis in connection with Permitted Acquisitions during such period plus/minus (g) changes in Consolidated Working Capital for such period. "Excluded Asset Disposition" means any Asset Disposition by any Consolidated Party to any Credit Party if (a) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such Asset Disposition and (b) after giving effect such Asset Disposition, no Default or Event of Default exists. "Excluded Equity Issuance" means (1) any Asset Disposition and (2) any Equity Issuance to the Sponsor or GE, including without limitation the issuance and sale by the Borrower of preferred capital stock pursuant to Section 2.1 of the GE Investment Agreement or Section 2.1 of the Sponsor Investment Agreement. "Executive Officer" of any Person means any of the chief executive officer, chief operating officer, president, vice president, chief financial officer or treasurer of such Person. "Fees" means all fees payable pursuant to Section 3.5. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to the Agent (in its individual capacity) on such day on such transactions as determined by the Agent. 9 "Fixed Charge Coverage Ratio" means, as of the end of any fiscal quarter of the Consolidated Parties for the twelve month period ending on such date, the ratio of (a) Consolidated EBITDAR for the applicable period minus Consolidated Cash Taxes for the applicable period to (b) Consolidated Cash Interest Expense for the applicable period plus Consolidated Scheduled Funded Debt Payments for the applicable period plus Consolidated Rental Expense for the applicable period. "Foreign Subsidiary" means, with respect to any Person, any Subsidiary of such Person which is not a Domestic Subsidiary of such Person. "Funded Indebtedness" means, with respect to any Person, without duplication, (a) all Indebtedness of such Person other than Indebtedness of the types referred to in clause (e), (f), (g), (i), (k) and (m) of the definition of "Indebtedness" set forth in this Section 1.1, (b) all Indebtedness of another Person of the type referred to in clause (a) above secured by (or for which the holder of such Funded Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, Property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (c) all Guaranty Obligations of such Person with respect to Indebtedness of the type referred to in clause (a) above of another Person and (d) Indebtedness of the type referred to in clause (a) above of any partnership or unincorporated joint venture in which such Person is legally obligated or has a reasonable expectation of being liable with respect thereto. "GAAP" means generally accepted accounting principles in the United States applied on a consistent basis and subject to the terms of Section 1.3. "GE" means General Electric Company, a New York corporation, and its Affiliates. "GE Equipment" shall have the meaning assigned to such term in the definition of "MD Assets". "GE Investment Agreement" means that certain Securities Purchase Agreement dated as of October 14, 1997 by and among GE and the Borrower. "GE Payoff Letter" means the payoff letter dated October 14, 1997 delivered by GE to the Borrower and pursuant to which and GE agrees to terminate the Master Debt Restructuring Agreement upon payment by the Borrower to GE of certain indebtedness owing by the Borrower to GE as of the date of such letter, all on the terms set forth more fully therein. "GE Registration Rights Agreement" means that certain Registration Rights Agreement dated as of a date on or before the Effective Date by and between the Borrower and GE. "GE Warrant Agreement" means that certain Warrant Agreement dated as of a date on or before the Effective Date by and between the Borrower and GE. "Governmental Authority" means any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantor" means each of the Persons identified as a "Guarantor" on the signature pages hereto and each Additional Credit Party which may hereafter execute a Joinder Agreement, together with their successors and permitted assigns, and "Guarantor" means any one of them "Guaranty Obligations" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any Property constituting security therefor, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keep well 10 agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase Property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Obligation is made. "Hedging Agreements" means any interest rate protection agreement or foreign currency exchange agreement between any Consolidated Party and any Lender, or any Affiliate of a Lender. "Indebtedness" means, with respect to any Person, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (c) all obligations of such Person under conditional sale or other title retention agreements relating to Property purchased by such Person (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (d) all obligations of such Person issued or assumed as the deferred purchase price of Property or services purchased by such Person (other than trade debt incurred in the ordinary course of business and due within six months of the incurrence thereof) which would appear as liabilities on a balance sheet of such Person, (e) all obligations of such Person under take-or-pay or similar arrangements or under commodities agreements, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, Property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Guaranty Obligations of such Person, (h) the principal portion of all obligations of such Person under Capital Leases, (i) all obligations of such Person under Hedging Agreements, (j) the maximum amount of all standby letters of credit issued or bankers' acceptances facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (k) all preferred Capital Stock issued by such Person and required by the terms thereof to be redeemed, or for which mandatory sinking fund payments are due, by a fixed date occurring prior to the Maturity Date for the Tranche A Term Loan, (l) the principal portion of all obligations of such Person under Synthetic Leases, (m) for purposes of any calculation made under the financial covenants set forth in Section 7.11 (including without limitation for purposes of the definitions of "Applicable Percentage" and "Pro Forma Basis" set forth in Section 1.1), the Indebtedness of any partnership or unincorporated joint venture in which such Person is a general partner or a joint venturer and (n) in the case of the Consolidated Parties for purposes of any calculation made under the financial covenants set forth in Section 7.11 (including without limitation for purposes of the definitions of "Applicable Percentage" and "Pro Forma Basis" set forth in Section 1.1) as of the end of any fiscal quarter of the Consolidated Parties, the Indebtedness of any Person whose results of operations would, in accordance with GAAP, be included in earnings of unconsolidated Persons on an income statement of the Consolidated Parties for any period ending on such fiscal quarter-end. "Interbank Offered Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Interbank Offered Rate" shall mean, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). "Interest Coverage Ratio" means, as of the end of any fiscal quarter of the Consolidated Parties for the twelve month period ending on such date, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Cash Interest Expense for such period. 11 "Interest Payment Date" means (a) as to Base Rate Loans, the last day of each fiscal quarter of the Borrower and the Maturity Date, and (b) as to Eurodollar Loans, the last day of each applicable Interest Period and the Maturity Date, and in addition where the applicable Interest Period for a Eurodollar Loan is greater than three months, then also the date three months from the beginning of the Interest Period and each three months thereafter. "Interest Period" means, as to Eurodollar Loans, a period of one, two, three or six months' duration, as the Borrower may elect, commencing, in each case, on the date of the borrowing (including continuations and conversions thereof); provided, however, (a) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (b) no Interest Period shall extend beyond the Maturity Date, (c) with regard to the Acquisition Loans, no Interest Period shall extend beyond any Principal Amortization Payment Date unless the portion of Acquisition Loans comprised of Base Rate Loans together with the portion of Acquisition Loans comprised of Eurodollar Loans with Interest Periods expiring prior to the date such Principal Amortization Payment is due, is at least equal to the amount of such Principal Amortization Payment due on such date, (d) with regard to the Tranche A Term Loans, no Interest Period shall extend beyond any Principal Amortization Payment Date unless the portion of Tranche A Term Loans comprised of Base Rate Loans together with the portion of Tranche A Term Loans comprised of Eurodollar Loans with Interest Periods expiring prior to the date such Principal Amortization Payment is due, is at least equal to the amount of such Principal Amortization Payment due on such date and (e) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month. "Investment" in any Person means (a) the acquisition (whether for cash, property, services, assumption of Indebtedness, securities or otherwise) of assets, shares of Capital Stock, bonds, notes, debentures, partnership, joint ventures or other ownership interests or other securities of such other Person or (b) any deposit with, or advance, loan or other extension of credit to, such Person (other than deposits made in connection with the purchase of equipment or other assets in the ordinary course of business) or (c) any other capital contribution to or investment in such Person, including, without limitation, any Guaranty Obligations (including any support for a letter of credit issued on behalf of such Person) incurred for the benefit of such Person, but excluding any Restricted Payment to such Person. "Investment Agreements" means a collective reference to the GE Investment Agreement and the Sponsor Investment Agreement. "Investment Documents" means a collective reference to the Investment Agreements, the Registration Rights Agreements, the Warrant Agreements and the Certificates of Designation. "Issuing Lender" means NationsBank. "Issuing Lender Fees" shall have the meaning assigned to such term in Section 3.5(b)(ii). "Joinder Agreement" means a Joinder Agreement substantially in the form of Exhibit 7.12 hereto, executed and delivered by an Additional Credit Party in accordance with the provisions of Section 7.12. "Joint Venture" means an entity which meets the following criteria: (a) it was organized pursuant to an express joint venture, partnership or limited liability company agreement; (b) it is a venture among two or more Persons and, except for purposes of the definition of "Indebtedness" set forth in this Section 1.1, at least one of such Persons is, and one of such Persons is not, the Borrower or a Wholly Owned Subsidiary of the Borrower; 12 (c) it operates a business for profit in which there is a joint proprietary interest in the subject matter; (d) the venture involves a right of mutual control of the subject of the enterprise; (e) each of the venturers has contributed or will contribute capital, materials, services or knowledge; (f) each of the venturers has a right to share in the profits of the venture; and (g) each of the venturers has a duty to share in the losses of the venture. The term "Joint Venture" shall in any event include the Persons identified on Schedule 1.1A. "Lender" means any of the Persons identified as a "Lender" on the signature pages hereto, and any Person which may become a Lender by way of assignment in accordance with the terms hereof, together with their successors and permitted assigns. "Letter of Credit" means any letter of credit issued by the Issuing Lender for the account of the Borrower in accordance with the terms of Section 2.2. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the Uniform Commercial Code as adopted and in effect in the relevant jurisdiction or other similar recording or notice statute, and any lease in the nature thereof); provided, however, the term "Lien" in respect of any Property of any Person shall not include any interest of title of a lessor (or any related filing) under any Operating Lease of such Property under which such Person is the lessee. "Loan" or "Loans" means the Revolving Loans, the Acquisition Loans and/or the Tranche A Term Loans (or a portion of any Revolving Loan, any Acquisition Loan or any Tranche A Term Loan bearing interest at the Adjusted Base Rate or the Adjusted Eurodollar Rate), individually or collectively, as appropriate. "LOC Commitment" means the commitment of the Issuing Lender to issue Letters of Credit in an aggregate face amount at any time outstanding (together with the amounts of any unreimbursed drawings thereon) of up to the LOC Committed Amount. "LOC Committed Amount" shall have the meaning assigned to such term in Section 2.2. "LOC Documents" means, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (i) the rights and obligations of the parties concerned or at risk or (ii) any collateral security for such obligations. "LOC Obligations" means, at any time, the sum of (i) the maximum amount which is, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit plus (ii) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not theretofore reimbursed by the Borrower. "Master Debt Restructuring Agreement" means that certain Master Debt Restructuring Agreement dated as of June 26, 1996 by and among GE, the Borrower, American Health Services Corp., Maxum Health Corp. and certain subsidiaries of Maxum Health Corp., as amended through the Closing Date. 13 "Material Adverse Effect" means a material adverse effect on (i) the condition (financial or otherwise), operations, business, assets, liabilities or prospects of the Consolidated Parties taken as a whole, (ii) the ability of the Credit Parties taken as a whole to perform any material obligation under the Credit Documents or (iii) the material rights and remedies of the Lenders under the Credit Documents. "Maturity Date" means (i) as to the Revolving Loans and Letters of Credit (and the related LOC Obligations) June 12, 2003, (ii) as to the Tranche A Term Loan, June 12, 2004 and (iii) as to the Acquisition Loans, June 12, 2004. "MD Assets" means (i) the assets of Mountain Diagnostics purchased or acquired by InSight Health Corp. pursuant to the Order Confirming Sale of Certain Assets of the Estate of Mountain Diagnostics, Inc. (Case No. BK-S-96-2500-RCJ) entered by the Honorable R. Clive Jones of the United States Bankruptcy Court for the District of Nevada on November 14, 1997 and (ii) the equipment described in Schedule attached hereto (the "GE Equipment"). "Moody's" means Moody's Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities. "Mortgage Instruments" shall have the meaning assigned such term in Section 5.2(c) of the Existing Credit Agreement. "Mortgage Policies" shall have the meaning assigned such term in Section 5.2(c) of the Existing Credit Agreement. "Mountain Diagnostics" means Mountain Diagnostics, Inc., a Nevada corporation. "Multiemployer Plan" means a Plan which is a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA. "Multiple Employer Plan" means a Plan which any Consolidated Party or any ERISA Affiliate and at least one employer other than the Consolidated Parties or any ERISA Affiliate are contributing sponsors. "NationsBank" means NationsBank, N. A. and its successors. "Net Cash Proceeds" means the aggregate cash proceeds received by the Consolidated Parties in respect of any Asset Disposition, Equity Issuance or Debt Issuance, net of (a) direct costs (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and (b) taxes paid or payable as a result thereof; it being understood that "Net Cash Proceeds" shall include, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received by the Consolidated Parties in any Asset Disposition, Equity Issuance or Debt Issuance. "Note" or "Notes" means the Revolving Notes, the Acquisition Notes and/or the Tranche A Term Notes, individually or collectively, as appropriate. "Notice of Borrowing" means a written notice of borrowing in substantially the form of Exhibit 2.1(b)(i), as required by Section 2.1(b)(i), Section 2.3(b)(i) or Section 2.4(b). "Notice of Extension/Conversion" means the written notice of extension or conversion in substantially the form of Exhibit 3.2, as required by Section 3.2. "Operating Lease" means, as applied to any Person, any lease (including, without limitation, leases which may be terminated by the lessee at any time) of any Property (whether real, personal or mixed) which is not a Capital Lease other than any such lease in which that Person is the lessor. 14 "Open MRI" means Open MRI, Inc., a Delaware corporation and a Wholly Owned Subsidiary of the Borrower. "Other Taxes" means such term as is defined in Section 3.11. "Participation Interest" means a purchase by a Lender of a participation in Letters of Credit or LOC Obligations as provided in Section 2.2 or in any Loans as provided in Section 3.14. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereof. "Permitted Acquisition" means (a) an Acquisition by the Borrower or any Wholly Owned Subsidiary of the Borrower for the fair market value of the Capital Stock or Property acquired, provided that (i) the Capital Stock or Property acquired in such Acquisition relates to a line of business similar to the business of the Borrower or any of its Wholly Owned Subsidiaries engaged in on the Closing Date, (ii) the Agent shall have received all items in respect of the Capital Stock or Property acquired in such Acquisition (and/or the seller thereof) required to be delivered by the terms of Section 7.12 and/or Section 7.13, (iii) in the case of an Acquisition of the Capital Stock of another Person, the board of directors (or other comparable governing body) of such other Person shall have duly approved such Acquisition, (iv) the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect to such Acquisition on a Pro Forma Basis, the Credit Parties shall be in compliance with all of the covenants set forth in Section 7.11, (v) the Agent shall be reasonably satisfied that, upon giving effect to such Acquisition on a Pro Forma Basis, at least 80% of Consolidated EBITDA for the 12 month period ended as of the most recent fiscal quarter end preceding the date of such transaction with respect to which the Agent has received the Required Financial Information shall have been audited in accordance with GAAP by independent certified public accountants of recognized national standing reasonably acceptable to the Agent (whose opinion shall not be limited as to the scope or qualified as to going concern status), it being acknowledged and agreed that, for purposes of this clause (v), any portion of Consolidated EBITDA attributable to any Person for any calculation period shall be deemed to have been audited if a fiscal year end audit for such Person has been prepared during such 12 month period, (vi) the representations and warranties made by the Credit Parties in any Credit Document shall be true and correct in all material respects at and as if made as of the date of such Acquisition (after giving effect thereto) except to the extent such representations and warranties expressly relate to an earlier date, (vii) the proceeds of Acquisition Loans used to finance such Acquisition shall not exceed $15,000,000 and the aggregate consideration for all such Acquisitions shall not exceed $50,000,000 per fiscal year of the Borrower, (viii) if such transaction involves the purchase of an interest in a partnership between the Borrower (or a subsidiary of the Borrower) as a general partner and entities unaffiliated with the Borrower as the other partners, such transaction shall be effected by having such equity interest acquired by a corporate holding company directly wholly-owned by the Borrower newly formed for the sole purpose of effecting such transaction and (ix) after giving effect to such Acquisition, the Revolving Committed Amount shall be at least $5,000,000 greater than the sum of the Revolving Loans outstanding plus LOC Obligations outstanding or (b) subject to the terms of Section 7.13 and Section 7.15, the Acquisition by InSight Health Corp. of the MD Assets on or before November 18, 1997. "Permitted Investments" means Investments which are either (i) cash and Cash Equivalents; (ii) accounts receivable created, acquired or made by any Consolidated Party in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (iii) Investments consisting of Capital Stock, obligations, securities or other property received by any Consolidated Party in settlement of accounts receivable (created in the ordinary course of business) from bankrupt obligors; (iv) Investments existing as of the Closing Date and set forth in Schedule 1.1B; (v) Guaranty Obligations permitted by Section 8.1; (vi) transactions permitted by Section 8.9; (vii) advances or loans to directors, officers, employees, agents, customers or suppliers made in the ordinary course of business for reasonable business and which do not exceed $1,000,000 in the aggregate at any one time outstanding for all of the Consolidated Parties; (viii) Investments in any Credit Party; (ix) Permitted Acquisitions; and (x) Investments in Joint Ventures not to exceed $5,000,000. 15 "Permitted Liens" means: (i) Liens in favor of the Agent to secure the Credit Party Obligations; (ii) Liens (other than Liens created or imposed under ERISA) for taxes, assessments or governmental charges or levies not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (iii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and suppliers and other Liens imposed by law or pursuant to customary reservations or retentions of title arising in the ordinary course of business, provided that such Liens secure only amounts not yet due and payable or, if due and payable, are unfiled and no other action has been taken to enforce the same or are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof); (iv) Liens (other than Liens created or imposed under ERISA) incurred or deposits made by any Consolidated Party in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (v) Liens in connection with attachments or judgments (including judgment or appeal bonds) provided that the judgments secured shall, within 60 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall have been discharged within 60 days after the expiration of any such stay; (vi) easements, rights-of-way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered Property for its intended purposes; (vii) Liens on Property securing purchase money Indebtedness (including Capital Leases and Synthetic Leases) to the extent permitted under Section 8.1(c), provided that any such Lien attaches to such Property concurrently with or within 90 days after the acquisition thereof; (viii) leases or subleases granted to others not interfering in any material respect with the business of any Consolidated Party; (ix) any interest of title of a lessor under, and Liens arising from UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases permitted by this Credit Agreement; (x) Liens deemed to exist in connection with Investments in repurchase agreements permitted under Section 8.6; (xi) normal and customary rights of setoff upon deposits of cash in favor of banks or other depository institutions; (xii) Liens existing as of the Closing Date and set forth on Schedule 1.1C; provided that no such Lien shall at any time be extended to or cover any Property other than the Property subject thereto on the Closing Date (other than a substitution of like Property); (xiii) Liens on any Property owned by any Subsidiary of the Borrower which is a Joint Venture; 16 (xiv) extensions, renewals or replacements of Liens referred to in clause (i) through (xiii) above. "Person" means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated) or any Governmental Authority. "Plan" means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which any Consolidated Party or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" within the meaning of Section 3(5) of ERISA. "Primary Real Properties" shall have the meaning assigned such term in Section 7.15. "Pledge Agreement" means the pledge agreement dated as of the Closing Date in the form of Exhibit 1.1A to be executed in favor of the Agent by each of the Credit Parties, as amended, modified, restated or supplemented from time to time. "Prime Rate" means the per annum rate of interest established from time to time by NationsBank as its prime rate, which rate may not be the lowest rate of interest charged by NationsBank to its customers. "Principal Amortization Payment" means a principal payment on the Acquisition Loans as set forth in Section 2.3(c) or on the Tranche A Term Loans as set forth in Section 2.4(d). "Principal Amortization Payment Date" means the date a Principal Amortization Payment is due. "Principal Office" means the principal office of NationsBank, presently located at Charlotte, North Carolina. "Pro Forma Basis" means, with respect to any transaction, that such transaction shall be deemed to have occurred (for purposes of calculating compliance in respect of such transaction with each of the financial covenants set forth in Section 7.11 as of the most recent fiscal quarter end preceding the date of such transaction with respect to which the Agent has received the Required Financial Information) as of the first day of the four fiscal-quarter period ending as of such fiscal quarter end. As used herein, "transaction" shall mean (i) any incurrence or assumption of Indebtedness as referred to in Section 8.1(g), (ii) any merger or consolidation as referred to in Section 8.4, (iii) any Asset Disposition as referred to in Section 8.5 or (iv) any Permitted Acquisition as referred to in Section 8.6 and clause (ix) of the definition of "Permitted Investment" set forth in this Section 1.1. With respect to any transaction of the type described in clause (i) above regarding Indebtedness which has a floating or formula rate, the implied rate of interest for such Indebtedness for the applicable period for purposes of this definition shall be determined by utilizing the rate which is or would be in effect with respect to such Indebtedness as at the relevant date of determination. With respect to any transaction of the type described in clause (ii) or (iv) above, any Indebtedness incurred by the Borrower or any of its Subsidiaries in order to consummate such transaction (A) shall be deemed to have been incurred on the first day of the applicable period four fiscal-quarter period and (B) if such Indebtedness has a floating or formula rate, then the implied rate of interest for such Indebtedness for the applicable period for purposes of this definition shall be determined by utilizing the rate which is or would be in effect with respect to such Indebtedness as at the relevant date of determination. In connection with any calculation of the financial covenants set forth in Section 7.11 upon giving effect to a transaction on a Pro Forma Basis for purposes of Section 8.1(g), Section 8.4, Section 8.5 or Section 8.6 and clause (ix) of the definition of "Permitted Investment" set forth in this Section 1.1, as applicable: (A) for purposes of any such calculation in respect of any incurrence or assumption of Indebtedness as referred to in Section 8.1(g), any Indebtedness which is retired in connection with such incurrence or assumption shall be excluded and deemed to have been retired as of the first day of the applicable period; 17 (B) for purposes of any such calculation in respect of any Asset Disposition as referred to in Section 8.5, (1) income statement items (whether positive or negative) attributable to the Property disposed of in such Asset Disposition shall be excluded and (2) any Indebtedness which is retired in connection with such Asset Disposition shall be excluded and deemed to have been retired as of the first day of the applicable period; (C) for purposes of any such calculation in respect of any merger or consolidation as referred to in Section 8.4 or any Permitted Acquisition as referred to in Section 8.6 and clause (ix) of the definition of "Permitted Investment" set forth in this Section 1.1, (1) any Indebtedness incurred by the Borrower or any of its Subsidiaries in connection with such transaction shall be deemed to have been incurred as of the first day of the applicable period and (2) income statement items (whether positive or negative) attributable to the Property acquired in such transaction or to the Investment comprising such transaction, as applicable, shall be included to the extent relating to the relevant period; and (D) for purposes of any such calculation, the principles set forth in the second paragraph of Section 1.3 shall be applicable. "Pro Forma Compliance Certificate" means a certificate of the chief financial officer of the Borrower delivered to the Agent in connection with (i) any incurrence, assumption or retirement of Indebtedness as referred to in Section 8.1(g), (ii) any merger or consolidation as referred to in Section 8.4, (iii) any Asset Disposition as referred to in Section 8.5 or (iv) any Permitted Acquisition as referred to in Section 8.6 and clause (ix) of the definition of "Permitted Investment" set forth in this Section 1.1, as applicable, and containing reasonably detailed calculations, upon giving effect to the applicable transaction on a Pro Forma Basis, of the Interest Coverage Ratio, the Fixed Charge Coverage Ratio, the Leverage Ratio and the minimum Consolidated EBITDA covenant as of the most recent fiscal quarter end preceding the date of the applicable transaction with respect to which the Agent shall have received the Required Financial Information. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Real Properties" shall have the meaning assigned such term in Section 7.15. "Recapitalization" means the recapitalization of the Borrower pursuant to and as evidenced by the terms of the Investment Documents (including without limitation the making by the Sponsor of a preferred equity investment of at least $25 million in cash (less fees and expenses) in the Borrower and the termination of the Supplemental Service Fee (as defined in the GE Investment Agreement) in exchange for 7,000 shares of Series C Preferred Stock in the Borrower) pursuant to the GE Investment Agreement, the refinancing of the existing Funded Indebtedness of the Borrower described on Schedule 6.15 in an aggregate principal amount not to exceed $80 million (plus per diem interest on such principal amount), the termination of the Master Debt Restructuring Agreement pursuant to the terms of the GE Payoff Letter. "Register" shall have the meaning given such term in Section 11.3(c). "Registration Rights Agreements" means a collective reference to the GE Registration Rights Agreement and the Sponsor Registration Rights Agreement. "Regulation G, T, U, or X" means Regulation G, T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the notice requirement has been waived by regulation. "Required Financial Information" means, with respect to the applicable Calculation Date, (i) the financial statements of the Consolidated Parties required to be delivered pursuant to Section 7.1(a) or (b) for 18 the fiscal period or quarter ending as of such Calculation Date, and (ii) the certificate of the chief financial officer of the Borrower required by Section 7.1(c) to be delivered with the financial statements described in clause (i) above. "Required Lenders" means, at any time, Lenders which are then in compliance with their obligations hereunder (as determined by the Agent) and holding in the aggregate more than least 50% of (i) the sum of (a) the Revolving Commitments (and Participation Interests therein), (b) the Acquisition Loan Commitments (and Participation Interests therein) and/or, after conversion of any portion of the Acquisition Loans to a term loan, the outstanding term loan portion of the Acquisition Loans and (c) the outstanding Tranche A Term Loans (and Participation Interests therein) or (ii) if the Commitments have been terminated, the outstanding Loans and Participation Interests (including the Participation Interests of the Issuing Lender in any Letters of Credit). "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its material property is subject. "Restricted Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of any Consolidated Party, now or hereafter outstanding and (iv) any payment or prepayment of principal of, premium, if any, or interest on, redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to, the Subordinated Notes. "Revolving Commitment" means, with respect to each Lender, the commitment of such Lender in an aggregate principal amount at any time outstanding of up to such Lender's Revolving Commitment Percentage of the Revolving Committed Amount, (i) to make Revolving Loans in accordance with the provisions of Section 2.1(a) and (ii) to purchase Participation Interests in Letters of Credit in accordance with the provisions of Section 2.2(c). "Revolving Commitment Percentage" means, for any Lender, the percentage identified as its Revolving Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "Revolving Committed Amount" shall have the meaning assigned to such term in Section 2.1(a). "Revolving Loans" shall have the meaning assigned to such term in Section 2.1(a). "Revolving Note" or "Revolving Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Revolving Loans provided pursuant to Section 2.1(e), individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Revolving Unused Fee" shall have the meaning assigned to such term in Section 3.5(a)(i). "Revolving Unused Fee Calculation Period" shall have the meaning assigned to such term in Section 3.5(a)(i). "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., or any successor or assignee of the business of such division in the business of rating securities. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to any Consolidated Party of any Property, whether owned by such Consolidated Party as of the Closing Date or later acquired, which has been or is to be sold or 19 transferred by such Consolidated Party to such Person or to any other Person from whom funds have been, or are to be, advanced by such Person on the security of such Property. "Secondary Real Properties" shall have the meaning assigned such term in Section 7.15. "Security Agreement" means the security agreement dated as of the Closing Date in the form of Exhibit 1.1B to be executed in favor of the Agent by each of the Credit Parties, as amended, modified, restated or supplemented from time to time. "Senior Leverage Ratio" means, as of the end of any fiscal quarter of the Consolidated Parties for the twelve month period ending on such date, the ratio of (a) all Funded Indebtedness other than Subordinated Indebtedness of the Consolidated Parties on a consolidated basis on the last day of such period (but net of cash) to (b) Consolidated EBITDA for such period. "Series B Certificate of Designation" means the Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B of the Borrower, to be filed with the Delaware Secretary of State on or prior to the Closing Date. "Series C Certificate of Designation" means the Certificate of Designation, Preferences and Rights of Series C Preferred of the Borrower, to be filed with the Delaware Secretary of State on or prior to the Closing Date. "Signal Medical" means Signal Medical Services, Inc., a Delaware corporation. "Single Employer Plan" means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple Employer Plan. "Solvent" or "Solvency" means, with respect to any Person as of a particular date, that on such date (i) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (ii) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature in their ordinary course, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person's Property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (iv) the fair value of the Property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person and (v) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Sponsor" means TC Group, L.L.C., a Delaware Limited Liability Company, and its Affiliates. "Sponsor Investment Agreement" means that certain Securities Purchase Agreement dated as of October 14, 1997 by and among the Sponsor and the Borrower. "Sponsor Registration Rights Agreement" means that certain Registration Rights Agreement dated as of a date on or before the Effective Date by and between the Borrower and the Sponsor. "Sponsor Warrant Agreement" means that certain Warrant Agreement dated as of a date on or before the Effective Date by and between the Borrower and the Sponsor. "Standby Letter of Credit Fee" shall have the meaning assigned to such term in Section 3.5(b)(i). 20 "Subordinated Indebtedness" means any Indebtedness incurred by the Borrower which by its terms is specifically subordinated in right of payment to the prior payment of the obligations of the Credit Parties under this Credit Agreement and the other Credit Documents on terms and conditions satisfactory to the Required Lenders. "Subordinated Note" means any one of the [__]% Notes due 2008, issued by the Borrower in favor of the Subordinated Noteholders pursuant to the Subordinated Note Indenture, as such Subordinated Notes may be amended, modified, restated or supplemented and in effect from time to time. "Subordinated Note Indenture" means the Indenture dated as of the Amendment No. 4 Effective Date, by and between the Borrower and State Street Bank and Trust Company in its capacity as trustee for the Subordinated Noteholders, as such Subordinated Note Indenture may be amended, modified, restated or supplemented and in effect from time to time. "Subordinated Noteholder" means any one of the holders from time to time of the Subordinated Notes. "Subordination Agreement" means a subordination agreement in substantially the form of Exhibit 1.1C by and between the Agent and GE, pursuant to which the Agent agrees to the subordination, on the terms and conditions set forth more fully therein, of the security interest of the Agent in any Collateral consisting of Property (i) leased by any Credit Party under any Capital Lease or Operating Lease with respect to which GE is the lessor or (ii) subject to any other conditional sale or other financing arrangement to which GE is a party. "Subsidiary" means, as to any Person at any time, (a) any corporation more than 50% of whose Capital Stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at such time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at such time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity of which such Person directly or indirectly through Subsidiaries owns at such time more than 50% of the Capital Stock. "Synthetic Lease" means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an Operating Lease. "Taxes" means such term as is defined in Section 3.11. "Total Leverage Ratio" means, as of the end of any fiscal quarter of the Consolidated Parties for the twelve month period ending on such date, the ratio of (a) all Funded Indebtedness (including without limitation Subordinated Indebtedness) of the Consolidated Parties on a consolidated basis on the last day of such period (but net of cash) to (b) Consolidated EBITDA for such period. "Trade Letter of Credit Fee" shall have the meaning assigned to such term in Section 3.5(b)(ii). "Tranche A Term Loan" shall have the meaning assigned to such term in Section 2.4(a). "Tranche A Term Loan Commitment" means, with respect to each Lender, the commitment of such Lender to make its portion of the Tranche A Term Loan in a principal amount equal to such Lender's Tranche A Term Loan Commitment Percentage of the Tranche A Term Loan Committed Amount. "Tranche A Term Loan Commitment Percentage" means, for any Lender, the percentage identified as its Tranche A Term Loan Commitment Percentage on Schedule 2.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "Tranche A Term Loan Committed Amount" shall have the meaning assigned to such term in Section 2.4(a). 21 "Tranche A Term Note" or "Tranche A Term Notes" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Tranche A Term Loans provided pursuant to Section 2.4(f), individually or collectively, as appropriate, as such promissory notes may be amended, modified, restated, supplemented, extended, renewed or replaced from time to time. "Unused Acquisition Loan Committed Amount" means, for any period, the amount by which (a) the then applicable Acquisition Loan Committed Amount exceeds (b) the daily average sum for such period of the outstanding aggregate principal amount of all Acquisition Loans. "Unused Revolving Committed Amount" means, for any period, the amount by which (a) the then applicable Revolving Committed Amount exceeds (b) the daily average sum for such period of (i) the outstanding aggregate principal amount of all Revolving Loans plus (ii) the outstanding aggregate principal amount of all LOC Obligations. "Voting Stock" means, with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency. "Warrant Agreements" means a collective reference to the GE Warrant Agreement and the Sponsor Warrant Agreement. "Wholly Owned Subsidiary" of any Person means any Subsidiary 100% of whose Voting Stock is at the time owned by such Person directly or indirectly through other Wholly Owned Subsidiaries. 1.2 Computation of Time Periods. For purposes of computation of periods of time hereunder, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." 1.3 Accounting Terms. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 (or, prior to the delivery of the first financial statements pursuant to Section 7.1, consistent with the financial statements as at June 30, 1997); provided, however, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Agent or the Required Lenders shall so object in writing within 60 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Borrower to the Lenders as to which no such objection shall have been made. Notwithstanding the above, the parties hereto acknowledge and agree that, for purposes of all calculations made under the financial covenants set forth in Section 7.11 (including without limitation for purposes of the definitions of "Applicable Percentage" and "Pro Forma Basis" set forth in Section 1.1), (i)(A) income statement items (whether positive or negative) attributable to the Property disposed of in any Asset Disposition as contemplated by Section 8.5, as applicable, shall be excluded to the extent relating to any period occurring prior to the date of such transaction and (B) Indebtedness which is retired in connection with any such Asset Disposition shall be excluded and deemed to have been retired as of the first day of the applicable period and (ii) income statement items (whether positive or negative) attributable to any Property acquired in any Investment transaction (including without limitation any Permitted Acquisition) contemplated by Section 8.6 shall be included to the extent relating to any period applicable in such calculations occurring after the date of such transaction (and, notwithstanding the 22 foregoing, during the first four fiscal quarters following the date of such transaction, shall be included on an annualized basis). SECTION 2 CREDIT FACILITIES 2.1 Revolving Loans. (a) Revolving Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, each Lender severally agrees to make available to the Borrower such Lender's Revolving Commitment Percentage of revolving credit loans requested by the Borrower in Dollars ("Revolving Loans") from time to time from the Amendment No. 4 Effective Date until the Maturity Date, or such earlier date as the Revolving Commitments shall have been terminated as provided herein for the purposes hereinafter set forth; provided, however, that the sum of the aggregate principal amount of outstanding Revolving Loans shall not exceed TWENTY-FIVE MILLION DOLLARS ($25,000,000) (as such aggregate maximum amount may be reduced from time to time as provided in Section 3.4, the "Revolving Committed Amount"); provided, further, (A) with regard to each Lender individually, such Lender's outstanding Revolving Loans shall not exceed such Lender's Revolving Commitment Percentage of the Revolving Committed Amount, and (B) the aggregate principal amount of outstanding Revolving Loans plus LOC Obligations outstanding shall not exceed the Revolving Committed Amount. Revolving Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request; provided, however, that no more than 16 Eurodollar Loans shall be outstanding hereunder at any time. For purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period. Revolving Loans hereunder may be repaid and reborrowed in accordance with the provisions hereof. (b) Revolving Loan Borrowings. (i) Notice of Borrowing. The Borrower shall request a Revolving Loan borrowing by written notice (or telephonic notice promptly confirmed in writing) to the Agent not later than 12:00 Noon (Charlotte, North Carolina time) on the Business Day prior to the date of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. If the Borrower shall fail to specify in any such Notice of Borrowing (I) an applicable Interest Period in the case of a Eurodollar Loan, then such notice shall be deemed to be a request for an Interest Period of one month, or (II) the type of Revolving Loan requested, then such notice shall be deemed to be a request for a Base Rate Loan hereunder. The Agent shall give notice to each affected Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.1(b)(i), the contents thereof and each such Lender's share of any borrowing to be made pursuant thereto. (ii) Minimum Amounts. Each Eurodollar Loan and Base Rate Loan that is a Revolving Loan shall be in a minimum aggregate principal amount of $1,000,000 and integral multiples of $100,000 in excess thereof (or the remaining amount of the Revolving Committed Amount, if less). (iii) Advances. Each Lender will make its Revolving Commitment Percentage of each Revolving Loan borrowing available to the Agent for the account of the Borrower as specified in Section 3.15(a), or in such other manner as the Agent may specify in writing, by 2:00 P.M. 23 (Charlotte, North Carolina time) on the date specified in the applicable Notice of Borrowing in Dollars and in funds immediately available to the Agent. Such borrowing will then be made available to the Borrower by the Agent by crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Agent by the Lenders and in like funds as received by the Agent. (c) Repayment. The principal amount of all Revolving Loans shall be due and payable in full on the Maturity Date, unless accelerated sooner pursuant to Section 9.2. (d) Interest. Subject to the provisions of Section 3.1, (i) Base Rate Loans. During such periods as Revolving Loans shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. (ii) Eurodollar Loans. During such periods as Revolving Loans shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. Interest on Revolving Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (e) Revolving Notes. The Revolving Loans made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to such Lender in an original principal amount equal to such Lender's Revolving Commitment Percentage of the Revolving Committed Amount and in substantially the form of Exhibit 2.1(e). 2.2 Letter of Credit Subfacility. (a) Issuance. Subject to the terms and conditions hereof and of the LOC Documents, if any, and any other terms and conditions which the Issuing Lender may reasonably require and in reliance upon the representations and warranties set forth herein, the Issuing Lender agrees to issue, and each Lender severally agrees to participate in the issuance by the Issuing Lender of, standby and trade Letters of Credit in Dollars from time to time from the Amendment No. 4 Effective Date until the date five (5) days prior to the Maturity Date as the Borrower may request, in a form acceptable to the Issuing Lender; provided, however, that (i) the LOC Obligations outstanding shall not at any time exceed EIGHT MILLION DOLLARS ($8,000,000) (the "LOC Committed Amount") and (ii) the sum of the aggregate principal amount of outstanding Revolving Loans plus LOC Obligations outstanding shall not at any time exceed the Revolving Committed Amount. No Letter of Credit shall (x) have an original expiry date more than one year from the date of issuance or (y) as originally issued or as extended, have an expiry date extending beyond the Maturity Date. Each Letter of Credit shall comply with the related LOC Documents. The issuance and expiry dates of each Letter of Credit shall be a Business Day. (b) Notice and Reports. The request for the issuance of a Letter of Credit shall be submitted by the Borrower to the Issuing Lender at least three (3) Business Days prior to the requested date of issuance. The Issuing Lender will, at least quarterly and more frequently upon request, disseminate to each of the Lenders a detailed report specifying the Letters of Credit which are then issued and outstanding and any activity with respect thereto which may have occurred since the date of the prior report, and including therein, among other things, the beneficiary, the face amount and the expiry date, as well as any payment or expirations which may have occurred. (c) Participation. Each Lender, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a Participation Interest from the applicable Issuing Lender in such Letter of Credit and the obligations arising thereunder and any collateral relating thereto, in each case in an amount equal to its pro rata share of the obligations under such Letter of Credit (based on the respective Revolving Commitment Percentages of the Lenders) and shall absolutely, unconditionally and irrevocably assume and be obligated to 24 pay to the Issuing Lender and discharge when due, its pro rata share of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender's Participation Interest in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit, each such Lender shall pay to the Issuing Lender its pro rata share of such unreimbursed drawing in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) below. The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided. (d) Reimbursement. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Borrower. Unless the Borrower shall immediately notify the Issuing Lender that the Borrower intends to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall be deemed to have requested that the Lenders make a Revolving Loan in the amount of the drawing as provided in subsection (e) below on the related Letter of Credit, the proceeds of which will be used to satisfy the related reimbursement obligations. The Borrower promises to reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in same day funds. If the Borrower shall fail to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Adjusted Base Rate plus 2%. The Borrower's reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of setoff, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation any defense based on any failure of the Borrower or any other Credit Party to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the other Lenders of the amount of any unreimbursed drawing and each Lender shall promptly pay to the Agent for the account of the Issuing Lender in Dollars and in immediately available funds, the amount of such Lender's pro rata share of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M. (Charlotte, North Carolina time) otherwise such payment shall be made at or before 12:00 Noon (Charlotte, North Carolina time) on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to, if paid within two (2) Business Days of the date that such Lender is required to make payments of such amount pursuant to the preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the Base Rate. Each Lender's obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the obligations of the Borrower hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever. Simultaneously with the making of each such payment by a Lender to the Issuing Lender, such Lender shall, automatically and without any further action on the part of the Issuing Lender or such Lender, acquire a Participation Interest in an amount equal to such payment (excluding the portion of such payment constituting interest owing to the Issuing Lender) in the related unreimbursed drawing portion of the LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower with respect thereto. (e) Repayment with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan advance to reimburse a drawing under a Letter of Credit, the Agent shall give notice to the Lenders that a Revolving Loan has been requested or deemed requested by the Borrower to be made in connection with a drawing under a Letter of Credit, in which case a Revolving Loan advance comprised of Base Rate Loans (or Eurodollar Loans to the extent the Borrower has complied with the procedures of Section 2.1(b)(i) with respect thereto) shall be immediately made to the Borrower by all Lenders (notwithstanding any termination of the Commitments pursuant to Section 9.2) pro rata based on the respective Revolving Commitment Percentages of the Lenders (determined 25 before giving effect to any termination of the Commitments pursuant to Section 9.2) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each such Lender hereby irrevocably agrees to make its pro rata share of each such Revolving Loan immediately upon any such request or deemed request in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (i) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 5.3 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure for any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (v) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (vi) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any Credit Party), then each such Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Issuing Lender such Participation Interests in the outstanding LOC Obligations as shall be necessary to cause each such Lender to share in such LOC Obligations ratably (based upon the respective Revolving Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9.2)), provided that at the time any purchase of Participation Interests pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Issuing Lender, to the extent not paid to the Issuer by the Borrower in accordance with the terms of subsection (d) above, interest on the principal amount of Participation Interests purchased for each day from and including the day upon which such borrowing would otherwise have occurred to but excluding the date of payment for such Participation Interests, at the rate equal to, if paid within two (2) Business Days of the date of the Revolving Loan advance, the Federal Funds Rate, and thereafter at a rate equal to the Base Rate. (f) Designation of Consolidated Parties as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including without limitation Section 2.2(a), a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a Consolidated Party other than the Borrower, provided that notwithstanding such statement, the Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Borrower's reimbursement obligations hereunder with respect to such Letter of Credit. (g) Renewal, Extension. The renewal or extension of any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder. (h) Uniform Customs and Practices. The Issuing Lender may have the Letters of Credit be subject to The Uniform Customs and Practice for Documentary Credits, as published as of the date of issue by the International Chamber of Commerce (the "UCP"), in which case the UCP may be incorporated therein and deemed in all respects to be a part thereof. (i) Indemnification; Nature of Issuing Lender's Duties. (i) In addition to its other obligations under this Section 2.2, the Borrower hereby agrees to pay, and protect, indemnify and save each Lender harmless from and against, any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) that such Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of such Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority (all such acts or omissions, herein called "Government Acts"). (ii) As between the Borrower and the Lenders (including the Issuing Lender), the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. No Lender (including the Issuing Lender) shall be responsible: (A) for the form, 26 validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (D) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (E) for any consequences arising from causes beyond the control of such Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender's rights or powers hereunder. (iii) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Lender (including the Issuing Lender), under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Lender under any resulting liability to the Borrower or any other Credit Party. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify each Lender (including the Issuing Lender) against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower (on behalf of itself and each of the other Credit Parties), including, without limitation, any and all Government Acts. No Lender (including the Issuing Lender) shall, in any way, be liable for any failure by such Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of such Lender. (iv) Nothing in this subsection (h) is intended to limit the reimbursement obligations of the Borrower contained in subsection (d) above. The obligations of the Borrower under this subsection (h) shall survive the termination of this Credit Agreement. No act or omissions of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Lenders (including the Issuing Lender) to enforce any right, power or benefit under this Credit Agreement. (v) Notwithstanding anything to the contrary contained in this subsection (h), the Borrower shall have no obligation to indemnify any Lender (including the Issuing Lender) in respect of any liability incurred by such Lender (A) arising solely out of the gross negligence or willful misconduct of such Lender, as determined by a court of competent jurisdiction, or (B) caused by such Lender's failure to pay under any Letter of Credit after presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit, as determined by a court of competent jurisdiction, unless such payment is prohibited by any law, regulation, court order or decree. (j) Responsibility of Issuing Lender. It is expressly understood and agreed that the obligations of the Issuing Lender hereunder to the Lenders are only those expressly set forth in this Credit Agreement and that the Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.3 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.2 shall be deemed to prejudice the right of any Lender to recover from the Issuing Lender any amounts made available by such Lender to the Issuing Lender pursuant to this Section 2.2 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of the Issuing Lender. (k) Conflict with LOC Documents. In the event of any conflict between this Credit Agreement and any LOC Document (including any letter of credit application), this Credit Agreement shall control. 27 2.3 Acquisition Loans. (a) Acquisition Loan Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein, each Lender severally agrees to make available to the Borrower such Lender's Acquisition Loan Commitment Percentage of revolving credit loans requested by the Borrower in Dollars ("Acquisition Loans") from time to time from the Amendment No. 4 Effective Date until June 12, 2000, or such earlier date as the Acquisition Loan Commitments shall have been terminated as provided herein for the purpose of financing the purchase price of, and fees and expenses in connection with, Permitted Acquisitions and capital expenditures; provided, however, that the sum of the aggregate principal amount of outstanding Acquisition Loans shall not exceed SEVENTY-FIVE MILLION DOLLARS ($75,000,000) (as such aggregate maximum amount may be reduced or increased from time to time as provided in Section 3.4, the "Acquisition Loan Committed Amount"); provided, further, (A) with regard to each Lender individually, such Lender's outstanding Acquisition Loans shall not exceed such Lender's Acquisition Loan Commitment Percentage of the Acquisition Loan Committed Amount, and (B) the aggregate principal amount of outstanding Acquisition Loans shall not exceed the Acquisition Loan Committed Amount. Acquisition Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request; provided, however, that no more than 16 Eurodollar Loans shall be outstanding hereunder at any time. For purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period. Acquisition Loans, other than any term portion of the Acquisition Loans, hereunder may be repaid and reborrowed in accordance with the provisions hereof. (b) Acquisition Loan Borrowings. (i) Notice of Borrowing. The Borrower shall request an Acquisition Loan borrowing by written notice (or telephonic notice promptly confirmed in writing) to the Agent not later than 12:00 Noon (Charlotte, North Carolina time) on the Business Day prior to the date of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall (A) be irrevocable, (B) specify (1) that an Acquisition Loan is requested, (2) the date of the requested borrowing (which shall be a Business Day), (3) the aggregate principal amount to be borrowed, (4) whether the borrowing shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor and (C) be accompanied by a certificate of the chief financial of the Borrower describing in reasonable detail the Permitted Acquisition to which such requested borrowing relates. If the Borrower shall fail to specify in any such Notice of Borrowing (I) an applicable Interest Period in the case of a Eurodollar Loan, then such notice shall be deemed to be a request for an Interest Period of one month, or (II) the type of Acquisition Loan requested, then such notice shall be deemed to be a request for a Base Rate Loan hereunder. The Agent shall give notice to each affected Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.3(b)(i), the contents thereof and each such Lender's share of any borrowing to be made pursuant thereto. (ii) Minimum Amounts. Each Eurodollar Loan or Base Rate Loan that is an Acquisition Loan shall be in a minimum aggregate principal amount of $1,000,000 and integral multiples of $100,000 in excess thereof (or the remaining amount of the Acquisition Loan Committed Amount, if less). (iii) Advances. Each Lender will make its Acquisition Loan Commitment Percentage of each Acquisition Loan borrowing available to the Agent for the account of the Borrower as specified in Section 3.15(a), or in such other manner as the Agent may specify in writing, by 2:00 P.M. (Charlotte, North Carolina time) on the date specified in the applicable Notice of Borrowing in Dollars and in funds immediately available to the Agent. Such borrowing will then be made available to the Borrower by the Agent by crediting the account of the Borrower on the books of 28 such office with the aggregate of the amounts made available to the Agent by the Lenders and in like funds as received by the Agent. (c) Repayment. (i) The principal amount of all Acquisition Loans advanced during the period from the Amendment No. 4 Effective Date to and including June 12, 1999 shall be repaid in twenty (20) consecutive quarterly installments as follows, unless accelerated sooner pursuant to Section 9.2:
Principal Amortization Principal Amortization Payment Dates Payment ------------------------------------ ----------------------- September 30, 1999, December 31, 1999, 3.75% March 31, 2000 and June 30, 2000 September 30, 2000, December 31, 2000, 4.375% March 31, 2001and June 30, 2001 September 30, 2001, December 31, 2001, 5.0% March 31, 2002 and June 30, 2002 September 30, 2002, December 31, 2002, 5.625% March 31, 2003 and June 30, 2003 September 30, 2003, December 31, 2003, 6.25% March 31, 2004 and the Maturity Date
(ii) The principal amount of all Acquisition Loans advanced during the period from June 12, 1999 to and including June 12, 2000 shall be repaid in sixteen (16) consecutive quarterly installments as follows, unless accelerated sooner pursuant to Section 9.2:
Principal Amortization Principal Amortization Payment Dates Payment ------------------------------------ ----------------------- September 30, 2000, December 31, 2000, 5.0% March 31, 2001and June 30, 2001 September 30, 2001, December 31, 2001, 6.25% March 31, 2002 and June 30, 2002 September 30, 2002, December 31, 2002, 6.25% March 31, 2003 and June 30, 2003 September 30, 2003, December 31, 2003, 7.5% March 31, 2004 and the Maturity Date
(d) Interest. Subject to the provisions of Section 3.1, (i) Base Rate Loans. During such periods as Acquisition Loans shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. 29 (ii) Eurodollar Loans. During such periods as Acquisition Loans shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. Interest on Acquisition Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (e) Acquisition Notes. The Acquisition Loans made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to such Lender in an original principal amount equal to such Lender's Acquisition Loan Commitment Percentage of the Acquisition Loan Committed Amount and in substantially the form of Exhibit 2.3(e). 2.4 Tranche A Term Loan. (a) Tranche A Term Commitment. Subject to the terms and conditions hereof and in reliance upon the representations and warranties set forth herein each Lender severally agrees to make available to the Borrower on the Amendment No. 4 Effective Date such Lender's Tranche A Term Loan Commitment Percentage of a term loan in Dollars (the "Tranche A Term Loan") in the aggregate principal amount of FIFTY MILLION DOLLARS ($50,000,000) (the "Tranche A Term Loan Committed Amount") for the purposes hereinafter set forth. The Tranche A Term Loan may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request; provided, however, that no more than 16 Eurodollar Loans shall be outstanding hereunder at any time. For purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period. Amounts repaid on the Tranche A Term Loan may not be reborrowed. (b) Borrowing Procedures. The Borrower shall submit an appropriate Notice of Borrowing to the Agent not later than 12:00 Noon (Charlotte, North Carolina time) on the Amendment No. 4 Effective Date, with respect to the portion of the Tranche A Term Loan initially consisting of a Base Rate Loan, or on the third Business Day prior to the Amendment No. 4 Effective Date, with respect to the portion of the Tranche A Term Loan initially consisting of one or more Eurodollar Loans, which Notice of Borrowing shall be irrevocable and shall specify (i) that the funding of a Tranche A Term Loan is requested and (ii) whether the funding of the Tranche A Term Loan shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. If the Borrower shall fail to deliver such Notice of Borrowing to the Agent by 12:00 Noon. (Charlotte, North Carolina time) on the third Business Day prior to the Amendment No. 4 Effective Date, then the full amount of the Tranche A Term Loan shall be disbursed on the Amendment No. 4 Effective Date as a Base Rate Loan. Each Lender shall make its Tranche A Term Loan Commitment Percentage of the Tranche A Term Loan available to the Agent for the account of the Borrower at the office of the Agent specified in Schedule 2.1(a), or at such other office as the Agent may designate in writing, by 2:00 P.M. (Charlotte, North Carolina time) on the Amendment No. 4 Effective Date in Dollars and in funds immediately available to the Agent. (c) Minimum Amounts. Each Eurodollar Loan or Base Rate Loan that is part of the Tranche A Term Loan shall be in an aggregate principal amount that is not less than $2,500,000 and integral multiples of $500,000 (or the then remaining principal balance of the Tranche A Term Loan, if less). (d) Repayment of Tranche A Term Loan. The principal amount of the Tranche A Term Loan shall be repaid in nineteen (19) consecutive quarterly installments as follows, unless accelerated sooner pursuant to Section 9.2: 30
Tranche A Term Loan Principal Amortization Payment Dates Principal Amortization Payment ------------------------------------ ----------------------- September 30, 1998, December 31, 1998, $1,875,000 March 31, 1999 and June 30, 1999 September 30, 1999, December 31, 1999, $1,875,000 March 31, 2000 and June 30, 2000 September 30, 2000, December 31, 2000, $1,875,000 March 31, 2001and June 30, 2001 September 30, 2001, December 31, 2001, $1,875,000 March 31, 2002 and June 30, 2002 September 30, 2002, December 31, 2002, $2,500,000 March 31, 2003 and June 30, 2003 September 30, 2003, December 31, 2003, $2,500,000 March 31, 2004 and the Maturity Date
(e) Interest. Subject to the provisions of Section 3.1, the Tranche A Term Loan shall bear interest at a per annum rate equal to: (i) Base Rate Loans. During such periods as the Tranche A Term Loan shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. (ii) Eurodollar Loans. During such periods as the Tranche A Term Loan shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. Interest on the Tranche A Term Loan shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein). (f) Tranche A Term Notes. The portion of the Tranche A Term Loan made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to such Lender in an original principal amount equal to such Lender's Tranche A Term Loan Commitment Percentage of the Tranche A Term Loan and substantially in the form of Exhibit 2.4(f). SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES 3.1 Default Rate. Upon the occurrence, and during the continuance, of an Event of Default, the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents shall bear interest, payable on demand, at a per annum rate 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then the Adjusted Base Rate plus 2%). 31 3.2 Extension and Conversion. Subject to the terms of Section 5.2, the Borrower shall have the option, on any Business Day, to extend existing Loans into a subsequent permissible Interest Period or to convert Loans into Loans of another interest rate type; provided, however, that (i) except as provided in Section 3.8, Eurodollar Loans may be converted into Base Rate Loans only on the last day of the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended, and Base Rate Loans may be converted into Eurodollar Loans, only if no Default or Event of Default is in existence on the date of extension or conversion, (iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to the terms of the definition of "Interest Period" set forth in Section 1.1 and shall be in such minimum amounts as provided in, with respect to Revolving Loans, Section 2.1(b)(ii), with respect to Acquisition Loans, Section 2.3(b)(ii), or, with respect to the Tranche A Term Loan, Section 2.4(c), (iv) no more than 16 Eurodollar Loans shall be outstanding hereunder at any time (it being understood that, for purposes hereof, Eurodollar Loans with different Interest Periods shall be considered as separate Eurodollar Loans, even if they begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new Eurodollar Loan with a single Interest Period) and (v) any request for extension or conversion of a Eurodollar Loan which shall fail to specify an Interest Period shall be deemed to be a request for an Interest Period of one month. Each such extension or conversion shall be effected by the Borrower by giving a Notice of Extension/Conversion (or telephonic notice promptly confirmed in writing) to the office of the Agent specified in specified in Schedule 2.1(a), or at such other office as the Agent may designate in writing, prior to 12:00 Noon (Charlotte, North Carolina time) on the Business Day of, in the case of the conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business Day prior to, in the case of the extension of a Eurodollar Loan as, or conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed extension or conversion, specifying the date of the proposed extension or conversion, the Loans to be so extended or converted, the types of Loans into which such Loans are to be converted and, if appropriate, the applicable Interest Periods with respect thereto. Each request for extension or conversion shall be irrevocable and shall constitute a representation and warranty by the Borrower of the matters specified in subsections (b), (c) and (d) of Section 5.3. In the event the Borrower fails to request extension or conversion of any Eurodollar Loan in accordance with this Section, or any such conversion or extension is not permitted or required by this Section, then such Eurodollar Loan shall be automatically converted into a Base Rate Loan at the end of the Interest Period applicable thereto. The Agent shall give each Lender notice as promptly as practicable of any such proposed extension or conversion affecting any Loan. 3.3 Prepayments. (a) Voluntary Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time, but otherwise without premium or penalty; provided, however, that each partial prepayment of Loans shall be in a minimum principal amount of $1,000,000 and integral multiples of $500,000. Subject to the foregoing terms, amounts prepaid under this Section 3.3(a) shall be applied as the Borrower may elect; provided that if the Borrower fails to specify a voluntary prepayment then such prepayment shall be applied first to Revolving Loans, second to the outstanding revolving loan portion of the Acquisition Loans and third pro rata to the outstanding term loan portion of the Acquisition Loans and the Tranche A Term Loan (in each case ratably to the remaining Principal Amortization Payments thereof), in each case first to Base Rate Loans and then to Eurodollar Loans in direct order of Interest Period maturities. All prepayments under this Section 3.3(a) shall be subject to Section 3.12 and be accompanied by interest on the principal amount prepaid through the date of prepayment. (b) Mandatory Prepayments. (i) Revolving Committed Amount. If at any time, the sum of the aggregate principal amount of outstanding Revolving Loans plus LOC Obligations outstanding shall exceed the Revolving Committed Amount, the Borrower immediately shall prepay the Revolving Loans and (after all Revolving Loans have been repaid) cash collateralize the LOC Obligations, in an amount sufficient to eliminate such excess. (ii) Excess Cash Flow. Within 90 days after the end of each fiscal year (commencing with the fiscal year ending June 30, 1998), the Borrower shall prepay the Loans in an amount equal to (w) 50% of the Excess Cash Flow earned during such prior fiscal year less (x) the amount of any 32 voluntary prepayments of the Tranche A Term Loan, (to the extent accompanied by a reduction in the Revolving Committed Amount) the Revolving Loans or (to the extent accompanied by a reduction in the Acquisition Loan Committed Amount) the Acquisition Loans pursuant to Section 3.3(a) during such prior fiscal year less (z) the amount of any mandatory prepayments of the Tranche A Term Loan, (to the extent accompanied by a reduction in the Revolving Committed Amount) the Revolving Loans or (to the extent accompanied by a reduction in the Acquisition Loan Committed Amount) the Acquisition Loans pursuant to Section 3.3(b)(iii), (iv) or (v) during such prior fiscal year. Any payments of Excess Cash Flow shall be applied as set forth in clause (vii) below. (iii) Asset Dispositions. Immediately upon the occurrence of any Asset Disposition Prepayment Event, the Borrower shall prepay the Loans in an aggregate amount equal to 100% of the Net Cash Proceeds of the related Asset Disposition not applied (or caused to be applied) by the Consolidated Parties during the related Application Period to the purchase, acquisition or construction of Eligible Assets as contemplated by the terms of Section 8.5(e) (such prepayment to be applied as set forth in clause (vii) below). (iv) Debt Issuances. Immediately upon receipt by any Consolidated Party of proceeds from any Debt Issuance (excluding Indebtedness permitted pursuant to Section 8.1), the Borrower shall prepay the Loans in an aggregate amount equal to 100% of the Net Cash Proceeds of such Debt Issuance to the Lenders (such prepayment to be applied as set forth in clause (vii) below). (v) Issuances of Equity. Immediately upon receipt by a Consolidated Party of proceeds from any Equity Issuance other than an Excluded Equity Issuance, the Borrower shall prepay the Loans in an aggregate amount equal to 50% of the Net Cash Proceeds of such Equity Issuance (such prepayments shall be applied as set forth in clause (vii) below). (vi) Acquisition Purchase Price Reductions. Immediately upon receipt by a Consolidated Party of proceeds from a post-closing purchase price reduction in respect of any Acquisition financed in whole or in part with the proceeds of any Acquisition Loans, the Borrower shall prepay the Loans to the Lenders in an aggregate amount equal to 100% of such purchase price reduction (such prepayments shall be applied as set forth in clause (vii) below). (vii) Application of Mandatory Prepayments. All amounts required to be paid pursuant to this Section 3.3(b) shall be applied as follows: (A) with respect to all amounts prepaid pursuant to Section 3.3(b)(i), to Revolving Loans and (after all Revolving Loans have been repaid) to a cash collateral account in respect of LOC Obligations, (B) with respect to all amounts prepaid pursuant to Section 3.3(b)(ii), Section 3.3(b)(iv) or Section 3.3(b)(v), pro rata to the Tranche A Term Loan and, if applicable, any term loan portion of the Acquisition Loans (in each case ratably to the remaining Principal Amortization Payments thereof), (C) with respect to all amounts prepaid pursuant to Section 3.3(b)(iii) (other than in respect of any Asset Disposition (x) involving Property described on Schedule 3.3(b)(vii) or (y) involving Sale and Leaseback Transactions of the real property portion of the MD Assets as permitted by Section 8.13), pro rata to (1) Revolving Loans and (after all Revolving Loans have been repaid) to a cash collateral account in respect of LOC Obligations (with a corresponding reduction in the Revolving Committed Amount in an amount equal to all amounts applied pursuant to this clause (1)), (2) any term loan portion of the Acquisition Loans (ratably to the remaining Principal Amortization Payments thereof) and (3) the Tranche A Term Loan (ratably to the remaining Principal Amortization Payments thereof), (D) with respect to all amounts prepaid pursuant to Section 3.3(b)(iii) in respect of any Asset Disposition involving Property described on Schedule 3.3(b)(vii), to Revolving Loans and (after all Revolving Loans have been repaid) to a cash collateral account in respect of LOC Obligations (without any 33 reduction in the Revolving Committed Amount), (E) with respect to all amounts prepaid pursuant to Section 3.3(b)(iii) in respect of any Asset Disposition involving the Sale and Leaseback Transaction of the real property portion of the MD Assets as permitted by Section 8.13, to Acquisition Loans and (after all Acquisition Loans have been repaid) as provided in (C) above, (F) with respect to all amounts prepaid pursuant to Section 3.3(b)(iv) in respect of a Debt Issuance of Subordinated Notes occurring within 90 days after the Amendment No. 4 Effective Date, to Acquisition Loans (without any reduction in the Acquisition Loan Committed Amount) and (after all Acquisition Loans have been repaid) to Revolving Loans (without any reduction in the Revolving Committed Amount) and (G) with respect to all amounts prepaid pursuant to Section 3.3(b)(vi), first, to any revolving loan portion of the Acquisition Loans (ratably to the remaining Principal Amortization Payments thereof) and then to any term loan portion of the Acquisition Loans (ratably to the remaining Principal Amortization Payments thereof). Within the parameters of the applications set forth above, prepayments shall be applied first to Base Rate Loans and then to Eurodollar Loans in direct order of Interest Period maturities. All prepayments under this Section 3.3(b) shall be subject to Section 3.12 and be accompanied by interest on the principal amount prepaid through the date of prepayment. 3.4 Termination and Reduction of Committed Amounts. (i) Voluntary Reductions. (A) The Borrower may from time to time permanently reduce or terminate the Revolving Committed Amount in whole or in part (in minimum aggregate amounts of $2,500,000 or in integral multiples of $500,000 in excess thereof (or, if less, the full remaining amount of the then applicable Revolving Committed Amount)) upon five Business Days' prior written notice to the Agent; provided, however, no such termination or reduction shall be made which would cause the aggregate principal amount of outstanding Revolving Loans plus LOC Obligations outstanding to exceed the Revolving Committed Amount, unless, concurrently with such termination or reduction, the Revolving Loans are repaid to the extent necessary to eliminate such excess. The Agent shall promptly notify each affected Lender of receipt by the Agent of any notice from the Borrower pursuant to this Section 3.4(i). (B) The Borrower may from time to time permanently reduce or terminate the Acquisition Loan Committed Amount in whole or in part (in minimum aggregate amounts of $2,500,000 or in integral multiples of $500,000 in excess thereof (or, if less, the full remaining amount of the then applicable Acquisition Loan Committed Amount)) upon five Business Days' prior written notice to the Agent; provided, however, no such termination or reduction shall be made which would cause the aggregate principal amount of outstanding Acquisition Loans to exceed the Acquisition Loan Committed Amount, unless, concurrently with such termination or reduction, the Acquisition Loans are repaid to the extent necessary to eliminate such excess. The Agent shall promptly notify each affected Lender of receipt by the Agent of any notice from the Borrower pursuant to this Section 3.4(ii). (ii) Mandatory Reductions. (A) On any date that the Revolving Loans are required to be prepaid pursuant to the terms of Section 3.3(b)(iii) the Revolving Committed Amount automatically shall be permanently reduced by the amount of such required prepayment and/or reduction. (B) The Acquisition Loan Committed Amount automatically shall be (A) permanently reduced on June 12, 1999 by an amount equal to the principal amount of all Acquisition Loans advanced during the period from the Amendment No. 4 Effective Date to and including June 12, 1999 and (B) terminated on June 12, 2000. (iii) Maturity Date. The Revolving Commitments of the Lenders, the LOC Commitment of the Issuing Lender and the Acquisition Loan Commitments of the Lenders automatically shall terminate on the Maturity Date. (iv) General. (A) The Borrower shall pay to the Agent for the account of the Lenders in accordance with the terms of Section 3.5(a)(i), on the date of each termination or reduction of the Revolving 34 Committed Amount, the Revolving Unused Fee accrued through the date of such termination or reduction on the amount of the Revolving Committed Amount so terminated or reduced. (B) The Borrower shall pay to the Agent for the account of the Lenders in accordance with the terms of Section 3.5(a)(ii), on the date of each termination or reduction of the Acquisition Loan Committed Amount, the Acquisition Loan Unused Fee accrued through the date of such termination or reduction on the amount of the Acquisition Loan Committed Amount so terminated or reduced. 3.5 Fees. (a) Unused Fees. (i) Revolving Credit Facility Unused Fee. In consideration of the Revolving Commitments of the Lenders hereunder, the Borrower agrees to pay to the Agent for the account of each Lender a fee (the "Revolving Unused Fee") on such Lender's Revolving Commitment Percentage of the Unused Revolving Committed Amount computed at a per annum rate for each day during the applicable Revolving Unused Fee Calculation Period (hereinafter defined) at a rate equal to the Applicable Percentage in effect from time to time. The Revolving Unused Fee shall commence to accrue on the Effective Date and shall be due and payable in arrears on the last business day of each March, June, September and December (and any date that the Revolving Committed Amount is reduced as provided in Section 3.4 and the Maturity Date) for the immediately preceding quarter (or portion thereof) (each such quarter or portion thereof for which the Revolving Unused Fee is payable hereunder being herein referred to as an "Revolving Unused Fee Calculation Period"), beginning with the first of such dates to occur after the Effective Date. (ii) Acquisition Loan Unused Fee. In consideration of the Acquisition Loan Commitments of the Lenders hereunder, the Borrower agrees to pay to the Agent for the account of each Lender a fee (the "Acquisition Loan Unused Fee") on such Lender's Acquisition Loan Commitment Percentage of the Unused Acquisition Loan Committed Amount computed at a per annum rate for each day during the applicable Acquisition Loan Unused Fee Calculation Period (hereinafter defined) at a rate equal to the Applicable Percentage in effect from time to time. The Acquisition Loan Unused Fee shall commence to accrue on the Effective Date and shall be due and payable in arrears on the last business day of each March, June, September and December (and any date that the Revolving Committed Amount is reduced as provided in Section 3.4 and the Maturity Date) for the immediately preceding quarter (or portion thereof) (each such quarter or portion thereof for which the Acquisition Loan Unused Fee is payable hereunder being herein referred to as an "Acquisition Loan Unused Fee Calculation Period"), beginning with the first of such dates to occur after the Effective Date. (b) Letter of Credit Fees. (i) Standby Letter of Credit Issuance Fee. In consideration of the issuance of standby Letters of Credit hereunder, the Borrower promises to pay to the Agent for the account of each Lender a fee (the "Standby Letter of Credit Fee") on such Lender's Revolving Commitment Percentage of the average daily maximum amount available to be drawn under each such standby Letter of Credit computed at a per annum rate for each day from the date of issuance to the date of expiration equal to the Applicable Percentage. The Standby Letter of Credit Fee will be payable quarterly in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or a portion thereof). (ii) Trade Letter of Credit Drawing Fee. In consideration of the issuance of trade Letters of Credit hereunder, the Borrower promises to pay to the Agent for the account of each Lender a fee (the "Trade Letter of Credit Fee") equal to the Applicable Percentage on such Lender's Revolving Commitment Percentage of the amount of each drawing under any such trade Letter of 35 Credit. The Trade Letter of Credit Fee will be payable on each date of drawing under a trade Letter of Credit. (iii) Issuing Lender Fees. In addition to the Standby Letter of Credit Fee payable pursuant to clause (i) above and the Trade Letter of Credit Fee payable pursuant to clause (ii) above, the Borrower promises to pay to the Issuing Lender for its own account without sharing by the other Lenders (a) a standby letter of credit fronting fee equal to 0.25% on the average daily maximum amount available to be drawn under each such standby Letter of Credit (such fee to be payable quarterly in arrears on the last Business Day of each March, June, September and December for the immediately preceding quarter (or a portion thereof)), (b) a trade letter of credit drawing fee equal to 0.25% on the amount of each drawing under any such trade Letter of Credit (such fee to be payable on each date of drawing under a trade Letter of Credit) and (c) the customary charges from time to time of the Issuing Lender with respect to the issuance, amendment, transfer, administration, cancellation and conversion of, and drawings under, such Letters of Credit (collectively, the "Issuing Lender Fees"). (c) Administrative Fees. The Borrower agrees to pay to the Agent, for its own account and NationsBanc Montgomery Securities, Inc., as applicable, the fees referred to in the Agent's Fee Letter (collectively, the "Agent's Fees"). 3.6 Capital Adequacy. If any Lender has determined, after the date hereof, that the adoption or the becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof in the interpretation or administration of, any applicable law, rule or regulation regarding capital adequacy, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy), then, upon notice from such Lender to the Borrower, the Borrower shall be obligated to pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. Any Lender claiming compensation under this Section 3.6 shall furnish to the Borrower and the Agent a statement setting forth in reasonable detail the additional amount or amounts payable to it hereunder and the calculations used to determine such amount or amounts, which statement shall be conclusive and binding on the parties hereto in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 3.7 Limitation on Eurodollar Loans. If on or prior to the first day of any Interest Period for any Eurodollar Loan: (a) the Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) the Required Lenders determine (which determination shall be conclusive) and notify the Agent that the Eurodollar Rate will not adequately and fairly reflect the cost to the Lenders of funding Eurodollar Loans for such Interest Period; then the Agent shall give the Borrower prompt notice thereof, and so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans, Continue Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans and the Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Eurodollar Loans or Convert such Eurodollar Loans into Base Rate Loans in accordance with the terms of this Credit Agreement. 36 3.8 Illegality. Notwithstanding any other provision of this Credit Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender's obligation to make or Continue Eurodollar Loans and to Convert Base Rate Loans into Eurodollar Loans shall be suspended until such time as such Lender may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 3.10 shall be applicable). 3.9 Requirements of Law. (a) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency: (i) shall subject such Lender (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Loans, its Notes, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Lender (or its Applicable Lending Office) under this Credit Agreement or its Notes in respect of any Eurodollar Loans (other than taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Eurodollar Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (or its Applicable Lending Office), including the Commitment of such Lender hereunder; or (iii) shall impose on such Lender (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting this Credit Agreement or its Notes or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Loans or to reduce any sum received or receivable by such Lender (or its Applicable Lending Office) under this Credit Agreement or its Notes with respect to any Eurodollar Loans, then the Borrower shall pay to such Lender on demand such amount or amounts as will compensate such Lender for such increased cost or reduction. If any Lender requests compensation by the Borrower under this Section 3.9(a), the Borrower may, by notice to such Lender (with a copy to the Agent), suspend the obligation of such Lender to make or Continue Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 3.10 shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested. (b) Each Lender shall promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 3.9 and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 3.9 shall furnish to the Borrower and the Agent a statement setting forth in reasonable detail the additional amount or amounts payable to it hereunder and the calculations used to determine such amount or amounts, which statement shall be conclusive and binding on the parties hereto in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 37 3.10 Treatment of Affected Loans. If the obligation of any Lender to make any Eurodollar Loan or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 3.8 or 3.9 hereof, such Lender's Eurodollar Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for such Eurodollar Loans (or, in the case of a Conversion required by Section 3.8 hereof, on such earlier date as such Lender may specify to the Borrower with a copy to the Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 3.8 or 3.9 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's Eurodollar Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Base Rate Loans of such Lender that would otherwise be Converted into Eurodollar Loans shall remain as Base Rate Loans. If such Lender gives notice to the Borrower (with a copy to the Agent) that the circumstances specified in Section 3.8 or 3.9 hereof that gave rise to the Conversion of such Lender's Eurodollar Loans pursuant to this Section 3.10 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Lenders are outstanding, such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding Eurodollar Loans and by such Lender are held pro rata (as to principal amounts, interest rate basis, and Interest Periods) in accordance with their respective Commitments. 3.11 Taxes. (a) Any and all payments by the Borrower to or for the account of any Lender or the Agent hereunder or under any other Credit Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its Applicable Lending Office) or the Agent (as the case may be) is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable under this Credit Agreement or any other Credit Document to any Lender or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.11) such Lender or the Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 11.1, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Credit Agreement or any other Credit Document or from the execution or delivery of, or otherwise with respect to, this Credit Agreement or any other Credit Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.11) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. 38 (d) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Credit Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower or the Agent (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Agent with (i) Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Credit Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and/or (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Lender is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Credit Agreement or any of the other Credit Documents. (e) For any period with respect to which a Lender has failed to provide the Borrower and the Agent with the appropriate form pursuant to Section 3.11(d) (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 3.11(a) or 3.11(b) with respect to Taxes imposed by the United States; provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section 3.11, then such Lender will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. (g) Within thirty (30) days after the date of any payment of Taxes, the Borrower shall furnish to the Agent the original or a certified copy of a receipt evidencing such payment. (h) Any Lender claiming compensation under this Section 3.11 shall furnish to the Borrower and the Agent a statement setting forth in reasonable detail the additional amount or amounts payable to it hereunder and the calculations used to determine such amount or amounts, which statement shall be conclusive and binding on the parties hereto in the absence of manifest error. (i) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 3.11 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 3.12 Compensation. Upon the request of any Lender, the Borrower shall pay to such Lender such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9.2) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Section 5 to be satisfied) to borrow, Convert, Continue, or prepay a 39 Eurodollar Loan on the date for such borrowing, Conversion, Continuation, or prepayment specified in the relevant notice of borrowing, prepayment, Continuation, or Conversion under this Credit Agreement. With respect to Eurodollar Loans, such indemnification may include an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Eurodollar Loans provided for herein (excluding, however, the Applicable Percentage included therein, if any) over (b) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. The covenants of the Borrower set forth in this Section 3.12 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 3.13 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) Loans. Each Loan, each payment or (subject to the terms of Section 3.3) prepayment of principal of any Loan or reimbursement obligations arising from drawings under Letters of Credit, each payment of interest on the Loans or reimbursement obligations arising from drawings under Letters of Credit, each payment of Revolving Unused Fees, each payment of Acquisition Loan Unused Fees, each payment of the Standby Letter of Credit Fee, each payment of the Trade Letter of Credit Fee, each reduction of the Revolving Committed Amount and each conversion or extension of any Loan, shall be allocated pro rata among the Lenders in accordance with the respective principal amounts of their outstanding Loans and Participation Interests. (b) Advances. No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make its ratable share of a borrowing hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Agent shall have been notified by any Lender prior to the date of any requested borrowing that such Lender does not intend to make available to the Agent its ratable share of such borrowing to be made on such date, the Agent may assume that such Lender has made such amount available to the Agent on the date of such borrowing, and the Agent in reliance upon such assumption, may (in its sole discretion but without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent, the Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent will promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from the Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to the Borrower to the date such corresponding amount is recovered by the Agent at a per annum rate equal to (i) from the Borrower at the applicable rate for the applicable borrowing pursuant to the Notice of Borrowing and (ii) from a Lender at the Federal Funds Rate. Nothing contained in this Section 3.13(b) shall be deemed to constitute a waiver by the Borrower of its rights in respect of any claim for breach of contract relating to the wrongful failure (as determined by a court of competent jurisdiction) of any Lender to make any Loan on the date of the requested borrowing. 3.14 Sharing of Payments. The Lenders agree among themselves that, in the event that any Lender shall obtain payment in respect of any Loan, LOC Obligations or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Credit Agreement, such Lender shall promptly purchase from the other Lenders a Participation Interest in such Loans, LOC Obligations and other obligations in such amounts, and make 40 such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker's lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by repurchase of a Participation Interest theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a Participation Interest may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker's lien or counterclaim, with respect to such Participation Interest as fully as if such Lender were a holder of such Loan, LOC Obligations or other obligation in the amount of such Participation Interest. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Agent shall fail to remit to the Agent or any other Lender an amount payable by such Lender or the Agent to the Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.14 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.14 to share in the benefits of any recovery on such secured claim. 3.15 Payments, Computations, Etc. (a) Except as otherwise specifically provided herein, all payments hereunder shall be made to the Agent in dollars in immediately available funds, without setoff, deduction, counterclaim or withholding of any kind, at the Agent's office specified in Schedule 2.1(a) not later than 2:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments received after such time shall be deemed to have been received on the next succeeding Business Day. The Agent may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower maintained with the Agent (with notice to the Borrower). The Borrower shall, at the time it makes any payment under this Credit Agreement, specify to the Agent the Loans, LOC Obligations, Fees, interest or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails so to specify, or if such application would be inconsistent with the terms hereof, the Agent shall distribute such payment to the Lenders in such manner as the Agent may determine to be appropriate in respect of obligations owing by the Borrower hereunder, subject to the terms of Section 3.13(a)). The Agent will distribute such payments to such Lenders, if any such payment is received prior to 12:00 Noon (Charlotte, North Carolina time) on a Business Day in like funds as received prior to the end of such Business Day and otherwise the Agent will distribute such payment to such Lenders on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and Fees for the period of such extension), except that in the case of Eurodollar Loans, if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day. Except as expressly provided otherwise herein, all computations of interest and fees shall be made on the basis of actual number of days elapsed over a year of 360 days, except with respect to computation of interest on Base Rate Loans which (unless the Base Rate is determined by reference to the Federal Funds Rate) shall be calculated based on a year of 365 or 366 days, as appropriate. Interest shall accrue from and include the date of borrowing, but exclude the date of payment. (b) Allocation of Payments After Event of Default. Notwithstanding any other provisions of this Credit Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Agent or any Lender on account of the Credit Party Obligations or any other amounts outstanding under any of the Credit Documents or in respect of the Collateral shall be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation reasonable attorneys' fees) of the Agent in connection with enforcing the rights of the Lenders under the Credit Documents and any protective advances made by the Agent with respect to the Collateral under or pursuant to the terms of the Collateral Documents; 41 SECOND, to payment of any fees owed to the Agent; THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Credit Party Obligations owing to such Lender; FOURTH, to the payment of all of the Credit Party Obligations consisting of accrued fees and interest; FIFTH, to the payment of the outstanding principal amount of the Credit Party Obligations (including the payment or cash collateralization of the outstanding LOC Obligations); SIXTH, to all other Credit Party Obligations and other obligations which shall have become due and payable under the Credit Documents or otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH" above; and SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (ii) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Loans and LOC Obligations held by such Lender bears to the aggregate then outstanding Loans and LOC Obligations) of amounts available to be applied pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above; and (iii) to the extent that any amounts available for distribution pursuant to clause "FIFTH" above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Agent in a cash collateral account and applied (A) first, to reimburse the Issuing Lender from time to time for any drawings under such Letters of Credit and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses "FIFTH" and "SIXTH" above in the manner provided in this Section 3.15(b). 3.16 Evidence of Debt. (a) Each Lender shall maintain an account or accounts evidencing each Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Credit Agreement. Each Lender will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary. (b) The Agent shall maintain the Register pursuant to Section 11.3(c), and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be recorded (i) the amount, type and Interest Period of each such Loan hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable to each Lender hereunder and (iii) the amount of any sum received by the Agent hereunder from or for the account of the Borrower and each Lender's share thereof. The Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary. (c) The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent with the entries of the Agent, subsection (a)) shall be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Agent to maintain any such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms hereof. 42 3.17 Mandatory Assignment. In the event that any Lender delivers to the Borrower, a demand for payment in accordance with Section 3.6, 3.9 or 3.11 then, provided that no Default or Event of Default has occurred and is continuing at such time, the Borrower may, at its own expense (such expense to include the administrative fee payable to the Agent under Section 11.3(b)), and with the consent of the Agent (such consent not to be unreasonably withheld), require such Lender to transfer and assign in whole, without recourse (in accordance with and subject to the terms and conditions of Section 11.3), all of its interests, rights and obligations under this Credit Agreement to an Eligible Assignee which shall assume such assigned obligations; provided that (i) such assignment shall not conflict with any law, rule or regulation or order of any court or any Governmental Authority and (ii) the Borrower or such assignee shall have paid to the assigning Lender in immediately available funds the principal of and interest accrued to the date of such payment on the Loans made by it hereunder and all other amounts owed to it hereunder. SECTION 4 GUARANTY 4.1 The Guaranty. Each of the Guarantors hereby jointly and severally guarantees to each Lender, each Affiliate of a Lender that enters into a Hedging Agreement, and the Agent as hereinafter provided the prompt payment of the Credit Party Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. The Guarantors hereby further agree that if any of the Credit Party Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise), the Guarantors will, jointly and severally, promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Credit Party Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents or Hedging Agreements, the obligations of each Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code or any comparable provisions of any applicable state law. 4.2 Obligations Unconditional. The obligations of the Guarantors under Section 4.1 are joint and several, absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Credit Documents or Hedging Agreements, or any other agreement or instrument referred to therein, or any substitution, release, impairment or exchange of any other guarantee of or security for any of the Credit Party Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 4.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other Guarantor of the Credit Party Obligations for amounts paid under this Section 4 until such time as the Lenders (and any Affiliates of Lenders entering into Hedging Agreements) have been paid in full, all Commitments under this Credit Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Lenders in connection with monies received under the Credit Documents or Hedging Agreements. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder which shall remain absolute and unconditional as described above: (a) at any time or from time to time, without notice to any Guarantor, the time for any performance of or compliance with any of the Credit Party Obligations shall be extended, or such performance or compliance shall be waived; 43 (b) any of the acts mentioned in any of the provisions of any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements shall be done or omitted; (c) the maturity of any of the Credit Party Obligations shall be accelerated, or any of the Credit Party Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements shall be waived or any other guarantee of any of the Credit Party Obligations or any security therefor shall be released, impaired or exchanged in whole or in part or otherwise dealt with; (d) any Lien granted to, or in favor of, the Agent or any Lender or Lenders as security for any of the Credit Party Obligations shall fail to attach or be perfected; or (e) any of the Credit Party Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Agent or any Lender exhaust any right, power or remedy or proceed against any Person under any of the Credit Documents, any Hedging Agreement or any other agreement or instrument referred to in the Credit Documents or Hedging Agreements, or against any other Person under any other guarantee of, or security for, any of the Credit Party Obligations. 4.3 Reinstatement. The obligations of the Guarantors under this Section 4 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Credit Party Obligations is rescinded or must be otherwise restored by any holder of any of the Credit Party Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, fees and expenses of counsel) incurred by the Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 4.4 Certain Additional Waivers. Without limiting the generality of the provisions of this Section 4, each Guarantor hereby specifically waives the benefits of N.C. Gen. Stat. Sections 26-7 through 26-9, inclusive, to the extent applicable. Each Guarantor further agrees that such Guarantor shall have no right of recourse to security for the Credit Party Obligations, except through the exercise of rights of subrogation pursuant to Section 4.2 and through the exercise of rights of contribution pursuant to Section 4.6. 4.5 Remedies. The Guarantors agree that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Agent and the Lenders, on the other hand, the Credit Party Obligations may be declared to be forthwith due and payable as provided in Section 9.2 (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 9.2) for purposes of Section 4.1 notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Credit Party Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Credit Party Obligations being deemed to have become automatically due and payable), the Credit Party Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of Section 4.1. The Guarantors acknowledge and agree that their obligations hereunder are secured in accordance with the terms of the 44 Security Agreements and the other Collateral Documents and that the Lenders may exercise their remedies thereunder in accordance with the terms thereof. 4.6 Rights of Contribution. The Guarantors hereby agree as among themselves that, if any Guarantor shall make an Excess Payment (as defined below), such Guarantor shall have a right of contribution from each other Guarantor in an amount equal to such other Guarantor's Contribution Share (as defined below) of such Excess Payment. The payment obligations of any Guarantor under this Section 4.6 shall be subordinate and subject in right of payment to the prior payment in full to the Agent and the Lenders of the Guaranteed Obligations, and none of the Guarantors shall exercise any right or remedy under this Section 4.6 against any other Guarantor until payment and satisfaction in full of all of such Guaranteed Obligations. For purposes of this Section 4.6, (a) "Guaranteed Obligations" shall mean any obligations arising under the other provisions of this Section 4; (b) "Excess Payment" shall mean the amount paid by any Guarantor in excess of its Pro Rata Share of any Guaranteed Obligations; (c) "Pro Rata Share" shall mean, for any Guarantor in respect of any payment of Guaranteed Obligations, the ratio (expressed as a percentage) as of the date of such payment of Guaranteed Obligations of (i) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair salable value of all assets and other properties of the Borrower and all of the Guarantors exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower and the Guarantors hereunder) of the Borrower and all of the Guarantors; provided, however, that, for purposes of calculating the Pro Rata Shares of the Guarantors in respect of any payment of Guaranteed Obligations, any Guarantor that became a Guarantor subsequent to the date of any such payment shall be deemed to have been a Guarantor on the date of such payment and the financial information for such Guarantor as of the date such Guarantor became a Guarantor shall be utilized for such Guarantor in connection with such payment; and (d) "Contribution Share" shall mean, for any Guarantor in respect of any Excess Payment made by any other Guarantor, the ratio (expressed as a percentage) as of the date of such Excess Payment of (i) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair salable value of all assets and other properties of the Borrower and all of the Guarantors other than the maker of such Excess Payment exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower and the Guarantors hereunder) of the Borrower and all of the Guarantors other than the maker of such Excess Payment; provided, however, that, for purposes of calculating the Contribution Shares of the Guarantors in respect of any Excess Payment, any Guarantor that became a Guarantor subsequent to the date of any such Excess Payment shall be deemed to have been a Guarantor on the date of such Excess Payment and the financial information for such Guarantor as of the date such Guarantor became a Guarantor shall be utilized for such Guarantor in connection with such Excess Payment. This Section 4.6 shall not be deemed to affect any right of subrogation, indemnity, reimbursement or contribution that any Guarantor may have under applicable law against the Borrower in respect of any payment of Guaranteed Obligations. Notwithstanding the foregoing, all rights of contribution against any Guarantor shall terminate from and after such time, if ever, that such Guarantor shall be relieved of its obligations pursuant to Section 8.4. 4.7 Continuing Guarantee. The guarantee in this Section 4 is a continuing guarantee, and shall apply to all Credit Party Obligations whenever arising. 45 SECTION 5 CONDITIONS 5.1 Closing Conditions. The obligation of the Lenders to enter into this Amendment shall be subject to satisfaction of the following conditions (in form and substance acceptable to the Lender): (a) Executed Credit Documents. Receipt by the Agent of duly executed copies of (i) this Amendment, (ii) a new Revolving Note for each Lender, (iii) a new Acquisition Note for each Lender and (iv) a new Tranche A Term Note for each Lender, each in form and substance acceptable to the Agent in its sole discretion. (b) Corporate Documents. Receipt by the Agent of all documents it may reasonably request relating to the existence and good standing of each Credit Party, the corporate or other necessary authority for and the validity of the Credit Documents, and any other matters relevant thereto, all in form and substance acceptable to the Agent. (c) Opinions of Counsel. The Agent shall have received, in each case dated as of the Amendment No. 4 Effective Date a legal opinion of McDermott, Will & Emery, general counsel for the Credit Parties, substantially in the form of Schedule 5.1(c); and (d) Corporate Structure. The corporate capital and ownership structure of the Consolidated Parties, after consummation of the transactions contemplated by this Credit Agreement shall be as described in Schedule 5.1(d). (e) Government Consent. Receipt by the Agent of evidence that all governmental, shareholder and material third party consents (including Hart-Scott-Rodino clearance) and approvals necessary or desirable in connection with the related financings and other transactions contemplated hereby and expiration of all applicable waiting periods without any action being taken by any authority that could restrain, prevent or impose any material adverse conditions on such transactions or that could seek or threaten any of the foregoing, and no law or regulation shall be applicable which in the judgment of the Agent could have such effect. (f) Litigation. There shall not exist any pending or threatened action, suit, investigation or proceeding against a Consolidated Party that could reasonably be expected to have a Material Adverse Effect. (g) Officer's Certificates. The Agent shall have received a certificate or certificates executed by an Executive Officer of the Borrower as of the Amendment No. 4 Effective Date stating that (A) each Consolidated Party is in compliance with all existing material financial obligations, (B) all governmental, shareholder and third party consents and approvals, if any, with respect to the Credit Documents and the transactions contemplated thereby have been obtained, (C) no action, suit, investigation or proceeding is pending or threatened in any court or before any arbitrator or governmental instrumentality that purports to affect any Consolidated Party or any transaction contemplated by the Credit Documents, if such action, suit, investigation or proceeding could reasonably be expected to have a Material Adverse Effect and (D) immediately after giving effect to this Amendment, the other Credit Documents and all the transactions contemplated therein to occur on such date, (1) each of the Credit Parties is Solvent, (2) no Default or Event of Default exists, (3) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects, and (4) the Credit Parties are in compliance with each of the financial covenants set forth in Section 7.11. (h) Material Adverse Effect. No material adverse change shall have occurred since June 30, 1997 in the condition (financial or otherwise), business, management or prospects of the Consolidated Parties taken as a whole. 46 (i) Fees and Expenses. Payment by the Credit Parties of all fees and expenses owed by them to the Lenders and the Agent as of the Amendment No. 4 Effective Date, including, without limitation, payment to the Agent of any fees set forth in the Fee Letter which are payable on such date. (j) Subordinated Debt. (i) The Borrower shall have entered into the Subordinated Note Indenture with the Subordinated Noteholders, (ii) the Borrower shall have executed the Subordinated Notes, (iii) the Agent shall have received a copy, certified by an officer of the Borrower as true and complete, of the Subordinated Note Indenture as originally executed and delivered and a form of Subordinated Note, and no amendment or modification thereof shall have been entered into on or prior to the Amendment No. 4 Effective Date which shall not have been approved by each of the Lenders and (iv) the Borrower shall have received proceeds from the sale of Subordinated Notes in an aggregate principal amount of $100,000,000. (k) Other. Receipt by the Lenders of such other documents, instruments, agreements or information as reasonably requested by any Lender, including, but not limited to, information regarding litigation, tax, accounting, labor, insurance, pension liabilities (actual or contingent), real estate leases, material contracts, debt agreements, property ownership and contingent liabilities of the Consolidated Parties. 5.2 Conditions to all Extensions of Credit. The obligations of each Lender to make, convert or extend any Loan and of the Issuing Lender to issue or extend any Letter of Credit are subject to satisfaction of the following conditions in addition to satisfaction of the conditions set forth in Section 5.1: (a) The Borrower shall have delivered (i) in the case of any Revolving Loan, any Acquisition Loan or any portion of the Tranche A Term Loan, an appropriate Notice of Borrowing or Notice of Extension/Conversion or (ii) in the case of any Letter of Credit, the Issuing Lender shall have received an appropriate request for issuance in accordance with the provisions of Section 2.2(b); (b) The representations and warranties set forth in Section 6 shall, subject to the limitations set forth therein, be true and correct in all material respects as of such date (except for those which expressly relate to an earlier date); (c) There shall not have been commenced against any Credit Party an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its Property or for the winding up or liquidation of its affairs, and such involuntary case or other case, proceeding or other action shall remain undismissed, undischarged or unbonded; and (d) Immediately after giving effect to the making of such Loan (and the application of the proceeds thereof) or to the issuance of such Letter of Credit, as the case may be, (i) the sum of the aggregate principal amount of outstanding Revolving Loans plus LOC Obligations outstanding shall not exceed the Revolving Committed Amount, and (ii) the LOC Obligations shall not exceed the LOC Committed Amount. The delivery of each Notice of Borrowing, each Notice of Extension/Conversion and each request for a Letter of Credit pursuant to Section 2.2(b) shall constitute a representation and warranty by the Borrower of the correctness of the matters specified in subsections (b), (c) and (d) above. 47 SECTION 6 REPRESENTATIONS AND WARRANTIES The Credit Parties hereby represent to the Agent and each Lender that: 6.1 Financial Condition. (a) The audited consolidated balance sheet of the Consolidated Parties as of June 30, 1997 and the audited consolidated statements of earnings and statements of cash flows for the year ended June 30, 1996 have heretofore been furnished to the Agent. Such audited financial statements (including the notes thereto) (i) have been audited by Arthur Andersen, (ii) have been prepared in accordance with GAAP consistently, applied throughout the periods covered thereby and (iii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated financial condition, results of operations and cash flows of the Consolidated Parties as of such date and for such period. The unaudited interim balance sheets of the Consolidated Parties as at the end of, and the related unaudited interim statements of earnings and of cash flows for, each fiscal month and quarterly period ended after June 30, 1997 and prior to the Amendment No. 4 Effective Date have heretofore been furnished to the Agent. Such unaudited interim financial statements for each such quarterly period, (i) have been prepared by independent certified public accountants in accordance with GAAP consistently applied throughout the periods covered thereby, subject to audit, normal year-end adjustments and the absence of notes and (ii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated financial condition, results of operations and cash flows of the Consolidated Parties as of such date and for such periods. (b) The pro forma consolidated balance sheet, statement of earnings and statement of cash flow of the Consolidated Parties for the two most recent fiscal years preceding the Closing Date prepared by Arthur Andersen in accordance with GAAP consistently applied throughout the periods covered thereby, have heretofore been furnished to the Agent. Such pro forma balance sheet is based upon reasonable assumptions and upon information not known to be incorrect or misleading in any material respect. (c) Except as otherwise disclosed in Schedule 6.1(c), the financial statements delivered to the Lenders pursuant to Section 7.1(a) and (b), (i) have been prepared in accordance with GAAP (except as may otherwise be permitted under Section 7.1(a) and (b)) and (ii) present fairly (on the basis disclosed in the footnotes to such financial statements) the consolidated financial condition, results of operations and cash flows of the Consolidated Parties as of such date and for such periods. 6.2 No Material Change. Since the later of (i) June 30, 1997 and (ii) the then most recent fiscal year end with respect to which the Agent has received the Required Financial Information, (a) there has been no Material Adverse Effect and (b) except as otherwise permitted under this Credit Agreement, no dividends or other distributions have been declared, paid or made upon the Capital Stock in a Consolidated Party nor has any of the Capital Stock in a Consolidated Party been redeemed, retired, purchased or otherwise acquired for value. 6.3 Organization and Good Standing. Each of the Consolidated Parties (a) is duly organized, validly existing and is in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has the corporate or other necessary power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged and (c) is duly qualified as a foreign entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing could reasonably be expected to have a Material Adverse Effect. 48 6.4 Power; Authorization; Enforceable Obligations. Each of the Credit Parties has the corporate or other necessary power and authority, and the legal right, to make, deliver and perform the Credit Documents to which it is a party, and in the case of the Borrower, to obtain extensions of credit hereunder, and has taken all necessary corporate action to authorize the borrowings and other extensions of credit on the terms and conditions of this Credit Agreement and to authorize the execution, delivery and performance of the Credit Documents to which it is a party. No material consent or authorization of, filing with, notice to or other similar act by or in respect of, any Governmental Authority or any other Person is required to be obtained or made by or on behalf of any Credit Party in connection with the borrowings or other extensions of credit hereunder or with the execution, delivery, performance, validity or enforceability of the Credit Documents to which such Credit Party is a party, except for (i) consents, authorizations, notices and filings described in Schedule 6.4, all of which have been obtained or made or have the status described in such Schedule 6.4 and (ii) filings to perfect the Liens created by the Collateral Documents. This Credit Agreement has been, and each other Credit Document to which any Credit Party is a party will be, duly executed and delivered on behalf of the Credit Parties. This Credit Agreement constitutes, and each other Credit Document to which any Credit Party is a party when executed and delivered will constitute, a legal, valid and binding obligation of such Credit Party enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 6.5 No Conflicts. Neither the execution and delivery of the Credit Documents, nor the consummation of the transactions contemplated therein, nor performance of and compliance with the terms and provisions thereof by such Credit Party will (a) violate or conflict with any provision of its articles or certificate of incorporation or bylaws or other organizational or governing documents of such Person, (b) violate, contravene or materially conflict with any material Requirement of Law or any other material law, regulation (including, without limitation, Regulation U or Regulation X), order, writ, judgment, injunction, decree or permit applicable to it, (c) violate, contravene or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which it is a party or by which it may be bound, the violation of which could reasonably be expected to have a Material Adverse Effect, or (d) result in or require the creation of any Lien (other than those contemplated in or created in connection with the Credit Documents) upon or with respect to its properties. 6.6 No Default. No Consolidated Party is in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound which default could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred or exists except as previously disclosed in writing to the Lenders. 6.7 Ownership. Each Consolidated Party is the owner of, and has good and marketable title to, all of its respective assets and none of such assets is subject to any Lien other than Permitted Liens. 6.8 Indebtedness. Except as otherwise permitted under Section 8.1, the Consolidated Parties have no Indebtedness. 6.9 Litigation. Except as disclosed in Schedule 6.9, there are no actions, suits or legal, equitable, arbitration or administrative proceedings, pending or, to the knowledge of any Credit Party, threatened against any Consolidated Party which might have a Material Adverse Effect. 49 6.10 Taxes. Each Consolidated Party has filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed and paid (a) all amounts of taxes shown thereon to be due (including interest and penalties) and (b) all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owing by it, except for such taxes (i) which are not yet delinquent or (ii) that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP. No Credit Party is aware as of the Closing Date of any proposed tax assessments against it or any other Consolidated Party that if made would have or could reasonably be expected to have a Material Adverse Effect. 6.11 Compliance with Law. Each Consolidated Party is in compliance with all Requirements of Law and all other laws, rules, regulations, orders and decrees (including without limitation Environmental Laws) applicable to it, or to its properties, unless such failure to comply could not have a Material Adverse Effect. 6.12 ERISA. Except as disclosed and described in Schedule 6.12 attached hereto: (a) During the five-year period prior to the date on which this representation is made or deemed made: (i) no ERISA Event has occurred, and, to the best knowledge of the Credit Parties, no event or condition has occurred or exists as a result of which any ERISA Event could reasonably be expected to occur, with respect to any Plan; (ii) no "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Code, and any other applicable federal or state laws; and (iv) no lien in favor of the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan. (b) The actuarial present value of all "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA), whether or not vested, under each Single Employer Plan, as of the last annual valuation date prior to the date on which this representation is made or deemed made (determined, in each case, in accordance with Financial Accounting Standards Board Statement 87, utilizing the actuarial assumptions used in such Plan's most recent actuarial valuation report), did not exceed as of such valuation date the fair market value of the assets of such Plan. (c) Neither any Consolidated Party nor any ERISA Affiliate has incurred, or, to the best knowledge of the Credit Parties, could be reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither any Consolidated Party nor any ERISA Affiliate would become subject to any withdrawal liability under ERISA if any Consolidated Party or any ERISA Affiliate were to withdraw completely from all Multiemployer Plans and Multiple Employer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. Neither any Consolidated Party nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit Parties, reasonably expected to be in reorganization, insolvent, or terminated. (d) No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has occurred with respect to a Plan which has subjected or may subject any Consolidated Party or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which any Consolidated Party or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability. 50 (e) Neither any Consolidated Party nor any ERISA Affiliates has any material liability with respect to "expected post-retirement benefit obligations" within the meaning of the Financial Accounting Standards Board Statement 106. Each Plan which is a welfare plan (as defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply has been administered in compliance in all material respects of such sections. (f) Neither the execution and delivery of this Credit Agreement nor the consummation of the financing transactions contemplated thereunder will involve any transaction which is subject to the prohibitions of Sections 404, 406 or 407 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code. The representation by the Credit Parties in the preceding sentence is made in reliance upon and subject to the accuracy of the Lenders' representation in Section 11.14 with respect to their source of funds and is subject, in the event that the source of the funds used by the Lenders in connection with this transaction is an insurance company's general asset account, to the application of Prohibited Transaction Class Exemption 95-60, 60 Fed. Reg. 35,925 (1995), compliance with the regulations issued under Section 401(c)(1)(A) of ERISA, or the issuance of any other prohibited transaction exemption or similar relief, to the effect that assets in an insurance company's general asset account do not constitute assets of an "employee benefit plan" within the meaning of Section 3(3) of ERISA of a "plan" within the meaning of Section 4975(e)(1) of the Code. 6.13 Subsidiaries. Set forth on Schedule 6.13 is a complete and accurate list of all Subsidiaries (including Subsidiaries which are Joint Ventures) of each Consolidated Party. Information on Schedule 6.13 includes jurisdiction of incorporation, the number of shares of each class of Capital Stock outstanding, the number and percentage of outstanding shares of each class owned (directly or indirectly) by such Consolidated Party; and the number and effect, if exercised, of all outstanding options, warrants, rights of conversion or purchase and all other similar rights with respect thereto. The outstanding Capital Stock of all such Subsidiaries is validly issued, fully paid and non-assessable and is owned by each such Consolidated Party, directly or indirectly, free and clear of all Liens (other than those arising under or contemplated in connection with the Credit Documents). Other than as set forth in Schedule 6.13, no Consolidated Party has outstanding any securities convertible into or exchangeable for its Capital Stock nor does any such Person have outstanding any rights to subscribe for or to purchase or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to its Capital Stock. Schedule 6.13 may be updated from time to time by the Borrower by giving written notice thereof to the Agent. 6.14 Governmental Regulations, Etc. (a) No part of the Letters of Credit or proceeds of the Loans will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation G or Regulation U, or for the purpose of purchasing or carrying or trading in any securities. If requested by any Lender or the Agent, the Borrower will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in Regulation U. No indebtedness being reduced or retired out of the proceeds of the Loans was or will be incurred for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U or any "margin security" within the meaning of Regulation T. "Margin stock" within the meaning of Regulation U does not constitute more than 25% of the value of the consolidated assets of the Consolidated Parties. None of the transactions contemplated by this Credit Agreement (including, without limitation, the direct or indirect use of the proceeds of the Loans) will violate or result in a violation of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or regulations issued pursuant thereto, or Regulation G, T, U or X. (b) No Consolidated Party is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940, each as amended. In addition, no Consolidated Party is (i) an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company, or (ii) a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of 51 a "subsidiary" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (c) No director, executive officer or principal shareholder of any Consolidated Party is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms "director", "executive officer" and "principal shareholder" (when used with reference to any Lender) have the respective meanings assigned thereto in Regulation O issued by the Board of Governors of the Federal Reserve System. (d) Each Consolidated Party has obtained and holds in full force and effect, all franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals which are necessary for the ownership of its respective Property and to the conduct of its respective businesses as presently conducted unless the failure to do so would not have a Material Adverse Effect. (e) No Consolidated Party is in violation of any applicable statute, regulation or ordinance of the United States of America, or of any state, city, town, municipality, county or any other jurisdiction, or of any agency thereof (including without limitation, environmental laws and regulations), which violation could reasonably be expected to have a Material Adverse Effect. (f) Each Consolidated Party is current with all material reports and documents, if any, required to be filed with any state or federal securities commission or similar agency and is in full compliance in all material respects with all applicable rules and regulations of such commissions unless the failure to do so would not have a Material Adverse Effect. 6.15 Purpose of Loans and Letters of Credit. The proceeds of the Revolving Loans and Tranche A Term Loan shall be used solely by the Borrower (i) to refinance on the Amendment No. 4 Effective Date existing Indebtedness under the Existing Credit Agreement and (ii) for working capital and general corporate purposes (other than Permitted Acquisitions and capital expenditures) of the Borrower and its Wholly Owned Subsidiaries on and after the Amendment No. 4 Effective Date. The proceeds of the Acquisition Loans shall be used solely by the Borrower to finance the purchase price of, and fees and expenses in connection with, Permitted Acquisitions and capital expenditures on and after the Amendment No. 4 Effective Date. The Letters of Credit shall be used only for or in connection with appeal bonds, reimbursement obligations arising in connection with surety and reclamation bonds, reinsurance, domestic or international trade transactions and obligations not otherwise aforementioned relating to transactions entered into by the applicable account party in the ordinary course of business. 6.16 Environmental Matters. Except as disclosed and described in Schedule 6.16 attached hereto, Environmental Laws and liabilities thereunder, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Each of the Properties owned, leased or operated by the Consolidated Parties is in compliance with all Environmental Laws except where liability under such Environmental Laws could not reasonably be expected to have a Material Adverse Effect. 6.17 Intellectual Property. Each Consolidated Party owns, or has the legal right to use, all trademarks, tradenames, copyrights, technology, know-how and processes (the "Intellectual Property") necessary for each of them to conduct its business as currently conducted except for those the failure to own or have such legal right to use could not have a Material Adverse Effect. Set forth on Schedule 6.17 is a list of all Intellectual Property owned by each Consolidated Party or that any Consolidated Party has the right to use. Except as provided on Schedule 6.17, no claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does any Credit Party know of any such claim, and to the Credit Parties' knowledge the use of such Intellectual Property by any Consolidated Party does not infringe on the rights of any 52 Person, except for such claims and infringements that in the aggregate, could not have a Material Adverse Effect. Schedule 6.17 may be updated from time to time by the Borrower by giving written notice thereof to the Agent. 6.18 Solvency. Each Credit Party is and, after consummation of the Recapitalization and the other transactions contemplated by this Credit Agreement, will be Solvent. 6.19 Investments. All Investments of each Consolidated Party are Permitted Investments. 6.20 Location of Collateral. Set forth on Schedule 6.20(a)(i) is a list of all Primary Real Properties with street address, county and state where located. Set forth on Schedule 6.20(a)(ii) is a list of all Secondary Real Properties with street address, county and state where located. Set forth on Schedule 6.20(b) is a list of all locations where any tangible personal property of a Consolidated Party is located, including county and state where located. Set forth on Schedule 6.20(c) is the chief executive office and principal place of business of each Consolidated Party. Schedule 6.20(a), 6.20(b) and 6.20(c) may be updated from time to time by the Borrower giving written notice thereof to the Agent. 6.21 Disclosure. Neither this Credit Agreement nor any financial statements delivered to the Lenders nor any other document, certificate or statement furnished to the Lenders by or on behalf of any Consolidated Party in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein, in light of the circumstances under which such information is or is to be used, not misleading. It is understood by the Agent and the Lenders that all of the estimates and assumptions on which any projections and forecasts are based may not prove to be correct and that actual future financial performance may vary from such projections or forecasts. 6.22 No Burdensome Restrictions. No Consolidated Party is a party to any agreement or instrument or subject to any other obligation or any charter or corporate restriction or any provision of any applicable law, rule or regulation which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 6.23 Brokers' Fees. Except as disclosed on Schedule 6.23, no Consolidated Party has any obligation to any Person in respect of any finder's, broker's, investment banking or other similar fee in connection with any of the transactions contemplated under the Credit Documents. 6.24 Labor Matters. There are no collective bargaining agreements or Multiemployer Plans covering the employees of a Consolidated Party as of the Closing Date and none of the Consolidated Parties has suffered any strikes, walkouts, work stoppages or other material labor difficulty within the last five years. 6.25 Nature of Business. As of the Closing Date, the Consolidated Parties are engaged in the business of providing diagnostic imaging services and ancillary services to the healthcare industry. 6.26 Year 2000 Compliance. 53 The Borrower has (i) conducted a review and assessment of its and of its Subsidiaries' reporting systems and operations that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications may not be able to recognize and properly perform date-sensitive functions after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. SECTION 7 AFFIRMATIVE COVENANTS Each Credit Party hereby covenants and agrees that so long as this Credit Agreement is in effect or any amounts payable hereunder or under any other Credit Document shall remain outstanding, and until all of the Commitments hereunder shall have terminated: 7.1 Information Covenants. The Borrower will furnish, or cause to be furnished, to the Agent and the Lenders: (a) Annual Financial Statements. As soon as available, and in any event within 90 days after the close of each fiscal year of the Consolidated Parties, a consolidated balance sheet and income statement of the Consolidated Parties, as of the end of such fiscal year, together with related consolidated statements of operations and retained earnings and of cash flows for such fiscal year, setting forth in comparative form consolidated figures for the preceding fiscal year, all such financial information described above to be in reasonable form and detail and audited by independent certified public accountants of recognized national standing reasonably acceptable to the Agent and whose opinion shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified as to the status of the Consolidated Parties as a going concern. (b) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the close of each fiscal quarter of the Consolidated Parties (other than the fourth fiscal quarter, in which case 90 days after the end thereof) a consolidated and consolidating balance sheet and income statement of the Consolidated Parties, as of the end of such fiscal quarter, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal quarter in each case setting forth in comparative form consolidated and consolidating figures for the corresponding period of the preceding fiscal year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Agent, and accompanied by a certificate of the chief financial officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Consolidated Parties and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments. (c) Officer's Certificate. At the time of delivery of the financial statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate of the chief financial officer of the Borrower substantially in the form of Exhibit 7.1(c), (i) demonstrating compliance with the financial covenants contained in Section 7.11 by calculation thereof as of the end of each such fiscal period and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Credit Parties propose to take with respect thereto. (d) Annual Budgets and Plan. By the end of each fiscal year of the Borrower, beginning with the fiscal year ending June 30, 1998, an annual budget and plan for the Consolidated Parties containing, among other things, pro forma financial statements for the next fiscal year. (e) Compliance With Certain Provisions of the Credit Agreement. Within 90 days after the end of each fiscal year of the Borrower, a certificate containing information regarding (i) the calculation of Excess 54 Cash Flow and (ii) the amount of all Asset Dispositions, Debt Issuances and Equity Issuances that were made during the prior fiscal year. (f) Accountant's Certificate. Within the period for delivery of the annual financial statements provided in Section 7.1(a), a certificate of the accountants conducting the annual audit stating that they have reviewed this Credit Agreement and stating further whether, in the course of their audit, they have become aware of any Default or Event of Default and, if any such Default or Event of Default exists, specifying the nature and extent thereof. (g) Auditor's Reports. Promptly upon receipt thereof, a copy of any other report or "management letter" submitted by independent accountants to any Consolidated Party in connection with any annual, interim or special audit of the books of such Person. (h) Reports. Promptly upon transmission or receipt thereof, (i) copies of any filings and registrations with, and reports to or from, the Securities and Exchange Commission, or any successor agency, and copies of all financial statements, proxy statements, notices and reports as any Consolidated Party shall send to its shareholders or to a holder of any Indebtedness owed by any Consolidated Party in its capacity as such a holder and (ii) upon the request of the Agent, all reports and written information to and from the United States Environmental Protection Agency, or any state or local agency responsible for environmental matters, the United States Occupational Health and Safety Administration, or any state or local agency responsible for health and safety matters, or any successor agencies or authorities concerning environmental, health or safety matters. (i) Notices. Upon obtaining knowledge thereof, the Borrower will give written notice to the Agent immediately of (i) the occurrence of an event or condition consisting of a Default or Event of Default, specifying the nature and existence thereof and what action the Credit Parties propose to take with respect thereto, and (ii) the occurrence of any of the following with respect to any Consolidated Party (A) the pendency or commencement of any litigation, arbitral or governmental proceeding against such Person which if adversely determined is likely to have a Material Adverse Effect, (B) the institution of any proceedings against such Person with respect to, or the receipt of notice by such Person of potential liability or responsibility for violation, or alleged violation of any federal, state or local law, rule or regulation, including but not limited to, Environmental Laws, the violation of which could reasonably be expected to have a Material Adverse Effect, or (C) any notice or determination concerning the imposition of any withdrawal liability by a Multiemployer Plan against such Person or any ERISA Affiliate, the determination that a Multiemployer Plan is, or is expected to be, in reorganization within the meaning of Title IV of ERISA or the termination of any Plan. (j) ERISA. Upon obtaining knowledge thereof, the Borrower will give written notice to the Agent promptly (and in any event within five business days) of: (i) of any event or condition, including, but not limited to, any Reportable Event, that constitutes, or could reasonably lead to, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Borrower or any of its ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which any Consolidated Party or any ERISA Affiliate is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Code with respect thereto; or (iv) any change in the funding status of any Plan that could reasonably be expected to have a Material Adverse Effect, together with a description of any such event or condition or a copy of any such notice and a statement by the chief financial officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken by the Credit Parties with respect thereto. Promptly upon request, the Credit Parties shall furnish the Agent and the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Code, respectively, for each "plan year" (within the meaning of Section 3(39) of ERISA). 55 (k) Year 2000 Compliance. Promptly upon the discovery or determination that any computer application that is material to its or any of its Subsidiaries' business and operations will not be "Year 2000 Compliant" (that is, be able to properly perform date-sensitive functions for all dates before and after January 1, 2000), except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. (l) Other Information. With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of any Consolidated Party as the Agent or the Required Lenders may reasonably request. 7.2 Preservation of Existence and Franchises. Except as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, each Credit Party will, and will cause each of its Subsidiaries to, do all things necessary to preserve and keep in full force and effect its existence, rights, franchises and authority if the failure to do so could reasonably be expected to have a Material Adverse Effect. 7.3 Books and Records. Each Credit Party will, and will cause each of its Subsidiaries to, keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves). 7.4 Compliance with Law. Each Credit Party will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its Property if noncompliance with any such law, rule, regulation, order or restriction could reasonably be expected to have a Material Adverse Effect. 7.5 Payment of Taxes and Other Indebtedness. Each Credit Party will, and will cause each of its Subsidiaries to, pay and discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) except as prohibited hereunder, all of its other Indebtedness as it shall become due; provided, however, that no Consolidated Party shall be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (i) could give rise to an immediate right to foreclose on a Lien securing such amounts or (ii) could reasonably be expected to have a Material Adverse Effect. 7.6 Insurance. (a) Each Credit Party will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance (including worker's compensation insurance, liability insurance, casualty insurance and business interruption insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice (or as otherwise required by the Collateral Documents). The Agent shall be named as loss payee or mortgagee, as its interest may appear, and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Agent, that it will use good faith efforts to give the Agent thirty (30) days prior written notice before any such policy or policies shall be altered or canceled, and that no act or default of any Consolidated Party or any other Person shall affect the rights of the Agent or the Lenders under such policy or policies. The present insurance coverage of the 56 Consolidated Parties is outlined as to carrier, policy number, expiration date, type and amount on Schedule 7.6. (b) In case of any material loss, damage to or destruction of the Collateral of any Credit Party or any part thereof, such Credit Party shall promptly give written notice thereof to the Agent generally describing the nature and extent of such damage or destruction. In case of any loss, damage to or destruction of the Collateral of any Credit Party or any part thereof, such Credit Party, whether or not the insurance proceeds, if any, received on account of such damage or destruction shall be sufficient for that purpose, at such Credit Party's cost and expense, will promptly repair or replace the Collateral of such Credit Party so lost, damaged or destroyed; provided, however, that such Credit Party need not repair or replace the Collateral of such Credit Party so lost, damaged or destroyed to the extent the failure to make such repair or replacement (i) is desirable to the proper conduct of the business of such Credit Party in the ordinary course and otherwise in the best interest of such Credit Party; and (ii) would not materially impair the rights and benefits of the Agent or the Lenders under the Collateral Documents, any other Credit Document or any Hedging Agreement. In the event a Credit Party shall receive any proceeds of such insurance in a net amount in excess of $500,000, such Credit Party will immediately pay over such proceeds to the Agent, for payment on the Credit Party Obligations; provided, however, that the Agent agrees to release such insurance proceeds to such Credit Party for replacement or restoration of the portion of the Collateral of such Credit Party lost, damaged or destroyed if, but only if, (A) no Default or Event of Default shall have occurred and be continuing at the time of release, (B) written application for such release is received by the Agent from such Credit Party within 30 days of receipt of such proceeds and (C) the Agent has received evidence reasonably satisfactory to it that the Collateral lost, damaged or destroyed has been or will be replaced or restored to its condition immediately prior to the loss, destruction or other event giving rise to the payment of such insurance proceeds. 7.7 Maintenance of Property. Each Credit Party will, and will cause each of its Subsidiaries to, maintain and preserve its properties and equipment material to the conduct of its business in good repair, working order and condition, normal wear and tear and casualty and condemnation excepted, and will make, or cause to be made, in such properties and equipment from time to time all repairs, renewals, replacements, extensions, additions, betterments and improvements thereto as may be needed or proper, to the extent and in the manner customary for companies in similar businesses. 7.8 Performance of Obligations. Each Credit Party will, and will cause each of its Subsidiaries to, perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound. 7.9 Use of Proceeds. The Borrower will use the proceeds of the Loans and will use the Letters of Credit solely for the purposes set forth in Section 6.15. 7.10 Audits/Inspections. Upon reasonable notice and during normal business hours, each Credit Party will, and will cause each of its Subsidiaries to, permit representatives appointed by the Agent, including, without limitation, independent accountants, agents, attorneys, and appraisers to visit and inspect its property, including its books and records, its accounts receivable and inventory, its facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Agent or its representatives to investigate and verify the accuracy of information provided to the Lenders and to discuss all such matters with the officers, employees and representatives of such Person. The Credit Parties agree that the Agent, and its representatives, may conduct an annual audit of the Collateral, at the expense of the Borrower. 57 7.11 Financial Covenants. The Credit Parties hereby agree that: (a) Interest Coverage Ratio. The Interest Coverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be greater than or equal to: (i) for the period from the Amendment No. 4 Effective Date to and including June 29, 2001, 2.0 to 1.0; (ii) for the period from June 30, 2001 to and including June 29, 2002, 2.25 to 1.0; (iii) for the period from June 30, 2002 to and including June 29, 2003, 2.50 to 1.0; (iv) for the period from June 30, 2003 to and including June 29, 2004, 2.75 to 1.0; and (v) for the period from June 30, 2004 and thereafter, 3.0 to 1.0. (b) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be greater than or equal to 1.1 to 1.0. (c) Total Leverage Ratio. The Total Leverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be less than or equal to: (i) for the period from the Amendment No. 4 Effective Date to and including June 29, 2001, 4.5 to 1.0; (ii) for the period from June 30, 2001 to and including June 29, 2002, 4.0 to 1.0; (iii) for the period from June 30, 2002 to and including June 29, 2003, 3.5 to 1.0; and (iv) for the period from June 30, 2003 and thereafter, 3.0 to 1.0. (d) Senior Leverage Ratio. The Senior Leverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be less than or equal: (i) for the period from the Amendment No. 4 Effective Date to and including June 29, 2001, 3.0 to 1.0; (ii) for the period from June 30, 2001 to and including June 29, 2002, 2.5 to 1.0; and (iii) for the period from June 30, 2002 and thereafter, 2.0 to 1.0. (e) Certain Calculation Procedures. The parties hereto acknowledge and agree that, notwithstanding any other provision hereof to the contrary, for purposes of all calculations made in determining compliance with the financial covenants set forth in this Section 7.11, (i)(A) income statement items (whether positive or negative) attributable to the Property disposed of in any Asset Disposition as contemplated by Section 8.5, as applicable, shall be excluded to the extent relating to any period occurring prior to the date of such transaction and (B) Indebtedness which is retired in connection with any such Asset Disposition shall be excluded and deemed to have been retired as of the first day of the applicable period and (ii) income statement items (whether positive or negative) attributable to any Property acquired in any Investment transaction (including without limitation any Permitted Acquisition) contemplated by Section 8.6 shall be included to the extent relating to any period applicable in such calculations occurring after the date of such transaction (and, notwithstanding the foregoing, during the first four fiscal quarters following the date of such transaction, shall be included on an annualized basis). 58 7.12 Additional Credit Parties. As soon as practicable and in any event within 30 days after any Person which is not a Joint Venture becomes a Subsidiary of any Credit Party, the Borrower shall provide the Agent with written notice thereof setting forth information in reasonable detail describing all of the assets of such Person and shall (a) cause such Person to execute a Joinder Agreement in substantially the same form as Exhibit 7.12, (b) cause all of the Capital Stock of such Person owned by the Consolidated Parties to be delivered to the Agent (together with undated stock powers signed in blank) and pledged to the Agent pursuant to an appropriate pledge agreement(s) in substantially the form of the Pledge Agreement and otherwise in form acceptable to the Agent and (c) cause such Person to (i) if such Person owns or leases any real property located in the United States of America or deemed to be material by the Agent or the Required Lenders in its or their sole reasonable discretion, deliver to the Agent with respect to such real property documents, instruments and other items of the types required to be delivered pursuant to Section 5.2(c) all in form, content and scope reasonably satisfactory to the Agent and (ii) deliver such other documentation as the Agent may reasonably request in connection with the foregoing, including, without limitation, appropriate UCC-1 financing statements, real estate title insurance policies, environmental reports, landlord's waivers, certified resolutions and other organizational and authorizing documents of such Person, favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above and the perfection of the Agent's liens thereunder) and other items of the types required to be delivered pursuant to Section 5.2(b), all in form, content and scope reasonably satisfactory to the Agent. 7.13 Pledged Assets. Each Credit Party will, and will cause each of its Subsidiaries which is not a Joint Venture to, cause (i) all of its owned real and personal property located in the United States, (ii) to the extent deemed to be material by the Agent or the Required Lenders in its or their sole reasonable discretion, all of its other owned real and personal property and (iii) all of its leased real property located in the United States, to be subject at all times to first priority (subject to Permitted Liens), perfected and, in the case of real property (whether leased or owned), title insured Liens in favor of the Agent pursuant to the terms and conditions of the Collateral Documents or, with respect to any such property acquired subsequent to the Closing Date, such other additional security documents as the Agent shall reasonably request. With respect to any real property (whether leased or owned) located in the United States of America acquired by any direct or indirect Subsidiary of the Borrower which is not a Joint Venture subsequent to the Closing Date, such Person will cause to be delivered to the Agent with respect to such real property: (i) if the value of such real property is greater than or equal to $1,000,000, documents, instruments and other items of the types required to be delivered pursuant to Section 7.15(a)(i)-(iv) in form acceptable to the Agent and (ii) if the value of such real property is greater than $250,000 but less than $1,000,000, documents, instruments and other items of the types required to be delivered pursuant to Section 7.15(a)(ii) and (iv) in a form acceptable to Agent. Without limiting the generality of the above, the Credit Parties will cause 100% of the Capital Stock in each direct or indirect Subsidiary of the Borrower which is not a Joint Venture to be subject at all times to a first priority (subject to Permitted Liens), perfected Lien in favor of the Agent pursuant to the terms and conditions of the Collateral Documents or such other security documents as the Agent shall reasonably request. If, subsequent to the Closing Date, a Credit Party shall (a) acquire any intellectual property, securities, instruments, chattel paper or other personal property required to be delivered to the Agent as Collateral hereunder or under any of the Collateral Documents or (b) acquire or lease any real property, the Borrower shall promptly (and in any event within three (3) Business Days) after any Executive Officer of a Credit Party acquires knowledge of same notify the Agent of same. Each Credit Party shall, and shall cause each of its Subsidiaries to, take such action (including but not limited to the actions set forth in Sections 5.2(a) and Section 7.15 (as qualified by this Section 7.13)) at its own expense as requested by the Agent to ensure that the Agent has a first priority (subject to Permitted Liens), perfected Lien to secure the Credit Party Obligations in (i) all owned real property and personal property of the Credit Parties located in the United States, (ii) to the extent deemed to be material by the Agent or the Required Lenders in its or their sole reasonable discretion, all other owned real and personal property of the Credit Parties and (iii) all leased real property located in the United States, subject in each case only to Permitted Liens. Each Credit Party shall, and shall cause each of its Subsidiaries to, adhere to the covenants regarding the location of personal property as set forth in the Security Agreements. 59 7.14 Upstreaming of Income from Joint Ventures. The Credit Parties will cause each of the Joint Ventures to distribute to the Borrower from time to time (and in any event at least once during each fiscal year of the Borrower) the Borrower's share of the net income before taxes for such period (as determined in accordance with GAAP) of such Joint Venture. 7.15 Further Assurances. (a) Within 90 days after the Amendment No. 4 Effective Date, the Credit Parties shall have delivered to the Agent: (i) fully executed and notarized mortgages, deeds of trust or deeds to secure debt (each, as the same may be amended, modified, restated or supplemented from time to time, a "Mortgage Instrument" and collectively the "Mortgage Instruments") encumbering the fee interest and/or leasehold interest of any Credit Party in each real property asset designated in Schedule 6.20(a)(i) (each a "Primary Real Property" and collectively the "Primary Real Properties"); (ii) in the case of each leasehold interest of any Credit Party in each real property asset designated in Schedule 6.20(a)(ii) (each a "Secondary Real Property" and collectively "Secondary Real Properties") or Primary Real Property (each Primary Real Property or Secondary Real Property a "Real Property" and collectively the "Real Properties"), (a) such estoppel letters, consents and waivers from the landlords on such real property as may be required by the Agent, which estoppel letters shall be in the form and substance reasonably satisfactory to the Agent and (b) evidence that the applicable lease, a memorandum of lease with respect thereto, or other evidence of such lease in form and substance reasonably satisfactory to the Agent, has been or will be recorded in all places to the extent necessary or desirable, in the reasonable judgment of the Agent, so as to enable the Mortgage Instrument encumbering such leasehold interest to effectively create a valid and enforceable first priority lien (subject to Permitted Liens) on such leasehold interest in favor of the Agent (or such other Person as may be required or desired under local law) for the benefit of Lenders; (iii) ALTA mortgagee title insurance policies issued by Chicago Title Insurance Company (the "Mortgage Policies"), in amounts reasonably satisfactory to the Agent, assuring the Agent that each of the Mortgage Instruments creates a valid and enforceable first priority mortgage lien on the applicable Primary Real Property, free and clear of all defects and encumbrances except Permitted Liens, which Mortgage Policies shall be in form and substance reasonably satisfactory to the Agent and shall provide for affirmative insurance and such reinsurance as the Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to the Agent; and (iv) Evidence satisfactory to the Agent that each of the Real Properties, and the uses of the Real Properties, are in compliance in all material respects with all applicable laws, regulations and ordinances including without limitation health and environmental protection laws, erosion control ordinances, storm drainage control laws, doing business and/or licensing laws, zoning laws (the evidence submitted as to zoning should include the zoning designation made for each of the Real Properties, the permitted uses of each such Real Properties under such zoning designation and zoning requirements as to parking, lot size, ingress, egress and building setbacks) and laws regarding access and facilities for disabled persons including, but not limited to, the federal Architectural Barriers Act, the Fair Housing Amendments Act of 1988, the Rehabilitation Act of 1973 and the Americans with Disabilities Act of 1990. (b) On or before January 31,1998, the Credit Parties shall deliver to the Agent (i) evidence satisfactory to the Agent that the good standing status of each Subsidiary identified in Schedule 6.13 as not being in good standing in any listed jurisdiction has been reinstated to good standing status in each such jurisdiction and (ii) evidence satisfactory to the Agent that each Subsidiary identified in Schedule 6.13 as 60 having incomplete tax data available for any listed jurisdiction is in good tax standing in each such jurisdiction. (c) On or before February 16, 1998, the Credit Parties shall deliver to the Agent all documents and information of the types described in Section 7.15(a) with respect to the real property portion of the MD Assets. SECTION 8 NEGATIVE COVENANTS Each Credit Party hereby covenants and agrees that, so long as this Credit Agreement is in effect or any amounts payable hereunder or under any other Credit Document shall remain outstanding, and until all of the Commitments hereunder shall have terminated: 8.1 Indebtedness. The Credit Parties will not permit any Consolidated Party to contract, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness arising under this Credit Agreement and the other Credit Documents; (b) Indebtedness of the Borrower and its Subsidiaries set forth in Schedule 8.1 (and renewals, refinancings and extensions thereof on terms and conditions no less favorable to such Person than such existing Indebtedness); (c) (i) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by the Borrower or any of its Subsidiaries which is not a Joint Venture other than Open MRI or Central Coast to finance the purchase of fixed assets provided that (A) the total of all such Indebtedness for all such Persons taken together shall not exceed an aggregate principal amount of $10,000,000 (excluding any such Indebtedness of the Borrower or any of its Subsidiaries other than Open MRI or Central Coast referred to in subsection (b) above) at any one time outstanding; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (ii) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by Open MRI to finance the purchase of fixed assets provided that (A) the total outstanding principal of all such Indebtedness (including any such Indebtedness of Open MRI referred to in subsection (b) above), taken together with the aggregate original equipment cost of all Property leased by Open MRI under Operating Leases, shall not exceed at any time an aggregate principal amount of $20,000,000; (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (iii) purchase money Indebtedness (including Capital Leases and Synthetic Leases) hereafter incurred by Central Coast to finance the purchase of fixed assets provided that (A) the total outstanding principal of all such Indebtedness shall not exceed at any time an aggregate principal amount of $6,000,000 (including any such Indebtedness of Central Coast referred to in subsection (b) above); (B) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (C) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; 61 (d) obligations of the Borrower or any of its Subsidiaries in respect of Hedging Agreements entered into in order to manage existing or anticipated interest rate or exchange rate risks and not for speculative purposes; (e) intercompany Indebtedness arising out of loans and advances permitted under Section 8.6; (f) Indebtedness in an aggregate principal amount not to exceed $100,000,000 arising under the Subordinated Note Indenture and the Subordinated Notes, and Guaranty Obligations with respect to such Indebtedness; (g) in addition to the Indebtedness otherwise permitted by this Section 8.1, other unsecured Indebtedness hereafter incurred by the Borrower provided that (A) the loan documentation with respect to such Indebtedness shall not contain covenants or default provisions relating to any Consolidated Party that are more restrictive than the covenants and default provisions contained in the Credit Documents, (B) the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to the incurrence of such Indebtedness and to the concurrent retirement of any other Indebtedness of any Consolidated Party, no Default or Event of Default would exist hereunder and (C) the aggregate principal amount of such Indebtedness shall not exceed $2,500,000 at any time. 8.2 Liens. The Credit Parties will not permit any Consolidated Party to contract, create, incur, assume or permit to exist any Lien with respect to any of its Property, whether now owned or after acquired, except for Permitted Liens. 8.3 Nature of Business. The Credit Parties will not permit any Consolidated Party to substantively alter the character or conduct of the business conducted by such Person as of the Closing Date. 8.4 Consolidation, Merger, Dissolution, etc. Except in connection with an Asset Disposition permitted by the terms of Section 8.5, the Credit Parties will not permit any Consolidated Party to enter into any transaction of merger or consolidation or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that, notwithstanding the foregoing provisions of this Section 8.4, (a) the Borrower may merge or consolidate with any of its Wholly Owned Subsidiaries provided that (i) the Borrower shall be the continuing or surviving corporation, (ii) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (iii) the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (b) any Credit Party other than the Borrower may merge or consolidate with any other Credit Party other than the Borrower provided that (i) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (ii) the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (c) any Consolidated Party which is not a Credit Party may be merged or consolidated with or into any Credit Party provided that (i) such Credit Party shall be the continuing or surviving corporation, (ii) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (iii) the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (d) any Consolidated Party which is not a Credit Party may be merged or consolidated with or into any other Consolidated Party which is not a Credit Party provided the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist, (e) the Borrower or any Wholly 62 Owned Subsidiary of the Borrower may merge with any Person other than a Consolidated Party in connection with a Permitted Acquisition if (i) the Borrower or such Wholly Owned Subsidiary shall be the continuing or surviving corporation, (ii) the Credit Parties shall cause to be executed and delivered such documents, instruments and certificates as the Agent may request so as to cause the Credit Parties to be in compliance with the terms of Section 7.13 after giving effect to such transaction and (iii) the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist and (f) any Wholly Owned Subsidiary of the Borrower may dissolve, liquidate or wind up its affairs at any time. 8.5 Asset Dispositions. The Credit Parties will not permit any Consolidated Party to make any Asset Disposition (including, without limitation, any Sale and Leaseback Transaction) other than Excluded Asset Dispositions unless (a) the consideration paid in connection therewith is cash or Cash Equivalents, (b) if such transaction is a Sale and Leaseback Transaction, such transaction is permitted by the terms of Section 8.13, (c) such transaction does not involve the sale or other disposition of a minority equity interest in any Consolidated Party, (d) the aggregate net book value of all of the assets sold or otherwise disposed of by the Consolidated Parties in all such transactions after the Closing Date shall not exceed $2,500,000, (e) if the book value of the assets disposed of pursuant to such Asset Disposition exceeds $1,000,000, the Borrower shall have delivered to the Agent a Pro Forma Compliance Certificate demonstrating that, upon giving effect on a Pro Forma Basis to such transaction, no Default or Event of Default would exist hereunder, and (f) no later than 15 days prior to such Asset Disposition, the Agent and the Lenders shall have received a certificate of an officer of the Borrower specifying the anticipated or actual date of such Asset Disposition, briefly describing the assets to be sold or otherwise disposed of and setting forth the net book value of such assets, the aggregate consideration and the Net Cash Proceeds to be received for such assets in connection with such Asset Disposition, and thereafter the Borrower shall, within the period of 30 days following the consummation of such Asset Disposition (with respect to any such Asset Disposition, the "Application Period"), apply (or cause to be applied) an amount equal to the Net Cash Proceeds of such Asset Disposition to (i) the purchase, acquisition or, in the case of improvements to real property, construction of Eligible Assets or (ii) to the prepayment of the Loans in accordance with the terms of Section 3.3(b)(iii). Upon a sale of assets or the sale of Capital Stock of a Consolidated Party permitted by this Section 8.5, the Agent shall (to the extent applicable) deliver to the Borrower, upon the Borrower's request and at the Borrower's expense, such documentation as is reasonably necessary to evidence the release of the Agent's security interest, if any, in such assets or Capital Stock, including, without limitation, amendments or terminations of UCC financing statements, if any, the return of stock certificates, if any, and the release of such Subsidiary from all of its obligations, if any, under the Credit Documents. 8.6 Investments. The Credit Parties will not permit any Consolidated Party to make Investments in or to any Person, except for Permitted Investments. 8.7 Restricted Payments. The Credit Parties will not permit any Consolidated Party which is not a Joint Venture to, directly or indirectly, declare, order, make or set apart any sum for or pay any Restricted Payment, except (a) to make dividends payable solely in the same class of Capital Stock of such Person and, in connection with any such stock dividend, to make cash dividends in respect of fractional shares, (b) to make dividends or other distributions payable to any Credit Party (directly or indirectly through Subsidiaries), (c) as permitted by Section 8.8, (d) pursuant to the terms of either of the Investment Agreements, any payments made in connection with the Recapitalization, (e) to purchase, redeem or otherwise acquire shares of its Capital Stock, or warrants or options to acquire any such shares, with the proceeds received from the substantially concurrent issue of its Capital Stock and (f) provided that no Default or Event of Default has occurred and is continuing at such time or would be directly or indirectly caused as a result thereof, to make interest payments in respect of Indebtedness arising under the Subordinated Note Indenture and the Subordinated Notes, including payment of accrued interest and premium, if any, payable in connection with a redemption of the Subordinated Notes permitted under Section 8.8. 63 8.8 Prepayments of Indebtedness, etc. The Credit Parties will not permit any Consolidated Party which is not a Joint Venture to, (a) if any Default or Event of Default has occurred and is continuing or would be directly or indirectly caused as a result thereof (i) after the issuance thereof, amend or modify (or permit the amendment or modification of) any of the terms of any Indebtedness if such amendment or modification would add or change any terms in a manner adverse to the issuer of such Indebtedness, or shorten the final maturity or average life to maturity or require any payment to be made sooner than originally scheduled or increase the interest rate applicable thereto or change any subordination provision thereof, or (ii) except for the exchange of the Subordinated Notes for notes with identical terms registered pursuant to the registration rights agreement set forth in the Subordinated Note Indenture, make (or give any notice with respect thereto) any voluntary or optional payment or prepayment or redemption or acquisition for value of (including without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), refund, refinance or exchange of any other Indebtedness (including without limitation any Indebtedness arising under the Subordinated Note Indenture and the Subordinated Notes), (b) except for the exchange of the Subordinated Notes for notes with identical terms registered pursuant to the registration rights agreement set forth in the Subordinated Note Indenture, make (or give any notice with respect thereto) any voluntary or optional payment or prepayment, redemption, acquisition for value or defeasance of (including without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), refund, refinance or exchange of any Indebtedness arising under the Subordinated Note Indenture and the Subordinated Notes or (c) make interest payments in respect of the Indebtedness arising under the Subordinated Note Indenture in violation of the subordination provisions of the Subordinated Note Indenture. 8.9 Transactions with Affiliates. The Credit Parties will not permit any Consolidated Party to enter into or permit to exist any transaction or series of transactions with any officer, director, shareholder, Subsidiary or Affiliate of such Person other than (a) advances of working capital to any Credit Party, (b) transfers of cash and assets to any Credit Party, (c) transactions permitted by Section 8.1, Section 8.4, Section 8.5, Section 8.6, or Section 8.7, (d) transactions contemplated by the Investment Agreements, including any and all payments required to be paid pursuant to the terms thereof, (e) normal compensation and reimbursement of expenses of officers and directors and (f) except as otherwise specifically limited in this Credit Agreement, other transactions which are entered into in the ordinary course of such Person's business on terms and conditions substantially as favorable to such Person as would be obtainable by it in a comparable arms-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate. 8.10 Fiscal Year; Organizational Documents. The Credit Parties will not permit any Consolidated Party to change its fiscal year or amend, modify or change its articles of incorporation (or corporate charter or other similar organizational document) or bylaws (or other similar document) without providing prior written notice to the Agent and the Lenders. 8.11 Limitation on Restricted Actions. The Credit Parties will not permit any Consolidated Party to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Person to (a) pay dividends or make any other distributions to any Credit Party on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Indebtedness or other obligation owed to any Credit Party, (c) make loans or advances to any Credit Party, (d) sell, lease or transfer any of its properties or assets to any Credit Party or (e) act as a Guarantor and pledge its assets pursuant to the Credit Documents or any renewals, refinancings, exchanges, refundings or extension thereof, except (in respect of any of the matters referred to in clauses (a)-(d) above) for such encumbrances or restrictions existing under or by reason of (i) this Credit Agreement and the other Credit Documents, (ii) the Subordinated Note Indenture and the Subordinated Notes, in each case as in effect as of the Amendment No. 4 Effective Date, (iii) applicable law, (iv) any document or instrument governing Indebtedness incurred pursuant to Section 8.1(c), provided that any such restriction contained therein relates only to the asset or assets constructed or acquired in connection therewith or (v) any Permitted Lien or any document or 64 instrument governing any Permitted Lien, provided that any such restriction contained therein relates only to the asset or assets subject to such Permitted Lien. 8.12 Ownership of Subsidiaries. Notwithstanding any other provisions of this Credit Agreement to the contrary, the Credit Parties will not permit any Consolidated Party to (i) permit any Person (other than the Borrower or any Wholly Owned Subsidiary of the Borrower) to own any Capital Stock of any Subsidiary of the Borrower which is not a Joint Venture, (ii) permit any Subsidiary of the Borrower which is not a Joint Venture to issue Capital Stock (except to the Borrower or to a Wholly-Owned Subsidiary of the Borrower), (iii) permit, create, incur, assume or suffer to exist any Lien on any Capital Stock, in each case except (A) as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5 or (B) for Permitted Liens and (iv) notwithstanding anything to the contrary contained in clause (ii) above, permit any Subsidiary of the Borrower which is not a Joint Venture to issue any shares of preferred Capital Stock. 8.13 Sale Leasebacks. The Credit Parties will not permit any Consolidated Party to, directly or indirectly, become or remain liable as lessee or as guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any Property (whether real, personal or mixed), whether now owned or hereafter acquired, (a) which such Consolidated Party has sold or transferred or is to sell or transfer to a Person which is not a Consolidated Party or (b) which such Consolidated Party intends to use for substantially the same purpose as any other Property which has been sold or is to be sold or transferred by such Consolidated Party to another Person which is not a Consolidated Party in connection with such lease; provided, however, notwithstanding the foregoing, so long as the Net Proceeds from the sale of any real property are applied to the prepayment of the Loans in accordance with the terms of Sections 3.3(b)(iii) and 3.3(b)(vii), InSight Health Corp. may, on or before July 31, 1998, enter into a Sale and Leaseback Transaction with respect to the real property portion of the MD Assets. 8.14 Capital Expenditures. (a) The Credit Parties will not permit Consolidated Capital Expenditures (excluding capital expenditures incurred by Open MRI and its Subsidiaries) to exceed $20,000,000 per fiscal year. (b) The Credit Parties will not permit the consolidated capital expenditures of Open MRI and its Subsidiaries, as determined in accordance with GAAP, to exceed $15,000,000 per fiscal year. 8.15 No Further Negative Pledges. The Credit Parties will not permit any Consolidated Party which is not a Joint Venture to enter into, assume or become subject to any agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for such obligation if security is given for some other obligation, except (a) pursuant to this Credit Agreement and the other Credit Documents, (b) pursuant to the Subordinated Note Indenture and the Subordinated Notes, in each case as in effect as of the applicable date of effectiveness, (c) pursuant to any document or instrument governing Indebtedness incurred pursuant to Section 8.1(c), provided that any such restriction contained therein relates only to the asset or assets constructed or acquired in connection therewith and (d) in connection with any Permitted Lien or any document or instrument governing any Permitted Lien, provided that any such restriction contained therein relates only to the asset or assets subject to such Permitted Lien. 8.16 Operating Lease Obligations. (a) The Credit Parties will not permit the aggregate obligations of the Consolidated Parties other than Open MRI which are not Joint Ventures for the payment of rental under Operating Leases (other than in respect of 65 Operating Leases existing as of the Closing Date and described in Schedule 8.16 (and renewals, refinancings and extensions thereof)) for any fiscal year to exceed at any time an aggregate principal amount of $2,500,000. (b) The Credit Parties will not permit the aggregate original equipment cost of all Property leased by Open MRI under Operating Leases, taken together with the outstanding principal of all purchase money Indebtedness (including Capital Leases and Synthetic Leases) of Open MRI permitted under Section 8.1(c)(ii), to exceed at any time an aggregate amount of $20,000,000. 8.17 No Foreign Subsidiaries. None of the Credit Party will create, acquire or permit to exist any direct or indirect Foreign Subsidiary. 8.18 Joint Venture Operations. The Credit Parties will not permit, as of as of the last day of each fiscal quarter, the portion of Consolidated EBITDA attributable to the Borrower and its Subsidiaries which are not Joint Ventures for the four quarters then ended to be less than 75% of Consolidated EBITDA for such period. SECTION 9 EVENTS OF DEFAULT 9.1 Events of Default. An Event of Default shall exist upon the occurrence of any of the following specified events (each an "Event of Default"): (a) Payment. Any Credit Party shall (i) default in the payment when due of any principal of any of the Loans or of any reimbursement obligations arising from drawings under Letters of Credit, or (ii) default, and such default shall continue for three (3) or more Business Days, in the payment when due of any interest on the Loans or on any reimbursement obligations arising from drawings under Letters of Credit, or of any Fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith or therewith; or (b) Representations. Any representation, warranty or statement made or deemed to be made by any Credit Party herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was deemed to have been made; or (c) Covenants. Any Credit Party shall (i) default in the due performance or observance of any term, covenant or agreement contained in Sections 7.2, 7.9, 7.11 or 8.1 through 8.18, inclusive; (ii) default in the due performance or observance of any term, covenant or agreement contained in Section 7.1(a), (b), (c) or (d), Section 7.12 or Section 7.13 and such default shall continue unremedied for a period of at least 5 days after the earlier of a responsible officer of a Credit Party becoming aware of such default or notice thereof by the Agent; or (iii) default in the due performance or observance by it of any other term, covenant or agreement (other than those referred to in subsections (a), (b), (c)(i) or (c)(ii) of this Section 9.1 66 hereof) contained in this Credit Agreement or the other Credit Documents (subject to applicable grace or cure periods, if any) and such default shall continue unremedied for a period of at least 30 days after the earlier of a responsible officer of a Credit Party becoming aware of such default or notice thereof by the Agent; or (d) Failure of Full Force and Effect. Except as a result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4 or Section 8.5, any Credit Document shall fail to be in full force and effect or to give the Agent and/or the Lenders the Liens, rights, powers and privileges purported to be created thereby, or any Credit Party shall so state in writing; or (e) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect to any Consolidated Party; or (f) Defaults under Other Agreements. With respect to any Indebtedness (other than Indebtedness outstanding under this Credit Agreement) having an outstanding principal amount in excess of $1,000,000 in the aggregate, (A) any Consolidated Party shall (1) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (2) the occurrence and continuance of a default in the observance or performance relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required), any such Indebtedness to become due prior to its stated maturity; or (B) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or (g) Judgments. One or more judgments or decrees shall be entered against one or more of the Consolidated Parties involving a liability of $1,000,000 or more in the aggregate (to the extent not paid or fully covered by insurance provided by a carrier who has acknowledged coverage and has the ability to perform) and any such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or (i) ERISA. Any of the following events or conditions, if such event or condition could reasonably be expected to have a Material Adverse Effect: (i) any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of any Consolidated Party or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) an ERISA Event shall occur with respect to a Single Employer Plan, which is, in the reasonable opinion of the Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable opinion of the Agent, likely to result in (A) the termination of such Plan for purposes of Title IV of ERISA, or (B) any Consolidated Party or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency or (within the meaning of Section 4245 of ERISA) such Plan; or (iv) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which may subject any Consolidated Party or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which any Consolidated Party or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability; or (j) Indemnification Claim under Investment Agreements. The Borrower shall be required to make any indemnification payment of $1,000,000 or more under Article VIII of either of the Investment Agreements (to the extent not paid or fully covered by insurance provided by a carrier who has acknowledged coverage and has the ability to perform) and any such indemnification payment shall remain unpaid for at least 60 days from the date of demand thereof; (k) Ownership. There shall occur a Change of Control; or 67 (l) Subordinated Note Indenture. (i) There shall occur and be continuing any Event of Default under and as defined in the Subordinated Note Indenture or (ii) any of the Credit Party Obligations for any reason shall cease to be "Designated Senior Indebtedness" under and as defined in the Subordinated Note Indenture. 9.2 Acceleration; Remedies. Upon the occurrence of an Event of Default, and at any time thereafter unless and until such Event of Default has been waived by the requisite Lenders (pursuant to the voting requirements of Section 11.6) or cured to the satisfaction of the requisite Lenders (pursuant to the voting procedures in Section 11.6), the Agent shall, upon the request and direction of the Required Lenders, by written notice to the Credit Parties take any of the following actions: (a) Termination of Commitments. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated. (b) Acceleration. Declare the unpaid principal of and any accrued interest in respect of all Loans, any reimbursement obligations arising from drawings under Letters of Credit and any and all other indebtedness or obligations of any and every kind owing by the Borrower to the Agent and/or any of the Lenders hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. (c) Cash Collateral. Direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default under Section 9.1(e), it will immediately pay) to the Agent additional cash, to be held by the Agent, for the benefit of the Lenders, in a cash collateral account as additional security for the LOC Obligations in respect of subsequent drawings under all then outstanding Letters of Credit in an amount equal to the maximum aggregate amount which may be drawn under all Letters of Credits then outstanding. (d) Enforcement of Rights. Enforce any and all rights and interests created and existing under the Credit Documents including, without limitation, all rights and remedies existing under the Collateral Documents, all rights and remedies against a Guarantor and all rights of set-off. Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(e) shall occur, then the Commitments shall automatically terminate and all Loans, all reimbursement obligations arising from drawings under Letters of Credit, all accrued interest in respect thereof, all accrued and unpaid Fees and other indebtedness or obligations owing to the Agent and/or any of the Lenders hereunder automatically shall immediately become due and payable without the giving of any notice or other action by the Agent or the Lenders. SECTION 10 AGENCY PROVISIONS 10.1 Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent under this Credit Agreement and the other Credit Documents with such powers and discretion as are specifically delegated to the Agent by the terms of this Credit Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 10.5 and the first sentence of Section 10.6 hereof shall include its Affiliates and its own and its Affiliates' officers, directors, employees, and agents): (a) shall not have any duties or responsibilities except those expressly set forth in this Credit Agreement and shall not be a trustee or fiduciary for any Lender; (b) shall not be responsible to the Lenders for any recital, statement, representation, or warranty (whether written or oral) made in or in connection with any Credit Document or any certificate or other document referred to or provided for in, or received by any of them under, any Credit Document, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of 68 any Credit Document, or any other document referred to or provided for therein or for any failure by any Credit Party or any other Person to perform any of its obligations thereunder; (c) shall not be responsible for or have any duty to ascertain, inquire into, or verify the performance or observance of any covenants or agreements by any Credit Party or the satisfaction of any condition or to inspect the property (including the books and records) of any Credit Party or any of its Subsidiaries or Affiliates; (d) shall not be required to initiate or conduct any litigation or collection proceedings under any Credit Document; and (e) shall not be responsible for any action taken or omitted to be taken by it under or in connection with any Credit Document, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. 10.2 Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice, instrument, writing, or other communication (including, without limitation, any thereof by telephone or telecopy) believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel for any Credit Party), independent accountants, and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until the Agent receives and accepts an Assignment and Acceptance executed in accordance with Section 11.3(b) hereof. As to any matters not expressly provided for by this Credit Agreement, the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding on all of the Lenders; provided, however, that the Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to any Credit Document or applicable law or unless it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking any such action. 10.3 Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or Event of Default unless the Agent has received written notice from a Lender or the Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default or Event of Default, the Agent shall give prompt notice thereof to the Lenders. The Agent shall (subject to Section 10.2 hereof) take such action with respect to such Default or Event of Default as shall reasonably be directed by the Required Lenders, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Lenders. 10.4 Rights as a Lender. With respect to its Commitment and the Loans made by it, NationsBank (and any successor acting as Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. NationsBank (and any successor acting as Agent) and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, make investments in, provide services to, and generally engage in any kind of lending, trust, or other business with any Credit Party or any of its Subsidiaries or Affiliates as if it were not acting as Agent, and NationsBank (and any successor acting as Agent) and its Affiliates may accept fees and other consideration from any Credit Party or any of its Subsidiaries or Affiliates for services in connection with this Credit Agreement or otherwise without having to account for the same to the Lenders. 10.5 Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed under Section 11.5 hereof, but without limiting the obligations of the Borrower under such Section) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys' fees), or disbursements of any kind and nature whatsoever that may be imposed on, 69 incurred by or asserted against the Agent (including by any Lender) in any way relating to or arising out of any Credit Document or the transactions contemplated thereby or any action taken or omitted by the Agent under any Credit Document (including any of the foregoing arising from the negligence of the Agent; provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Person to be indemnified. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any costs or expenses payable by the Borrower under Section 11.5, to the extent that the Agent is not promptly reimbursed for such costs and expenses by the Borrower. The agreements in this Section 10.5 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 10.6 Non-Reliance on Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Credit Parties and their Subsidiaries and decision to enter into this Credit Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Credit Documents. Except for notices, reports, and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition, or business of any Credit Party or any of its Subsidiaries or Affiliates that may come into the possession of the Agent or any of its Affiliates. 10.7 Successor Agent. The Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Borrower, with the consent of the Required Lenders (such consent not to be unreasonably withheld) shall have the right to appoint a successor Agent from among the Lenders. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a commercial bank organized under the laws of the United States of America having combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges, and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. SECTION 11 MISCELLANEOUS 11.1 Notices. Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (a) when delivered, (b) when transmitted via telecopy (or other facsimile device) to the number set out below, (c) the Business Day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (d) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address, in the case of the Borrower, Guarantors and the Agent, set forth below, and, in the case of the Lenders, set forth on Schedule 2.1(a), or at such other address as such party may specify by written notice to the other parties hereto: 70 if to the Borrower or the Guarantors: c/o Insight Health Services Corp. 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92660 Attn: Thomas V. Croal, CFO Telephone: (714) 476-0733 Telecopy: (714) 851-5981 with a copy to: TC Group, L.L.C. 1001 Pennsylvania Avenue Washington, DC 20004-2505 Attn: David Dupree Telephone: (202) 626-1250 Telecopy: (202) 347-1818 if to the Agent: NationsBank, N. A. Independence Center, 15th Floor NC1-001-15-04 101 North Tryon Street Charlotte, North Carolina 28255 Attn: Agency Services - Mike Roof Telephone: (704) 388-3916 Telecopy: (704) 386-9923 with a copy to: NationsBank, N. A. 700 Louisiana Street Houston, Texas 77002 Attn: Scott Singhoff Telephone: (713) 247-6961 Telecopy: (713) 247-6360 11.2 Right of Set-Off; Adjustments. Upon the occurrence and during the continuance of any Event of Default, each Lender (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender (or any of its Affiliates) to or for the credit or the account of any Credit Party against any and all of the obligations of such Person now or hereafter existing under this Credit Agreement, under the Notes, under any other Credit Document or otherwise, irrespective of whether such Lender shall have made any demand under hereunder or thereunder and although such obligations may be unmatured. Each Lender agrees promptly to notify any affected Credit Party after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 11.2 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. 71 11.3 Benefit of Agreement. (a) This Credit Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided that none of the Credit Parties may assign or transfer any of its interests and obligations without prior written consent of the Lenders; provided further that the rights of each Lender to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth in this Section 11.3. (b) Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Loans, its Notes, and its Commitment); provided, however, that (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to another Lender or an Approved Fund (as referred to in the definition of "Eligible Assignee") or an assignment of all of a Lender's rights and obligations under this Credit Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 (or, if less, the remaining amount of the Commitment being assigned by such Lender) or an integral multiple of $1,000,000 in excess thereof; (iii) each such assignment by a Lender shall be of a constant, and not varying, percentage of all of its rights and obligations under this Credit Agreement and the Notes; and (iv) the parties to such assignment shall execute and deliver to the Agent for its acceptance an Assignment and Acceptance in the form of Exhibit 11.3(b) hereto, together with any Note subject to such assignment and a processing fee of $3,500; provided that no such fee shall be payable in the case of an assignment by a Lender to (A) an Affiliate of such Lender or (B) an Approved Fund (as referred to in the definition of "Eligible Assignee") which is an Affiliate of such Lender. Upon execution, delivery, and acceptance of such Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Lender hereunder and the assigning Lender shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Credit Agreement. Upon the consummation of any assignment pursuant to this Section 11.3(b), the assignor, the Agent and the Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the assignee. If the assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of Taxes in accordance with Section 3.11. (c) The Agent shall maintain at its address referred to in Section 11.1 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit 11.3(b) hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the parties thereto. 72 (e) Each Lender may sell participations to one or more Persons in all or a portion of its rights, obligations or rights and obligations under this Credit Agreement (including all or a portion of its Commitment and its Loans); provided, however, that (i) such Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Sections 3.7 through 3.12, inclusive, and the right of set-off contained in Section 11.2, and (iv) the Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Credit Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to its Loans and its Notes and to approve any amendment, modification, or waiver of any provision of this Credit Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on such Loans or Notes, extending any scheduled principal payment date or date fixed for the payment of interest on such Loans or Notes, or extending its Commitment). (f) Notwithstanding any other provision set forth in this Credit Agreement, any Lender may at any time assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (g) Any Lender may furnish any information concerning the Borrower or any of its Subsidiaries in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants). 11.4 No Waiver; Remedies Cumulative. No failure or delay on the part of the Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Agent or any Lender and any of the Credit Parties shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle the Borrower or any other Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent or the Lenders to any other or further action in any circumstances without notice or demand. 11.5 Expenses; Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the syndication, preparation, execution, delivery, administration, modification, and amendment of this Credit Agreement, the other Credit Documents, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for the Agent (including the cost of internal counsel) with respect thereto and with respect to advising the Agent as to its rights and responsibilities under the Credit Documents. The Borrower further agrees to pay on demand all costs and expenses of the Agent and the Lenders, if any (including, without limitation, reasonable attorneys' fees and expenses and the cost of internal counsel), in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Credit Documents and the other documents to be delivered hereunder. (b) The Borrower agrees to indemnify and hold harmless the Agent and each Lender and each of their Affiliates and their respective officers, directors, employees, agents, and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, costs, and expenses (including, without limitation, reasonable attorneys' fees) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation, or proceeding or preparation of defense in connection therewith) the Credit Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loans (including any of the foregoing arising from the negligence of the Indemnified Party), except to the extent such claim, damage, loss, liability, cost, or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have 73 resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 11.5 applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Borrower agrees not to assert any claim against the Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys, agents, and advisers, on any theory of liability, for special, indirect, consequential, or punitive damages arising out of or otherwise relating to the Credit Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loans. (c) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 11.5 shall survive the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder. 11.6 Amendments, Waivers and Consents. Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing entered into by, or approved in writing by, the Required Lenders and the Borrower, provided, however, that: (a) without the consent of each Lender affected thereby, neither this Credit Agreement nor any other Credit Document may be amended to (i) extend the final maturity of any Loan or the time of payment of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit, or extend or waive any Principal Amortization Payment of any Loan, or any portion thereof, (ii) reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or Fees hereunder, (iii) reduce or waive the principal amount of any Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit, (v) increase the Commitment of a Lender over the amount thereof in effect (it being understood and agreed that a waiver of any Default or Event of Default or mandatory reduction in the Commitments shall not constitute a change in the terms of any Commitment of any Lender), (v) except as the result of or in connection with an Asset Disposition permitted by Section 8.5, release all or substantially all of the Collateral, (vi) except as the result of or in connection with a dissolution, merger or disposition of a Subsidiary permitted under Section 8.4, release the Borrower or substantially all of the other Credit Parties from its or their obligations under the Credit Documents, (vii) except amend, modify or waive any provision of this Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 9.1(a), 11.2, 11.3, 11.5 or 11.9, (viii) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders, or (ix) consent to the assignment or transfer by the Borrower or all or substantially all of the other Credit Parties of any of its or their rights and obligations under (or in respect of) the Credit Documents except as permitted thereby; 74 (b) without the consent of the Agent, no provision of Section 10 may be amended; (c) without the consent of the Issuing Lender, no provision of Section 2.2 may be amended. Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (x) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein and (y) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding. 11.7 Counterparts. This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Credit Agreement to produce or account for more than one such counterpart for each of the parties hereto. Delivery by facsimile by any of the parties hereto of an executed counterpart of this Credit Agreement shall be as effective as an original executed counterpart hereof and shall be deemed a representation that an original executed counterpart hereof will be delivered. 11.8 Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement. 11.9 Survival. All indemnities set forth herein, including, without limitation, in Section 2.2(i), 3.11, 3.12, 10.5 or 11.5 shall survive the execution and delivery of this Credit Agreement, the making of the Loans, the issuance of the Letters of Credit, the repayment of the Loans, LOC Obligations and other obligations under the Credit Documents and the termination of the Commitments hereunder, and all representations and warranties made by the Credit Parties herein shall survive delivery of the Notes and the making of the Loans hereunder. 11.10 Governing Law; Submission to Jurisdiction; Venue. (a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of North Carolina in Mecklenburg County, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Credit Agreement, each of the Credit Parties hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the Credit Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 11.1, such service to become effective three (3) days after such mailing. Nothing herein shall affect the right of the Agent or any Lender to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Credit Party in any other jurisdiction. (b) Each of the Credit Parties hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Credit Agreement or any other Credit Document brought in the courts referred to in subsection (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 75 (c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE AGENT, THE LENDERS, THE BORROWER AND THE CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.11 Severability. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 11.12 Entirety. This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein. 11.13 Binding Effect; Termination; Acknowledgement. (a) This Credit Agreement shall become effective at such time on or after the Closing Date when it shall have been executed by the Borrower, the Guarantors and the Agent, and the Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Guarantors, the Agent and each Lender and their respective successors and assigns. (b) The term of this Credit Agreement shall be until no Loans, LOC Obligations or any other amounts payable hereunder or under any of the other Credit Documents shall remain outstanding, no Letters of Credit shall be outstanding, all of the Credit Party Obligations have been irrevocably satisfied in full and all of the Commitments hereunder shall have expired or been terminated. (c) This Amendment shall become effective at such time the conditions set forth in Section 5.1 hereof have been satisfied, and thereafter the Credit Agreement shall be binding upon and inure to the benefit of the Borrowers, the Guarantors, the Agent and each Lender and their respective successors and assigns. (d) At such time as this Amendment shall have become effective pursuant to the terms of Section 11.13(c), (i) the Commitments under the Existing Credit Agreement (as defined therein) automatically shall be terminated and replaced with the Commitments hereunder, (ii) the Commitments of Heller Financial, Inc., Strata Funding, Ltd., Merrill Lynch Senior Floating Rate Fund, Inc., Indosuez Capital Funding II, Limited, Van Kampen American Capital Prime Rate Income Trust, ML CLO XV Pilgrim America (Cayman) Ltd. and Amara-1 Finance Ltd. (collectively, the "Terminating Lenders") shall be terminated (iii) any right of the Lenders to receive compensation under Section 3.12 of the Existing Credit Agreement shall be terminated and (iv) the promissory notes executed in connection with the Existing Credit Agreement shall be canceled, returned to the Borrower and replaced with the Notes executed in connection with this Amendment. The Terminating Lenders join in the execution of this Amendment solely for the purposes of acknowledging and consenting to the termination of their Commitments under the Existing Credit Facility and waiver of any right to receive compensation under Section 3.12 of the Existing Credit Agreement. (e) Each Credit Party hereby acknowledges that the Credit Party Obligations under this Credit Agreement are secured by the Collateral pursuant to the Collateral Documents. 76 11.14 Source of Funds. Each of the Lenders hereby represents and warrants to the Borrower that at least one of the following statements is an accurate representation as to the source of funds to be used by such Lender in connection with the financing hereunder: (a) no part of such funds constitutes assets allocated to any separate account maintained by such Lender in which any employee benefit plan (or its related trust) has any interest; (b) to the extent that any part of such funds constitutes assets allocated to any separate account maintained by such Lender, such Lender has disclosed to the Borrower the name of each employee benefit plan whose assets in such account exceed 10% of the total assets of such account as of the date of such purchase (and, for purposes of this subsection (b), all employee benefit plans maintained by the same employer or employee organization are deemed to be a single plan); (c) to the extent that any part of such funds constitutes assets of an insurance company's general account, such insurance company has complied with all of the requirements of the regulations issued under Section 401(c)(1)(A) of ERISA; or (d) such funds constitute assets of one or more specific benefit plans which such Lender has identified in writing to the Borrower. As used in this Section 11.15, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 11.15 Conflict. To the extent that there is a conflict or inconsistency between any provision hereof, on the one hand, and any provision of any Credit Document, on the other hand, this Credit Agreement shall control. 11.16 Confidentiality. The Agent and each Lender (each, a "Lending Party") agrees to keep confidential any information furnished or made available to it by the Borrower pursuant to this Credit Agreement that is marked confidential; provided that nothing herein shall prevent any Lending Party from disclosing such information (a) to any other Lending Party or any Affiliate of any Lending Party, or any officer, director, employee, agent, or advisor of any Lending Party or Affiliate of any Lending Party, (b) to any other Person if reasonably incidental to the administration of the credit facility provided herein, (c) as required by any law, rule, or regulation, (d) upon the order of any court or administrative agency, (e) upon the request or demand of any regulatory agency or authority, (f) that is or becomes available to the public or that is or becomes available to any Lending Party other than as a result of a disclosure by any Lending Party prohibited by this Credit Agreement, (g) in connection with any litigation to which such Lending Party or any of its Affiliates may be a party, (h) to the extent necessary in connection with the exercise of any remedy under this Credit Agreement or any other Credit Document, and (i) subject to provisions substantially similar to those contained in this Section 11.16, to any actual or proposed participant or assignee; provided, however, that in the event that any Lending Party is requested to disclose any confidential information pursuant to clause (c), (d), (e) or (g) above, then such Lending Party shall, to the extent lawfully permitted, use reasonable best efforts to promptly notify the Borrower. [Signature Page to Follow] 77 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Fourth Amendment and Restatement of Credit Agreement to be duly executed and delivered as of the date first above written. BORROWER: INSIGHT HEALTH SERVICES CORP. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary GUARANTORS: INSIGHT HEALTH CORP. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary RADIOLOGY SERVICES CORP. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary OPEN MRI, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH CORP. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary RADIOSURGERY CENTERS, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MTS ENTERPRISES, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary QUEST FINANCIAL SERVICES, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES CORP. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary DIAGNOSTEMPS, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary DIAGNOSTIC SOLUTIONS CORP. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF DALLAS, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary NDDC, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary SIGNAL MEDICAL SERVICES, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MISSISSIPPI MOBILE TECHNOLOGY, INC. By: ----------------------------------- Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary LENDERS: NATIONSBANK, N. A., individually in its capacity as a Lender and in its capacity as Agent By: ----------------------------------- Name: Title: THE BANK OF NOVA SCOTIA By: ----------------------------------- Name: Title: BANKBOSTON, N.A. By: ----------------------------------- Name: Title: BANQUE PARIBAS By: ----------------------------------- Name: Title: BHF-BANK AKTIENGESELLSCHAFT By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: [Signatures continue] DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION By: ----------------------------------- Name: Title: UNION BANK OF CALIFORNIA, N.A. By: ----------------------------------- Name: Title: BANK POLSKA KASA OPIEKI, S.A. By: ----------------------------------- Name: Title: TERMINATING LENDERS: STRATA FUNDING LTD. By: ----------------------------------- Name: Title: MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: ----------------------------------- Name: Title: INDOSUEZ CAPITAL FUNDING II, LIMITED By: Indosuez Capital Luxembourg, as Collateral Manager By: ----------------------------------- Name: Title: VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: ----------------------------------- Name: Title: ML CLO XV PILGRIM AMERICA (CAYMAN) LTD. By: ----------------------------------- Name: Title: AMARA-1 FINANCE LTD. By: ----------------------------------- Name: Title: HELLER FINANCIAL, INC. By: ----------------------------------- Name: Title: Schedule 1.1A JOINT VENTURES Schedule 1.1B INVESTMENTS Schedule 1.1C LIENS Schedule 1.1D GE EQUIPMENT 1 1990 GE 5X Sigma MR System, Order No. 861-101631 1 1994 GE CT9800 Upgraded to HiSpeed Advantage, Order No. 970-062282 Schedule 2.1(a) LENDER ADDRESSES AND COMMITMENTS Schedule 3.3(b)(vii) SPECIAL ASSET DISPOSITIONS Schedule 5.1(c) FORM OF LEGAL OPINION (GENERAL EXTERNAL COUNSEL) Schedule 5.1(f) CORPORATE STRUCTURE Schedule 6.4 REQUIRED CONSENTS, AUTHORIZATIONS, NOTICES AND FILINGS Schedule 6.9 LITIGATION Schedule 6.12 ERISA Schedule 6.13 SUBSIDIARIES Schedule 6.15 INDEBTEDMNESS TO BE REFINANCED Schedule 6.16 ENVIRONMENTAL DISCLOSURES Schedule 6.17 INTELLECTUAL PROPERTY Schedule 6.20(a)(i) PRIMARY REAL PROPERTIES Schedule 6.20(a)(ii) SECONDARY REAL PROPERTIES Schedule 6.20(b) COLLATERAL LOCATIONS Schedule 6.20(c) CHIEF EXECUTIVE OFFICES/ PRINCIPAL PLACES OF BUSINESS Schedule 6.23 BROKER'S FEES Schedule 7.6 INSURANCE Schedule 8.1 INDEBTEDNESS Schedule 8.16 EXISTING OPERATING LEASES Exhibit 1.1A FORM OF PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Pledge Agreement") is entered into as of October 14, 1997 among INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Borrower"), certain Subsidiaries of the Borrower (individually a "Guarantor", and collectively the "Guarantors"; together with the Borrower, individually a "Pledgor", and collectively the "Pledgors") and NATIONSBANK, N.A., in its capacity as agent (in such capacity, the "Agent") for the lenders from time to time party to the Credit Agreement described below (the "Lenders"). RECITALS WHEREAS, pursuant to that certain Credit Agreement dated as of the date hereof (as amended, modified, extended, renewed or replaced from time to time, the "Credit Agreement") among the Borrower, the Guarantors, the Lenders and the Agent, the Lenders have agreed to make Loans and issue Letters of Credit upon the terms and subject to the conditions set forth therein; and WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make their respective Loans and to issue Letters of Credit under the Credit Agreement that the Pledgors shall have executed and delivered this Pledge Agreement to the Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement. For purposes of this Pledge Agreement, the term "Lender" shall include any Affiliate of any Lender which has entered into a Hedging Agreement with the Borrower. 2. Pledge and Grant of Security Interest. To secure the prompt payment and performance in full when due, whether by lapse of time or otherwise, of the Pledgor Obligations (as defined in Section 3 hereof), each Pledgor hereby pledges and assigns to the Agent, for the benefit of the Lenders, and grants to the Agent, for the benefit of the Lenders, a continuing security interest in any and all right, title and interest of such Pledgor in and to the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the "Pledged Collateral"): (a) Pledged Shares. 100% (or, if less, the full amount owned by such Pledgor) of the issued and outstanding shares of capital stock owned by such Pledgor of each Subsidiary set forth on Schedule 2(a) attached hereto, in each case together with the certificates (or other agreements or instruments), if any, representing such shares, and all options and other rights, contractual or otherwise, with respect thereto (collectively, together with the shares of capital stock described in Section 2(b) and 2(c) below, the "Pledged Shares"), including, but not limited to, the following: (y) all shares or securities representing a dividend on any of the Pledged Shares, or representing a distribution or return of capital upon or in respect of the Pledged Shares, or resulting from a stock split, revision, reclassification or other exchange therefor, and any subscriptions, warrants, rights or options issued to the holder of, or otherwise in respect of, the Pledged Shares; and (z) without affecting the obligations of the Pledgors under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger involving the issuer of any Pledged Shares and in which such issuer is not the surviving corporation, all shares of each class of the capital stock of the successor corporation formed by or resulting from such consolidation or merger. -1- (b) Additional Shares. 100% (or, if less, the full amount owned by such Pledgor) of the issued and outstanding shares of capital stock owned by such Pledgor of any Person which is not a Joint Venture and hereafter becomes a Subsidiary, including, without limitation, the certificates representing such shares. (c) Other Equity Interests. Any and all other Capital Stock in each Pledgor in any Subsidiary which is not a Joint Venture. (d) Proceeds. All proceeds and products of the foregoing, however and whenever acquired and in whatever form. Without limiting the generality of the foregoing, it is hereby specifically understood and agreed that a Pledgor may from time to time hereafter deliver additional shares of stock to the Agent as collateral security for the Pledgor Obligations. Upon delivery to the Agent, such additional shares of stock shall be deemed to be part of the Pledged Collateral of such Pledgor and shall be subject to the terms of this Pledge Agreement whether or not Schedule 2(a) is amended to refer to such additional shares. 3. Security for Pledgor Obligations. The security interest created hereby in the Pledged Collateral of each Pledgor constitutes continuing collateral security for all of the following, whether now existing or hereafter incurred (the "Pledgor Obligations"): (a) In the case of the Borrower, the prompt performance and observance by the Borrower of all obligations of the Borrower under the Credit Agreement, the Notes, this Pledge Agreement and the other Credit Documents to which the Borrower is a party; (b) In the case of the Guarantors, the prompt performance and observance by such Guarantor of all obligations of such Guarantor under the Credit Agreement, this Pledge Agreement and the other Credit Documents to which such Guarantor is a party, including, without limitation, its guaranty obligations arising under Section 4 of the Credit Agreement; and (c) All other indebtedness, liabilities and obligations of any kind or nature, now existing or hereafter arising, owing from any Pledgor to any Lender or the Agent, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent, or joint and several, including, without limitation, all liabilities arising under Hedging Agreements and all obligations and liabilities incurred in connection with collecting and enforcing the Pledgor Obligations. 4. Delivery of the Pledged Collateral. Each Pledgor hereby agrees that: (a) Each Pledgor shall deliver to the Agent (i) simultaneously with or prior to the execution and delivery of this Pledge Agreement, all certificates representing the Pledged Shares of such Pledgor and (ii) promptly upon the receipt thereof by or on behalf of a Pledgor, all other certificates and instruments constituting Pledged Collateral of a Pledgor. Prior to delivery to the Agent, all such certificates and instruments constituting Pledged Collateral of a Pledgor shall be held in trust by such Pledgor for the benefit of the Agent pursuant hereto. All such certificates shall be delivered in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, substantially in the form provided in Exhibit 4(a) attached hereto. (b) Additional Securities. If such Pledgor shall receive by virtue of its being or having been the owner of any Pledged Collateral, any (i) stock certificate, including without limitation, any certificate representing a stock dividend or distribution in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock splits, spin-off or split-off, promissory notes or other instrument; (ii) option or right, whether as an addition to, substitution for, or an exchange for, any Pledged Collateral or otherwise; (iii) dividends payable in securities; or -2- (iv) distributions of securities in connection with a partial or total liquidation, dissolution or reduction of capital, capital surplus or paid-in surplus, then such Pledgor shall receive such stock certificate, instrument, option, right or distribution in trust for the benefit of the Agent, shall segregate it from such Pledgor's other property and shall deliver it forthwith to the Agent in the exact form received together with any necessary endorsement and/or appropriate stock power duly executed in blank, substantially in the form provided in Exhibit 4(a), to be held by the Agent as Pledged Collateral and as further collateral security for the Pledgor Obligations. (c) Financing Statements. Each Pledgor shall execute and deliver to the Agent such UCC or other applicable financing statements as may be reasonably requested by the Agent in order to perfect and protect the security interest created hereby in the Pledged Collateral of such Pledgor. 5. Representations and Warranties. Each Pledgor hereby represents and warrants to the Agent, for the benefit of the Lenders, that so long as any of the Pledgor Obligations remain outstanding or any Credit Document or Hedging Agreement is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated: (a) Authorization of Pledged Shares. The Pledged Shares are duly authorized and validly issued, are fully paid and nonassessable and are not subject to the preemptive rights of any Person. All other shares of stock constituting Pledged Collateral will be duly authorized and validly issued, fully paid and nonassessable and not subject to the preemptive rights of any Person. (b) Title. Each Pledgor has good and indefeasible title to the Pledged Collateral of such Pledgor and will at all times be the legal and beneficial owner of such Pledged Collateral free and clear of any Lien, other than Permitted Liens. There exists no "adverse claim" within the meaning of Section 8-302 of the Uniform Commercial Code as in effect in the State of New York (the "UCC") with respect to the Pledged Shares of such Pledgor. (c) Exercising of Rights. The exercise by the Agent of its rights and remedies hereunder will not violate any law or governmental regulation or any material contractual restriction binding on or affecting a Pledgor or any of its property. (d) Pledgor's Authority. No authorization, approval or action by, and no notice or filing with any Governmental Authority or with the issuer of any Pledged Stock is required either (i) for the pledge made by a Pledgor or for the granting of the security interest by a Pledgor pursuant to this Pledge Agreement or (ii) for the exercise by the Agent or the Lenders of their rights and remedies hereunder (except as may be required by laws affecting the offering and sale of securities). (e) Security Interest/Priority. This Pledge Agreement creates a valid security interest in favor of the Agent for the benefit of the Lenders, in the Pledged Collateral. The taking possession by the Agent of the certificates representing the Pledged Shares and all other certificates and instruments constituting Pledged Collateral will perfect and establish the first priority of the Agent's security interest in the Pledged Shares and, when properly perfected by filing or registration, in all other Pledged Collateral represented by such Pledged Shares and instruments securing the Pledgor Obligations. Except as set forth in this Section 5(e), no action is necessary to perfect or otherwise protect such security interest. (f) No Other Shares. No Pledgor owns any shares of stock other than as set forth on Schedule 2(a) attached hereto. 6. Covenants. Each Pledgor hereby covenants, that so long as any of the Pledgor Obligations remain outstanding or any Credit Document or Hedging Agreement is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated, such Pledgor shall: -3- (a) Books and Records. Mark its books and records (and shall cause the issuer of the Pledged Shares of such Pledgor to mark its books and records) to reflect the security interest granted to the Agent, for the benefit of the Lenders, pursuant to this Pledge Agreement. (b) Defense of Title. Warrant and defend title to and ownership of the Pledged Collateral of such Pledgor at its own expense against the claims and demands of all other parties claiming an interest therein, keep the Pledged Collateral free from all Liens, except for Permitted Liens, and not sell, exchange, transfer, assign, lease or otherwise dispose of Pledged Collateral of such Pledgor or any interest therein, except as permitted under the Credit Agreement and the other Credit Documents. (c) Further Assurances. Promptly execute and deliver at its expense all further instruments and documents and take all further action that may be necessary and desirable or that the Agent may reasonably request in order to (i) perfect and protect the security interest created hereby in the Pledged Collateral of such Pledgor (including without limitation any and all action necessary to satisfy the Agent that the Agent has obtained a first priority perfected security interest in any capital stock); (ii) enable the Agent to exercise and enforce its rights and remedies hereunder in respect of the Pledged Collateral of such Pledgor; and (iii) otherwise effect the purposes of this Pledge Agreement, including, without limitation and if requested by the Agent, delivering to the Agent irrevocable proxies in respect of the Pledged Collateral of such Pledgor. (d) Amendments. Not make or consent to any amendment or other modification or waiver with respect to any of the Pledged Collateral of such Pledgor or enter into any agreement or allow to exist any restriction with respect to any of the Pledged Collateral of such Pledgor other than pursuant hereto or as may be permitted under the Credit Agreement. (e) Compliance with Securities Laws. File all reports and other information now or hereafter required to be filed by such Pledgor with the United States Securities and Exchange Commission and any other state, federal or foreign agency in connection with the ownership of the Pledged Collateral of such Pledgor. 7. Advances by Lenders. On failure of any Pledgor to perform any of the covenants and agreements contained herein, the Agent may, at its sole option and in its sole discretion, perform the same and in so doing may expend such sums as the Agent may reasonably deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Agent or the Lenders may make for the protection of the security hereof or which may be compelled to make by operation of law. All such sums and amounts so expended shall be repayable by the Pledgors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Pledgor Obligations and shall bear interest from the date said amounts are expended at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans. No such performance of any covenant or agreement by the Agent or the Lenders on behalf of any Pledgor, and no such advance or expenditure therefor, shall relieve the Pledgors of any default under the terms of this Pledge Agreement, the other Credit Documents or any Hedging Agreement. The Lenders may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by a Pledgor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP. 8. Events of Default. The occurrence of an event which under the Credit Agreement would constitute an Event of Default shall be an Event of Default hereunder (an "Event of Default"). -4- 9. Remedies. (a) General Remedies. Upon the occurrence of an Event of Default and during the continuation thereof, the Agent and the Lenders shall have, in respect of the Pledged Collateral of any Pledgor, in addition to the rights and remedies provided herein, in the Credit Documents, in the Hedging Agreements or by law, the rights and remedies of a secured party under the UCC or any other applicable law. (b) Sale of Pledged Collateral. Upon the occurrence of an Event of Default and during the continuation thereof, without limiting the generality of this Section and the Agent may, in its sole discretion, sell or otherwise dispose of or realize upon the Pledged Collateral, or any part thereof, in one or more parcels, at public or private sale, at any exchange or broker's board or elsewhere, at such price or prices and on such other terms as the Agent may deem commercially reasonable, for cash, credit or for future delivery or otherwise in accordance with applicable law. To the extent permitted by law, any Lender may in such event, bid for the purchase of such securities. Each Pledgor agrees that, to the extent notice of sale shall be required by law and has not been waived by such Pledgor, any requirement of reasonable notice shall be met if notice, specifying the place of any public sale or the time after which any private sale is to be made, is personally served on or mailed, postage prepaid, to such Pledgor, in accordance with the notice provisions of Section 11.1 of the Credit Agreement at least 10 days before the time of such sale. The Agent shall not be obligated to make any sale of Pledged Collateral of such Pledgor regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) Private Sale. Upon the occurrence of an Event of Default and during the continuation thereof, the Pledgors recognize that the Agent may deem it impracticable to effect a public sale of all or any part of the Pledged Shares or any of the securities constituting Pledged Collateral and that the Agent may, therefore, determine to make one or more private sales of any such securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sale shall be deemed to have been made in a commercially reasonable manner and that the Agent shall have no obligation to delay sale of any such securities for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Securities Act of 1933. Each Pledgor further acknowledges and agrees that any offer to sell such securities which has been (i) publicly advertised on a bona fide basis in a newspaper or other publication of general circulation in the financial community of New York, New York (to the extent that such offer may be advertised without prior registration under the Securities Act of 1933), or (ii) made privately in the manner described above shall be deemed to involve a "public sale" under the UCC, notwithstanding that such sale may not constitute a "public offering" under the Securities Act of 1933, and the Agent may, in such event, bid for the purchase of such securities. (d) Retention of Pledged Collateral. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default, the Agent may, after providing the notices required by Section 9-505(2) of the UCC or otherwise complying with the requirements of applicable law of the relevant jurisdiction, retain all or any portion of the Pledged Collateral in satisfaction of the Pledgor Obligations. Unless and until the Agent shall have provided such notices, however, the Agent shall not be deemed to have retained any Pledged Collateral in satisfaction of any Pledgor Obligations for any reason. (e) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Agent or the Lenders are legally entitled, the Pledgors shall be jointly and severally liable for the deficiency, together with interest thereon at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans, together with the costs -5- of collection and the reasonable fees of any attorneys employed by the Agent to collect such deficiency. Any surplus remaining after the full payment and satisfaction of the Pledgor Obligations shall be returned to the Pledgors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto. 10. Rights of the Agent. (a) Power of Attorney. In addition to other powers of attorney contained herein, each Pledgor hereby designates and appoints the Agent, on behalf of the Lenders, and each of its designees or agents as attorney-in-fact of such Pledgor, irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuance of an Event of Default: (i) to demand, collect, settle, compromise, adjust and give discharges and releases concerning the Pledged Collateral of such Pledgor, all as the Agent may reasonably determine; (ii) to commence and prosecute any actions at any court for the purposes of collecting any of the Pledged Collateral of such Pledgor and enforcing any other right in respect thereof; (iii) to defend, settle or compromise any action brought and, in connection therewith, give such discharge or release as the Agent may deem reasonably appropriate; (iv) to pay or discharge taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Pledged Collateral of such Pledgor; (v) to direct any parties liable for any payment under any of the Pledged Collateral to make payment of any and all monies due and to become due thereunder directly to the Agent or as the Agent shall direct; (vi) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Pledged Collateral of such Pledgor; (vii) to sign and endorse any drafts, assignments, proxies, stock powers, verifications, notices and other documents relating to the Pledged Collateral of such Pledgor; (viii) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as the Agent may deem reasonably appropriate; (ix) execute and deliver all assignments, conveyances, statements, financing statements, renewal financing statements, pledge agreements, affidavits, notices and other agreements, instruments and documents that the Agent may determine necessary in order to perfect and maintain the security interests and liens granted in this Pledge Agreement and in order to fully consummate all of the transactions contemplated therein; (x) to exchange any of the Pledged Collateral of such Pledgor or other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Pledged Collateral of such Pledgor with any committee, depository, transfer agent, registrar or other designated agency upon such terms as the Agent may determine; and -6- (xi) to do and perform all such other acts and things as the Agent may reasonably deem to be necessary, proper or convenient in connection with the Pledged Collateral of such Pledgor. This power of attorney is a power coupled with an interest and shall be irrevocable (i) for so long as any of the Pledgor Obligations remain outstanding, any Credit Document or any Hedging Agreement is in effect or any Letter of Credit shall remain outstanding and (ii) until all of the Commitments shall have been terminated. The Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Agent in this Pledge Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct. This power of attorney is conferred on the Agent solely to protect, preserve and realize upon its security interest in Pledged Collateral. (b) Performance by the Agent of Pledgor's Obligations. If any Pledgor fails to perform any agreement or obligation contained herein, the Agent itself may perform, or cause performance of, such agreement or obligation, and the expenses of the Agent incurred in connection therewith shall be payable by the Pledgors on a joint and several basis pursuant to Section 13 hereof. (c) Assignment by the Agent. The Agent may from time to time assign the Pledgor Obligations and any portion thereof and/or the Pledged Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of the Agent under this Pledge Agreement in relation thereto. (d) The Agent's Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Pledged Collateral while being held by the Agent hereunder, the Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that Pledgors shall be responsible for preservation of all rights in the Pledged Collateral of such Pledgor, and the Agent shall be relieved of all responsibility for Pledged Collateral upon surrendering it or tendering the surrender of it to the Pledgors. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which the Agent accords its own property, which shall be no less than the treatment employed by a reasonable and prudent agent in the industry, it being understood that the Agent shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not the Agent has or is deemed to have knowledge of such matters; or (ii) taking any necessary steps to preserve rights against any parties with respect to any Pledged Collateral. (e) Voting Rights in Respect of the Pledged Collateral. (i) So long as no Event of Default shall have occurred and be continuing, to the extent permitted by law, each Pledgor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral of such Pledgor or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement or the Credit Agreement; and (ii) Upon the occurrence and during the continuance of an Event of Default, all rights of a Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to paragraph (i) of this Section shall cease and all such rights shall thereupon become vested in the Agent which shall then have the sole right to exercise such voting and other consensual rights. -7- (f) Dividend Rights in Respect of the Pledged Collateral. (i) So long as no Event of Default shall have occurred and be continuing and subject to Section 4(b) hereof, each Pledgor may receive and retain any and all dividends (other than stock dividends and other dividends constituting Pledged Collateral which are addressed hereinabove) or interest paid in respect of the Pledged Collateral to the extent they are allowed under the Credit Agreement. (ii) Upon the occurrence and during the continuance of an Event of Default: (A) all rights of a Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to paragraph (i) of this Section shall cease and all such rights shall thereupon be vested in the Agent which shall then have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (B) all dividends and interest payments which are received by a Pledgor contrary to the provisions of paragraph (A) of this Section shall be received in trust for the benefit of the Agent, shall be segregated from other property or funds of such Pledgor, and shall be forthwith paid over to the Agent as Pledged Collateral in the exact form received, to be held by the Agent as Pledged Collateral and as further collateral security for the Pledgor Obligations. (g) Release of Pledged Collateral. The Agent may release any of the Pledged Collateral from this Pledge Agreement or may substitute any of the Pledged Collateral for other Pledged Collateral without altering, varying or diminishing in any way the force, effect, lien, pledge or security interest of this Pledge Agreement as to any Pledged Collateral not expressly released or substituted, and this Pledge Agreement shall continue as a first priority lien on all Pledged Collateral not expressly released or substituted. 11. Rights of Required Lenders. All rights of the Agent hereunder, if not exercised by the Agent, may be exercised by the Required Lenders. 12. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any payments in respect of the Pledgor Obligations and any proceeds of any Pledged Collateral, when received by the Agent or any of the Lenders in cash or its equivalent, will be applied in reduction of the Pledgor Obligations in the order set forth in Section 3.15(b) of the Credit Agreement, and each Pledgor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Agent shall have the continuing and exclusive right to apply and reapply any and all such payments and proceeds in the Agent's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. 13. Costs of Counsel. At all times hereafter, the Pledgors agree to promptly pay upon demand any and all reasonable costs and expenses of the Agent or the Lenders, (a) as required under Section 11.5 of the Credit Agreement and (b) as necessary to protect the Pledged Collateral or to exercise any rights or remedies under this Pledge Agreement or with respect to any Pledged Collateral. All of the foregoing costs and expenses shall constitute Pledgor Obligations hereunder. 14. Continuing Agreement. (a) This Pledge Agreement shall be a continuing agreement in every respect and shall remain in full force and effect so long as any of the Pledgor Obligations remain outstanding or any Credit Document or Hedging Agreement is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments thereunder shall have terminated (other than any obligations with respect to the indemnities and the representations and warranties set forth in the Credit Documents). Upon such payment and -8- termination, this Pledge Agreement shall be automatically terminated and the Agent and the Lenders shall, upon the request and at the expense of the Pledgors, forthwith release all of its liens and security interests hereunder and shall executed and deliver all UCC termination statements and/or other documents reasonably requested by the Pledgors evidencing such termination. Notwithstanding the foregoing all releases and indemnities provided hereunder shall survive termination of this Pledge Agreement. (b) This Pledge Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Pledgor Obligations is rescinded or must otherwise be restored or returned by the Agent or any Lender as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event payment of all or any part of the Pledgor Obligations is rescinded or must be restored or returned, all reasonable costs and expenses (including without limitation any reasonable legal fees and disbursements) incurred by the Agent or any Lender in defending and enforcing such reinstatement shall be deemed to be included as a part of the Pledgor Obligations. 15. Amendments; Waivers; Modifications. This Pledge Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated except as set forth in Section 11.6 of the Credit Agreement. 16. Successors in Interest. This Pledge Agreement shall create a continuing security interest in the Collateral and shall be binding upon each Pledgor, its successors and assigns and shall inure, together with the rights and remedies of the Agent and the Lenders hereunder, to the benefit of the Agent and the Lenders and their successors and permitted assigns; provided, however, that none of the Pledgors may assign its rights or delegate its duties hereunder without the prior written consent of each Lender or the Required Lenders, as required by the Credit Agreement. To the fullest extent permitted by law, each Pledgor hereby releases the Agent and each Lender, and its successors and assigns, from any liability for any act or omission relating to this Pledge Agreement or the Collateral, except for any liability arising from the gross negligence or willful misconduct of the Agent, or such Lender, or its officers, employees or agents. 17. Notices. All notices required or permitted to be given under this Pledge Agreement shall be in conformance with Section 11.1 of the Credit Agreement. 18. Counterparts. This Pledge Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Pledge Agreement to produce or account for more than one such counterpart. 19. Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Pledge Agreement. 20. Governing Law; Submission to Jurisdiction; Venue. (a) THIS PLEDGE AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Security Agreement may be brought in the courts of the State of North Carolina, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Security Agreement, each Pledgor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of such courts. Each Pledgor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1 of the Credit Agreement, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Agent to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Pledgor in any other jurisdiction. -9- (b) Each Pledgor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Pledge Agreement brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 21. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES TO THIS PLEDGE AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 22. Severability. If any provision of any of the Pledge Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 23. Entirety. This Pledge Agreement, the other Credit Documents and the Hedging Agreements represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents, the Hedging Agreements or the transactions contemplated herein and therein. 24. Survival. All representations and warranties of the Pledgors hereunder shall survive the execution and delivery of this Pledge Agreement, the other Credit Documents and the Hedging Agreements, the delivery of the Notes and the making of the Loans and the issuance of the Letters of Credit under the Credit Agreement. 25. Other Security. To the extent that any of the Pledgor Obligations are now or hereafter secured by property other than the Pledged Collateral (including, without limitation, real and other personal property owned by a Pledgor), or by a guarantee, endorsement or property of any other Person, then the Agent and the Lenders shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence of any Event of Default, and the Agent and the Lenders have the right, in their sole discretion, to determine which rights, security, liens, security interests or remedies the Agent and the Lenders shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or any of the Agent's and the Lenders' rights or the Pledgor Obligations under this Pledge Agreement, under any other of the Credit Documents or under any Hedging Agreement. 26. Joint and Several Obligations of Pledgors. (a) Each of the Pledgors is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by the Lenders under the Credit Agreement, for the mutual benefit, directly and indirectly, of each of the Pledgors and in consideration of the undertakings of each of the Pledgors to accept joint and several liability for the obligations of each of them. (b) Each of the Pledgors jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Pledgors with respect to the payment and performance of all of the Pledgor Obligations arising under this Pledge Agreement, the other Credit Documents and the Hedging Agreements, it being the intention of the parties hereto that all the Pledgor Obligations shall be the joint and several obligations of each of the Pledgors without preferences or distinction among them. (c) Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each Guarantor hereunder shall be -10- limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code). [The remainder of this page is intentionally left blank.] -11- Each of the parties hereto has caused a counterpart of this Pledge Agreement to be duly executed and delivered as of the date first above written. BORROWER: INSIGHT HEALTH SERVICES CORP., a Delaware corporation By: Name: Title: GUARANTORS: INSIGHT HEALTH CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary RADIOLOGY SERVICES CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary OPEN MRI, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary [Signatures Continued] RADIOSURGERY CENTERS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MTS ENTERPRISES, INC. -12- By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary QUEST FINANCIAL SERVICES, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary DIAGNOSTEMPS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary [Signatures Continued] DIAGNOSTIC SOLUTIONS CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: Name: Thomas V. Croal Title: Executive Vice President, -13- Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF DALLAS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary NDDC, INC.. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary [Signatures Continued] Accepted and agreed to in Charlotte, North Carolina as of the date first above written. NATIONSBANK, N.A., as Agent By: Name: Title: -14- Schedule 2(a) to Pledge Agreement dated as of October 14, 1997 in favor of NationsBank, N.A. as Agent PLEDGED STOCK Pledgor: Insight Health Services Corp.
Name of Subsidiary Number of Shares Certificate Percentage Number Ownership Subsidiaries
Pledgor:
Name of Subsidiary Number of Shares Certificate Percentage Number Ownership Subsidiaries
-1- Exhibit 4(a) to Pledge Agreement dated as of October 14, 1997 in favor of NationsBank, N.A. as Agent Irrevocable Stock Power FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to the following shares of capital stock of _____________________, a ___________ corporation:
No. of Shares Certificate No.
and irrevocably appoints __________________________________ its agent and attorney-in-fact to transfer all or any part of such capital stock and to take all necessary and appropriate action to effect any such transfer. The agent and attorney-in-fact may substitute and appoint one or more persons to act for him. The effectiveness of a transfer pursuant to this stock power shall be subject to any and all transfer restrictions referenced on the face of the certificates evidencing such interest or in the certificate of incorporation or bylaws of the subject corporation, to the extent they may from time to time exist. ---------------, a ______________ corporation By: Name: Title: -1- Exhibit 1.1B FORM OF SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Security Agreement") is entered into as of October 14, 1997 among INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Borrower"), certain Subsidiaries of the Borrower (individually a "Guarantor" and collectively the "Guarantors"; together with the Borrower, individually an "Obligor", and collectively the "Obligors") and NATIONSBANK, N.A., in its capacity as agent (in such capacity, the "Agent") for the lenders from time to time party to the Credit Agreement described below (the "Lenders"). RECITALS WHEREAS, pursuant to that certain Credit Agreement, dated as of the date hereof (as amended, modified, extended, renewed or replaced from time to time, the "Credit Agreement"), among the Borrower, the Guarantors, the Lenders and the Agent, the Lenders have agreed to make Loans and issue Letters of Credit upon the terms and subject to the conditions set forth therein; and WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make their respective Loans and to issue Letters of Credit under the Credit Agreement that the Obligors shall have executed and delivered this Security Agreement to the Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, Farm Products, Fixtures, General Intangibles, Instruments, Inventory and Proceeds. For purposes of this Security Agreement, the term "Lender" shall include any Affiliate of any Lender which has entered into a Hedging Agreement with the Borrower. (b) In addition, the following terms shall have the following meanings: "Copyright Licenses": any written agreement, naming any Obligor as licensor, granting any right under any Copyright including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Copyrights": (a) all registered United States copyrights in all Works, now existing or hereafter created or acquired, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Copyright office including, without limitation, any thereof referred to in Schedule 1(b) hereto, and (b) all renewals thereof including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Patent License": all agreements, whether written or oral, providing for the grant by or to an Obligor of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Patents": (a) all letters patent of the United States or any other country and all reissues and extensions thereof, including, without limitation, any thereof referred to in Schedule 1(b) hereto, and (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including, without limitation, any thereof referred to in Schedule 1(b) hereto. -1- "Secured Obligations": the collective reference to the following: (a) In the case of the Borrower, the prompt performance and observance by the Borrower of all obligations of the Borrower under the Credit Agreement, the Notes, this Security Agreement and the other Credit Documents to which the Borrower is a party; (b) In the case of the Guarantors, the prompt performance and observance by such Guarantor of all obligations of such Guarantor under the Credit Agreement, this Security Agreement and the other Credit Documents to which such Guarantor is a party, including, without limitation, its guaranty obligations arising under Section 4 of the Credit Agreement; and (c) All other indebtedness, liabilities and obligations of any kind or nature, now existing or hereafter arising, owing from any Obligor to any Lender or the Agent, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent, or joint and several, including, without limitation, all liabilities arising under Hedging Agreements and all obligations and liabilities incurred in connection with collecting and enforcing the Secured Obligations. "Trademark License": means any agreement, written or oral, providing for the grant by or to an Obligor of any right to use any Trademark, including, without limitation, any thereof referred to in Schedule 1(b) hereto. "Trademarks": (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, including, without limitation, any thereof referred to in Schedule 1(b) hereto, and (b) all renewals thereof. "Work": any work which is subject to copyright protection pursuant to Title 17 of the United States Code. 2. Grant of Security Interest in the Collateral. To secure the prompt payment and performance in full when due, whether by lapse of time, acceleration or otherwise, of the Secured Obligations, each Obligor hereby grants to the Agent, for the benefit of the Lenders, a continuing security interest in, and a right to set off against, any and all right, title and interest of such Obligor in and to the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the "Collateral"): (a) all Accounts; (b) all Chattel Paper; (c) all Copyrights; (d) all Copyright Licenses; (e) all Deposit Accounts; (f) all Documents; (g) all Equipment; -2- (h) all Fixtures; (i) all General Intangibles; (j) all Instruments; (k) all Inventory; (l) all Patents; (m) all Patent Licenses; (n) all Trademarks; (o) all Trademark Licenses; (p) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks, and related data processing software (owned by such Obligor or in which it has an interest) that at any time evidence or contain information relating to any Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (q) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing. The Obligors and the Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest created hereby in the Collateral (i) constitutes continuing collateral security for all of the Secured Obligations, whether now existing or hereafter arising and (ii) is not to be construed as an assignment of any Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks or Trademark Licenses. 3. Provisions Relating to Accounts. (a) Anything herein to the contrary notwithstanding, each of the Obligors shall remain liable under each of the Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account. Neither the Agent nor any Lender shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Security Agreement or the receipt by the Agent or any Lender of any payment relating to such Account pursuant hereto, nor shall the Agent or any Lender be obligated in any manner to perform any of the obligations of an Obligor under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) Once during each calendar year (upon reasonable notice) or at any time after the occurrence and during the continuation of an Event of Default, the Agent shall have the right, but not the obligation, during normal business hours, to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Obligors shall furnish all such assistance and information as the Agent may require in connection with such test verifications. At any time and from time to time, upon the Agent's request and at the expense of the Obligors, the Obligors shall cause independent public accountants or others satisfactory to the Agent to furnish to the Agent reports showing reconciliations, aging -3- and test verifications of, and trial balances for, the Accounts. The Agent in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Agent's satisfaction the existence, amount and terms of any Accounts. 4. Representations and Warranties. Each Obligor hereby represents and warrants to the Agent, for the benefit of the Lenders, that so long as any of the Secured Obligations remain outstanding or any Credit Document or Hedging Agreement is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated: (a) Chief Executive Office; Books & Records. Each Obligor's chief executive office and chief place of business is (and for the prior four months have been) located at the locations set forth on Schedule 4(a) hereto, and each Obligor keeps its books and records at such locations. (b) Location of Collateral. The location of all Collateral owned by each Obligor is as shown on Schedule 4(b) hereto. (c) Ownership. Each Obligor is the legal and beneficial owner of its Collateral and has the right to pledge, sell, assign or transfer the same. Each Obligor's legal name is as shown in this Security Agreement and no Obligor has in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 4(c) attached hereto. (d) Security Interest/Priority. This Security Agreement creates a valid security interest in favor of the Agent, for the benefit of the Lenders, in the Collateral of such Obligor and, when properly perfected by filing, shall constitute a valid perfected security interest in such Collateral, to the extent such security can be perfected by filing under the UCC, free and clear of all Liens except for Permitted Liens. (e) Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. (f) Accounts. (i) Each Account of the Obligors and the papers and documents relating thereto are genuine and in all material respects what they purport to be, (ii) each Account arises out of (A) a bona fide sale of goods sold and delivered by such Obligor (or is in the process of being delivered) or (B) services theretofore actually rendered by such Obligor to, the account debtor named therein, (iii) no Account of an Obligor is evidenced by any Instrument or Chattel Paper unless such Instrument or Chattel Paper has been theretofore endorsed over and delivered to the Agent and (iv) no surety bond was required or given in connection with any Account of an Obligor or the contracts or purchase orders out of which they arose. (g) Inventory. No Inventory is held by an Obligor pursuant to consignment, sale or return, sale on approval or similar arrangement. (h) Copyrights, Patents and Trademarks. (i) Schedule 1(b) hereto includes all Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks and Trademark Licenses owned by the Obligors in their own names as of the date hereof. (ii) To the best of each Obligor's knowledge, each Copyright, Patent and Trademark of such Obligor is valid, subsisting, unexpired, enforceable and has not been abandoned. (iii) Except as set forth in Schedule 1(b) hereto, none of such Copyrights, Patents and Trademarks is the subject of any licensing or franchise agreement. -4- (iv) No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of any Copyright, Patent or Trademark. (v) No action or proceeding is pending seeking to limit, cancel or question the validity of any Copyright, Patent or Trademark, or which, if adversely determined, would have a material adverse effect on the value of any Copyright, Patent or Trademark. (vi) All applications pertaining to the Copyrights, Patents and Trademarks of each Obligor have been duly and properly filed, and all registrations or letters pertaining to such Copyrights, Patents and Trademarks have been duly and properly filed and issued, and all of such Copyrights, Patents and Trademarks are valid and enforceable. (vii) No Obligor has made any assignment or agreement in conflict with the security interest in the Copyrights, Patents or Trademarks of each Obligor hereunder. 5. Covenants. Each Obligor covenants that, so long as any of the Secured Obligations remain outstanding or any Credit Document or Hedging Agreement is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments shall have been terminated, such Obligor shall: (a) Other Liens. Defend the Collateral against the claims and demands of all other parties claiming an interest therein, keep the Collateral free from all Liens, except for Permitted Liens, and not sell, exchange, transfer, assign, lease or otherwise dispose of the Collateral or any interest therein, except as permitted under the Credit Agreement. (b) Preservation of Collateral. Keep the Collateral in good order, condition and repair and not use the Collateral in violation of the provisions of this Security Agreement or any other agreement relating to the Collateral or any policy insuring the Collateral or any applicable statute, law, bylaw, rule, regulation or ordinance. (c) Instruments/Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, immediately deliver such Instrument or Chattel Paper to the Agent, duly indorsed in a manner satisfactory to the Agent, to be held as Collateral pursuant to this Security Agreement. (d) Change in Location. Not, without providing 30 days prior written notice to the Agent and without filing such amendments to any previously filed financing statements as the Agent may require, (a) change the location of its chief executive office and chief place of business (as well as its books and records) from the locations set forth on Schedule 4(a) hereto, (b) change the location of its Collateral from the locations set forth for such Obligor on Schedule 4(b) hereto, or (c) change its name, be party to a merger, consolidation or other change in structure or use any tradename other than as set forth on Schedule 4(c) attached hereto. (e) Inspection. Upon reasonable notice, and during reasonable hours, at all times allow the Agent or its representatives to visit and inspect the Collateral as set forth in Section 7.10 of the Credit Agreement. (f) Perfection of Security Interest. Execute and deliver to the Agent such agreements, assignments or instruments (including affidavits, notices, reaffirmations and amendments and restatements of existing documents, as the Agent may reasonably request) and do all such other things as the Agent may reasonably deem necessary or appropriate (i) to assure to the Agent its security interests hereunder, including (A) such financing statements (including renewal statements) or amendments thereof or supplements thereto or other instruments as the Agent may from time to time reasonably request in order to perfect and maintain the security interests granted hereunder in accordance with the UCC, (B) with regard to Copyrights, a Notice -5- of Grant of Security Interest in Copyrights in the form of Schedule 5(f)(i), (C) with regard to Patents, a Notice of Grant of Security Interest in Patents for filing with the United States Patent and Trademark Office in the form of Schedule 5(f)(ii) attached hereto and (D) with regard to Trademarks, a Notice of Grant of Security Interest in Trademarks for filing with the United States Patent and Trademark Office in the form of Schedule 5(f)(iii) attached hereto, (ii) to consummate the transactions contemplated hereby and (iii) to otherwise protect and assure the Agent of its rights and interests hereunder. To that end, each Obligor agrees that the Agent may file one or more financing statements disclosing the Agent's security interest in any or all of the Collateral of such Obligor without, to the extent permitted by law, such Obligor's signature thereon, and further each Obligor also hereby irrevocably makes, constitutes and appoints the Agent, its nominee or any other person whom the Agent may designate, as such Obligor's attorney in fact with full power and for the limited purpose to sign in the name of such Obligor any such financing statements, or amendments and supplements to financing statements, renewal financing statements, notices or any similar documents which in the Agent's reasonable discretion would be necessary, appropriate or convenient in order to perfect and maintain perfection of the security interests granted hereunder, such power, being coupled with an interest, being and remaining irrevocable so long as the Credit Agreement is in effect or any amounts payable thereunder or under any other Credit Document, any Letter of Credit or any Hedging Agreement shall remain outstanding, and until all of the Commitments thereunder shall have terminated. Each Obligor hereby agrees that a carbon, photographic or other reproduction of this Security Agreement or any such financing statement is sufficient for filing as a financing statement by the Agent without notice thereof to such Obligor wherever the Agent may in its sole discretion desire to file the same. In the event for any reason the law of any jurisdiction other than New York becomes or is applicable to the Collateral of any Obligor or any part thereof, or to any of the Secured Obligations, such Obligor agrees to execute and deliver all such instruments and to do all such other things as the Agent in its sole discretion reasonably deems necessary or appropriate to preserve, protect and enforce the security interests of the Agent under the law of such other jurisdiction (and, if an Obligor shall fail to do so promptly upon the request of the Agent, then the Agent may execute any and all such requested documents on behalf of such Obligor pursuant to the power of attorney granted hereinabove). If any Collateral is in the possession or control of an Obligor's agents and the Agent so requests, such Obligor agrees to notify such agents in writing of the Agent's security interest therein and, upon the Agent's request, instruct them to hold all such Collateral for the Lenders' account and subject to the Agent's instructions. Each Obligor agrees to mark its books and records to reflect the security interest of the Agent in the Collateral. (g) Treatment of Accounts. Not grant or extend the time for payment of any Account, or compromise or settle any Account for less than the full amount thereof, or release any person or property, in whole or in part, from payment thereof, or allow any credit or discount thereon, other than as normal and customary in the ordinary course of an Obligor's business. (h) Covenants Relating to Copyrights. (i) Employ the Copyright for each Work with such notice of copyright as may be required by law to secure copyright protection. (ii) Not do any act or knowingly omit to do any act whereby any material Copyright may become invalidated and (A) not do any act, or knowingly omit to do any act, whereby any material Copyright may become injected into the public domain; (B) notify the Agent immediately if it knows, or has reason to know, that any material Copyright may become injected into the public domain or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any court or tribunal in the United States or any other country) regarding an Obligor's ownership of any such Copyright or its validity; (C) take all necessary steps as it shall deem appropriate under the circumstances, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of each material Copyright owned by an Obligor including, without limitation, filing of applications for renewal where necessary; and (D) promptly notify the Agent of any material infringement of any material Copyright of an Obligor of which it becomes aware and take such actions as it shall -6- reasonably deem appropriate under the circumstances to protect such Copyright, including, where appropriate, the bringing of suit for infringement, seeking injunctive relief and seeking to recover any and all damages for such infringement. (iii) Not make any assignment or agreement in conflict with the security interest in the Copyrights of each Obligor hereunder. (i) Covenants Relating to Patents and Trademarks. (i) (A) Continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (B) maintain as in the past the quality of products and services offered under such Trademark, (C) employ such Trademark with the appropriate notice of registration, (D) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Agent, for the ratable benefit of the Lenders, shall obtain a perfected security interest in such mark pursuant to this Security Agreement, and (E) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (ii) Not do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated. (iii) Notify the Agent and the Lenders immediately if it knows, or has reason to know, that any application or registration relating to any Patent or Trademark may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding an Obligor's ownership of any Patent or Trademark or its right to register the same or to keep and maintain the same. (iv) Whenever an Obligor, either by itself or through an agent, employee, licensee or designee, shall file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, an Obligor shall report such filing to the Agent and the Lenders within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Agent, an Obligor shall execute and deliver any and all agreements, instruments, documents and papers as the Agent may request to evidence the Agent's and the Lenders' security interest in any Patent or Trademark and the goodwill and general intangibles of an Obligor relating thereto or represented thereby. (v) Take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Patents and Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (vi) Promptly notify the Agent and the Lenders after it learns that any Patent or Trademark included in the Collateral is infringed, misappropriated or diluted by a third party and promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as it shall reasonably deem appropriate under the circumstances to protect such Patent or Trademark. -7- (vii) Not make any assignment or agreement in conflict with the security interest in the Patents or Trademarks of each Obligor hereunder. (j) New Patents, Copyrights and Trademarks. Promptly provide the Agent with (i) a listing of all applications, if any, for new Copyrights, Patents or Trademarks (together with a listing of the issuance of registrations or letters on present applications), which new applications and issued registrations or letters shall be subject to the terms and conditions hereunder, and (ii) (A) with respect to Copyrights, a duly executed Notice of Security Interest in Copyrights, (B) with respect to Patents, a duly executed Notice of Security Interest in Patents, (C) with respect to Trademarks, a duly executed Notice of Security Interest in Trademarks or (D) such other duly executed documents as the Agent may request in a form acceptable to counsel for the Agent and suitable for recording to evidence the security interest in the Copyright, Patent or Trademark which is the subject of such new application. (k) Insurance. Insure, repair and replace the Collateral of such Obligor as set forth in the Credit Agreement. All insurance proceeds shall be subject to the security interest of the Agent hereunder. 6. Advances by Lenders. On failure of any Obligor to perform any of the covenants and agreements contained herein, the Agent may, at its sole option and in its sole discretion, perform the same and in so doing may expend such sums as the Agent may reasonably deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Agent or the Lenders may make for the protection of the security hereof or which may be compelled to make by operation of law. All such sums and amounts so expended shall be repayable by the Obligors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Secured Obligations and shall bear interest from the date said amounts are expended at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans. No such performance of any covenant or agreement by the Agent or the Lenders on behalf of any Obligor, and no such advance or expenditure therefor, shall relieve the Obligors of any default under the terms of this Security Agreement, the other Credit Documents or any Hedging Agreement. The Lenders may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by an Obligor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP. 7. Events of Default. The occurrence of an event which under the Credit Agreement would constitute an Event of Default shall be an Event of Default hereunder (an "Event of Default"). 8. Remedies. (a) General Remedies. Upon the occurrence of an Event of Default and during continuation thereof, the Lenders shall have, in addition to the rights and remedies provided herein, in the Credit Documents, in the Hedging Agreements or by law (including, but not limited to, the rights and remedies set forth in the Uniform Commercial Code of the jurisdiction applicable to the affected Collateral), the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights and remedies are asserted and regardless of whether the UCC applies to the affected Collateral), and further, the Agent may, with or without judicial process or the aid and assistance of others, (i) enter on any premises on which any of the Collateral may be located and, without resistance or interference by the Obligors, take possession of the Collateral, (ii) dispose of any Collateral on any such premises, (iii) require the Obligors to assemble and make available to the Agent at the expense of the Obligors any Collateral at any place and time designated by the Agent which is reasonably convenient to both parties, (iv) remove any -8- Collateral from any such premises for the purpose of effecting sale or other disposition thereof, and/or (v) without demand and without advertisement, notice, hearing or process of law, all of which each of the Obligors hereby waives to the fullest extent permitted by law, at any place and time or times, sell and deliver any or all Collateral held by or for it at public or private sale, by one or more contracts, in one or more parcels, for cash, upon credit or otherwise, at such prices and upon such terms as the Agent deems advisable, in its sole discretion (subject to any and all mandatory legal requirements). In addition to all other sums due the Agent and the Lenders with respect to the Secured Obligations, the Obligors shall pay the Agent and each of the Lenders all reasonable documented costs and expenses incurred by the Agent or any such Lender, including, but not limited to, reasonable attorneys' fees and court costs, in obtaining or liquidating the Collateral, in enforcing payment of the Secured Obligations, or in the prosecution or defense of any action or proceeding by or against the Agent or the Lenders or the Obligors concerning any matter arising out of or connected with this Security Agreement, any Collateral or the Secured Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the Bankruptcy Code. To the extent the rights of notice cannot be legally waived hereunder, each Obligor agrees that any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Borrower in accordance with the notice provisions of Section 11.1 of the Credit Agreement at least 10 days before the time of sale or other event giving rise to the requirement of such notice. The Agent and the Lenders shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. To the extent permitted by law, any Lender may be a purchaser at any such sale. To the extent permitted by applicable law, each of the Obligors hereby waives all of its rights of redemption with respect to any such sale. Subject to the provisions of applicable law, the Agent and the Lenders may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, to the extent permitted by law, be made at the time and place to which the sale was postponed, or the Agent and the Lenders may further postpone such sale by announcement made at such time and place. (b) Remedies relating to Accounts. Upon the occurrence of an Event of Default and during the continuation thereof, whether or not the Agent has exercised any or all of its rights and remedies hereunder, each Obligor will promptly upon request of the Agent instruct all account debtors to remit all payments in respect of Accounts to a mailing location selected by the Agent. In addition, the Agent or its designee may notify any Obligor's customers and account debtors that the Accounts of such Obligor have been assigned to the Agent or of the Agent's security interest therein, and may (either in its own name or in the name of an Obligor or both) demand, collect (including without limitation by way of a lockbox arrangement), receive, take receipt for, sell, sue for, compound, settle, compromise and give acquittance for any and all amounts due or to become due on any Account, and, in the Agent's discretion, file any claim or take any other action or proceeding to protect and realize upon the security interest of the Lenders in the Accounts. Each Obligor acknowledges and agrees that the Proceeds of its Accounts remitted to or on behalf of the Agent in accordance with the provisions hereof shall be solely for the Agent's own convenience and that such Obligor shall not have any right, title or interest in such Accounts or in any such other amounts except as expressly provided herein. The Agent and the Lenders shall have no liability or responsibility to any Obligor for acceptance of a check, draft or other order for payment of money bearing the legend "payment in full" or words of similar import or any other restrictive legend or endorsement or be responsible for determining the correctness of any remittance. Each Obligor hereby agrees to indemnify the Agent and the Lenders from and against all liabilities, damages, losses, actions, claims, judgments, costs, expenses, charges and reasonable attorneys' fees suffered or incurred by the Agent or the Lenders (each, an "Indemnified Party") because of the maintenance of the foregoing arrangements except as relating to or arising out of the gross negligence or willful misconduct of an Indemnified Party or its officers, employees or agents. In the case of any investigation, litigation or other proceeding, the foregoing indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by an Obligor, its directors, shareholders or creditors or an Indemnified Party or any other Person or any other Indemnified Party is otherwise a party thereto. (c) Access. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default and during the continuance thereof, the Agent shall have the right to enter and remain upon the -9- various premises of the Obligors without cost or charge to the Agent, and use the same, together with materials, supplies, books and records of the Obligors for the purpose of collecting and liquidating the Collateral, or for preparing for sale and conducting the sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, the Agent may remove Collateral, or any part thereof, from such premises and/or any records with respect thereto, in order to effectively collect or liquidate such Collateral. (d) Nonexclusive Nature of Remedies. Failure by the Agent or the Lenders to exercise any right, remedy or option under this Security Agreement, any other Credit Document, any Hedging Agreement or as provided by law, or any delay by the Agent or the Lenders in exercising the same, shall not operate as a waiver of any such right, remedy or option. No waiver hereunder shall be effective unless it is in writing, signed by the party against whom such waiver is sought to be enforced and then only to the extent specifically stated, which in the case of the Agent or the Lenders shall only be granted as provided herein. To the extent permitted by law, neither the Agent, the Lenders, nor any party acting as attorney for the Agent or the Lenders, shall be liable hereunder for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct hereunder. The rights and remedies of the Agents and the Lenders under this Security Agreement shall be cumulative and not exclusive of any other right or remedy which the Agent or the Lenders may have. (e) Retention of Collateral. The Agent may, after providing the notices required by Section 9-505(2) of the UCC or otherwise complying with the requirements of applicable law of the relevant jurisdiction, to the extent the Agent is in possession of any of the Collateral, retain the Collateral in satisfaction of the Secured Obligations. Unless and until the Agent shall have provided such notices, however, the Agent shall not be deemed to have retained any Collateral in satisfaction of any Secured Obligations for any reason. (f) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Agent or the Lenders are legally entitled, the Obligors shall be jointly and severally liable for the deficiency, together with interest thereon at the default rate specified in Section 3.1 of the Credit Agreement for Revolving Loans that are Base Rate Loans, together with the costs of collection and the reasonable fees of any attorneys employed by the Agent to collect such deficiency. Any surplus remaining after the full payment and satisfaction of the Secured Obligations shall be returned to the Obligors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto. 9. Rights of the Agent. (a) Power of Attorney. In addition to other powers of attorney contained herein, each Obligor hereby designates and appoints the Agent, on behalf of the Lenders, and each of its designees or agents, as attorney-in-fact of such Obligor, irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuance of an Event of Default: (i) to demand, collect, settle, compromise, adjust, give discharges and releases, all as the Agent may reasonably determine; (ii) to commence and prosecute any actions at any court for the purposes of collecting any Collateral and enforcing any other right in respect thereof; (iii) to defend, settle or compromise any action brought and, in connection therewith, give such discharge or release as the Agent may deem reasonably appropriate; (iv) receive, open and dispose of mail addressed to an Obligor and endorse checks, notes, drafts, acceptances, money orders, bills of lading, warehouse receipts or other instruments or documents evidencing payment, shipment or storage of the goods giving rise to the Collateral of such Obligor on behalf of and in the name of such Obligor, or securing, or relating to such Collateral; -10- (v) sell, assign, transfer, make any agreement in respect of, or otherwise deal with or exercise rights in respect of, any Collateral or the goods or services which have given rise thereto, as fully and completely as though the Bank were the absolute owner thereof for all purposes; (vi) adjust and settle claims under any insurance policy relating thereto; (vii) execute and deliver all assignments, conveyances, statements, financing statements, renewal financing statements, security agreements, affidavits, notices and other agreements, instruments and documents that the Agent may determine necessary in order to perfect and maintain the security interests and liens granted in this Security Agreement and in order to fully consummate all of the transactions contemplated therein; (viii) institute any foreclosure proceedings that the Agent may deem appropriate; and (ix) do and perform all such other acts and things as the Agent may reasonably deem to be necessary, proper or convenient in connection with the Collateral. This power of attorney is a power coupled with an interest and shall be irrevocable (i) for so long as any of the Secured Obligations remain outstanding, any Credit Document or any Hedging Agreement is in effect or any Letter of Credit shall remain outstanding and (ii) until all of the Commitments shall have been terminated. The Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Agent in this Security Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct. This power of attorney is conferred on the Agent solely to protect, preserve and realize upon its security interest in the Collateral. (b) Performance by the Agent of Obligations. If any Obligor fails to perform any agreement or obligation contained herein, the Agent itself may perform, or cause performance of, such agreement or obligation, and the expenses of the Agent incurred in connection therewith shall be payable by the Obligors on a joint and several basis pursuant to Section 11 hereof. (c) Assignment by the Agent. The Agent may from time to time assign the Secured Obligations and any portion thereof and/or the Collateral and any portion thereof, and the assignee shall be entitled to all of the rights and remedies of the Agent under this Security Agreement in relation thereto. (d) The Agent's Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Collateral while being held by the Agent hereunder, the Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that the Obligors shall be responsible for preservation of all rights in the Collateral, and the Agent shall be relieved of all responsibility for the Collateral upon surrendering it or tendering the surrender of it to the Obligors. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Agent accords its own property, which shall be no less than the treatment employed by a reasonable and prudent agent in the industry, it being understood that the Agent shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to any of the Collateral. 10. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any payments in respect of the Secured Obligations and any proceeds of the Collateral, when received by the Agent or any of the Lenders in cash or its equivalent, will be applied in reduction of the Secured Obligations in the order set forth -11- in Section 3.15(b) of the Credit Agreement, and each Obligor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Agent shall have the continuing and exclusive right to apply and reapply any and all such payments and proceeds in the Agent's sole discretion, notwithstanding any entry to the contrary upon any of its books and records. 11. Costs of Counsel. If at any time hereafter, whether upon the occurrence of an Event of Default or not, the Agent employs counsel to prepare or consider amendments, waivers or consents with respect to this Security Agreement, or to take action or make a response in or with respect to any legal or arbitral proceeding relating to this Security Agreement or relating to the Collateral, or to protect the Collateral or exercise any rights or remedies under this Security Agreement or with respect to the Collateral, then the Obligors agree to promptly pay upon demand any and all such reasonable documented costs and expenses of the Agent or the Lenders, all of which costs and expenses shall constitute Secured Obligations hereunder. 12. Continuing Agreement. (a) This Security Agreement shall be a continuing agreement in every respect and shall remain in full force and effect so long as any of the Secured Obligations remain outstanding or any Credit Document or Hedging Agreement is in effect or any Letter of Credit shall remain outstanding, and until all of the Commitments thereunder shall have terminated (other than any obligations with respect to the indemnities and the representations and warranties set forth in the Credit Documents). Upon such payment and termination, this Security Agreement shall be automatically terminated and the Agent and the Lenders shall, upon the request and at the expense of the Obligors, forthwith release all of its liens and security interests hereunder and shall execute and deliver all UCC termination statements and/or other documents reasonably requested by the Obligors evidencing such termination. Notwithstanding the foregoing all releases and indemnities provided hereunder shall survive termination of this Security Agreement. (b) This Security Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by the Agent or any Lender as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event payment of all or any part of the Secured Obligations is rescinded or must be restored or returned, all reasonable costs and expenses (including without limitation any reasonable legal fees and disbursements) incurred by the Agent or any Lender in defending and enforcing such reinstatement shall be deemed to be included as a part of the Secured Obligations. 13. Amendments; Waivers; Modifications. This Security Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated except as set forth in Section 11.6 of the Credit Agreement. 14. Successors in Interest. This Security Agreement shall create a continuing security interest in the Collateral and shall be binding upon each Obligor, its successors and assigns and shall inure, together with the rights and remedies of the Agent and the Lenders hereunder, to the benefit of the Agent and the Lenders and their successors and permitted assigns; provided, however, that none of the Obligors may assign its rights or delegate its duties hereunder without the prior written consent of each Lender or the Required Lenders, as required by the Credit Agreement. To the fullest extent permitted by law, each Obligor hereby releases the Agent and each Lender, and its successors and assigns, from any liability for any act or omission relating to this Security Agreement or the Collateral, except for any liability arising from the gross negligence or willful misconduct of the Agent, or such Lender, or its officers, employees or agents. 15. Notices. All notices required or permitted to be given under this Security Agreement shall be in conformance with Section 11.1 of the Credit Agreement. -12- 16. Counterparts. This Security Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Security Agreement to produce or account for more than one such counterpart. 17. Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Security Agreement. 18. Governing Law; Submission to Jurisdiction; Venue. (a) THIS SECURITY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Security Agreement may be brought in the courts of the State of North Carolina, or of the United States for the Western District of North Carolina, and, by execution and delivery of this Security Agreement, each Obligor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of such courts. Each Obligor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1 of the Credit Agreement, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Agent to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Obligor in any other jurisdiction. (b) Each Obligor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Security Agreement brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 19. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES TO THIS SECURITY AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 20. Severability. If any provision of any of the Security Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 21. Entirety. This Security Agreement, the other Credit Documents and the Hedging Agreements represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents, the Hedging Agreements or the transactions contemplated herein and therein. 22. Survival. All representations and warranties of the Obligors hereunder shall survive the execution and delivery of this Security Agreement, the other Credit Documents and the Hedging Agreements, the delivery of the Notes and the making of the Loans and the issuance of the Letters of Credit under the Credit Agreement. 23. Other Security. To the extent that any of the Secured Obligations are now or hereafter secured by property other than the Collateral (including, without limitation, real property and securities owned by an Obligor), or by a guarantee, endorsement or property of any other Person, then the Agent and the Lenders shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence of any Event of Default, and the Agent and the Lenders have the right, in their sole discretion, to determine which rights, security, liens, security -13- interests or remedies the Agent and the Lenders shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or any of the Agent's and the Lenders' rights or the Secured Obligations under this Security Agreement, under any other of the Credit Documents or under any Hedging Agreement. 24. Joint and Several Obligations of Obligors. (a) Each of the Obligors is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by the Lenders under the Credit Agreement, for the mutual benefit, directly and indirectly, of each of the Obligors and in consideration of the undertakings of each of the Obligors to accept joint and several liability for the obligations of each of them. (b) Each of the Obligors jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Obligors with respect to the payment and performance of all of the Secured Obligations arising under this Security Agreement, the other Credit Documents and the Hedging Agreements, it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each of the Obligors without preferences or distinction among them. (c) Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code). 25. Rights of Required Lenders. All rights of the Agent hereunder, if not exercised by the Agent, may be exercised by the Required Lenders. [remainder of page intentionally left blank] -14- Each of the parties hereto has caused a counterpart of this Security Agreement to be duly executed and delivered as of the date first above written. BORROWER: INSIGHT HEALTH SERVICES CORP., a Delaware corporation By: Name: Title: GUARANTORS: INSIGHT HEALTH CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary RADIOLOGY SERVICES CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary OPEN MRI, INC. By: Name: Thomas V. Croal Title Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary RADIOSURGERY CENTERS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary [Signatures Continued] MTS ENTERPRISES, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary QUEST FINANCIAL SERVICES, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary DIAGNOSTEMPS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary DIAGNOSTIC SOLUTIONS CORP. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary [Signatures Continued] MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary MAXUM HEALTH SERVICES OF DALLAS, INC. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary NORTH DALLAS DIAGNOSTIC CENTER, INC.. By: Name: Thomas V. Croal Title: Executive Vice President, Chief Financial Officer and Secretary Accepted and agreed to in Charlotte, North Carolina as of the date first above written. NATIONSBANK, N.A., as Agent By: Name: Title: SCHEDULE 1(b) INTELLECTUAL PROPERTY SCHEDULE 4(a) CHIEF EXECUTIVE OFFICE SCHEDULE 4(b) LOCATIONS OF COLLATERAL SCHEDULE 4(c) MERGERS, CONSOLIDATIONS, CHANGE IN STRUCTURE OR USE OF TRADENAMES SCHEDULE 5(f)(i) NOTICE OF GRANT OF SECURITY INTEREST IN COPYRIGHTS United States Copyright Office Gentlemen: Please be advised that pursuant to the Security Agreement dated as of October 14, 1997 (as the same may be amended, modified, extended or restated from time to time, the "Security Agreement") by and among the Obligors party thereto (each an "Obligor" and collectively, the "Obligors") and NationsBank, N.A., as Agent (the "Agent") for the lenders referenced therein (the "Lenders"), the undersigned Obligor has granted a continuing security interest in and continuing lien upon, the copyrights and copyright applications shown below to the Agent for the ratable benefit of the Lenders: COPYRIGHTS ----------
Date of Copyright No. Description of Copyright Copyright ------------ ------------------------ ---------
Copyright Applications ----------------------
Copyright Description of Copyright Date of Copyright Applications No. Applied For Applications - ---------------- ------------------------ -----------------
The Obligors and the Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest in the foregoing copyrights and copyright applications (i) may only be terminated in accordance with the terms of the Security Agreement and (ii) is not to be construed as an assignment of any copyright or copyright application. Very truly yours, __________________________________ [Obligor] By: _______________________________ Name: _____________________________ Title: ____________________________ Acknowledged and Accepted: NATIONSBANK, N.A., as Agent By: ___________________________ Name: _________________________ Title: ________________________ SCHEDULE 5(f)(ii) ----------------- NOTICE OF GRANT OF SECURITY INTEREST IN PATENTS United States Patent and Trademark Office Gentlemen: Please be advised that pursuant to the Security Agreement dated as of October 14, 1997 (the "Security Agreement") by and among the Obligors party thereto (each an "Obligor" and collectively, the "Obligors") and NationsBank, N.A., as Agent (the "Agent") for the lenders referenced therein (the "Lenders"), the undersigned Obligor has granted a continuing security interest in and continuing lien upon, the patents and patent applications shown below to the Agent for the ratable benefit of the Lenders: PATENTS -------
Description of Patent Date of Patent No. Item Patent ---------- --------------------- -------
Patent Applications -------------------
Patent Description of Patent Date of Patent Applications No. Applied For Applications - --------------- --------------------- --------------
The Obligors and the Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest in the foregoing patents and patent applications (i) may only be terminated in accordance with the terms of the Security Agreement and (ii) is not to be construed as an assignment of any patent or patent application. Very truly yours, ________________________________ [Obligor] By: ____________________________ Name: __________________________ Title: _________________________ Acknowledged and Accepted: NATIONSBANK, N.A., as Agent By:____________________________ Name: _________________________ Title: ________________________ SCHEDULE 5(f)(iii) ------------------ NOTICE OF GRANT OF SECURITY INTEREST IN TRADEMARKS United States Patent and Trademark Office Gentlemen: Please be advised that pursuant to the Security Agreement dated as of October 14, 1997 (the "Security Agreement") by and among the Obligors party thereto (each an "Obligor" and collectively, the "Obligors") and NationsBank, N.A., as Agent (the "Agent") for the lenders referenced therein (the "Lenders"), the undersigned Obligor has granted a continuing security interest in and continuing lien upon, the trademarks and trademark applications shown below to the Agent for the ratable benefit of the Lenders: TRADEMARKS ----------
Description of Trademark Date of Trademark No. Item Trademark ------------- ------------------------ ---------
Trademark Applications ----------------------
Trademark Description of Trademark Date of Trademark Applications No. Applied For Applications - ---------------- ------------------------ -----------------
The Obligors and the Agent, on behalf of the Lenders, hereby acknowledge and agree that the security interest in the foregoing trademarks and trademark applications (i) may only be terminated in accordance with the terms of the Security Agreement and (ii) is not to be construed as an assignment of any trademark or trademark application. Very truly yours, __________________________________ [Obligor] By: ______________________________ Name: ____________________________ Title: ___________________________ Acknowledged and Accepted: NATIONSBANK, N.A., as Agent By: ___________________________ Name: _________________________ Title: ________________________ Exhibit 1.1C FORM OF SUBORDINATION AGREEMENT THIS AGREEMENT (this "Agreement"), dated as of _________ __, 1997, is entered into by NATIONSBANK, N.A., in its capacity as agent (the "Agent") for the lending institution (the "Lenders") from time to time party to that certain Credit Agreement, dated as of October 13, 1997 (as the same may be amended, modified, supplemented, extended, restated, refinanced, replaced or refunded from time to time, the "Credit Agreement") by and among InSight Health Services Corp., a Delaware corporation (the "Borrower"), certain subsidiaries of the Borrower as guarantors (the "Guarantors"), for the benefit of GENERAL ELECTRIC COMPANY (together with its affiliates, "GE"). RECITALS: GE has entered into, and may from time to time hereafter enter into, certain equipment lease or other financing transactions with the Borrower and/or the Guarantors under the GE Agreements hereinafter defined pursuant to which (i) GE, as lessor, agrees to lease to the Borrower and/or such Guarantors, as lessees, the leased equipment, under either a capital lease or an operating lease, or GE and the Borrower and/or such Guarantors are party to any other financing arrangement in respect of equipment, and (ii) the Borrower and/or such Guarantors have granted GE a first priority security interest in such equipment. The Lenders have agreed to make certain extensions of credit to the Borrower pursuant to the Credit Agreement provided that the Agent, on behalf of the Lenders, is granted liens and security interest in certain personal property of the Borrower and the Guarantors, including without limitation, the GE Collateral. GE has agreed to enter into this Agreement in order to consent to the security interest in favor of the Agent in the GE Collateral arising pursuant to the GE Collateral Documents defined in the Credit Agreement, provided that such security interest is subordinated by the Agent on the terms set forth in this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Agent hereby agrees as follows for the benefit of GE: SECTION 1 Definitions 1.1 For the purposes hereof: (l) "GE Collateral" shall mean any present or future collateral subject to a GE Agreement (including without limitation equipment subject of any capital or operating lease between GE, on the one hand, and either the Borrower ort any of the Guarantors , on the other hand). subject to a financing arrangement between the Borrower or any of the Guarantors, on the one hand, and GE, on the other hand, and evidenced by a GE Equipment Agreement. (m) "GE Agreements" means, collectively, any present or future operating leases, capital leases, purchase money financing arrangements and other agreements pursuant to which GE sells, leases or otherwise transfers equipment to the Borrower or any of the Guarantors. (n) "GE Obligations" means all of the principal, interest, premium, penalties, fees, expenses, indemnities and other liabilities and obligations payable by Borrower and/or any Guarantor under all GE Agreements. 1.2 The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. All capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement. SECTION 2 Consent to Second Lien 2.1 GE hereby consents to the granting by the Borrower and the Guarantors of a second priority security interest in the GE Collateral and agrees that the granting thereof shall not constitute a default under the GE Agreements or any other documents executed in connection with the transactions evidenced by the GE Agreements. SECTION 3 Subordination of Liens 3.1 Notwithstanding anything to the contrary contained in the Credit Documents, the Agent hereby (a) acknowledges that the GE Collateral is (and/or will be from time to time) subject to Liens on and security interests in favor of each of the Agent (arising under the Credit Documents) and GE (arising under the GE Agreements), (b) hereby expressly subordinates its interest in and to any present or future GE Collateral to the prior interests of GE arising under the GE Agreements, and (c) agrees that any Lien or security interest of GE is and shall remain prior to any Lien or security interest in or to any present or future GE Collateral and that the Agent's Lien and security interest in and to any present or future GE Collateral shall at all times remain subordinated to any such Lien or security interest of GE in the GE Collateral. 3.2 Until such time as all GE Obligations shall have been paid irrevocably in full and the GE Agreements shall have been terminated, the Agent agrees that it will not commence or continue any foreclosure or liquidation proceedings or remedies in respect of any of the GE Collateral. In the event that any of the GE Collateral, or any collections or other proceeds thereof, shall be received by the Agent at any time for any reason, such GE Collateral and/or proceeds shall be held in trust for the benefit of, and promptly remitted to GE. 3.3 Notwithstanding anything to the contrary contained in this Agreement, the Agent may file UCC financing statements and continuation statements to preserve its Liens and security interests in the GE Collateral and may file such claims and proofs of claim and take such other action as may be necessary to enforce its claim in any bankruptcy, insolvency, reorganization, liquidation or similar proceeding. The Agent agrees not to initiate, prosecute, encourage, or cooperate with any other Person to initiate or prosecute any claim, action or other proceeding (a) challenging the enforceability of GE's claim, (b) challenging the perfection or enforceability of any Liens or security interests in GE Collateral securing any GE Obligations or (c) asserting any claims which the Borrower or any Guarantor may hold with respect to GE or the GE Obligations. 3.4 No right of GE to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act by GE, or by any noncompliance by the Borrower or any Guarantor with the terms and provisions and covenants herein, regardless of any knowledge thereof such holder may have or otherwise be charged with. SECTION 4 Modification of GE Obligations; Reliance 4.1 The Agent consents that, without the necessity of any reservation of rights against the Agent, and without notice to or further assent by the Agent, the GE Obligations and any document or instrument evidencing or governing the terms of any GE Obligations or any collateral security documents or guaranties or documents relating to the GE Obligations may be amended, modified, supplemented or terminated, in whole or in part, as GE may deem advisable from time to time, and any GE Collateral at any time securing payment of any of the GE Obligations may be sold, exchanged, waived, surrendered or released, in each case all without notice to or further assent by the Agent, which will remain bound under this Agreement, and all without impairing, abridging, releasing or affecting the subordination provided for herein, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender or release. The Agent waives any and all notice of the creation, modification, renewal, extension or accrual of any of the GE Obligations. SECTION 5 Miscellaneous 5.1 No failure to exercise, and no delay in exercising on the part of GE, from time to time, any rights, power and privileges under the GE Obligations, or any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and in any agreement relating to any of the GE Obligations and all other agreements, instruments and documents referred to in any of the foregoing are cumulative and shall not be exclusive of any rights or remedies provided by law. 5.2 Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (a) when delivered, (b) when transmitted via telecopy (or other facsimile device) to the number set out below, (c) the business day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (d) the third business day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address set forth below, or at such other address as such party may specify by written notice to the other parties hereto: if to the Borrower or the Guarantors: c/o Insight Health Services Corp. 4400 MacArthur Boulevard Suite 800 Newport Beach, CA 92600 Attn: Thomas V. Croal, CFO Telephone: (714) 476-0733 Telecopy: (714) 851-5981 with a copy to: TC Group, L.L.C. 1001 Pennsylvania Avenue Washington, DC 20004-2505 Attn: David Dupree Telephone: (202) 626-1250 Telecopy: (202) 347-1818 if to the Agent: NationsBank, N. A. Independence Center, 15th Floor NC1-001-15-04 101 North Tryon Street Charlotte, North Carolina 28255 Attn: Agency Services Telephone: (704) 388-1108 Telecopy: (704) 388-9436 with a copy to: NationsBank, N. A. 700 Louisiana Street Houston, Texas 77002 Attn: Scott Singhoff Telephone: (713) 247-6961 Telecopy: (713) 247-6360 if to GE: General Electric Company 20825 Swenson Drive, Suite 100 Waukesha, Wisconsin Attn: Richard S. Berger Telephone: (414) 798-4500 Telecopy: (414) 798-4573 5.3 This Agreement and the rights and obligations of the parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York applicable to contracts made and to be performed in such state, and shall be binding upon and inure to the benefit of GE, the Agent and their respective successors, transferees and assigns. 5.4 This Agreement may be executed by the parties hereto in any number of separate counterparts all of which taken together shall constitute one and the same instrument. 5.5 The subordination provisions contained herein are for the benefit of GE and its successors and assigns as holder from time to time of GE Obligations and may not be rescinded or canceled or modified in any way, nor, unless otherwise expressly provided for herein, may any provision of this Agreement be waived or changed without the express prior written consent thereto of GE. 5.6 This Agreement shall (i) become effective as of the date hereof at such time as a counterpart hereof shall have been executed by each of the Agent, GE, the Borrower, the Guarantors and (ii) shall remain in effect until such time as all GE Obligations shall have been paid irrevocably in full and the agreements evidencing any GE Obligations shall have been terminated. IN WITNESS WHEREOF, the Agent has caused this Agreement to be executed by its duly authorized officer as of the day and year first above written. NATIONSBANK, N.A., in its capacity as Agent for the Lenders under the Credit Agreement By: __________________________________ Title: _______________________________ Acknowledged and accepted: GENERAL ELECTRIC COMPANY, By: ___________________________ Title:_________________________ [Signatures Continued] Each of the undersigned agrees to comply with the provisions of this Agreement applicable to it. INSIGHT HEALTH SERVICES CORP. By: ___________________________ Title: ________________________ Date: _________________________ INSIGHT HEALTH CORP. By: ___________________________ Title: ________________________ Date: _________________________ RADIOLOGY SERVICES CORP. By: ___________________________ Title: ________________________ Date: _________________________ OPEN MRI, INC. By: ___________________________ Title: ________________________ Date: _________________________ MAXUM HEALTH CORP. By: ___________________________ Title: ________________________ Date: _________________________ RADIOSURGERY CENTERS, INC. By: ___________________________ Title: ________________________ Date: _________________________ MTS ENTERPRISES, INC. By: ___________________________ Title: ________________________ Date: _________________________ QUEST FINANCIAL SERVICES, INC. By: ___________________________ Title: ________________________ Date: _________________________ MAXUM HEALTH SERVICES CORP. By: ___________________________ Title: ________________________ Date: _________________________ DIAGNOSTEMPS, INC. By: ___________________________ Title: ________________________ Date: _________________________ DIAGNOSTIC SOLUTIONS CORP. By: ___________________________ Title: ________________________ Date: _________________________ MAXUM HEALTH SERVICES OF NORTH TEXAS, INC. By: ___________________________ Title: ________________________ Date: _________________________ MAXUM HEALTH SERVICES OF ARLINGTON, INC. By: ___________________________ Title: ________________________ Date: _________________________ MAXUM HEALTH SERVICES OF DALLAS, INC. By: ___________________________ Title: ________________________ Date: _________________________ NORTH DALLAS DIAGNOSTIC CENTER, INC.. By: ___________________________ Title: ________________________ Date: _________________________ Exhibit 2.1(b)(i) FORM OF NOTICE OF BORROWING NationsBank, N. A., as Agent for the Lenders 101 North Tryon Street Independence Center, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attention: Agency Services Ladies and Gentlemen: The undersigned, Insight Health Services Corp. (the "Borrower"), refers to the Credit Agreement dated as of October 14, 1997 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Guarantors, the Lenders and NationsBank, N. A., as Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. [The Borrower hereby gives notice pursuant to Section 2.1 of the Credit Agreement that it requests a Revolving Loan advance under the Credit Agreement, and in connection therewith sets forth below the terms on which such Loan advance is requested to be made] [The Borrower hereby gives notice pursuant to Section 2.3 of the Credit Agreement that it requests an Acquisition Loan advance under the Credit Agreement, and in connection therewith sets forth below the terms on which such Loan advance is requested to be made]: (A) Date of Borrowing (which is a Business Day) _______________________ (B) Principal Amount of Borrowing _______________________ (C) Interest rate basis _______________________ (D) Interest Period and the last day thereof _______________________
In accordance with the requirements of Section 5.3, the Borrower hereby reaffirms the representations and warranties set forth in the Credit Agreement as provided in subsection (b) of such Section, and confirms that the matters referenced in subsections (c) and (d) of such Section, are true and correct. INSIGHT HEALTH SERVICES CORP. By: ____________________________________ Name: __________________________________ Title: _________________________________ Exhibit 2.1(e) FORM OF REVOLVING NOTE $_________________ June 12, 1998 FOR VALUE RECEIVED, INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of __________________________, its successors and assigns (the "Lender"), at the office of NationsBank, N. A., as Agent (the "Agent"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of October 14, 1997 among the Borrower, the Guarantors, the Lenders and the Agent (as it may be as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of ________________________DOLLARS ($____________) or, if less than such principal amount, the aggregate unpaid principal amount of all Revolving Loans made by the Lender to the Borrower pursuant to the Credit Agreement, and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.1(d) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. All borrowings evidenced by this Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on Schedule A attached hereto and incorporated herein by reference, or on a continuation thereof which shall be attached hereto and made a part hereof; provided, however, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect the obligation of the Borrower to make payments of principal and interest in accordance with the terms of this Note. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. INSIGHT HEALTH SERVICES CORP. By: _____________________________________ Name: ___________________________________ Title: __________________________________ SCHEDULE A TO THE REVOLVING NOTE OF ______________ DATED JUNE 12, 1998
Unpaid Name of Type Principal Person of Interest Payments Balance Making Date Loan Period Principal Interest of Note Notation - ---- ---- ------- --------- -------- -------- --------
Exhibit 2.3(e) FORM OF ACQUISITION LOAN NOTE $_________________ June 12, 1998 FOR VALUE RECEIVED, INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of __________________________, its successors and assigns (the "Lender"), at the office of NationsBank, N. A., as Agent (the "Agent"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of October 14, 1997 among the Borrower, the Guarantors, the Lenders and the Agent (as it may be as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of ________________________DOLLARS ($____________) or, if less than such principal amount, the aggregate unpaid principal amount of all Acquisition Loans made by the Lender to the Borrower pursuant to the Credit Agreement, and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.3(d) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. All borrowings evidenced by this Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on Schedule A attached hereto and incorporated herein by reference, or on a continuation thereof which shall be attached hereto and made a part hereof; provided, however, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect the obligation of the Borrower to make payments of principal and interest in accordance with the terms of this Note. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. INSIGHT HEALTH SERVICES CORP. By: Name: Title: SCHEDULE A TO THE ACQUISITION LOAN NOTE OF ______________ DATED JUNE 12, 1998
Unpaid Name of Type Principal Person of Interest Payments Balance Making Date Loan Period Principal Interest of Note Notation - ---- ---- -------- --------- -------- -------- --------
Exhibit 2.4(f) FORM OF TRANCHE A TERM NOTE $_________________ June 12, 1998 FOR VALUE RECEIVED, INSIGHT HEALTH SERVICES CORP., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of __________________________, its successors and assigns (the "Lender"), at the office of NationsBank, N. A., as Agent (the "Agent"), at 101 North Tryon Street, Independence Center, NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of October 14, 1997 among the Borrower, the Guarantors, the Lenders and the Agent (as it may be as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than the Maturity Date, in Dollars and in immediately available funds, the principal amount of ________________________DOLLARS ($____________), and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.4(e) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default, the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement, this Note, and all other indebtedness of the Borrower to the Lender shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. All borrowings evidenced by this Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on Schedule A attached hereto and incorporated herein by reference, or on a continuation thereof which shall be attached hereto and made a part hereof; provided, however, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect the obligation of the Borrower to make payments of principal and interest in accordance with the terms of this Note. This Note and the Loans evidenced hereby may be transferred in whole or in part only by registration of such transfer on the Register maintained by or on behalf of the Borrower as provided in Section 11.3(c) of the Credit Agreement. IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. INSIGHT HEALTH SERVICES CORP. By: Name: Title: SCHEDULE A TO THE TRANCHE A TERM NOTE OF _____________ DATED JUNE 12, 1998
Unpaid Name of Type Principal Person of Interest Payments Balance Making Date Loan Period Principal Interest of Note Notation - ---- ---- -------- --------- -------- -------- --------
Exhibit 3.2 FORM OF NOTICE OF EXTENSION/CONVERSION NationsBank, N. A., as Agent for the Lenders 101 North Tryon Street Independence Center, 15th Floor NC1-001-15-04 Charlotte, North Carolina 28255 Attention: Agency Services Ladies and Gentlemen: The undersigned, Insight Health Services Corp. (the "Borrower"), refers to the Credit Agreement dated as of October 14, 1997 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Guarantors, the Lenders and NationsBank, N. A., as Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Borrower hereby gives notice pursuant to Section 3.2 of the Credit Agreement that it requests an extension or conversion of a [Revolving Loan] [Acquisition Loan] [Tranche A Term Loan] outstanding under the Credit Agreement, and in connection therewith sets forth below the terms on which such extension or conversion is requested to be made: (A) Loan Type/Tranche _______________________ (B) Date of Extension or Conversion (which is the last day of the the applicable Interest Period) _______________________ (C) Principal Amount of Extension or Conversion _______________________ (D) Interest rate basis _______________________ (E) Interest Period and the last day thereof _______________________
In accordance with the requirements of Section 5.3, the Borrower hereby reaffirms the representations and warranties set forth in the Credit Agreement as provided in subsection (b) of such Section, and confirms that the matters referenced in subsections (c) and (d) of such Section, are true and correct. INSIGHT HEALTH SERVICES CORP. By: Name: Title: Exhibit 7.1(c) FORM OF OFFICER'S COMPLIANCE CERTIFICATE For the fiscal quarter ended _________________, 19___. I, ______________________, [Title] of Insight Health Services Corp. (the "Borrower") hereby certify that, to the best of my knowledge and belief, with respect to that certain Credit Agreement dated as of October 14, 1997 (as amended, modified, restated or supplemented from time to time, the "Credit Agreement"; all of the defined terms in the Credit Agreement are incorporated herein by reference) among the Borrower, the Guarantors, the Lenders and NationsBank, N. A., as Agent: a. The company-prepared financial statements which accompany this certificate are true and correct in all material respects and have been prepared in accordance with GAAP applied on a consistent basis, subject to changes resulting from normal year-end audit adjustments. b. Since ___________ (the date of the last similar certification, or, if none, the Closing Date) no Default or Event of Default has occurred under the Credit Agreement; c. Consolidated Capital Expenditures for the current fiscal year as of the date hereof are $__________________; and d. Capital expenditures for Open MRI and its Subsidiaries for the current fiscal year as of the date hereof are $_________________. Delivered herewith are detailed calculations demonstrating compliance by the Credit Parties with the financial covenants contained in Section 7.11 of the Credit Agreement as of the end of the fiscal period referred to above. This ______ day of ___________, 19__. INSIGHT HEALTH SERVICES CORP. By: Name: Title: Attachment to Officer's Certificate Computation of Financial Covenants Exhibit 7.12 FORM OF JOINDER AGREEMENT THIS JOINDER AGREEMENT (the "Agreement"), dated as of _____________, 19__, is by and between _____________________, a ___________________ (the "Subsidiary"), and NATIONSBANK, N. A., in its capacity as Agent under that certain Credit Agreement (as it may be amended, modified, restated or supplemented from time to time, the "Credit Agreement"), dated as of October 14, 1997, by and among Insight Health Services Corp., a Delaware corporation (the "Borrower"), the Guarantors, the Lenders and NationsBank, N. A., as Agent. All of the defined terms in the Credit Agreement are incorporated herein by reference. The Subsidiary is an Additional Credit Party, and, consequently, the Credit Parties are required by Section 7.12 of the Credit Agreement to cause the Subsidiary to become a "Guarantor". Accordingly, the Subsidiary hereby agrees as follows with the Agent, for the benefit of the Lenders: 1. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Credit Agreement and a "Guarantor" for all purposes of the Credit Agreement, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Subsidiary hereby (i) jointly and severally together with the other Guarantors, guarantees to each Lender and the Agent, as provided in Section 4 of the Credit Agreement, the prompt payment and performance of the Credit Party Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof. 2. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Security Agreement, and shall have all the obligations of an "Obligor" (as such term is defined in the Security Agreement) thereunder as if it had executed the Security Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting generality of the foregoing terms of this paragraph 2, the Subsidiary hereby grants to the Agent, for the benefit of the Lenders, a continuing security interest in, and a right of set off against any and all right, title and interest of the Subsidiary in and to the Collateral (as such term is defined in Section 2 of the Security Agreement) of the Subsidiary. The Subsidiary hereby represents and warrants to the Agent that: (i) The Subsidiary's chief executive office and chief place of business are (and for the prior four months have been) located at the locations set forth on Schedule 1 attached hereto and the Subsidiary keeps its books and records at such locations. (ii) The type of Collateral owned by the Subsidiary and the location of all Collateral owned by the Subsidiary is as shown on Schedule 2 attached hereto. (iii) The Subsidiary's legal name is as shown in this Agreement and the Subsidiary has not in the past four months changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 3 attached hereto. (iv) The patents and trademarks listed on Schedule 4 attached hereto constitute all of the registrations and applications for the patents and trademarks owned by the Subsidiary. 3. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Pledge Agreement, and shall have all the obligations of a "Pledgor" thereunder as if it had executed the Pledge Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all the terms, provisions and conditions contained in the Pledge Agreement. Without limiting the generality of the foregoing terms of this paragraph 3, the Subsidiary hereby pledges and -1- assigns to the Agent, for the benefit of the Lenders, and grants to the Agent, for the benefit of the Lenders, a continuing security interest in any and all right, title and interest of the Subsidiary in and to Pledged Shares (as such term is defined in Section 2 of the Pledge Agreement) listed on Schedule 5 attached hereto and the other Pledged Collateral (as such term is defined in Section 2 of the Pledge Agreement). 4. The address of the Subsidiary for purposes of all notices and other communications is ____________________, ____________________________, Attention of ______________ (Facsimile No. ____________). 5. The Subsidiary hereby waives acceptance by the Agent and the Lenders of the guaranty by the Subsidiary under Section 4 of the Credit Agreement upon the execution of this Agreement by the Subsidiary. 6. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 7. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be duly executed by its authorized officers, and the Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written. [SUBSIDIARY] By: Name: Title: Acknowledged and accepted: NATIONSBANK, N. A., as Agent By: Name: Title: Schedule 1 TO FORM OF JOINDER AGREEMENT [Chief Executive Office and Chief Place of Business of Subsidiary] Schedule 2 TO FORM OF JOINDER AGREEMENT [Types and Locations of Collateral] Schedule 3 TO FORM OF JOINDER AGREEMENT [Tradenames] Schedule 4 TO FORM OF JOINDER AGREEMENT [Patents and Trademarks] Schedule 5 TO FORM OF JOINDER AGREEMENT [Pledged Shares] Exhibit 11.3(b) FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement dated as of October 14, 1997, as amended and modified from time to time thereafter (the "Credit Agreement") among Insight Health Services Corp., the other Credit Parties party thereto, the Lenders party thereto and NationsBank, N.A., as Agent. Terms defined in the Credit Agreement are used herein with the same meanings. The "Assignor" and the "Assignee" referred to on Schedule 1 agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, without recourse and without representation or warranty except as expressly set forth herein, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement and the other Credit Documents as of the date hereof equal to the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement and the other Credit Documents. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Loans owing to the Assignee will be as set forth on Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Documents or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Credit Party or the performance or observance by any Credit Party of any of its obligations under the Credit Documents or any other instrument or document furnished pursuant thereto; and (iv) attaches the Notes held by the Assignor and requests that the Agent exchange such Notes for new Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and to the Assignor in an amount equal to the Commitment retained by the Assignor, if any, as specified on Schedule 1. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 7.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service or other forms required under Section 3.11. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Agent, unless otherwise specified on Schedule 1. 5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. -1- 6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and unused fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date hereof. ____________________, as Assignor By: Name: Title: _____________________, as Assignee By: Name: Title: Notice address of Assignee: Assignee ========================== Attn: _____________________ Telephone: (___) ________ Telecopy: (___) ________ -2- CONSENTED TO: NATIONSBANK, N.A., * as Agent By: Name: Title: Insight Health Services Corp.* By: Name: Title: - ---------- * Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee." * Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee." -3- SCHEDULE 1 to ASSIGNMENT AND ACCEPTANCE (a) Date of Assignment: (b) Legal Name of Assignor: (c) Legal Name of Assignee: (d) Effective Date of Assignment* : (e) Revolving Commitment Percentage Assigned (expressed as a percentage set forth to at least 8 decimals) % (f) Revolving Commitment Percentage of Assignee after giving effect to this Assignment and Acceptance as of the Effective Date (set forth to at least 8 decimals) % (g) Revolving Commitment Percentage of Assignor after giving effect to this Assignment and Acceptance as of the Effective Date (set forth to at least 8 decimals) % (h) Revolving Committed Amount as of Effective Date $_____________ (i) Dollar Amount of Assignor's Revolving Commitment Percentage as of the Effective Date (the amount set forth in (h) multiplied by the percentage set forth in (g)) $_____________ (j) Dollar Amount of Assignee's Revolving Commitment Percentage as of the Effective Date (the amount set forth in (h) multiplied by the percentage set forth in (f)) $_____________ (k) Tranche A Term Loan Commitment Percentage Assigned (expressed as a percentage set forth to at least 8 decimals) % (l) Tranche A Term Loan Commitment Percentage of Assignee after giving effect to this Assignment and Acceptance on the Effective Date (set forth to at least 8 decimals) % (m) Tranche A Term Loan Commitment Percentage of Assignor after giving effect to this Assignment and Acceptance on the Effective Date (set forth to at least 8 decimals) % (n) Outstanding Balance of Tranche A Term Loan as of Effective Date $_____________ (o) Principal Amount of Assignor's portion of the Tranche A Term Loan after giving effect to this Assignment and Acceptance on Effective Date (the amount set forth in (n) multiplied by the percentage set forth in (m)) $_____________ (p) Principal Amount of Assignee's portion of the Tranche A Term Loan after giving effect to this Assignment and Acceptance on Effective Date (the amount set forth in (n) multiplied by the percentage set forth in (l)) $_____________
- -------- * This date should be no earlier than five Business Days after delivery of this Assignment and Acceptance to the Agent. 4 (q) Acquisition Loan Commitment Percentage Assigned (expressed as a percentage set forth to at least 8 decimals) % (r) Acquisition Loan Commitment Percentage of Assignee after giving effect to this Assignment and Acceptance as of the Effective Date (set forth to at least 8 decimals) % (s) Acquisition Loan Commitment Percentage of Assignor after giving effect to this Assignment and Acceptance as of the Effective Date (set forth to at least 8 decimals) % (t) Acquisition Loan Committed Amount as of Effective Date $_____________ (u) Dollar Amount of Assignor's Acquisition Loan Commitment Percentage as of the Effective Date (the amount set forth in (t) multiplied by the percentage set forth in (s)) $_____________ (v) Dollar Amount of Assignee's Acquisition Loan Commitment Percentage as of the Effective Date (the amount set forth in (t) multiplied by the percentage set forth in (r)) $_____________
5 EX-21.1 8 EXHIBIT 21.1 EXHIBIT 21.1
STATE OF NAME OF SUBSIDIARY INCORPORATION - ------------------------------------------------------------------------ -------------------- InSight Health Corp..................................................... Delaware Radiosurgery Centers, Inc............................................. Delaware Mississippi Mobile Technology, Inc.................................... Mississippi Maxum Health Corp....................................................... Delaware Quest Financial Services, Inc......................................... Delaware Maxum Health Services Corp............................................ Delaware Diagnostic Solutions Corp........................................... Delaware Diagnostic Solutions Corp. II..................................... Delaware Diagnos Temps, Inc. Delaware MTS Enterprises, Inc. Texas Maxum Health Services of Arlington, Inc............................. Texas Maxum Health Services of Dallas, Inc................................ Texas Maxum Health Services of North Texas, Inc. Texas NDDC, Inc........................................................... Texas Open MRI, Inc........................................................... Delaware Radiology Services Corp................................................. Delaware Signal Medical Services, Inc............................................ Delaware
EX-23.2 9 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Orange County, California July 29, 1998 EX-23.3 10 EXH 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our reports included herein and to the references to our firm under the headings "Experts" and "Summary Consolidated Historical Financial Data" in the prospectus. KPMG Peat Marwick LLP Hartford, Connecticut July 31, 1998 EX-23.4 11 EXHIBIT 23.4 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of InSight Health Services Corp. on Form S-4 of our report for Maxum Health Corp. dated March 1, 1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the Headings "Selected Historical Consolidated Financial and Operating Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Dallas, Texas July 29, 1998 EX-23.5 12 EXHIBIT 23.5 EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Registration Statement of InSight Health Services Corp. on Form S-4 of our report dated January 20, 1997, appearing in the Prospectus which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. BAKER NEWMAN & NOYES LIMITED LIABILITY COMPANY July 29, 1998 EX-99.1 13 EXHIBIT 99.1 EXHIBIT 99.1 FORM OF LETTER OF TRANSMITTAL INSIGHT HEALTH SERVICES CORP. OFFER FOR ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED PURSUANT TO THE PROSPECTUS, DATED , 1998 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERED SECURITIES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME ON THE EXPIRATION DATE. THE EXCHANGE AGENT IS: STATE STREET BANK AND TRUST COMPANY BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY: State Street Bank and Trust Company State Street Bank and Trust Company Corporate Trust Dept. Two International Place PO Box 778 Corporate Trust Window, 4th Floor Boston, Massachusetts 02102 Boston, Massachusetts 02110 Attn: Kellie Mullen Attn: Kellie Mullen
BY FACSIMILE: (for Eligible Institutions Only) State Street Bank and Trust Company CONFIRM BY FAX Attn: Corporate Trust Operations (617) 664-5290 CONFIRM BY TELEPHONE: (617) 664-5587 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned acknowledges that he or she has received and reviewed the Prospectus dated , 1998 (the "Prospectus") of InSight Health Services Corp. (the "Issuer") and this Letter of Transmittal (the "Letter"), which together constitute the Issuer's offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $100,000,000 of 9 5/8% Series B Senior Subordinated Notes Due 2008 (the "Exchange Notes") of the Issuer, which have been registered under the Securities Act of 1933, as amended, for a like principal amount of the Issuer's issued and outstanding 9 5/8% Senior Subordinated Notes Due 2008 (the "Outstanding Notes" and, with the Exchange Notes, the "Notes"). Capitalized terms used but not defined herein have the meanings given to them in the Prospectus. For each Outstanding Note accepted for exchange and not validly withdrawn, the holder of such Outstanding Note will receive an Exchange Note having a principal amount equal to that of the surrendered Outstanding Note. If the Exchange Offer has not been consummated on or prior to December 9, 1998 or a shelf registration statement is not declared effective when required, then the Issuer will pay liquidated damages to each Holder of Outstanding Notes for the first 90 days following such date in an amount equal to $.05 per week per $1,000 principal amount of Outstanding Notes held by such Holder. The amount of liquidated damages will increase by an additional $.05 per week per $1,000 principal amount of Outstanding Notes at the beginning of each subsequent 90-day period until the Exchange Offer is consummated or the shelf registration is declared effective, up to a maximum amount of liquidated damages of $.30 per week per $1000 principal amount of Outstanding Notes. The Exchange Notes will bear interest from the last interest payment date of the Outstanding Notes to occur prior to the issue date of the Exchange Notes at the same rate and upon the same terms as the Outstanding Notes. Holders whose Outstanding Notes are accepted for exchange will not receive interest on such Outstanding Notes for any period subsequent to the last interest payment date of the Outstanding Notes to occur prior to the issue date of the Exchange Notes or, if no such interest has been paid, from June 12, 1998, and will be deemed to have waived the right to receive any payment in respect of interest on the Outstanding Notes accrued from and after such date. Pursuant to the Registration Rights Agreement, dated as of June 12, 1998, by and among the Issuer, the Subsidiary Guarantors and the Initial Purchasers (the "Registration Rights Agreement"), the Issuer has agreed to keep the Exchange Offer open for not less than 30 days and not more than 45 days after the date notice thereof is mailed to the holders of the Outstanding Notes (or longer if required by applicable law). The Issuer shall notify the holders of the Outstanding Notes of any extension by means of a press release or other public announcement prior to 9:00 A.M. New York City time, on the next business day after the previously scheduled Expiration Date, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Exchange Offer is not conditioned upon any minimum principal amount of Outstanding Notes being tendered for exchange. However, the Exchange Offer is subject to certain conditions. Please see the Prospectus under the section entitled "Exchange Offer--Certain Conditions to the Exchange Offer." The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Outstanding Notes in any jurisdiction in which the making or acceptance of the Exchange Offer would not be in compliance with the laws of such jurisdiction. This Letter is to be completed by a holder of Outstanding Notes either if certificates are to be forwarded herewith or if a tender of certificates for Outstanding Notes, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in the Prospectus under the section entitled "Exchange Offer--Procedures for Tendering Outstanding Notes." Holders of Outstanding Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Outstanding Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and deliver all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, may tender their Outstanding Notes according to the guaranteed delivery procedures set forth in the Prospectus under the section entitled "Exchange Offer--Guaranteed Delivery Procedures." Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Outstanding Notes must complete this Letter of Transmittal in its entirety. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE BOX BELOW. List below the Outstanding Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Outstanding Notes should be listed on a separate signed schedule affixed hereto. DESCRIPTION OF OUTSTANDING NOTES (SEE INSTRUCTIONS 2, 3, AND 8)
- ------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED CERTIFICATE(S) TENDERED PURSUANT TO THIS LETTER HOLDER(S) OR CEDE & CO. PARTICIPANT(S) (ATTACH ADDITIONAL LIST, IF NECESSARY) - ------------------------------------------------------------------------------------------- TITLE OF AGGREGATE PRINCIPAL SECURITIES AND PRINCIPAL AMOUNT OF CERTIFICATE AMOUNT OF OUTSTANDING NUMBER(S)(1) OUTSTANDING NOTES NOTES TENDERED(2) (Must be in denominations of principal amount of $1,000 or integral multiples thereof) --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- --------------------------------------------------- - -------------------------------------------------------------------------------------------
(1) Certificate numbers not required if Outstanding Notes are being tendered by book-entry transfer. (2) Unless otherwise indicated, a holder will be deemed to have tendered ALL of the Outstanding Notes represented in column 2. / / CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution: _________________________________________________ Account Number: ________________________________________________________________ Transaction Code Number: _______________________________________________________ / / CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): _______________________________________________ Window Ticket Number (if any): _________________________________________________ Date of Execution of Notice of Guaranteed Delivery: ____________________________ Name of Institution which guaranteed delivery: _________________________________ If delivered by Book-Entry Transfer, complete the following: Account Number: ________________________________________________________________ Transaction Code Number: _______________________________________________________ / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: __________________________________________________________________________ Address: _______________________________________________________________________ You are entitled to as many copies as you may reasonably request. If you need more than 10 copies, please so indicate by noting the number of copies required below: . NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY LADIES AND GENTLEMEN: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Issuer the aggregate principal amount of Outstanding Notes indicated above. The undersigned has completed, executed and delivered this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. Subject to, and effective upon, the acceptance for exchange of the Outstanding Notes tendered hereby, the undersigned hereby transfers to, or upon the order of, the Issuer all right, title and interest in and to such Outstanding Notes as are being tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Issuer) with respect to the tendered Outstanding Notes with full power of substitution to (i) deliver certificates for such Outstanding Notes to the Issuer and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Issuer, (ii) present such Outstanding Notes for transfer on the books of the Issuer and (iii) receive for the account of the Issuer all benefits and otherwise exercise all rights of the beneficial ownership of such Outstanding Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed to be irrevocable from and after the Expiration Date and coupled with an interest. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender and transfer the Outstanding Notes tendered hereby and that the Issuer will acquire such Outstanding Notes free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Issuer. The undersigned hereby further represents that (i) any Exchange Notes acquired in exchange for Outstanding Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the undersigned, (ii) neither the holder of such Outstanding Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes and (iii) neither the holder of such Outstanding Notes nor any such other person is an "affiliate," as described in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), of the Issuer. The undersigned also acknowledges that this Exchange Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "Commission"), as set forth in no-action letters issued to third parties, that the Exchange Notes issued in exchange for the Outstanding Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by Holders thereof (other than any such holder that is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and such holders have no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. However, the undersigned acknowledges that the Issuer has not sought its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of the Exchange Notes and that it has no arrangement or understanding with respect to the distribution of the Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Outstanding Notes, it represents that the Outstanding Notes to be exchanged for Exchange Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes pursuant to the Exchange Offer; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Issuer to be necessary or desirable to complete the assignment, transfer and sale of the Outstanding Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in the instructions contained in this Letter or in the Prospectus under the section entitled "Exchange Offer--Withdrawal Rights." For the purposes of the Exchange Offer, the Issuer shall be deemed to have accepted validly tendered Outstanding Notes when, as and if the Issuer has given oral and written notice thereof to the Exchange Agent. If any tendered Outstanding Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Outstanding Notes will be returned (or, in the case of Outstanding Notes tendered by book-entry transfer through the Book-Entry Transfer Facility, will be promptly credited to an account maintained at the Book-Entry Transfer Facility), without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under the "Special Delivery Instructions" as promptly as practicable after the Expiration Date. The undersigned understands that tenders of Outstanding Notes pursuant to the procedures described in the Prospectus under the section entitled "Exchange Offer--Procedures for Tendering Outstanding Notes" and in the instructions hereto will constitute a binding agreement between the undersigned and the Issuer upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please issue the Exchange Notes (and, if applicable, substitute certificates representing Outstanding Notes for any Outstanding Notes not exchanged) in the name(s) of the undersigned or, in the case of a book-entry delivery of Outstanding Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the Exchange Notes (and, if applicable, substitute certificates representing Outstanding Notes for any Outstanding Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Outstanding Notes." In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the Exchange Notes issued in exchange for the Outstanding Notes accepted for exchange in the name(s) of, and return any certificates for Outstanding Notes not tendered or not exchanged to, the person(s) so indicated. The undersigned understands that the Issuer has no obligations pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Outstanding Notes from the name of the registered holder(s) thereof if the Issuer does not accept for exchange any of the Outstanding Notes so tendered. THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OUTSTANDING NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OUTSTANDING NOTES AS SET FORTH IN SUCH BOX ABOVE. SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if certificates for Outstanding Notes not exchanged and/or Exchange Notes are to be issued in the name of someone other than the person or person(s) whose signature(s) appear(s) on this Letter below, or if Outstanding Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue: Exchange Notes and/or Outstanding Notes to: Name: __________________________________________________________________________ (Please Type or Print) Name: __________________________________________________________________________ (Please Type or Print) Address: _______________________________________________________________________ Employer Identification or Social Security Number: _____________________________ (Complete Substitute Form W-9) / / Credit non-accepted Outstanding Notes delivered by book-entry transfer to the following Book-Entry Transfer Facility account: ________________________________________________________________________________ (Book-entry Transfer Facility Account Number, if applicable) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if certificates for Outstanding Notes not exchanged and/or Exchange Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter below or to such person or persons at an address other than shown in the box entitled "Description of Outstanding Notes" on this Letter above. Mail: Exchange Notes and/or Outstanding Notes to: Name: __________________________________________________________________________ (Please Type or Print) Name: __________________________________________________________________________ (Please Type or Print) Address: _______________________________________________________________________ IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF OR AN AGENT'S MESSAGE (TOGETHER WITH THE CERTIFICATES FOR OUTSTANDING NOTES OR A BOOK-ENTRY CONFIRMATION AND ANY OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M. NEW YORK CITY TIME, ON THE EXPIRATION DATE. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) (COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE) I hereby TENDER the Outstanding Notes described above in the box entitled "Description of Outstanding Notes" pursuant to the terms of the Exchange Offer. X____________________________________ ___________________________________, 1998 X____________________________________ ___________________________________, 1998 X____________________________________ ___________________________________, 1998 Signature(s) of Owner(s) Date Area Code and Telephone Number: ________________________________________________ If a holder is tendering any Outstanding Notes, this Letter must be signed by the registered holder(s) as the name(s) appear(s) on the certificate(s) for the Outstanding Notes or on a security position listing or by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 4. Name(s): _______________________________________________________________________ (Please Type or Print) Name:(s): ______________________________________________________________________ (Please Type or Print) Capacity: ______________________________________________________________________ Address: _______________________________________________________________________ (Include Zip Code) SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 4) Signature(s) Guaranteed by an Eligible Institution: ________________________________________________________________________________ (Authorized Signature) ________________________________________________________________________________ (Title) ________________________________________________________________________________ (Name of Firm) ________________________________________________________________________________ (Area Code and Telephone Number) Dated: ___________________________________________________________________, 1998 IMPORTANT TAX INFORMATION Under U.S. federal income tax laws, a registered holder of Notes is required to provide the Trustee (as defined in the Prospectus) (as payor) with such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 below or otherwise establish a basis for exemption from backup withholding. If such holder is an individual, the TIN is his or her U.S. social security number. If the Trustee is not provided with the correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and payments made to such holder with respect to Notes may be subject to backup withholding. Certain holders (including, among others, all corporations and certain foreign persons) are not subject to these backup withholding and reporting requirements. Exempt holders should indicate their exempt status on Substitute Form W-9. A foreign person may qualify as an exempt recipient by submitting to the Trustee a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to that holder's exempt status. A Form W-8 can be obtained from the Trustee. If backup withholding applies, the Trustee is required to withhold 31% of any payments made to the holder or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments made with respect to Notes, the holder is required to provide the Trustee with: (i) the holder's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such holder is awaiting a TIN) and that (A) such holder is exempt from backup withholding, (B) the holder has not been notified by the Internal Revenue Service that the holder is subject to backup withholding as a result of failure to report all interest or dividends or (C) the Internal Revenue Service has notified the holder that the holder is no longer subject to backup withholding; and (ii) if applicable, an adequate basis for exemption. PAYOR'S NAME: STATE STREET BANK AND TRUST COMPANY, N.A. - ----------------------------------------------------------------------------------------- SUBSTITUTE Part I--PLEASE PROVIDE FORM W-9 YOUR TIN IN THE BOX AT Department of the Treasury RIGHT AND CERTIFY BY ------------------- Internal Revenue Service SIGNING AND DATING Social Security Number Payor's Request for Taxpayer BELOW. OR ------------------- Identification Number (TIN) Employer Identification Number ---------------------------------------------------------- CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding either because: (a) I am exempt from backup withholding; or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends; or (c) the IRS has notified me that I am no longer subject to backup withholding.
PART II--AWAITING PART III--EXEMPT / / TIN / /
CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). Signature _______________________________ Date ______________________________ Please fill out your name and address below: ________________________________________________________________________________ Name ________________________________________________________________________________ Address (Number and street) ________________________________________________________________________________ City, State and Zip Code NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER AND THE SOLICITATION. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART II OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number to the payor by the time of payment, 31% of all reportable payments made to me will be withheld until I provide a number and that, if I do not provide my taxpayer identification number within 60 days, such retained amounts shall be remitted to the IRS as backup withholding. Signature ________________________________________ Date ___________________ IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF OR AN AGENT'S MESSAGE (TOGETHER WITH THE CERTIFICATES FOR OUTSTANDING NOTES OR A BOOK-ENTRY CONFIRMATION AND ANY OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M. NEW YORK CITY TIME, ON THE EXPIRATION DATE. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. This letter must be used to forward, and must accompany, all certificates for Outstanding Notes tendered pursuant to the Exchange Offer. INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER AND CERTIFICATES. This letter is to be completed by holders either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in the Prospectus under the section entitled "Exchange Offer--Book-Entry Transfer." Certificates for all physically tendered Outstanding Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter (or manually signed facsimile hereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Outstanding Notes tendered hereby must be in denominations of $1,000 or integral multiples thereof. The method of delivery of this Letter, the Outstanding Notes and all other required documents is at the election and risk of the tendering holders, but the delivery will be deemed made only when actually received and confirmed by the Exchange Agent. If Outstanding Notes are sent by mail, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. No Letters or Outstanding Notes should be sent to the Issuer. Holders who wish to tender their Outstanding Notes and (i) whose Outstanding Notes are not immediately available, (ii) cannot deliver their Outstanding Notes, this Letter or any other documents required hereby to the Exchange Agent prior to the Expiration Date or (iii) cannot comply with the procedures for book-entry tender on a timely basis must tender their Outstanding Notes according to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures: (i) such tender must be made through an Eligible Institution (as defined below); (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by mail, hand delivery or facsimile transmission (immediately followed by mail or hand delivery)) setting forth the name and address of the holder, the certificate number(s) of such Outstanding Notes (except in the case of book-entry tenders) and the principal amount of Outstanding Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the Expiration Date, this Letter (or a facsimile hereof) together with the certificate(s) representing the Outstanding Notes (except in the case of book-entry tenders) and any other required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter (or facsimile hereof), as well as all other documents required by this Letter and the certificate(s) representing all tendered Outstanding Notes in proper form for transfer or a Book-Entry Confirmation with respect to such Outstanding Notes, must be received by the Exchange Agent within five business days after the Expiration Date, all as provided in the Prospectus under the section entitled "Exchange Offer--Guaranteed Delivery Procedures." Any holder who wishes to tender his Outstanding Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Outstanding Notes according to the guaranteed delivery procedures set forth above. As used in this Letter, "Eligible Institution" shall mean a firm which is a member of a registered securities exchange or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or which is otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. All questions as to the validity, eligibility (including time of receipt), acceptance and withdrawal of tendered Outstanding Notes will be determined by the Issuer in its sole discretion, which determination will be final and binding. The Issuer reserves the absolute right to reject any and all Outstanding Notes not properly tendered or any Outstanding Notes the Issuer's acceptance of which would, in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves the right to waive any defects, irregularities or conditions of tender as to particular Outstanding Notes. The Issuer's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes must be cured within such time as the Issuer shall determine. Neither the Issuer, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Outstanding Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Outstanding Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in this Letter, as soon as practicable following the Expiration Date. See the section entitled "Exchange Offer" in the Prospectus. 2. TENDER BY HOLDER. Only a holder of Outstanding Notes may tender such Outstanding Notes in the Exchange Offer. Any beneficial owner whose Outstanding Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on behalf of such beneficial owner. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing this Letter and delivering such owner's Outstanding Notes, either make appropriate arrangements to register ownership of the Outstanding Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. 3. PARTIAL TENDERS AND WITHDRAWALS. Tenders of Outstanding Notes will be accepted only in denominations of $1,000 or integral multiples thereof. If less than all of a holder's Outstanding Notes are to be tendered, the tendering holder(s) should fill in the aggregate principal amount of Outstanding Notes to be tendered in the box above entitled "Description of Outstanding Notes--Principal Amount of Outstanding Notes Tendered." A reissued certificate representing the balance of nontendered Outstanding Notes will be sent to such tendering holder (except in the case of book-entry tenders), unless otherwise provided in the appropriate box on this Letter, promptly after the Expiration Date. All of the Outstanding Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. Any holder who has tendered Outstanding Notes may withdraw the tender by delivering written notice of withdrawal to the Issuer prior to 5:00 p.m., New York City time, on the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at its address set forth on the first page of this Letter. Any such notice of withdrawal must (i) specify the name of the person having deposited the Outstanding Notes to be withdrawn (the "Depositor"); (ii) identify the Outstanding Notes to be withdrawn (including the certificate number or numbers and principal amount of such Outstanding Notes (except in the case of book-entry tenders)); (iii) be signed by the holder in the same manner as the original signature on this Letter by which such Outstanding Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee (as defined in the Prospectus) register the transfer of such Outstanding Notes into the name of the person withdrawing the tender, and (iv) specify the name in which any such Outstanding Notes are to be registered, if different from that of the Depositor. If Outstanding Notes have been delivered or otherwise identified to the Exchange Agent, the name of the registered holder and the certificate numbers of the particular Outstanding Notes withdrawn must also be furnished to the Exchange Agent as aforesaid prior to the physical release of the withdrawn Outstanding Notes. If the Outstanding Notes have been tendered pursuant to the procedures for book-entry tender set forth in the Prospectus, a notice of withdrawal must specify, in lieu of certificate numbers, the name and account number at the Book-Entry Transfer Facility to be credited with the withdrawn Outstanding Notes. Outstanding Notes properly withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer; provided, however, that withdrawn Outstanding Notes may be retendered by again following one of the procedures herein at any time prior to 5:00 p.m., New York City time, on the Expiration Date. All questions as to the validity, form and eligibility (including time of receipt) of notice of withdrawal will be determined by the Issuer, whose determinations will be final and binding on all parties. Neither the Issuer, the Exchange Agent nor any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. See the section entitled "Exchange Offer--Withdrawal Rights" in the Prospectus. 4. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURE. If this Letter is signed by the registered holder of the Outstanding Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates (if applicable) without any change whatsoever. If any tendered Outstanding Notes are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Outstanding Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered holder or holders of the Outstanding Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the Exchange Notes are to be issued, or any untendered Outstanding Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. If this Letter is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder(s) appear(s) on the certificate(s). If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Issuer, proper evidence satisfactory to the Issuer of their authority to so act must be submitted. Endorsements on certificates for Outstanding Notes or signatures on bond powers required by this Instruction 4 must be guaranteed by an Eligible Institution. Signatures on this Letter need not be guaranteed by an Eligible Institution, provided the Outstanding Notes are tendered: (i) by a registered holder of such Outstanding Notes (which term, for purposes of the Exchange Offer, includes any participant in the Book-Entry Transfer Facility system whose name appears on a security position listing as the holder of such Outstanding Notes) who has not completed the box entitled "Special Issuance Instructions" on this Letter or (ii) for the account of an Eligible Institution. 5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of Outstanding Notes should indicate in the applicable box the name and address in or to which Exchange Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Outstanding Notes not exchanged are to be issued or sent, if different from the name or address of the Person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Holders tendering Outstanding Notes by book-entry transfer may request that Outstanding Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such holder may designate hereon. If no such instructions are given, such Outstanding Notes not exchanged will be returned to the name or address of the person signing this Letter. 6. WAIVER OF CONDITIONS. Subject to the terms and conditions set forth in the Prospectus, the Issuer reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 7. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Outstanding Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Outstanding Notes for exchange. Neither the Issuer, the Exchange Agent nor any other person is obligated to give notice of defects or irregularities with respect to any tender of Outstanding Notes, nor shall any of them incur any liability for failure to give any such notice. 8. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES. Any holder whose Outstanding Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, may be directed to the Exchange Agent, at the address indicated on the first page of this Letter. EX-99.2 14 EXHIBIT 99.2 EXHIBIT 99.2 FORM OF NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY FOR INSIGHT HEALTH SERVICES CORP. As set forth in the Prospectus dated , 1998 (the "Prospectus") of InSight Health Services Corp. (the "Issuer") and in the accompanying Letter of Transmittal and instructions thereto (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to accept the Issuer's offer (the "Exchange Offer") to exchange its outstanding 9 5/8% Senior Subordinated Notes Due 2008 (the "Outstanding Notes") for its Series B 9 5/8% Senior Subordinated Notes Due 2008 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended, if the Letter of Transmittal or any other documents required thereby cannot be delivered to the Exchange Agent, or the procedure for book-entry transfer cannot be completed, prior to 5:00 P.M., New York City time, on the Expiration Date (as defined herein). This form may be delivered by an Eligible Institution by hand or transmitted by facsimile transmission, overnight courier or mail to the Exchange Agent as set forth below. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERED SECURITIES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME ON THE EXPIRATION DATE. DELIVERY TO: State Street Bank and Trust Company, N.A., as Exchange Agent If by Mail, Hand or Overnight Courier: State Street Bank and Trust Company, N.A. 61 Broadway, 15th Floor New York, New York 10006 Attention: __________ or If by Facsimile: (212) 612-3201 (for Eligible Institutions only) Confirm by Telephone: (212) 612-3450 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA A FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal to be used to tender Outstanding Notes is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to the Issuer, upon the terms and subject to the conditions to the Exchange Offer set forth in the Prospectus and the Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Outstanding Notes set forth below pursuant to the guaranteed delivery procedures described in the Prospectus under the section entitled "Exchange Offer--Guaranteed Delivery Procedures." The undersigned understands that tenders of Outstanding Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Outstanding Notes pursuant to the Exchange Offer may only be withdrawn prior to 5:00 P.M., New York City time, on the Expiration Date pursuant to the procedures described in the Prospectus under the section entitled "Exchange Offer--Withdrawal Rights." Tenders of Outstanding Notes may also be withdrawn if the Exchange Offer is terminated without any such Outstanding Notes being purchased thereunder or as otherwise provided in the Prospectus. All authority thereto conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW. Principal Amount of Outstanding Notes: _________________________________________ Name(s) of Holder(s): __________________________________________________________ Address: _______________________________________________________________________ Area Code and Telephone No.: ___________________________________________________ Signature(s) Dated: Dated: Signature(s)
The Depository Trust Company Account No.: ______________________________________ This Notice of Guaranteed Delivery must be signed by (i) the Holders(s) of Outstanding Notes exactly as its (their) name(s) appear on a security position listing maintained by The Depository Trust Company as the owner of Outstanding Notes or (ii) by person(s) authorized to become Holder(s) by documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information: PLEASE PRINT NAME(S) AND ADDRESS(ES) OF PERSON SIGNING ABOVE. Name(s):________________________________________________________________________ Capacity:_______________________________________________________________________ Address(es):____________________________________________________________________ GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees that delivery to the Exchange Agent of a confirmation of the book-entry transfer of such Outstanding Notes into the Exchange Agent's account at The Depository Trust Company, pursuant to the procedures for book-entry transfer set forth in the Prospectus, with delivery of either a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signatures and any other documents required by the Letter of Transmittal, will be received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND OUTSTANDING NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME PERIOD SET FORTH HEREIN AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED. Name of Firm Authorized Signature DTC Participant Number Title Address Name (Please Print or Type) City State Zip Code Area Code and Telephone No. Contact Name Date
NOTE: DO NOT SEND CERTIFICATES FOR OUTSTANDING NOTES WITH THIS FORM. CERTIFICATES FOR OUTSTANDING NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL. EX-99.3 15 EXHIBIT 99.3 EXHIBIT 99.3 FORM OF LETTERS TO DTC PARTICIPANTS OFFER FOR ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF INSIGHT HEALTH SERVICES, CORP. To The Depository Trust Company Participants: We are enclosing herewith the materials listed below relating to the offer by InSight Health Services Corp. (the "Issuer") to exchange its 9 5/8% Series B Senior Subordinated Notes Due 2008 (the "Exchange Notes"), pursuant to an offering registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount of its issued and outstanding 9 5/8% Senior Subordinated Notes Due 2008 (the "Outstanding Notes") upon the terms and subject to the conditions set forth in the Issuer's Prospectus dated , 1998, and the related Letter of Transmittal (which together constitute the "Exchange Offer"). Enclosed herewith are copies of the following documents; 1. Prospectus dated , 1998; 2. Letter of Transmittal; 3. Notice of Guaranteed Delivery; 4. Instruction to Book-Entry Transfer Participant from Owner; and 5. Letter which may be sent to your clients for whose account you hold Outstanding Notes in your name or in the name of your nominee, to accompany the instruction form referred to above, for obtaining such client's instruction with regard to the Exchange Offer. WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. The Exchange Offer is not conditioned upon any minimum number of Outstanding Notes being tendered. To participate in the Exchange Offer, a beneficial holder must cause a DTC Participant to tender such holder's Outstanding Notes to the account of State Street Bank and Trust Company, N.A. (the "Exchange Agent") maintained at The Depository Trust Company ("DTC") for the benefit of the Exchange Agent through DTC's Automated Tender Offer Program ("ATOP"), including transmission of a computer-generated message that acknowledges and agrees to be bound by the terms of the Letter of Transmittal. By complying with DTC's ATOP procedures with respect to the Exchange Offer, the DTC Participant confirms on behalf of itself and the beneficial owners of tendered Outstanding Notes all provisions of the Letter of Transmittal applicable to it and such beneficial owners as fully as if it completed, executed and returned the Letter of Transmittal to the Exchange Agent. Pursuant to the Letter of Transmittal, each holder of Outstanding Notes will represent to the Issuer that (i) the Exchange Notes acquired in the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is such holder, (ii) neither the holder of the Outstanding Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes, (iii) if the holder is not a broker-dealer or is a broker-dealer but will not receive Exchange Notes for its own account in exchange for Outstanding Notes, neither the holder nor any such other person is engaged in or intends to participate in a distribution of the Exchange Notes or has any arrangement or understanding with respect to the distribution of the Exchange Notes and (iv) neither the holder nor any such person is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act. If the tendering holder is a broker-dealer that will receive Exchange Notes for its own account pursuant to the Exchange Offer, you represent on behalf of such broker-dealer that the Outstanding Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities, and acknowledge on behalf of such broker-dealer that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes, such broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The enclosed Instruction to the Book Entry Transfer Participant from Owner contains an authorization by the beneficial owners of the Outstanding Notes for you to make the foregoing representations. The Issuer will not pay any fee or commission to any broker or dealer or to any other persons (other than the Exchange Agent) in connection with the solicitation of tenders of Outstanding Notes pursuant to the Exchange Offer. The Company will pay or cause to be paid any transfer taxes payable on the transfer of Outstanding Notes [pursuant to the Exchange Offer, except as otherwise provided in Instruction 5 of the enclosed Letter of Transmittal.] Additional copies of the enclosed material may be obtained from State Street Bank and Trust Company, N.A., 61 Broadway, 15th Floor, New York, NY 10006, Attention: . Very truly yours, INSIGHT HEALTH SERVICES CORP. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE AGENT OF INSIGHT HEALTH SERVICES CORP. OR STATE STREET BANK AND TRUST COMPANY, N.A., OR AUTHORIZE YOU TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN. EX-99.4 16 EXHIBIT 99.4 EXHIBIT 99.4 FORM OF LETTER TO CLIENTS AND FORM OF INSTRUCTION TO BOOK-ENTRY TRANSFER PARTICIPANTS OFFER FOR ALL OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 IN EXCHANGE FOR 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OF INSIGHT HEALTH SERVICES CORP. To Our Clients: We are enclosing herewith a Prospectus, dated , 1998 of InSight Health Services Corp. (the "Issuer") and a related Letter of Transmittal (which together constitute the "Exchange Offer") relating to the offer by the Issuer to exchange its 9 5/8% Series B Senior Subordinated Notes Due 2008 (the "Exchange Notes"), pursuant to an offering registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount of its issued and outstanding 9 5/8% Senior Subordinated Notes Due 2008 (the "Outstanding Notes") upon the terms and subject to the conditions set forth in the Exchange Offer. PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. The Exchange Offer is not conditioned upon any minimum number of Outstanding Notes being tendered. We are the participant in a book-entry transfer facility of Outstanding Notes held by us for your account. A tender of such Outstanding Notes can be made only by us as the participant in such book-entry transfer facility and pursuant to your instructions. The Letter of Transmittal is furnished to you for your information only and cannot be used by you to tender Outstanding Notes held by us for your account. We request instructions as to whether you wish to tender any or all of the Outstanding Notes held by us for your account pursuant to the terms and conditions of the Exchange Offer. We also request that you confirm that we may on your behalf make the representations contained in the Letter of Transmittal that are to be made with respect to you as beneficial owner. Pursuant to the Letter of Transmittal, each holder of Outstanding Notes will represent to the Issuer that (i) the Exchange Notes acquired in the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, (ii) the holder of the Outstanding Notes has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes, (iii) if the holder is not a broker-dealer or is a broker-dealer but will not receive Exchange Notes for its own account in exchange for Outstanding Notes, the holder is not engaged in and does not intend to participate in a distribution of the Exchange Notes and that it has no arrangement or understanding with respect to the distribution of the Exchange Notes and (iv) the holder is not an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act. If the tendering holder is a broker-dealer that will receive Exchange Notes for its own account pursuant to the Exchange Offer, we will represent on behalf of such broker-dealer that the Outstanding Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities, and acknowledge on behalf of such broker-dealer that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes, such broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Very truly yours, INSTRUCTION TO BOOK-ENTRY TRANSFER PARTICIPANT FROM OWNER OF INSIGHT HEALTH SERVICES CORP. 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 To Participant of the Book Entry Transfer Facility: The undersigned hereby acknowledges receipt of the Prospectus dated , 1998 of InSight Health Services Corp. (the "Issuer") and a related Letter of Transmittal (which together constitute the "Exchange Offer"). Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus. This will instruct you, the book-entry transfer facility participant, as to the action to be taken by you relating to the Exchange Offer with respect to the Outstanding Notes held by you for the account of the undersigned. The aggregate face amount of the Outstanding Notes held by you for the account of the undersigned is (fill in amount): $ of the 9 5/8% Senior Subordinated Notes Due 2008. With respect to the Exchange Offer, the undersigned hereby instructs you (check appropriate statement): A. To TENDER the following Outstanding Notes held by you for the account of the undersigned (insert principal amount of Outstanding Notes to be tendered): $ of the 9 5/8% Senior Subordinated Notes Due 2008, and not to tender other Outstanding Notes, if any, held by you for the account or the undersigned; OR B. NOT to tender any Outstanding Notes held by you for the account of the undersigned. If the undersigned instructs you to tender the Outstanding Notes held by you for the account of the undersigned, it is understood that you are authorized to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representations and warranties contained in the Letter of Transmittal that are to be made with respect to the undersigned as a beneficial owner, including but not limited to; the representations that (i) the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the undersigned, (ii) the undersigned has no arrangement nor understanding with any person to participate in the distribution of such Exchange Notes, (iii) if the undersigned is not a broker-dealer or is a broker-dealer but will not receive Exchange Notes for its own account in exchange for Outstanding Notes, the undersigned is not engaged in and does not intend to participate in a distribution of the Exchange Notes and that it has no arrangement or understanding with respect to the distribution of the Exchange Notes and (iv) the undersigned is not an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act. If the undersigned is a broker-dealer (whether or not it is also an "affiliate") that will receive Exchange Notes for its own account pursuant to the Exchange Offer, it represents that such Outstanding Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities, and it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. SIGN HERE Signature(s): __________________________________________________________________ Name(s) (please print): ________________________________________________________ Address: _______________________________________________________________________ Telephone Number: ______________________________________________________________ Taxpayer Identification or Social Security Number: _____________________________ Date: __________________________________________________________________________ -----END PRIVACY-ENHANCED MESSAGE-----