-----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, E1pZdivGoSmUVDOEdYp7u8PKqnXbU6GQW/BHx2xxytsVZrpUsExhnzO0tKRjzuXC TNomKK0mBsHFxYbjHSignQ== 0001047469-99-037069.txt : 20030212 0001047469-99-037069.hdr.sgml : 20030212 19990928161319 ACCESSION NUMBER: 0001047469-99-037069 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT HEALTH SERVICES CORP CENTRAL INDEX KEY: 0001012697 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 330702770 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28622 FILM NUMBER: 99718803 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 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-28622 INSIGHT HEALTH SERVICES CORP. (Exact name of Registrant as specified in its charter) DELAWARE 33-0702770 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) No.) 4400 MACARTHUR BLVD., SUITE 800, NEWPORT BEACH, CA 92660 (Address of principal executive offices) (Zip code) (949) 476-0733 (Registrant's telephone number including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of the Registrant's knowledge, in definitive proxy or informative statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _______ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 15, 1999 (based on the closing price on the NASDAQ Small Cap Market on that date) was $17,578,769. The number of shares outstanding of the Registrant's Common Stock as of September 15, 1999 was 2,880,321. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the next Annual Meeting of Stockholders of the Registrant are incorporated herein by reference in Part III. Certain exhibits are incorporated herein by reference as set forth in Item 14(a)(3), Exhibits, in Part IV. PART I ITEM 1. BUSINESS The principal executive offices of InSight Health Services Corp. (the "Company" or "InSight") are located at 4400 MacArthur Blvd., Suite 800, Newport Beach, California 92660, and its telephone number is (949) 476-0733. RECAPITALIZATION AND FINANCING 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 (the "Carlyle Warrants") to purchase up to 250,000 shares of common stock at an 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 Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," below) in exchange for (A) the issuance of 7,000 shares of newly issued convertible preferred stock, Series C of the Company, par value $0.001 per share ("Series C Preferred Stock"), initially convertible, at the option of GE, in the aggregate into 835,821 shares of common stock, and (B) warrants (the "GE Warrants") to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share, and (ii) exchanged all of its convertible preferred stock, Series A of the Company, for an additional 20,953 shares of Series C Preferred Stock, initially convertible, at the option of GE, in the aggregate into 2,501,760 shares of common stock; and (c) the Company executed a credit agreement with Bank of America, N.A. (formerly NationsBank, N.A.) ("BofA") pursuant to which BofA, as agent and lender, provided a total of $125 million in senior secured credit 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 (the "Bank Financing"). Initial funding under the Bank Financing occurred on October 22, 1997 and, 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. Pursuant to the terms of the Recapitalization, the number of directors comprising the Company's Board of Directors (the "Board") is currently fixed at nine. Six directors (the "Common Stock Directors") are elected by the common stockholders, one of whom (the "Joint Director") is to be proposed by Carlyle and GE and approved by a majority of the Board in its sole discretion. Of the three remaining directors (the "Preferred Stock Directors"), two are elected by the holders of the Series B Preferred Stock and one 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 thereafter be elected by the common stockholders. The Board currently consists of seven directors, four of whom are Common Stock Directors and three of whom are Preferred Stock Directors. There is a vacancy in the Common Stock Directors, as a result of the resignation of E. Larry Atkins, the Company's President and Chief Executive Officer and a Common Stock Director, on July 12, 1999. The vacancy created for the Joint Director has not yet been filled. The common stockholders currently are entitled to elect a majority of the Board. Under certain circumstances, 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 holders of the Series D Preferred Stock would be entitled to elect a majority of the Board. If 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 2 ("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 outstanding common stock currently owned by the Series B Preferred Stock holders is approximately 33% and the percentage of 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, the aggregate percentage of common stock owned by the Series D Preferred Stock holders would be approximately 70%. Thus, as a result of such conversion, designees of the Series D Preferred Stock holders would constitute a majority (but less than two-thirds) of the Board. The less than two-thirds limitation would expire at the second annual stockholders' meeting after the Conversion Date. On June 12, 1998, the Company completed a refinancing of substantially all of the Company's long-term debt through the issuance of $100 million of 9 5/8% senior subordinated notes (the "Notes") due 2008. Concurrently with the issuance of the Notes, the Company entered into an amendment to and restatement of the Bank Financing, pursuant to which, the Company refinanced and consolidated its prior $20 million tranche and $40 million tranche into a $50 million term loan facility with a six-year amortization, a $25 million revolving working capital facility with a five-year maturity and a $75 million acquisition facility with a six-year maturity. CENTERS IN OPERATION The Company provides diagnostic imaging, treatment and related management services in 31 states throughout the United States. The Company's services are provided through a network of 77 mobile magnetic resonance imaging ("MRI") facilities ("Mobile Facilities"), 35 fixed-site MRI facilities ("Fixed Facilities"), 22 multi-modality imaging centers ("Centers"), five mobile lithotripsy facilities, one Leksell Stereotactic Gamma Unit ("Gamma Knife") treatment center, and one radiation oncology center. An additional radiation oncology center is operated by the Company as part of one of its Centers. The Company's operations are located throughout the United States, with a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio). At its Centers, the Company offers other services in addition to MRI, including computed tomography ("CT"), diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, lithotripsy, nuclear medicine, nuclear cardiology, and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services and training/applications, marketing, radiology management services, patient scheduling, utilization review and billing and collection services. DIAGNOSTIC IMAGING AND TREATMENT TECHNOLOGY During approximately the last 20 years there has been a major effort undertaken by the medical and scientific communities to develop cost-effective diagnostic imaging technologies and to minimize the risks associated with the application of such technologies. The major categories of diagnostic imaging systems currently offered in the medical marketplace are conventional x-ray, CT scanners, digital ultrasound systems, computer-based nuclear gamma cameras, radiography/fluoroscopy systems and MRI systems, each of which (other than conventional x-ray) represents the marriage of computer technology and various medical imaging modalities. Patients exposed to x-rays and to gamma rays employed in nuclear medicine receive potentially harmful ionizing radiation. Much of the thrust of product development during the period has been to reduce the hazards associated with conventional x-ray and nuclear medicine techniques and to develop new, virtually harmless imaging technologies such as ultrasound and MRI. MRI: The Company believes that the introduction of MRI technology into the health care marketplace marked a significant advance in diagnostic medicine. Magnetic resonance is a technique that utilizes low energy radiowaves to manipulate protons (usually hydrogen) in the body. MRI systems place patients in a magnetic field. Once in the magnetic field, the protons in a patient's body will tend to align with the magnetic field. Radio frequency ("RF") waves, produced by a radio antenna coil, which surrounds the body part to be imaged, are "pulsed" against the magnetic field. The RF energy is then turned off, and the protons are observed for different types of behavior, movement or "relaxation." Different tissues have different relaxation times, depending on the amount of hydrogen or water in each proton. The data on each proton's behavior is collected digitally by the system's computer and then reconstructed into cross-sectional images in three-dimensional planes of orientation. The resulting image reproduces soft tissue anatomy (as found in the brain, spinal cord and interior ligaments of body joints such as the knee) with 3 superior clarity, not available by any other currently existing imaging modality. A typical MRI examination takes from 20 to 45 minutes. MRI systems are typically priced in the range of $0.9 million to $2 million each, depending upon the system configuration, magnet design and field strength. There are no known hazards to the general population from magnetic and RF fields of the intensity to which a patient is exposed in a clinical MRI system. Equipment literature nonetheless recommends that, until further information is available, pregnant women should be scanned only under limited circumstances. Furthermore, MRI magnets may disrupt the operation of cardiac pacemakers and may react with ferrous clips utilized in various surgical procedures, so that individuals with such devices may be excluded from examination with MRI systems, and access to the area surrounding the MRI facility may also be controlled to avoid these possible hazards. Additionally, some MRI examinations require injection of a paramagnetic contrast material. Although it is extremely unusual, some patients may develop a significant adverse reaction to this contrast material; however, chances of fatalities as a result of such reaction are remote. Because the signals used to produce magnetic resonance images contain both chemical and structural information, the Company believes this technique has greater potential for many important diagnostic applications than any other imaging technology currently in use. While existing MRI systems demonstrate excellent portrayals of anatomical structures within the human body, of even greater significance is the fact that MRI is also sensitive to subtle differences between tissues. Thus, MRI offers not only the opportunity for highly effective classical diagnosis, but also the potential for future monitoring of chemical processes within the body. OPEN MRI: Recent technological advances in software and gradient coil technology for MRI systems have allowed equipment with lower magnetic field strength and open architecture design to offer significantly improved image quality. Most Open MRI systems use permanent electromagnetic technology, which substantially lowers both siting and service costs, but does not provide images as efficiently as high-field MRI systems. The open design allows for studies not normally possible in conventional MRI systems, including exams of infants, pediatric patients, claustrophobic patients, large or obese patients and patients suffering from post-traumatic stress syndrome. Open MRI is also capable of conducting musculoskeletal exams that require the patient to move or flex, such as kinematic knee studies. A typical Open MRI non-kinematic exam takes from 45 to 90 minutes. Open MRI systems are priced in the range of $0.6 million to $1 million each. CT: CT technology consists of a doughnut-shaped gantry structure into which a patient, resting on a remotely controlled couch assembly, is positioned to scan the anatomical region of interest. The scanning process is performed by the rotation of a high output x-ray tube around the patient. The x-ray tube emits a thin fan-shaped beam of x-rays that passes through the patient and is absorbed by an array of x-ray detectors located on the opposite side of the patient from the x-ray tube. The detected x-rays are then converted into digital measurements of x-ray intensity directly proportional to the density of the portion of the patient through which the beam passes. These digital measurements of x-ray intensity are then processed by a specialized image reconstruction computer system into a cross-sectional image of the anatomical region of interest. The patient is then indexed on the couch and another scan performed and then another, creating a "stack" of cross-sectional images constituting the complete diagnostic imaging procedure. Typical scanning times for a single cross-sectional image are in the one second to six second range. A complete CT examination takes from 15 to 45 minutes, depending on the complexity of the examination and number of individual cross-sectional images required. The current selling prices of CT systems fall in the range of $0.3 million to $1.5 million each, depending upon the specific performance characteristics of the systems. Based on the fact that CT systems have been commercially marketed for approximately 20 years, the Company believes that CT is a relatively mature technology and, therefore, not subject to significant risk of obsolescence. Certain CT examinations require the injection of an iodine-based contrast material, allowing for better visualization of the anatomy. Although it is very unusual, some patients may develop a significant adverse reaction to this contrast material. Fatalities as a result of such reaction have occurred but are rare. In an effort to scan only appropriate patients, all patients are required to answer a questionnaire, which helps to identify those patients who may suffer an adverse reaction to this contrast material. ULTRASOUND: Ultrasound systems emit, detect and process high frequency sound waves to generate images of soft tissues and internal body organs. The sound waves used in ultrasound do not involve ionizing radiation and are not known to cause any harmful effects to the patient. 4 NUCLEAR MEDICINE: Nuclear medicine gamma cameras, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals injected or inhaled into the body, are used to provide information about organ function as opposed to anatomical structure. X-RAY: X-ray is the most common energy source used in imaging the body and is now employed in the three following imaging modalities: (i) conventional x-ray systems, the oldest method of imaging, are typically used to image bones and contrast-enhanced vasculature and organs and constitute the largest number of installed systems; (ii) CT scanners utilize computers to produce cross-sectional images of particular organs or areas of the body; and (iii) digital x-ray systems add computer image processing capability to conventional x-ray systems. RADIATION ONCOLOGY: Radiation oncology generally uses external beam radiation from a linear accelerator to treat cancer with ionizing radiation of the same type, but at higher doses, as for diagnostic x-rays. In addition to x-rays, certain linear accelerators have the capacity to produce electrons. While x-ray radiation can penetrate the body a certain distance before delivering its maximum dose, and therefore can treat internal structures, electrons have less penetrating ability and permit the clinician to treat superficial lesions. Radiation oncology also includes brachytherapy, which implants radioactive sources directly into or near a tumor. LITHOTRIPSY: Lithotripsy is a non-invasive procedure for the treatment of kidney stones, typically performed on an outpatient basis, that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery. Lithotripters shatter kidney stones through the use of extracorporeal shockwaves, following which the resulting kidney stone fragments pass out of the body naturally. GAMMA KNIFE: The Gamma Knife is a state-of-the-art radiosurgical device used to treat intracranial neoplasma and vascular anomalies, which are inaccessible or unsuitable for conventional invasive surgery. The Gamma Knife was designed to provide neurosurgeons and radiation therapists with the ability to perform radiosurgery, using high-energy gamma rays, instead of conventional invasive techniques (open surgery), thereby generally eliminating the risk of infection and intracerebral bleeding. The Gamma Knife delivers a single high dose of ionizing radiation emanating from 201 individual Cobalt 60 sources focused on a common target producing an intense concentration of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly and harmlessly over the patient's skull. The Gamma Knife treatment requires no open surgical intervention, no lengthy hospital stay and no risk of post-surgical bleeding or infection. When compared to the average length of stay and costs associated with conventional surgery, the Gamma Knife greatly reduces the cost of neurosurgical treatment. Typical treatment time is approximately 10 to 15 minutes per area of interest. In addition, other applications for the Gamma Knife are currently being developed. Investigative work is being conducted to treat patients for chronic pain and motion disorders such as Parkinson's disease, epilepsy and trigeminal neuralgia. These applications represent an expanded market for the Gamma Knife. The current selling price of a Gamma Knife system is approximately $3 million. BUSINESS STRATEGY The Company believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through consolidation. The Company's strategy is to further develop and expand regional diagnostic imaging networks that emphasize quality of care, produce cost-effective diagnostic information and provide superior service and convenience to its customers. The strategy of the Company is focused on the following components: (i) to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing regional diagnostic imaging networks through geographically disciplined acquisitions; (ii) to develop or acquire additional regional networks in strategic locations where the Company can offer a broad range of services to its customers and realize increased economies of scale; (iii) to continue to market current diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume; (iv) to strengthen the regional diagnostic imaging networks by focusing on managed care customers; (v) to implement a variety of new products and services designed to further leverage its core business strengths, including: Open MRI systems and the radiology co-source product which involves the joint ownership and management of the physical and technical operations of the multi-modality radiology department of a hospital or multi-specialty physician group. In fiscal 1999, the Company completed two acquisitions as follows: a 70% interest in a partnership which owns four Centers and two Fixed Facilities in Buffalo, New York and; and a 100% interest in three Centers and two Fixed Facilities in Phoenix, Arizona. The Company utilized its Bank Financing to fund the purchase price of these acquisitions. In addition, on July 22, 1999, the Company opened its second radiology co-source outpatient Center in Granada Hills, California, which was financed with internally generated funds. 5 GOVERNMENT REGULATION The health care industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretation of existing laws can have a material effect on permissible activities of the Company, the relative costs associated with doing business and the amount of reimbursement by government and other third-party payors. The federal government and all states in which the Company currently operates regulate various aspects of the Company's business. Failure to comply with these laws could adversely affect the Company's ability to receive reimbursement for its services and subject the Company and its officers to penalties. ANTI-KICKBACK STATUTES: The Company is subject to federal and state laws, which govern financial and other arrangements between health care providers. These include the federal anti-kickback statute which prohibits bribes, kickbacks, rebates and any other direct or indirect remuneration in return for or to induce the referral of an individual to a person for the furnishing, directing or arranging of services, items or equipment for which payment may be made in whole or in part under Medicare, Medicaid or other federal health care programs. Violation of the anti-kickback statute may result in criminal penalties and exclusion from the Medicare and other federal health care programs. Many states have enacted similar statutes, which are not limited to items and services paid for under Medicare or a federally funded health care program. In recent years, there has been increasing scrutiny by law enforcement authorities, the Department of Health and Human Services ("HHS"), the courts and Congress of financial arrangements between health care providers and potential sources of patient and similar referrals of business to ensure that such arrangements are not designed as mechanisms to pay for patient referrals. HHS interprets the anti-kickback statute broadly to apply, under certain circumstances, to distributions of partnership and corporate profits to investors who refer federal health care program patients to a corporation or partnership in which they have an ownership interest and to payments for service contracts and equipment leases that are designed to provide direct or indirect remuneration for patient referrals or similar opportunities to furnish reimbursable items or services. In July 1991, HHS issued "safe harbor" regulations that set forth certain provisions which, if met, will assure that health care providers and other parties who refer patients or other business opportunities, or who provide reimbursable items or services, will be deemed not to violate the anti-kickback statute. The Company is also subject to separate laws governing the submission of false claims. The Company believes that its operations materially comply with the anti-kickback statutes. STARK II; STATE PHYSICIAN SELF-REFERRAL LAWS: A federal law, commonly known as the "Stark Law" or "Stark II," also imposes civil penalties and exclusions for referrals for "designated health services" by physicians to certain entities with which they have a financial relationship (subject to certain exceptions). "Designated health services" include, among other things, radiology services, including MRIs, CTs and ultrasound, and inpatient and outpatient hospital services. The law applies only to services reimbursable by Medicare or Medicaid. The Stark Law is self-effectuating and does not require implementing regulation; however, while implementing regulations have been issued relating to referrals for clinical laboratory services, final regulations have not been issued regarding the other designated health services. In addition, several states in which the Company operates have enacted or are considering legislation that prohibits "physician self-referral" arrangements or requires physicians to disclose to their patients any financial interest they may have with a health care provider whom they recommend. Possible sanctions for violating these provisions include loss of licensure and civil and criminal sanctions. Such state laws vary from state to state and seldom have been interpreted by the courts or regulatory agencies. Nonetheless, strict enforcement of these requirements is likely. Although the Company believes its operations materially comply with these federal and state physician self-referral laws, there can be no assurance that Stark II or other regulations will not be interpreted or changed in a manner that would have a material adverse effect on the Company's business, financial condition or results of operations. FDA PREMARKET APPROVALS: The U.S. Food and Drug Administration ("FDA") has issued the requisite premarket approval for all of the MRI, CT, lithotripsy and Gamma Knife systems utilized by the Company. The Company does not believe that any further FDA approval is required in connection with equipment currently in operation or proposed to be operated. RADIOLOGIST LICENSING: The radiologists with whom the Company may enter into agreements to provide professional services are subject to licensing and related regulations by the states. As a result, the Company requires its radiologists to have and maintain appropriate licensure. The Company does not believe that such laws and regulations will either prohibit or require licensure approval of its business operations, although no assurances can be made that such laws and regulations will not be interpreted to extend such prohibitions or requirements to the Company's operations. 6 LIABILITY INSURANCE: The hospitals and physicians who use the Company's diagnostic imaging systems are involved in the delivery of health care services to the public and, therefore, are exposed to the risk of liability claims. The Company's position is that it does not engage in the practice of medicine. The Company provides only the equipment and technical components of diagnostic imaging, including certain limited nursing services, and has not experienced any material losses due to claims for malpractice. Nevertheless, claims for malpractice have been asserted against the Company in the past and any future claims, if successful, could result in substantial damage awards to the claimants, which may exceed the limits of any applicable insurance coverage. The Company maintains professional liability insurance in amounts it believes are adequate for its business of providing diagnostic imaging, treatment and management services. In addition, the radiologists or other health care professionals with whom the Company contracts are required by such contracts to carry adequate medical malpractice insurance. Successful malpractice claims asserted against the Company, to the extent not covered by the Company's liability insurance, could have a material adverse effect on the Company's business, financial condition and results of operations. INDEPENDENT PHYSIOLOGICAL LABORATORIES; INDEPENDENT DIAGNOSTIC TREATMENT FACILITIES: Under past Medicare policy, imaging centers generally participated in the Medicare program as either medical groups or, subject to the discretion of individual Medicare carriers, Independent Physiological Laboratories ("IPLs"). The IPL 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 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"). Under these regulations, imaging centers have the option to participate in the Medicare program as either IDTFs or medical groups. The Company believes that the impact of the IDTF regulations is likely to be positive overall. Accordingly, the Company is in the process of converting most of its imaging centers to IDTFs, except in those states where the medical group model is required. In addition, since the IDTF designation is new, it is unclear to what extent and in what manner IDTFs will be monitored by HCFA, but it is probable that HCFA will exercise increased oversight of IDTFs compared to IPLs, which could have a material adverse effect on the Company's business, financial condition and results of operations. CERTIFICATES OF NEED: Some states require hospitals and certain other health care facilities to obtain a certificate of need ("CON") or similar regulatory approval prior to the commencement of certain healthcare 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 diagnostics imaging services or systems in certain states. The Company believes that it will not be required to obtain CONs in most of the states in which it intends to operate, and in those states where a CON is required, the Company believes it has complied or will comply with such requirements. Nevertheless, a significant increase in the number of states regulating the Company's business within the CON or state licensure framework could adversely affect the Company's business, financial condition and results of operations. Conversely, repeal of existing CON regulations in jurisdictions where the Company has obtained or operates under a CON could also adversely affect the Company's business, financial condition and results of operations as barriers to entry are reduced or removed. This is an area of continuing legislative activity, and there can be no assurance that the Company will not be subject to CON and licensing statutes in other states in which it operates or may operate in the future. REIMBURSEMENT OF HEALTH CARE COSTS MEDICARE: Beginning in late 1983, prospective payment regulations became effective under the federal Medicare program. The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain others. Providers of service are paid by the federal government in accordance with regulations promulgated by the HHS and generally accept said payment, with nominal co-insurance amounts required to be paid by the service recipient, as payment in full. In general, these regulations provide for a specific prospective payment to reimburse hospitals for inpatient treatment services based upon the diagnosis of the patient. Although outpatient services are presently exempt from prospective payment reimbursement, Congress has instructed the Prospective Payment Assessment Commission to study alternative methods for reimbursing hospitals for outpatient services, including prospective payment methods, and the Medicare program has adopted fee schedules for some diagnostic services. Congressional and regulatory action in fiscal 1998 imposed additional requirements on the eligibility of certain diagnostic services for reimbursement by the Medicare 7 program, including 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 services offered by the Company and could indirectly adversely affect the Company's business, financial condition and results of operations. MEDICAID: The Medicaid program is a combined federal and state program providing coverage for low-income persons. The specific services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program. Changes in Medicaid program reimbursement are not expected to have a material adverse impact on the Company's business, financial condition and results of operations. MANAGED CARE: Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs") attempt to control the cost of health care services. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. The development and expansion of HMOs, PPOs and other managed care organizations within the Company's regional networks could have a negative impact on utilization of the Company's services in certain markets and/or affect the revenue per procedure which the Company can collect, since such organizations will exert greater control over patients' access to diagnostic imaging services, the selection of the provider of such services and the reimbursement thereof. The Company also expects that the excess capacity of equipment in the United States may negatively impact operations because of the competition among health care providers for contracts with all types of managed care organizations. As a result of such competition, the length of term of any contracts, which the Company may obtain, and the payment to the Company for such services may also be negatively affected. See "Customers and Fees". PRIVATE INSURANCE: Private health insurance programs generally have authorized the payment for the Company's services on satisfactory terms and HCFA has authorized reimbursement under the federal Medicare program for all diagnostic imaging and treatment services currently being provided by the Company. However, if Medicare reimbursement is reduced, the Company believes that private health insurance programs will also reduce reimbursement in response to reductions in government reimbursement, which could have an adverse impact on the Company's business. SALES AND MARKETING The Company selectively invests in marketing and sales resources and activities for the purpose of obtaining new sources of revenues for the Company, expanding business relationships, growing revenues at its existing facilities and maintaining present business alliances and contractual agreements. Marketing activities include efforts to contact physicians, education programs on new applications and uses of technology, customer service programs and contracting with insurance payors for volume discounts. Sales activities principally focus on hospital customers who purchase Mobile Facility services from the Company or enter into other more extensive relationships for Fixed Facility partnerships or radiology department management services. COMPETITION The health care industry in general, and the market for diagnostic imaging services in particular, are highly competitive. The Company competes principally on the basis of its reputation for productive and cost-effective quality services. The Company's operations must compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies, that own and operate imaging equipment. The Company will continue to encounter substantial competition from hospitals and independent organizations, including with respect to its Mobile Facilities, Alliance Imaging, Inc. and its affiliates. Some of the Company's direct competitors that provide contract diagnostic imaging services may have access to greater financial resources than the Company. Certain hospitals, particularly the larger hospitals, may be expected to directly acquire and operate imaging and treatment equipment on-site as part of their overall inpatient servicing capability, subject only to their decision to acquire a diagnostic imaging system, assume the associated financial risk, employ the necessary technologists and satisfy applicable CON and licensure requirements, if any. Historically, smaller hospitals have been reluctant to purchase imaging and treatment equipment. This reluctance, however, has encouraged the entry of start-up ventures and more established business operations into the diagnostic services business. As a result, there is significant excess capacity in the diagnostic imaging business in the United States, which negatively affects utilization and reimbursement. 8 CUSTOMERS AND FEES The Company's revenues are primarily generated from contract services and patient services. Contract services revenues are generally earned from services billed to a hospital or other health care provider which include: (i) fee-for-service arrangements in which revenues are based upon a contractual rate per procedure, (ii) equipment rental in which revenues are generally based upon a fixed monthly rental, and (iii) management fees. Contract services revenues are primarily earned through Mobile Facilities and certain Fixed Facilities and are generally paid pursuant to hospital contracts with a life span of up to five years for Mobile Facilities and up to ten years for Fixed Facilities. Patient services revenues are services billed directly to patients or third party payors (generally managed care organizations, Medicare, Medicaid, commercial insurance carriers and worker's compensation funds), on a fee-for-service basis and are primarily earned through Centers and certain Fixed and Mobile Facilities. The Company's Fixed Facility operations are principally dependent on the Company's ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). The Company currently has in excess of 400 contracts with managed care organizations for diagnostic imaging services provided at the Company's Fixed Facilities primarily on a discounted fee-for-service basis. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. A significant decline in referrals and/or reimbursement rates would adversely affect the Company's business, financial condition and results of operations. See "Managed Care". The Company's contract services revenues represent approximately 53% of total revenues. Each year approximately one-quarter to one-third of the contract services agreements for Mobile Facilities are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past, when such agreements have not been renewed, the Company has been able to obtain replacement contracts. While some replacement accounts have initially been smaller than the lost accounts, such replacement accounts' revenues have generally increased over the term of the contract; however, new and renewal contracts may not offset revenues from customers electing not to renew their contracts with the Company. Although the non-renewal of a single customer contract would not have a material impact on the Company's contract services revenues, non-renewal of several contracts could have a material impact on contract services revenues. In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some hospital accounts with high volume. If the future reimbursement levels of such hospitals were to decline or cease or if such hospitals were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, the Company's contract services revenues would be adversely affected. No single source accounts for more than 10% of the Company's total revenues. DIAGNOSTIC IMAGING AND OTHER EQUIPMENT The Company has estimated that it has invested approximately $119 million since June 1996, to replace and upgrade diagnostic imaging systems and to purchase new systems. As a result, the Company has technologically advanced, state-of-the-art diagnostic imaging equipment. The Company owns or leases 166 diagnostic imaging and treatment systems, of which 114 are conventional MRI systems, 24 are Open MRI systems, 20 are CT systems, five are lithotripters, two are radiation oncology systems and one is a Gamma Knife. The Company owns 96 of its imaging and treatment systems and has operating leases for the remaining 70 systems. Of the Company's 114 conventional MRI systems, 51% have a magnet strength of 1.5 Tesla and 36% have a magnet strength of 1.0 Tesla. Currently, the industry standard magnet strength for fixed and mobile systems is 1.5 Tesla. The Company is in the process of upgrading or replacing its remaining conventional MRI systems from magnet strengths of less than 1.0 Tesla to magnet strengths of at least 1.0 Tesla. Ten of the Company's Open MRI systems are less than one year old. The Company's master lease agreement with GE Medical Systems ("GEMS") includes a variable lease arrangement for 12 of the Company's 70 leased imaging and treatment systems, which can significantly reduce the Company's downside cash flow risk. Under the Company's standard operating lease agreement with GEMS, the Company pays approximately $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 to GEMS of $1,500 per system, 9 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 September 1, 1999, the Company had elected the variable lease option with respect to two of the 12 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. The Company continues to evaluate the mix of its MRI equipment in response to changes in technology and to the surplus capacity in the marketplace. The overall technological competitiveness of the Company's equipment continues to improve through upgrades, disposal and/or trade-in of older equipment and the purchase or execution of leases for new equipment. Several substantial companies are presently engaged in the manufacture of MRI (including Open MRI), CT and other diagnostic imaging equipment, including GEMS, Hitachi Medical Systems, Phillips Medical Systems North America Company, Picker International, Inc., and Siemens Medical Systems, Inc. The Company maintains good working relationships with many of the major manufacturers to better ensure an adequacy of supply as well as access to those types of diagnostic imaging systems which appear most appropriate for the specific diagnostic or treatment center to be established. EMPLOYEES As of September 1, 1999, the Company had approximately 1,030 full-time and 70 part-time employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes its employee relations to be satisfactory. FORWARD-LOOKING STATEMENTS DISCLOSURE Except for the historical information contained in this report, certain statements contained herein are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve a number of risks and uncertainties, including, but not limited to, availability of financing; limitations and delays in reimbursement by third-party payors; contract renewals and financial stability of customers; technology changes; governmental regulation; conditions within the health care environment; adverse utilization trends for certain diagnostic imaging procedures; aggressive competition; general economic factors; the Company's inability to carry out its business strategy due to rising purchase prices of imaging centers and companies; successful integration of acquisitions; and the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission (the "SEC"). ITEM 2. PROPERTIES The Company leases approximately 20,000 square feet of office space for its executive offices in Newport Beach, California, under a lease expiring in 2001, approximately 11,800 square feet of office space for its eastern regional offices in Farmington, Connecticut, under a lease expiring in 2002, approximately 4,400 square feet of office space for a billing office in Merrillville, Indiana, under a lease expiring in 2003 and approximately 5,400 square feet of office space for a billing office in Santa Ana, California, under a lease expiring in 2008. The Company believes its facilities are adequate for its reasonably foreseeable needs. In addition, the following table sets forth the other principal properties used as imaging or treatment facilities by the Company as of June 30, 1999:
APPROXIMATE NAME OF FACILITY SQUARE FEET LOCATION - ---------------- ----------- -------- OWNED: Granada Hills Open MRI Center (1) 2,200 Granada Hills, California Northern Indiana Oncology Center 3,500 Valparaiso, Indiana Berwyn Magnetic Resonance Center (1) 3,800 Berwyn, Illinois Garfield Imaging Center (1) 4,500 Monterey Park, California LAC/USC Imaging Sciences Center (1) 8,500 Los Angeles, California Maxum Diagnostic Center-Eighth Avenue 10,000 Ft. Worth, Texas Chattanooga Outpatient Center 14,700 Chattanooga, Tennessee 10 Harbor/UCLA Diagnostic Imaging Center (1) 15,000 Torrance, California Diagnostic Outpatient Center (1) 17,800 Hobart, Indiana LEASED: Lockport MRI - Maple Road 500 Williamsville, New York Buckhead Imaging 1,500 Atlanta, Georgia Diagnostic Imaging Center - N. 18th Place 1,800 Phoenix, Arizona Lockport MRI 2,200 N. Tonawanda, New York Lockport MRI 2,400 Lockport, New York Redwood City MRI 2,900 Redwood City, California Diagnostic Imaging Center 3,100 Tempe, Arizona Lockport MRI - Youngs Road 3,800 Tonawanda, New York Dublin Imaging 3,900 Dublin, Ohio Lockport MRI 4,000 Williamsville, New York Open MRI of Orange County 4,000 Santa Ana, California Washington Magnetic Resonance Center 4,100 Whittier, California Diagnostic Imaging Center - 15th Avenue 4,700 Phoenix, Arizona Imaging Center at Murfreesboro 5,000 Murfreesboro, Tennessee Marshwood Imaging 5,000 Scarborough, Maine Lockport MRI 5,200 East Amherst, New York Diagnostic Imaging Center 5,800 Peoria, Arizona Maxum Diagnostic Center - Preston Road 5,800 Dallas/Plano, Texas Open MRI of Hayward 6,400 Hayward, California Central Maine Imaging Center 7,250 Lewiston, Maine St. John's Regional Imaging Center 7,700 Oxnard, California Ocean Medical Imaging Center 8,700 Tom's River, New Jersey Diagnostic Imaging Center - E. Thomas Road 10,600 Phoenix, Arizona Broad Street Imaging Center 12,700 Columbus, Ohio Maxum Diagnostic Center - Forest Lane 18,500 Dallas, Texas InSight Mountain Diagnostics 19,100 Las Vegas, Nevada 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. In fiscal 1998, the Company completed the purchase of 77,690 square feet of land in Ft. Worth, Texas, upon which the Company intended to build a Center to which certain existing operations in Ft. Worth would be relocated; however, the Company is currently evaluating its options. In fiscal 1999, the Company completed the purchase of two buildings (approximately 14,700 square feet) in Chattanooga, Tennessee, in which the Chattanooga Outpatient Center is located. The Company also completed the sale of the building (approximately 19,100 square feet) in Las Vegas, Nevada in which InSight Mountain Diagnostics is located and entered into a lease expiring in 2014. In connection with the acquisition in Phoenix, Arizona, the Company assumed (i) a lease for approximately 7,000 square feet of storage space in Tempe, Arizona, under a lease expiring in 1999; and (ii) a lease for approximately 5,300 square feet of office space in Nashville, Tennessee, under a lease expiring in 2002, which the Company is intending to sublease. ITEM 3. LEGAL PROCEEDINGS The Company is engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of its business and has insurance policies covering such potential insurable losses where such coverage is cost-effective. The Company believes that the outcome of any such lawsuits will not have a material adverse impact on the Company's business, financial condition and results of operations. On 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. ("IHC") and certain of its then current 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 alleged 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' 11 complaint included 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 requested 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 case was 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. On April 13, 1999, the parties negotiated a settlement of the lawsuit at a mediation and a formal settlement agreement was executed by all parties. The settlement agreement was subject to approval by the bankruptcy court in the bankruptcies of MSI and CDMSI. The bankruptcy court approved the settlement on July 8, 1999. Under the terms of the settlement, IHC on behalf of all defendants, paid the plaintiffs an immaterial monetary settlement for all of the plaintiffs' claims and the plaintiffs and defendants mutually released each other from any further claims. On July 14, 1999, the lawsuit was dismissed by the District Court. A portion of the settlement and the Company's attorney's fees will be reimbursed by the Company's insurance company. On June 15, 1999, InfoTech Software Corporation ("InfoTech") filed a complaint against IHC, Shawn P. Railey, Jason P. Gardner and Alchemy Software Corporation ("Alchemy") in the District Court of Dallas County, Texas. The plaintiff alleges that, among other things, in March 1994, Maxum Health Corp. ("MHC"), an affiliate of IHC, entered into an agreement with InfoTech to design and implement a custom information system for MHC and that MHC received only a license to use the software and did not have the right to sublicense or otherwise provide third parties access to InfoTech's software or to modify it. InfoTech further alleges that defendants Railey and Gardner, former InfoTech employees, resigned from InfoTech and formed Alchemy, conspired to and did steal the IHC project from InfoTech and are now providing services to IHC. The plaintiff's complaint includes claims of unfair competition, breach of contract, collusion, business disparagement and tortious interference with contractual relations. The complaint requests a judgment for actual and exemplary damages in unspecified amounts, attorney's fees, pre-judgment and post judgment interest, costs and disbursements. The defendants have filed an answer to the complaint and discovery has commenced and is continuing. The Company believes the plaintiff's claims are without merit and intends to vigorously defend the lawsuit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the national over-the-counter market and quoted on the NASDAQ Small Cap Market under the symbol "IHSC". The following table sets forth the high and low prices as reported by NASDAQ for the Company's common stock for the quarters indicated. The prices (rounded to the nearest 1/8 or nearest 1/32 where applicable) represent quotations between dealers without adjustment for mark-up, markdown or commission, and may not necessarily represent actual transactions.
QUARTER ENDED LOW HIGH September 30, 1998 6 12 December 31, 1998 4 1/2 9 March 31, 1999 5 8 June 30, 1999 4 15/16 9 12 September 30, 1997 4 1/4 7 3/4 December 31, 1997 6 1/2 17 3/4 March 31, 1998 10 1/2 18 June 30, 1998 10 3/4 14 3/8
The Company has never paid a cash dividend on its common stock and does not expect to do so in the foreseeable future. The Company's credit agreement with its primary lender and the indenture governing publicly-issued debt securities of the Company contain restrictions on its ability to pay dividends on its common stock. As of September 15, 1999, the Company's records indicate that there were in excess of 1,981 beneficial holders of common stock and approximately 449 stockholders of record. ITEM 6. SELECTED FINANCIAL DATA On June 26, 1996, in connection with the Agreement and Plan of Merger among the Company, IHC (formerly American Health Services Corp., a Delaware corporation) ("AHS"), and MHC, AHS and MHC became wholly owned subsidiaries of the Company (the "Merger"). The Merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. MHC has been treated as the acquirer for accounting purposes, based upon relative revenues, book values and other factors. The selected consolidated financial data presented as of and for the years ended June 30, 1999, 1998 and 1997, the six months ended June 30, 1996 and 1995 (unaudited), and for the years ended December 31, 1995 and 1994 has been derived from the Company's audited consolidated financial statements and should be read in conjunction with such consolidated financial statements and related notes as of and for the years ended June 30, 1999, 1998 and 1997, and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this report. (Amounts in thousands, except shares and per share data)
SIX MONTHS ENDED YEARS ENDED ---------------------- YEARS ENDED JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, -------------------------------- -------------------- 1999 1998 1997 1996 (1) 1995(1) (9)1995 (1) 1994 (1) ---------- --------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues $ 161,992 $ 119,018 $92,273 $26,460 $24,434 $50,609 $45,868 Operating income (loss) (2) (3) 17,422 7,770 5,774 (2,949) (331) (1,193) (2,777) Interest expense, net 14,500 6,827 4,066 1,144 648 1,626 1,206 Net income (loss) (4) (5) (6) (7) 6,112 512 1,281 (979) (979) (4,319) 4,156 Income (loss) per common and converted preferred share (8): Basic $ 0.67 $ 0.06 $ 0.25 $ (0.70) $ (0.73) $ (3.21) $ 3.04 Diluted $ 0.65 $ 0.06 $ 0.24 $ (0.70) $ (0.73) $ (3.21) $ 2.96
AT JUNE 30, AT DECEMBER 31, ------------------------------------------- -------------------- BALANCE SHEET DATA: 1999 1998 1997 1996 1995 (1) 1994 (1) ---------- --------- --------- --------- --------- --------- Working capital (deficit) $ 24,651 $ 36,109 $ (6,162) $ (1,441) $ (2,228) $ 1,587 Property and equipment, net 90,671 75,146 34,060 29,349 12,386 5,272 Intangible assets 80,327 74,831 32,579 16,216 4,047 1,194 Total assets 238,304 231,592 97,271 69,313 28,306 22,592 Total long-term liabilities 161,116 155,642 59,205 39,839 19,723 9,575 Stockholders' equity (deficit) 44,106 37,858 6,685 5,404 (4,005) 300
(1) The selected consolidated financial data represents historical data of MHC only. (2) Includes a provision for supplemental service fee termination of $6.3 million in 1998. (3) Includes a provision for reorganization and other costs of $3.3 million in 1999. (4) Includes a provision for securities litigation settlement of $1.5 million in 1995. (5) Includes a gain on sale of partnership interests of $4.9 million in 1994. (6) Includes an extraordinary gain on debt extinguishment of $3.2 million and $3.3 million in 1996 and 1994, respectively. (7) Includes an income tax benefit of $3.5 million in 1999. (8) Amounts are computed on a pro forma basis as if the reset of par value of MHC common stock and related conversion into the Company's common stock had occurred on January 1, 1994. (9) Unaudited. (10) No cash dividends have been paid on the Company's common stock for the periods indicated above. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this report that are not purely historical or which might be considered an opinion or projection concerning the Company or its business, whether express or implied, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include statements regarding the Company's expectations, intentions, plans or strategies regarding the future, including statements related to the Year 2000 Issue. All forward-looking statements included in this report are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those described or implied in such forward-looking statements because of certain factors which could affect the Company. Such forward-looking statements should be evaluated in light of factors described in the Company's periodic filings with the SEC, on Forms 10-K, 10-Q and 8-K (if any) and the factors described under "Risk Factors" in the Company's Registration Statement on Form S-4, filed with the SEC on August 4, 1998, and any amendments thereto. The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with Item 1. "Business", and Item 8. "Financial Statements and Supplementary Data", included elsewhere in this report. ACQUISITIONS The Company believes a consolidation in the diagnostic imaging industry is occurring and is necessary in order to provide surviving companies the opportunity to achieve operating and administrative efficiencies through consolidation. The Company's strategy is to further develop and expand regional diagnostic imaging networks that emphasize quality of care, produce cost-effective diagnostic information and provide superior service and convenience to its customers. The strategy of the Company is focused on the following components: (i) to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing regional diagnostic imaging networks through geographically disciplined acquisitions; (ii) to develop or acquire additional regional networks in strategic locations where the Company can offer a broad range of services to its customers and realize increased economies of scale; (iii) to continue to market current diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume; (iv) to strengthen the regional diagnostic imaging networks by focusing on managed care customers; (v) to implement a variety of new products and services designed to further leverage its core business strengths, including: Open MRI systems and the radiology co-source product, which involves the joint ownership and management of the physical and technical operations of the multi-modality radiology department of a hospital or multi-specialty physician group. The Company believes that long-term viability is contingent upon its ability to successfully execute its business strategy. In fiscal 1997, the Company completed three acquisitions as follows: a Fixed Facility in Hayward, California; Mobile Facilities in Maine and New Hampshire; and a Center in Chattanooga, Tennessee. All three transactions included the purchase of assets and assumption of certain equipment related liabilities. The cumulative purchase price for these acquisitions was approximately $18.6 million. In fiscal 1998, the Company completed four acquisitions as follows: a Center in Columbus, Ohio; a Center in Murfreesboro, Tennessee; a Fixed Facility in Redwood City, California; and a Center in Las Vegas, Nevada. In connection with the purchase of the Center in Columbus, Ohio, the Company also acquired a majority ownership interest in a new Center in Dublin, Ohio. All transactions included the purchase of assets and assumption of certain equipment related liabilities. The cumulative purchase price for these acquisitions was approximately $18.4 million. In fiscal 1998, the Company also acquired all of the capital stock of Signal Medical Services, Inc. ("Signal") through the merger of Signal into a wholly owned subsidiary of the Company. The purchase price was approximately $45.7 million. The Signal assets primarily consisted of Mobile Facilities in the Northeastern and Southeastern United States. In addition, in fiscal 1998, the Company installed three Open MRI Fixed Facilities in Atlanta, Georgia; Scarborough, Maine; and Santa Ana, California; and opened its first radiology co-source outpatient Center in Oxnard, California, all of which were financed through GE. Effective December 31, 1997, the Company terminated its agreement to operate a Gamma Knife Center and entered into an agreement to dissolve a partnership related to a Fixed Facility in Seattle, Washington. 14 In fiscal 1999, the Company completed two acquisitions as follows: a 70% interest in a partnership which owns four Centers and two Fixed Facilities in Buffalo, New York; and a 100% interest in three Centers and two Fixed Facilities in Phoenix, Arizona. The cumulative purchase price for these two acquisitions was approximately $16.9 million. In addition, on July 22, 1999, the Company opened its second radiology co-source outpatient center in Granada Hills, California, which was financed with internally generated funds. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company operates in a capital intensive, high fixed cost industry that requires significant amounts of working capital to fund operations, particularly the initial start-up and development expenses of new operations and yet is constantly under external pressure to contain costs and reduce prices. Revenues and cash flows have been adversely affected by an increased collection cycle, competitive pressures and major restructurings within the health care industry. This adverse effect on revenues and cash flow is expected to continue. (See Item 1. "Business-Business Strategy"). The Company continues to pursue acquisition opportunities. The Company believes that the expansion of its business through acquisitions is a key factor in maintaining profitability. Generally, acquisition opportunities are aimed at increasing revenues and profits, and maximizing utilization of existing capacity; however, the Company has incurred and will continue to incur costs for the salaries, benefits and travel expenses of its business development team. 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. Since the Merger, the Company has completed ten acquisitions as discussed above. No assurance can be given, however, that the Company will be able to identify suitable acquisition candidates and thereafter complete such acquisitions on terms acceptable to the Company. As noted above (see Item 1. "Business-Recapitalization and Financing"), the Company consummated the Recapitalization on October 14, 1997, pursuant to which (a) the Company issued to Carlyle 25,000 shares of Series B Preferred Stock having a liquidation preference of $1,000 per share and warrants to purchase 250,000 shares of Common Stock at an exercise price of $10.00 per share, generating net proceeds to the Company (after related transaction costs of approximately $2.0 million) of approximately $23.0 million; (b) the Company issued to GE 7,000 shares of Series C Preferred Stock, with a liquidation preference of $1,000 per share, in consideration of the termination of GE's right to receive supplemental service fee payments equal to 14% of the Company's pretax income, warrants to purchase 250,000 shares of common stock at an exercise price of $10.00 per share, and an additional 20,953 shares of Series C Preferred Stock in exchange for all of GE's shares of Series A Preferred Stock; and (c) the Company executed a credit agreement with BofA which included (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. Initial funding under the Bank Financing occurred on October 22, 1997 and, 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 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 Bank Financing, 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. The terms of the Series B Preferred Stock and the Series C Preferred Stock, as well as the Bank Financing, contain certain restrictions on the Company's ability to act without first obtaining a waiver or consent from Carlyle, GE and BofA. On June 12, 1998, the Company completed a refinancing of substantially all of its debt through the issuance of $100 million of Notes. The Notes bear interest at 9.625%, with interest payable semi-annually and mature in June 2008. The Notes are redeemable at the option of the Company, in whole or in part, on or after June 15, 2003. The Notes are unsecured senior subordinated obligations of the Company and are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture, of the Company, including borrowings under the Bank Financing. The terms of the Notes contain certain restrictions on the Company's ability to act without first obtaining consent of the noteholders. Concurrently with the issuance of the Notes, the Company entered into an amendment to, and restatement of the Bank Financing, 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 $50 million term loan, with a six-year amortization. Borrowings under the $50 million term loan bear interest at LIBOR plus 1.75%. The Company utilized a portion of the net proceeds from the Notes, together with the net proceeds of the borrowing under the term 15 loan portion of the Bank Financing to repay outstanding indebtedness under the Bank Financing. The remaining net proceeds of approximately $28.8 million were used for general corporate purposes. At June 30, 1999, there was approximately $42.5 million in borrowings under the term loan. As part of the amendment to the Bank Financing, the Company has available a $25 million working capital facility with a five-year maturity and a $75 million acquisition facility with a six-year maturity. Borrowings under both credit facilities bear interest at LIBOR plus 1.75%. The Company is required to pay an annual unused facility fee of between 0.375% and 0.5%, payable quarterly, on unborrowed amounts under both facilities, of which the Company paid approximately $0.5 million during the year ended June 30, 1999. At June 30, 1999, there was approximately $3.1 million in borrowings under the working capital facility and $16.3 million in borrowings under the acquisition facility. Net cash provided by operating activities was approximately $10.9 million for the year ended June 30, 1999. Cash provided by operating activities resulted primarily from net income before depreciation and amortization (approximately $31.0 million), offset by an increase in accounts receivable (approximately $8.3 million), and a reduction in accounts payable and other current liabilities (approximately $7.6 million). The increase in accounts receivable is due primarily to the Company's acquisition and development activities. Net cash used in investing activities was approximately $47.2 million for the year ended June 30, 1999. Cash used in investing activities resulted primarily from the Company purchasing new diagnostic imaging equipment or upgrading its existing diagnostic imaging equipment (approximately $18.4 million), offset by the sale of the building in which a Center is located in Las Vegas, Nevada (approximately $3.6 million) and from the Company's acquisition and development activities, net of cash acquired (approximately $27.2 million), which included the purchase of two buildings in which a Center is located in Chattanooga, Tennessee (approximately $3.2 million). Net cash provided by financing activities was approximately $5.9 million for the year ended June 30, 1999, resulting primarily from borrowings of long-term debt (approximately $23.8 million), offset by principal payments of debt and capital lease obligations (approximately $17.5 million). The Company has committed to purchase or lease in connection with the development of new Mobile Facilities and replacement of diagnostic imaging equipment at Fixed and Mobile Facilities, at an aggregate cost of approximately $23 million, 16 MRI systems for delivery during the year ending June 30, 2000. The Company expects to use internally generated funds or operating leases from GE to finance the purchase of such equipment. In addition, the Company previously committed to purchase or lease from GE, at an aggregate cost of approximately $29 million, including siting costs, 24 Open MRI systems for delivery and installation. As of June 30, 1999, the Company had installed 16 of such Open MRI systems: four at existing Centers, three in newly opened Fixed Facilities, and nine in Mobile Facilities which operate in existing networks serviced by conventional Mobile Facilities. On August 30, 1999, the Company sold one Open MRI system, which it intended to install in a Fixed Facility at a hospital in Houston, Texas, to the hospital. As of August 31, 1999, the Company has a remaining commitment to purchase or lease seven of such Open MRI systems, at an aggregate cost of approximately $9 million. 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. The Company's lease expense for diagnostic imaging equipment and other miscellaneous equipment for the year ended June 30, 1999 was approximately $18.5 million. The operating leases generally provide the Company with the ability to purchase the equipment at fair market value at the end of the lease or at a negotiated amount during the term of the lease. As of June 30, 1999, the Company believes the leased equipment could be purchased for approximately $85 million. The purchase of the leased equipment would require the Company to obtain satisfactory financing and the consent of its lenders. The Company believes that, based on current levels of operations and anticipated growth, its cash from operations, together with other available sources of liquidity, including borrowings available under the Bank Financing, will be sufficient through June 30, 2001 to fund anticipated capital expenditures and make required payments of principal and interest on its debt, including payments due on the Notes and obligations under the Bank Financing. In addition, the Company continually evaluates potential acquisitions and expects to fund such acquisitions from its available sources of liquidity, including borrowings under the Bank Financing. 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. RESULTS OF OPERATIONS YEARS ENDED JUNE 30, 1999 AND 1998 REVENUES: Revenues increased approximately 36.1% from approximately $119.0 million for the year ended June 30, 1998, to approximately $162.0 million for the year ended June 30, 1999. This increase was due primarily to the 16 acquisitions and opened facilities discussed above (approximately $31.2 million) and an increase in contract services, patient services and other revenues (approximately $14.0 million) at existing facilities, partially offset by the termination of a Fixed Facility and a Gamma Knife Center in 1998 (approximately $2.2 million). Contract services revenues increased approximately 53.5% from approximately $55.7 million for the year ended June 30, 1998, to approximately $85.5 million for the year ended June 30, 1999. This increase was due primarily to the acquisitions discussed above (approximately $18.1 million) and an increase at existing facilities (approximately $11.7 million). The increase at existing facilities was due to higher utilization (approximately 10%) offset by a decline in reimbursement from customers, primarily hospitals (approximately 3%). Contract services revenues, primarily earned by its Mobile Facilities, represented approximately 53% of total revenues for the year ended June 30, 1999. Each year approximately one-quarter to one-third of the contract services agreements are subject to renewal. It is expected that some high volume customer accounts will elect not to renew their agreements and instead will purchase or lease their own diagnostic imaging equipment and some customers may choose an alternative services provider. In the past where agreements have not been renewed, the Company has been able to obtain replacement customer accounts. While some replacement accounts have initially been smaller than the lost accounts such replacement accounts revenues have generally increased over the term of the agreement. The non-renewal of a single customer agreement would not have a material impact on the Company's contract services revenues; however, non-renewal of several agreements could have a material impact on contract services revenues. In addition, the Company's contract services revenues with regard to its Mobile Facilities in certain markets depend in part on some customer accounts with high volume. If the future reimbursement levels of such customers were to decline or cease or if such customers were to become financially insolvent and if such agreements were not replaced with new accounts or with the expansion of services on existing accounts, the Company's contract services revenues would be adversely affected. Patient services revenues increased approximately 23.3% from approximately $59.7 million for the year ended June 30, 1998, to approximately $73.6 million for the year ended June 30, 1999. This increase was due primarily to the acquisitions and opened centers discussed above (approximately $11.7 million) and an increase in revenues at existing facilities (approximately $4.4 million). The increase at existing facilities was due to higher utilization (approximately 9%), partially offset by declines in reimbursement from third party payors (approximately 1%) and reduced revenues from the termination of a Fixed Facility and a Gamma Knife Center in fiscal 1998 (approximately $2.2 million). Management believes that any future increases in revenues at existing facilities can only be achieved by higher utilization and not by increases in procedure prices; however, slower start-ups of new operations, excess capacity of diagnostic imaging equipment, increased competition, and the expansion of managed care may impact utilization and make it difficult for the Company to achieve revenue increases in the future, absent the execution of provider agreements with managed care companies and other payors, and the execution of the Company's business strategy, particularly acquisitions. The Company's operations are principally dependent on its ability (either directly or indirectly through its hospital customers) to attract referrals from physicians and other health care providers representing a variety of specialties. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier (primarily if the insurance is provided by a managed care organization). Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels, and a significant decline in referrals could have a material impact on the Company's revenues. COSTS OF OPERATIONS: Costs of operations increased approximately 35.4% from approximately $96.7 million for the year ended June 30, 1998, to approximately $130.9 million for the year ended June 30, 1999. This increase was due primarily to an increase in costs due to the acquisitions and opened centers discussed above (approximately $25.4 million) and an increase in costs at existing facilities (approximately $9.9 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $1.1 million). Costs of operations, as a percent of total revenues, decreased from approximately 81.3% for the year ended June 30, 1998, to approximately 80.8% for the year ended June 30, 1999. The percentage decrease is due primarily to reduced costs in service supplies, equipment maintenance, and equipment lease and depreciation costs as a result of the Company negotiating favorable supply contracts and upgrading its existing diagnostic imaging equipment. The decrease is offset by higher salaries and benefits and marketing costs. 17 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the Recapitalization and Bank Financing discussed above, the Company issued to GE 7,000 shares of Series C Preferred Stock to terminate GE's rights to receive supplemental service fee payments equal to 14% of the Company's pretax income. The Series C Preferred Stock was valued at $7.0 million and, during the year ended June 30, 1998, the Company recorded a one-time provision of approximately $6.3 million, net of amounts previously accrued, for the Preferred Stock issuance. PROVISION FOR REORGANIZATION AND OTHER COSTS: In the fourth quarter of fiscal 1999, the Company recorded a one-time provision for reorganization and other costs of $3.3 million, consisting of the following: The Company realigned its corporate and regional organization to improve financial performance and operating efficiencies and recorded a provision with respect to the related employee severances and office closing costs of approximately $1.8 million. Additionally, in connection with its business strategy, the Company evaluated a number of potential acquisitions in the last six months of fiscal 1999 which it did not complete. The Company has recorded a provision of approximately $0.7 million for legal, accounting and consulting costs associated with certain potential acquisitions that the Company determined were no longer consistent with its strategic objectives. Finally, the Company reevaluated its information systems in light of organizational changes and developed a new strategic plan to modify and reimplement its proprietary radiology information system. Accordingly, the Company recorded a provision with respect to related software and other capitalized costs of approximately $0.8 million. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 22.5%, from approximately $8.9 million for the year ended June 30, 1998, to approximately $10.9 million for the year ended June 30, 1998. This increase was due primarily to (i) increased salaries, benefits and travel costs associated with the Company's acquisition and development activities, (ii) increased occupancy and communication costs, and (iii) additional information systems costs, offset by reduced legal costs. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 7.5% for the year ended June 30, 1998, to approximately 6.7% for the year ended June 30, 1999. INTEREST EXPENSE, NET: Interest expense, net increased approximately 113.2% from approximately $6.8 million for the year ended June 30, 1998, to approximately $14.5 million for the year ended June 30, 1999. This increase was due primarily to additional debt related to (i) the issuance of Notes discussed above, which increased the Company's effective interest rate, (ii) the acquisitions discussed above, and (iii) the Company upgrading its existing diagnostic imaging equipment, offset by reduced interest as a result of amortization of long-term debt. PROVISION FOR INCOME TAXES: Provision for income taxes decreased from approximately $0.4 million for the year ended June 30, 1998, to a benefit of approximately $3.2 million for the year ended June 30, 1999. The decrease in provision is due to the Company recording a reduction to the valuation allowance of approximately $3.5 million to recognize anticipated benefits from the utilization of certain net operating loss carryforwards available for use in fiscal 2000. INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.65 for the year ended June 30, 1999, compared to net income per common and converted preferred share of $0.06 for the same period in 1998. Excluding the one-time provision for reorganization and other costs and the benefit for income taxes discussed above, net income per common and converted preferred share on a diluted basis for the year ended June 30, 1999 would have been $0.63. Excluding the one-time provision for supplemental service fee termination discussed above, net income per common and converted preferred share on a diluted basis for the year ended June 30, 1998 would have been $0.83. The decrease in net income per common and converted preferred share before such provisions and benefit is the result of (i) the additional shares outstanding as a result of the Recapitalization discussed above, (ii) increased interest expense, and (iii) a decrease in earnings from unconsolidated partnerships as a result of the installation of new diagnostic imaging equipment, offset by increased income from company operations. YEARS ENDED JUNE 30, 1998 AND 1997 REVENUES: Revenues increased approximately 29.0% from approximately $92.2 million for the year ended June 30, 1997, to approximately $119.0 million for the year ended June 30, 1998. This increase was due primarily to the acquisitions discussed above (approximately $20.0 million) and an increase in contract services, patient services and other revenues (approximately $8.2 million) at existing facilities. Contract services revenues increased approximately 16.5% from approximately $47.8 million for the year ended June 30, 1997, to approximately $55.7 million for the year ended June 30, 1998. This increase was due primarily to the acquisitions discussed above (approximately $4.0 million) and an increase at existing facilities (approximately $3.9 million). The increase at existing facilities was due to higher utilization (approximately 17%) offset by a decline in reimbursement from customers, primarily hospitals (approximately 4%). Patient services revenues increased approximately 42.5% from approximately $41.9 million for the year ended June 18 30, 1997, to approximately $59.7 million for the year ended June 30, 1998. This increase was due primarily to the acquisitions discussed above (approximately $15.9 million) and an increase in revenues at existing facilities (approximately $3.4 million). The increase at existing facilities was due to higher utilization (approximately 11%), partially offset by declines in reimbursement from third party payors (approximately 4%) and reduced revenues from the termination of a Fixed Facility and a Gamma Knife Center in fiscal 1998 (approximately $1.5 million). COSTS OF OPERATIONS: Costs of operations increased approximately 21.5% from approximately $79.6 million for the year ended June 30, 1997, to approximately $96.7 million for the year ended June 30, 1998. This increase was due primarily to an increase in costs due to the acquisitions discussed above (approximately $14.7 million) and an increase in costs at existing facilities (approximately $4.7 million), offset by the elimination of costs at the two terminated facilities discussed above (approximately $2.3 million). Costs of operations, as a percent of total revenues, decreased from approximately 86.3% for the year ended June 30, 1997, to approximately 81.3% for the year ended June 30, 1998. The decrease in percent is due primarily to reduced costs in service supplies, equipment maintenance, and equipment lease and depreciation costs as a result of the Company negotiating favorable supply contracts and upgrading its existing diagnostic imaging equipment. The decrease is offset by higher salaries and benefits and marketing costs. PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION: As part of the Recapitalization and Bank Financing, the Company issued to GE 7,000 shares of Series C Preferred Stock to terminate GE's rights to receive supplemental service fee payments equal to 14% of the Company's pretax income. The Series C Preferred Stock was valued at $7.0 million and, during the year ended June 30, 1998, the Company recorded a one-time provision of approximately $6.3 million, net of amounts previously accrued, for the Preferred Stock issuance. CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 20.3%, from approximately $7.4 million for the year ended June 30, 1997, to approximately $8.9 million for the year ended June 30, 1998. This increase was due primarily to additional consulting, legal and travel costs associated with the Company's acquisition activities. Corporate operating expenses, as a percentage of total revenues, decreased from approximately 8.1% for the year ended June 30, 1997, to approximately 7.5% for the year ended June 30, 1998. INTEREST EXPENSE, NET: Interest expense, net increased approximately 65.9% from approximately $4.1 million for the year ended June 30, 1997, to approximately $6.8 million for the year ended June 30, 1998. This increase was due primarily to additional debt related to (i) the acquisitions discussed above (approximately $3.6 million), (ii) additional debt related to the issuance of Notes discussed above, and (iii) 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 $23.0 million in long-term debt relating to the Recapitalization and Bank Financing (approximately $1.9 million) and (ii) amortization of long-term debt. INCOME PER COMMON AND CONVERTED PREFERRED SHARE: On a diluted basis, net income per common and converted preferred share was $0.06 for the year ended June 30, 1998, compared to net income per common and converted preferred share of $0.24 for the same period in 1997. Excluding the one-time provision for supplemental service fee termination, net income per common and converted preferred share on a diluted basis would have been $0.83. The improvement in net income per common and converted preferred shares before provision for supplemental service fee termination is the result of (i) increased income from company operations and (ii) an increase in earnings from unconsolidated partnerships, offset by (i) increased interest expense, and (ii) the provision for income taxes. NEW PRONOUNCEMENTS In fiscal 2001, the Company will be required to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives, Instruments and Hedging Activities", as deferred and amended by SFAS No. 137. The Company believes the adoption of this standard will not have a material impact on the Company's financial condition or results of operations. YEAR 2000 ISSUE IMPACT OF YEAR 2000: The Year 2000 Issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date occurs, computer programs, computers and embedded microprocessors controlling equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at all. This inability to recognize or properly treat Year 2000 may result in computer system failures or 19 miscalculations of critical financial and operational information as well as failures of equipment controlling date-sensitive microprocessors. In addition, miscalculations or failures could be caused by the fact that the Year 2000 is a leap year. STATE OF READINESS: The Company started to formulate a plan to address the Year 2000 Issue in late 1995. To date, the Company's primary focus has been on its own internal information technology systems, including all types of systems in use by the Company in its operations, marketing, finance and human resources departments, and to deal with the most critical systems first. The Company has developed a Year 2000 Plan to address all of its Year 2000 Issues. The Company has given its Executive Vice President and Chief Information Officer specific responsibility for managing its Year 2000 Plan and a Year 2000 Committee has been established to assist in developing and implementing the Year 2000 Plan. The Year 2000 Plan involves generally the following phases: awareness, assessment, renovation, testing and implementation. Although the Company's assessment of the Year 2000 Issue is incomplete, the Company has completed an assessment of substantially all of its internal information technology systems. As a result of delays in obtaining information, the Company now estimates that it will complete the assessment of its remaining internal information technology systems by November 15, 1999 and will then establish a timetable for the renovation phase of the remaining technology systems. The Company has already completed the renovation of approximately 60% of its information technology systems, including modifying and upgrading software and developing and purchasing new software, and continues to renovate the portions of such systems for which assessment is complete. The Company has begun the testing and implementation phases. The Company's goal is to complete such phases by November 15, 1999, although complications arising from unanticipated acquisitions might cause some delay. The Company is assessing the potential for Year 2000 problems with the information systems of its customers and vendors. The Company has sent to the majority of its vendors, customers, business partners, landlords and other third parties, questionnaires and letters to confirm their Year 2000 readiness. The Company is reviewing the responses and evaluating whether any further action is necessary. The Company has extended the date to complete such assessment to November 15, 1999. The Company does not have sufficient information to provide an estimated timetable for completion of renovation and testing that such parties with which the Company has a material relationship may undertake. The Company is unable to estimate the costs that it may incur to remedy the Year 2000 Issues relating to such parties. The Company has received some preliminary information concerning the Year 2000 readiness of some of its customers, vendors and other third parties with which the Company has a material relationship and expects to finalize its discussions with most of such parties by November 15, 1999 in an attempt to determine the extent to which the Company is vulnerable to those parties' possible failure to become Year 2000 ready. All of the Company's diagnostic imaging equipment used to provide imaging services have computer systems and applications, and in some cases embedded microprocessors, that could be affected by Year 2000 Issues. The Company has substantially completed its assessment of the impact on its diagnostic imaging equipment by contacting the vendors of such equipment. The vendor with respect to the majority of the MRI and CT equipment used by the Company has informed the Company (i) that certain identified MRI and CT equipment is Year 2000 ready, (ii) it has developed software for functional workarounds to ensure Year 2000 compliance with respect to the balance of its noncompliant MRI and CT equipment and (iii) remediation will be made during future regular maintenance visits prior to December 31, 1999. The Company is in the process of contacting the other vendors of its diagnostic imaging equipment. While progress has been slow, the Company has received some information from such other vendors with respect to their assessment of the impact on the equipment that they provided to the Company and the nature and timetable of the remediation that such vendors may propose. In addition, the Company is utilizing other resources at its disposal, e.g. equipment vendor web sites, to assist in its assessment. As a result of these delays, the Company now expects to complete its assessment by November 1, 1999, subject to equipment vendor response, and that renovation will be completed by November 15, 1999. The Company expects that its equipment vendors will propose timely remediation and will bear the cost of modifying or otherwise renovating the Company's diagnostic imaging equipment. In September 1998, the Company began an assessment of the potential for Year 2000 problems with the embedded microprocessors in its other equipment, facilities and corporate and regional offices, including telecommunications systems, utilities, dictation systems, security systems and HVACS. The Company has experienced delays in responses, which have caused the Company to extend the completion of the assessment to November 15, 1999. 20 COSTS TO ADDRESS YEAR 2000 ISSUE: The Company estimates on a preliminary basis that the cost of assessment, renovation, testing and implementation of its internal information technology systems and diagnostic imaging equipment will range from approximately $500,000 to $1,500,000, primarily relating to capital expenditures for the replacement of diagnostic imaging equipment, if required. To date, the Company has incurred costs of approximately $100,000 relating to consultants, additional personnel, programming, new software and hardware, software upgrades and travel expenses. The Company expects that such costs will be funded through internally generated funds. This estimate, based on currently available information, will be updated as the Company continues its assessment and proceeds with renovation, testing and implementation and may be adjusted upon receipt of more information from the Company's vendors, customers and other third parties and upon the design and implementation of the Company's contingency plan. In addition, the availability and cost of consultants and other personnel trained in this area and unanticipated acquisitions might materially affect the estimated costs. RISKS TO THE COMPANY: The Company's Year 2000 Issue involves significant risks. There can be no assurance that the Company will succeed in implementing the Year 2000 Plan. The following describes the Company's most reasonably likely worst-case scenario, given current uncertainties. If the Company's renovated or replaced internal information technology systems fail the testing phase, or any software application or embedded microprocessors central to the Company's operations are overlooked in the assessment or implementation phases, significant problems including delays may be incurred in billing the Company's major customers (Medicare, HMOs or private insurance carriers) for services performed. If its major customers' systems do not become Year 2000 compliant on a timely basis, the Company will have problems and incur delays in receiving and processing correct reimbursement. If the computer systems of third parties with which the Company's systems exchange data do not become Year 2000 compliant both on a timely basis and in a manner compatible with continued data exchange with the Company's information technology systems, significant problems may be incurred in billing and reimbursement. If the systems on the diagnostic imaging equipment utilized by the Company are not Year 2000 compliant, the Company may not be able to provide imaging services to patients. If the Company's vendors or suppliers of the Company's necessary power, telecommunications, transportation and financial services fail to provide the Company with equipment and services, the Company will be unable to provide services to its customers. If any of these uncertainties were to occur, the Company's business, financial condition and results of operations would be adversely affected. The Company is unable to assess the likelihood of such events occurring or the extent of the effect on the Company. CONTINGENCY PLAN: The Company is in the process of developing a contingency plan to address unavoided or unavoidable Year 2000 risks with internal information technology systems and with customers, vendors and other third parties, which is expected to be submitted to the Company's senior management for review by November 1, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure relates primarily to interest rates, where the Company will periodically use interest rate swaps to hedge interest rates on long-term debt under its Bank Financing. The Company does not engage in activities using complex or highly leveraged instruments. At June 30, 1999, the Company had outstanding an interest rate swap, converting $38.5 million of its term loan floating rate debt to fixed rate debt. Since the majority of the Company's debt has historically been fixed-rate debt, the impact of the interest rate swap has not been material on the Company's weighted average interest rate. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements for the Years Ended June 30, 1999, 1998 and 1997
PAGE NUMBER ----------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 23 CONSOLIDATED BALANCE SHEETS 24 CONSOLIDATED STATEMENTS OF INCOME 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 26 CONSOLIDATED STATEMENTS OF CASH FLOWS 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28-50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 57 SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS 58
22 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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended June 30, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InSight Health Services Corp. and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for the years ended June 30, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California September 24, 1999 23 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998 (Amounts in thousands, except share and per share data)
1999 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,294 $ 44,740 Trade accounts receivables, net 35,987 25,663 Other current assets 3,952 3,050 Deferred income taxes 3,350 -- --------- --------- Total current assets 57,583 73,453 --------- --------- PROPERTY AND EQUIPMENT, net 90,671 75,146 INVESTMENTS IN PARTNERSHIPS 1,415 1,523 OTHER ASSETS 8,308 6,639 INTANGIBLE ASSETS, net 80,327 74,831 --------- --------- $ 238,304 $ 231,592 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of equipment and other notes $ 10,580 $ 7,978 Current portion of capital lease obligations 1,863 2,162 Accounts payable and other accrued expenses 20,489 27,204 --------- --------- Total current liabilities 32,932 37,344 --------- --------- LONG-TERM LIABILITIES: Equipment and other notes, less current portion 153,986 144,637 Capital lease obligations, less current portion 6,201 10,021 Other long-term liabilities 929 984 --------- --------- Total long-term liabilities 161,116 155,642 --------- --------- COMMITMENTS (Note 9) MINORITY INTEREST 150 748 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 3,500,000 shares authorized: Convertible Series B preferred stock, 25,000 shares outstanding at June 30, 1999 and 1998, with a liquidation preference of $25,000 as of June 30, 1999 23,923 23,923 Convertible Series C preferred stock, 27,953 shares outstanding at June 30, 1999 and 1998, with a liquidation preference of $27,953 as of June 30, 1999 13,173 13,173 Common stock, $.001 par value, 25,000,000 shares authorized, 2,879,071 and 2,824,090 shares outstanding at June 30, 1999 and 1998, respectively 3 3 Additional paid-in capital 23,551 23,415 Accumulated deficit (16,544) (22,656) --------- --------- Total stockholders' equity 44,106 37,858 --------- --------- $ 238,304 $ 231,592 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated balance sheets. 24 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Amounts in thousands, except share and per share data)
1999 1998 1997 ----------- ----------- ----------- REVENUES: Contract services $ 85,491 $ 55,661 $ 47,827 Patient services 73,565 59,669 41,916 Other 2,936 3,688 2,530 ----------- ----------- ----------- Total revenues 161,992 119,018 92,273 ----------- ----------- ----------- COSTS OF OPERATIONS: Costs of services 85,317 62,378 50,015 Provision for doubtful accounts 2,618 1,871 1,483 Equipment leases 18,522 17,023 18,396 Depreciation and amortization 24,468 15,441 9,740 ----------- ----------- ----------- Total costs of operations 130,925 96,713 79,634 ----------- ----------- ----------- Gross profit 31,067 22,305 12,639 PROVISION FOR SUPPLEMENTAL SERVICE FEE TERMINATION -- 6,309 -- PROVISION FOR REORGANIZATION AND OTHER COSTS 3,300 -- -- CORPORATE OPERATING EXPENSES 10,893 8,933 7,431 ----------- ----------- ----------- Income from company operations 16,874 7,063 5,208 EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS 548 707 566 ----------- ----------- ----------- Operating income 17,422 7,770 5,774 INTEREST EXPENSE, net 14,500 6,827 4,066 ----------- ----------- ----------- Income before income taxes 2,922 943 1,708 PROVISION (BENEFIT) FOR INCOME TAXES (3,190) 431 427 ----------- ----------- ----------- Net income $ 6,112 $ 512 $ 1,281 ----------- ----------- ----------- ----------- ----------- ----------- INCOME PER COMMON AND CONVERTED PREFERRED SHARE: Basic $ 0.67 $ 0.06 $ 0.25 ----------- ----------- ----------- ----------- ----------- ----------- Diluted $ 0.65 $ 0.06 $ 0.24 ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON AND CONVERTED PREFERRED SHARES OUTSTANDING: Basic 9,158,041 7,964,238 5,214,531 ----------- ----------- ----------- ----------- ----------- ----------- Diluted 9,375,531 8,271,298 5,440,315 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. 25 INSIGHT HEALTH SERVICES CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Amounts in thousands, except share data)
Preferred Stock ------------------------------------------------------------------ Series A Series B Series C -------------------------- --------------------------- ------------------------- Shares Amount Shares Amount Shares Amount ------------ ------------ ----------- ---------- --------- ------------- BALANCE AT JUNE 30, 1996 2,501,760 $ 6,750 -- $ -- -- $ -- Stock options exercised -- -- -- -- -- -- Net income -- -- -- -- -- -- ------------ ------------ ----------- ---------- --------- ------------- BALANCE AT JUNE 30, 1997 2,501,760 6,750 -- -- -- -- Stock options and warrants exercised -- -- -- -- -- -- Sale of Series B preferred stock -- -- 25,000 23,923 -- -- Exchange of Series A for Series C preferred stock (2,501,760) (6,750) -- -- 20,953 6,173 Supplemental service fee termination -- -- -- -- 7,000 7,000 Adjustment for fractional shares on MHC and IHC exchange -- -- -- -- -- -- Net income -- -- -- -- -- -- ------------ ------------ ----------- ---------- --------- ------------- BALANCE AT JUNE 30, 1998 -- -- 25,000 23,923 27,953 13,173 Stock options exercised -- -- -- -- -- -- Common stock issued -- -- -- -- -- -- Net income -- -- -- -- -- -- ------------ ------------ ----------- ---------- --------- ------------- BALANCE AT JUNE 30, 1999 -- $ -- 25,000 $ 23,923 27,953 $ 13,173 ------------ ------------ ----------- ---------- --------- ------------- ------------ ------------ ----------- ---------- --------- -------------
Common Stock Additional ----------------------------- Paid-In Accumulated Shares Amount Capital Deficit Total ----------- ------------- ----------- ------------ ------------ BALANCE AT JUNE 30, 1996 2,710,240 $ 3 $ 23,100 $ (24,449) $ 5,404 Stock options exercised 4,485 -- -- -- -- Net income -- -- -- 1,281 1,281 ----------- ------------- ----------- ------------ ------------ BALANCE AT JUNE 30, 1997 2,714,725 3 23,100 (23,168) 6,685 Stock options and warrants exercised 110,372 -- 315 -- 315 Sale of Series B preferred stock -- -- -- -- 23,923 Exchange of Series A for Series C preferred stock -- -- -- -- (577) Supplemental service fee termination -- -- -- -- 7,000 Adjustment for fractional shares on MHC and IHC exchange (1,007) -- -- -- -- Net income -- -- -- 512 512 ----------- ------------- ----------- ------------ ------------ BALANCE AT JUNE 30, 1998 2,824,090 3 23,415 (22,656) 37,858 Stock options exercised 52,596 -- 115 -- 115 Common stock issued 2,385 -- 21 -- 21 Net income -- -- -- 6,112 6,112 ----------- ------------- ----------- ------------ ------------ BALANCE AT JUNE 30, 1999 2,879,071 $ 3 $ 23,551 $ (16,544) $ 44,106 ----------- ------------- ----------- ------------ ------------ ----------- ------------- ----------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 26 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (Amounts in thousands)
1999 1998 1997 -------------- --------------- --------------- OPERATING ACTIVITIES: Net income $ 6,112 $ 512 $ 1,281 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization 24,887 15,749 9,740 Amortization of deferred gain on debt restructure (75) (1,384) (1,047) Provision for supplemental service fee termination -- 6,309 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables (8,324) (5,853) (1,518) Other current assets (4,106) (316) 160 Accounts payable and other accrued expenses (7,602) 3,199 (1,138) --------- --------- --------- Net cash provided by operating activities 10,892 18,216 7,478 --------- --------- --------- INVESTING ACTIVITIES: Cash acquired in acquisitions 850 4,174 -- Acquisition of Centers and Mobile Facilities (28,046) (56,720) (18,566) Additions to property and equipment (18,440) (23,644) (6,868) Other (1,565) (1,978) (4,943) --------- --------- --------- Net cash used in investing activities (47,201) (78,168) (30,377) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock -- 23,346 -- Proceeds from stock options and warrants exercised 115 315 -- Proceeds from issuance of common stock 21 -- -- Payment of loan financing costs -- (6,483) -- Principal payments of debt and capital lease obligations (17,495) (150,928) (10,998) Proceeds from issuance of debt 23,820 231,480 33,728 Other (598) 78 474 --------- --------- --------- Net cash provided by financing activities 5,863 97,808 23,204 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: (30,446) 37,856 305 Cash, beginning of year 44,740 6,884 6,579 --------- --------- --------- Cash, end of year $ 14,294 $ 44,740 $ 6,884 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 14,923 $ 7,048 $ 5,114 Equipment additions under capital leases 1,507 7,517 1,779
The accompanying notes are an integral part of these consolidated financial statements. 27 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. NATURE OF BUSINESS InSight Health Services Corp. (the Company) provides diagnostic imaging, treatment and related management services in 31 states throughout the United States. InSight's services are provided through a network of 77 mobile magnetic resonance imaging (MRI) facilities (Mobile Facilities), 35 fixed-site MRI facilities (Fixed Facilities), 22 multi-modality imaging centers (Centers), 5 mobile lithotripsy facilities, one Leksell Stereotactic Gamma Knife treatment center, and one radiation oncology center. An additional radiation oncology center is operated by the Company as part of one of its Centers. The Company's operations are located throughout the United States, with a substantial presence in California, Texas, New England, the Carolinas and the Midwest (Illinois, Indiana and Ohio). At its Centers, the Company offers other services in addition to MRI including computed tomography (CT), diagnostic and fluoroscopic x-ray, mammography, diagnostic ultrasound, lithotripsy, nuclear medicine, nuclear cardiology, and cardiovascular services. The Company offers additional services through a variety of arrangements including equipment rental, technologist services and training/applications, marketing, radiology management services, patient scheduling, utilization review and billing and collection services. b. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company's investment interests in partnerships or limited liability companies (Partnerships) are accounted for under the equity method of accounting for ownership of 50 percent or less when the Company does not exercise significant control over the operations of the Partnership and does not have primary responsibility for the Partnership's long-term debt. The Company's investment interests in Partnerships are consolidated for ownership of 50 percent or greater owned entities when the Company exercises significant control over the operations and is primarily responsible for the associated long-term debt (Note 13). 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 Fixed Facilities and Centers) are recognized when services are provided. Patient services revenues are presented net of related contractual adjustments. Equipment rental revenues, management fees and other revenues are recognized over the applicable contract period. Revenues collected in advance are recorded as unearned revenue. e. CASH EQUIVALENTS Cash equivalents are generally composed of highly liquid investments with original maturities of three months or less, such as certificates of deposit and commercial paper. f. PROPERTY AND EQUIPMENT Property and equipment are depreciated and amortized on the straight-line method using the following estimated useful lives:
Vehicles 3 to 8 years Buildings 7 to 20 years 28 Leasehold improvements Term of lease Computer and office equipment 3 to 5 years Diagnostic and related equipment 5 to 8 years Equipment and vehicles under capital leases Term of lease
The Company capitalizes expenditures for improvements and major renewals. Maintenance, repairs and minor replacements are charged to operations as incurred. When assets are sold or otherwise disposed of, the cost and related reserves are removed from the accounts and any resulting gain or loss is included in the results of operations. g. INTANGIBLE ASSETS The Company has classified as goodwill the cost in excess of fair value of the net assets acquired in purchase transactions. Intangible assets are amortized on the straight-line basis over the following periods:
Goodwill 5 to 20 years Other 3 to 7 years
The Company assesses the ongoing recoverability of its intangible assets (including goodwill) by determining whether the intangible asset balance can be recovered over the remaining amortization period through projected nondiscounted future cash flows. If projected future cash flows indicate that the unamortized intangible asset balances will not be recovered, an adjustment is made to reduce the net intangible asset to an amount consistent with projected future cash flows discounted at the Company's incremental borrowing rate. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. h. INCOME TAXES The Company accounts for income taxes using the asset and liability method. A valuation allowance is provided against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. i. INCOME PER COMMON AND CONVERTED PREFERRED SHARE The Company reports basic and diluted earnings per share (EPS) for common and converted preferred stock. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed 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. 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 The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," in 1999. This standard requires disclosure of reportable segments based on such factors as products and services, geography, legal structure, management structure or any manner by which a company's management distinguishes major operating units. Management believes that there are no differences between the Company's reported financial statements and segment information, as defined, for the periods presented. The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in 1999. This standard requires that all items that meet the definition of components of comprehensive income be reported in a separate financial statement for the period in which they are recognized. Components of comprehensive income include revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, but excluded from net income. There are no differences between the Company's net income, as reported and comprehensive income, as defined, for the periods presented. 29 In fiscal 2001, the Company will be required to adopt SFAS No. 133, "Accounting for Derivatives, Instruments and Hedging Activities", as deferred and amended by SFAS No. 137. The Company believes the adoption of this standard will not have a material impact on the Company's financial condition or results of operations. l. RECLASSIFICATIONS Reclassifications have been made to certain 1998 and 1997 amounts to conform to the 1999 presentation. 2. RECAPITALIZATION AND FINANCING On October 14, 1997, the Company consummated a recapitalization (Recapitalization) pursuant to which (a) certain investors affiliated with TC Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank headquartered in Washington, D.C., made a cash investment of $25 million in the Company and received therefor (i) 25,000 shares of newly issued convertible preferred stock, Series B of the Company, par value $0.001 per share (Series B Preferred Stock), initially convertible, at the option of the holders thereof, in the aggregate into 2,985,075 shares of common stock, and (ii) warrants (Carlyle Warrants) to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share; (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 in exchange for (A) the issuance of 7,000 shares of newly issued convertible preferred stock, Series C of the Company, par value $0.001 per share (Series C Preferred Stock) initially convertible, at the option of GE, in the aggregate into 835,821 shares of common stock , for which the Company recorded a non-recurring expense of approximately $6.3 million, and (B) warrants (GE Warrants) to purchase up to 250,000 shares of common stock at an exercise price of $10.00 per share and (ii) exchanged all of its convertible preferred stock, Series A of the Company, for an additional 20,953 shares of Series C Preferred Stock, initially convertible, at the option of GE, in the aggregate into 2,501,760 shares of common stock; and (c) the Company executed a credit agreement with Bank of America, N.A. (formerly NationsBank, N.A.) (BofA) pursuant to which BofA, 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. Initial funding under the Bank Financing occurred on October 22, 1997 and, 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 into an aggregate of 6,322,656 shares of common stock. For so long as Carlyle and its affiliates own at least 33% of the Series B Preferred Stock or GE and its affiliates own at least 33% of the Series C Preferred Stock, respectively, the approval of at least 67% of the holders of such series of Preferred Stock is required before the Company may take certain actions including, but not limited to, amending its certificate of incorporation or bylaws, changing the number of directors or the manner in which directors are selected, incurring indebtedness in excess of $15 million in any fiscal year, issuing certain equity securities below the then current market price or the then applicable conversion price, acquiring equity interests or assets of entities for consideration equal to or greater than $15 million, and engaging in mergers for consideration equal to or greater than $15 million. The Preferred Stock will vote with the common stock on an as-if-converted basis on all matters except the election of directors, subject to an aggregate maximum Preferred Stock percentage of 37% of all votes entitled to be cast on such matters. Assuming the conversion of all of the Series B Preferred Stock into common stock and the exercise of all of the Carlyle Warrants, Carlyle would own approximately 31% of the common stock of the Company, on a fully diluted basis. Assuming the conversion of all of the Series C Preferred Stock and the exercise of the GE Warrants, GE would own approximately 35% of the common stock of the Company, on a fully diluted basis. 30 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 of common stock in certain transactions or proposed transactions not involving a public offering by the Company of its common stock or securities convertible into common stock. Holders of the Preferred Stock are also entitled to certain demand and "piggyback" registration rights. On June 12, 1998, the Company completed a refinancing of substantially all of the Company's long-term debt through the issuance of $100 million of 9 5/8% senior subordinated notes (Notes) due 2008. Concurrent with the issuance of the Notes, the Company entered into an amendment to and restatement of the Bank Financing, pursuant to which the Company refinanced and consolidated its prior $20 million tranche and $40 million tranche into a $50 million term loan facility with a six-year amortization, (ii) a $25 million revolving working capital facility with a five-year maturity and (iii) a $75 million acquisition facility with a six-year maturity (see Note 8). 3. PROVISION FOR REORGANIZATION AND OTHER COSTS In the fourth quarter of fiscal 1999, the Company recorded a one-time provision for reorganization and other costs of $3.3 million, consisting of the following: The Company realigned its corporate and regional organization to improve financial performance and operating efficiencies and recorded a provision with respect to the related employee severances and office closing costs of approximately $1.8 million. Additionally, in connection with its business strategy, the Company evaluated a number of potential acquisitions in the last six months of fiscal 1999 which it did not complete. The Company has recorded a provision of approximately $0.7 million for legal, accounting and consulting costs associated with certain potential acquisitions that the Company determined were no longer consistent with its strategic objectives. Finally, the Company reevaluated its information systems in light of organizational changes and developed a new strategic plan to modify and reimplement its proprietary radiology information system. Accordingly, the Company recorded a provision with respect to related software and other capitalized costs of approximately $0.8 million. 31 4. TRADE ACCOUNTS RECEIVABLES Trade accounts receivables are comprised of the following (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Trade accounts receivables $ 60,785 $ 41,971 Less: Allowances for doubtful accounts and contractual adjustments 17,822 11,399 Allowances for professional fees 6,976 4,909 -------- -------- Trade accounts receivables, net $ 35,987 $ 25,663 -------- -------- -------- --------
The allowance for doubtful accounts and contractual adjustments include management's estimate of the amounts expected to be written off on specific accounts and for write offs on other unidentified accounts included in accounts 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, 1999. The Company reserves a contractually agreed upon percentage at several of its Centers and Fixed Facilities, 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. 5. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are comprised of the following (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Vehicles $ 2,015 $ 1,085 Land, building and leasehold improvements 18,003 16,736 Computer and office equipment 16,496 8,391 Diagnostic and related equipment 91,743 69,025 Equipment and vehicles under capital leases 6,025 6,025 -------- -------- 134,282 101,262 Less: Accumulated depreciation and amortization 43,611 26,116 -------- -------- Property and equipment, net $ 90,671 $ 75,146 -------- -------- -------- --------
32 6. INTANGIBLE ASSETS Intangible assets consist of the following (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Intangible assets $ 89,714 $ 79,546 Less: Accumulated amortization 9,387 4,715 -------- -------- $ 80,327 $ 74,831 -------- -------- -------- -------- Net intangible assets: Goodwill $ 79,163 $ 73,794 Other 1,164 1,037 -------- -------- $ 80,327 $ 74,831 -------- -------- -------- --------
Amortization of intangible assets was approximately $4.7 million, $2.8 million and $1.4 million for the years ended June 30, 1999, 1998 and 1997, respectively. In 1997, the Company completed three acquisitions as follows: a Fixed Facility in Hayward, California; Mobile Facilities in Maine and New Hampshire; and a Center in Chattanooga, Tennessee. All three transactions included the purchase of assets and assumption of certain equipment related liabilities. The cumulative purchase price for these acquisitions was approximately $18.6 million. In 1998, the Company completed four acquisitions as follows: a Center in Columbus, Ohio; a Center in Murfreesboro, Tennessee, a Fixed Facility in Redwood City, California; and a Center in Las Vegas, Nevada. In connection with the purchase of the Center in Columbus, Ohio, the Company also acquired a majority ownership interest in a new Center in Dublin, Ohio. All transactions included the purchase of assets and assumption of certain equipment related liabilities. The cumulative purchase price for these acquisitions was approximately $18.4 million. Additionally, in 1998, the Company acquired all of the capital stock of Signal Medical Services, Inc. (Signal), through the merger of Signal into a wholly owned subsidiary of the Company. The purchase price was approximately $45.7 million. The Signal assets primarily consisted of Mobile Facilities in the Northeastern and Southeastern United States. In 1999, the Company completed two acquisitions as follows: a 70% interest in a partnership which owns four Centers and two Fixed Facilities in Buffalo, New York; and a 100% interest in three Centers and two Fixed Facilities in Phoenix, Arizona. The cumulative purchase price for these two acquisitions was approximately $16.9 million. A summary of the Company's 1999 acquisitions consists of the following (amounts in thousands): Total purchase price $16,896 Estimated fair market value of net assets acquired 6,726 -------- Goodwill $10,170 -------- --------
7. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES Accounts payable and other accrued expenses are comprised of the following (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Accounts payable $ 3,711 $ 6,946 Accrued equipment related costs 1,748 6,105 Accrued payroll and related costs 6,048 5,174 Other accrued expenses 8,982 8,979 -------- -------- $ 20,489 $ 27,204 -------- -------- -------- --------
33 8. EQUIPMENT AND OTHER NOTES PAYABLE Equipment and other notes payable are comprised of the following (amounts in thousands):
June 30, --------------------------------- 1999 1998 --------------- --------------- Unsecured senior subordinated notes payable, bearing interest at 9.625 percent, interest payable semi-annually, principal due in June 2008. $ 100,000 $ 100,000 Notespayable to bank, bearing interest at LIBOR plus 1.75 percent (6.93 percent at June 30, 1999), principal and interest payable quarterly, maturing in June 2004. The note is secured by substantially all of the Company's assets. 61,800 50,000 Notespayable to GE, bearing interest at rates which range from 8.60 percent to 8.75 percent, maturing at various dates through May 2005. The notes are primarily secured by certain buildings and diagnostic equipment. 1,934 1,360 Notespayable 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. 832 1,255 --------- --------- Total equipment and other notes payable 164,566 152,615 Less: Current portion 10,580 7,978 --------- --------- Long-term equipment and other notes payable $ 153,986 $ 144,637 --------- --------- --------- ---------
Scheduled maturities of equipment and other notes payable at June 30, 1999, are as follows (amounts in thousands):
2000 $ 10,580 2001 10,767 2002 11,203 2003 17,082 2004 14,319 Thereafter 100,615 --------- $ 164,566 --------- ---------
The Company has a $25 million revolving working capital facility, which expires in June 2003 and a $75 million acquisition six-year facility, which expires in June 2004. Borrowings under both credit facilities bear interest at LIBOR plus 1.75%. The Company is also required to pay an unused facility fee of between .375% and .5% on unborrowed amounts under both facilities. There were borrowings of approximately $3.0 million and $16.3 million, respectively, under these facilities at June 30, 1999. The credit agreement related to the Bank Financing and the indenture related to the Notes contain limitations on additional borrowings, capital expenditures, dividend payments and certain financial covenants. As of June 30, 1999, the Company was in compliance with these covenants. During 1998, the Company entered into an interest rate swap agreement with a bank to hedge against the effects of increases in the interest rates associated with the Company's floating rate debt. The swap agreement initially had a notional amount of $40.0 million and expires in 2001. The fair value of the interest rate swap is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates at the reporting date, and the current creditworthiness of the swap counter-parties. At June 30, 1999, the estimated fair market value of the interest rate swap, and the effective fixed interest rate due on the remaining notional amount is as follows:
Effective Maximum Notional Interest Fair Market Amount Rate Value ------ -------- ----- $ 38.5 million 5.72% $ 62,000
34 9. 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, 1999 are as follows (amounts in thousands):
Capital Operating ------------- ----------- 2000 $ 2,479 $ 23,316 2001 1,948 18,798 2002 1,794 15,536 2003 1,777 12,382 2004 1,371 7,307 Thereafter 475 8,155 ------- -------- Total minimum lease payments 9,844 $ 85,494 -------- -------- Less: Amounts representing interest 1,780 ------- Present value of capital lease obligations 8,064 Less: Current portion 1,863 ------- Long-term capital lease obligations $ 6,201 ------- -------
As of June 30, 1999, certain equipment leased by the Company is subject to contingent rental adjustments dependent on certain operational factors. The Company's future operating and capital lease obligations to GE were approximately $63.8 million and $7.9 million, respectively. Rental expense for diagnostic equipment and other equipment for the years ended June 30, 1999, 1998 and 1997 was $18.5 million, $17.0 million and $18.3 million, respectively. These amounts include contingent rental expense of $0.1 million and $0.3 million for the years ended June 30, 1998 and 1997, respectively. No contingent rental expense was paid for the year ended June 30, 1999. The Company occupies facilities under lease agreements expiring through April 2009. Rental expense for these facilities for the years ended June 30, 1999, 1998 and 1997 was $3.7 million, $2.8 million and $1.9 million, respectively. The Company is engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of its business and has insurance policies covering such potential insurable losses where such coverage is cost-effective. The Company believes that the outcome of any such lawsuits will not have a material adverse impact on the Company's business, financial condition and results of operations. 35 On June 15, 1999, InfoTech Software Corporation (InfoTech) filed a complaint against IHC, Shawn P. Railey, Jason P. Gardner and Alchemy Software Corporation (Alchemy) in the District Court of Dallas County, Texas. The plaintiff alleges that, among other things, in March 1994, Maxum Health Corp. (MHC), an affiliate of IHC, entered into an agreement with InfoTech to design and implement a custom information system for MHC and that MHC received only a license to use the software and did not have the right to sublicense or otherwise provide third parties access to InfoTech's software or to modify it. InfoTech further alleges that defendants Railey and Gardner, former employees of InfoTech, resigned from InfoTech and formed Alchemy, conspired to and did steal the IHC project from InfoTech, and are now providing services to IHC. The plaintiff's complaint includes claims of unfair competition, breach of contract, collusion, business disparagement and tortious interference with contractual relations. The complaint requests a judgment for actual and exemplary damages in unspecified amounts, attorney's fees, pre-judgment and post judgment interest, costs and disbursements. The defendants have filed an answer to the complaint and discovery has commenced and is continuing. The Company believes the plaintiff's claims are without merit and intends to vigorously defend the lawsuit. 36 10. CAPITAL STOCK WARRANTS: The Company does not have a formal warrant plan. The Board authorizes the issuance of warrants at its discretion. The Board has generally granted warrants in connection with financing transactions. The number of warrants issued and related terms are determined by the Board. All warrants have been issued with an exercise price of at least fair market value of its common stock on the issuance date. There were no warrants granted for the year ended June 30, 1999. A summary of the status of the Company's warrants at June 30, 1999, 1998 and 1997 and changes during the years ended June 30, 1999, 1998 and 1997 is presented below:
Weighted Average Shares Exercise Price --------------- --------------- Outstanding, June 30, 1996 20,000 $ 2.50 Granted 100,000 5.57 ------- ------ Outstanding, June 30, 1997 120,000 5.06 Granted 605,000 9.32 Exercised (62,817) 4.64 ------- ------ Outstanding, June 30, 1998 662,183 $ 9.00 ------- ------ Outstanding, June 30, 1999 662,183 $ 9.00 ------- ------ ------- ------
Of the 662,183 warrants outstanding at June 30, 1999, the characteristics are as follows:
Exercise Price Weighted Average Warrants Total Warrants Remaining Contractual Range Exercise Price Exercisable Outstanding Life ----------------- ---------------------- --------------- ---------------- ------------------------ $4.56 - $5.64 $5.03 89,683 117,183 4.53 years $7.25 - $10.00 $9.85 524,584 545,000 6.96 years ---------- ---------- 614,267 662,183 ---------- ---------- ---------- ----------
STOCK OPTIONS: The Company has four stock option plans, which provide for the granting of incentive and nonstatutory stock options to key employees and non-employee directors. Incentive stock options must have an exercise price of at least the fair market value of its common stock on the grant date. Options become vested cumulatively over various periods up to seven years from the grant date, are exercisable in whole or in installments, and expire five or ten years from the grant date. In addition, two wholly owned subsidiaries of the Company have three stock option plans, which provided for the granting of incentive or nonstatutory stock options to key employees and non-employee directors. No shares are available for future grants under these plans. As of June 30, 1999, the Company has 268,433 shares available for issuance under its plans. A summary of the status of the Company's stock option plans at June 30, 1999, 1998 and 1997 and changes during the years is presented below: 37
Weighted Average Shares Exercise Price --------------- --------------- Outstanding, June 30, 1996 369,918 $ 3.15 Granted 233,000 6.19 Exercised (4,485) 2.50 Expired (25,000) 13.85 --------- ------ Outstanding, June 30, 1997 573,433 3.98 Granted 975,000 8.59 Exercised (47,555) 0.48 Forfeited (17,500) 4.67 --------- ------ Outstanding, June 30, 1998 1,483,378 7.15 Granted 265,000 8.46 Exercised (59,800) 1.92 Forfeited (136,500) 7.28 --------- ------ Outstanding, June 30, 1999 1,552,078 $ 7.56 --------- ------ --------- ------ Exercisable at: June 30, 1997 296,416 $ 2.12 June 30, 1998 336,805 $ 3.65 June 30, 1999 558,838 $ 6.12
Of the 1,552,078 options outstanding at June 30, 1999, the characteristics are as follows:
Exercise Price Weighted Average Options Total Options Remaining Contractual Range Exercise Price Exercisable Outstanding Life ----------------- ---------------------- --------------- ---------------- ------------------------- $0.10 - $1.25 $0.57 137,540 137,540 5.04 years $2.50 - $7.00 $5.26 235,708 476,350 6.92 years $8.37 - $12.57 $9.59 160,902 913,500 9.25 years $15.64 - $16.20 $15.78 24,688 24,688 2.70 years --------------- ---------------- 558,838 1,552,078 --------------- ---------------- --------------- ----------------
As permitted under SFAS No. 123, "Accounting for Stock Based Compensation (SFAS No. 123)", the Company accounts for the options and warrants issued in accordance with APB Opinion No. 25, and no compensation cost has been recognized in the financial statements. SFAS No. 123 requires that the Company presents pro forma disclosures as if the Company recognized compensation expense equal to the fair value of options and warrants granted, as determined at the date of grant. The Company's net income and earnings per share would have reflected the following pro forma amounts:
Years Ended June 30, -------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Net income (loss): As Reported $ 6,112,000 $ 512,000 $ 1,281,000 Pro Forma 4,446,000 (506,000) 966,000 Diluted EPS: As Reported 0.65 0.06 0.24 Pro Forma 0.47 (0.06) 0.18
The fair value of each option grant and warrant issued is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions used for the grants and issuances in the fiscal years ended June 30, 1999, 1998 and 1997, respectively: 38
Years Ended June 30, --------------------------------------------------- Assumptions 1999 1998 1997 ------------------------------------------------------------------ --------------- --------------- --------------- Risk-free interest rate 5.08% 5.93% 6.75% Volatility 64.90% 79.46% 70.00% Expected dividend yield 0.00% 0.00% 0.00% Estimated contractual life 9.35 years 6.51 years 10 years
11. INCOME TAXES The provision (benefit)for income taxes for the years ended June 30, 1999, 1998 and 1997 was computed using effective tax rates calculated as follows:
Years Ended June 30, ----------------------------------------------------- 1999 1998 1997 ------------ ------------- ------------ Federal statutory tax rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 6.0 1.2 1.2 Permanent items, including goodwill, non-deductible merger costs 12.3 79.4 41.8 Change in valuation allowance (161.5) (68.9) (52.0) ------------ ------------- ------------ Net effective tax rate (109.2)% 45.7% 25.0% ------------ ------------- ------------ ------------ ------------- ------------
The provision (benefit) for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statements and tax bases of assets and liabilities. The provision (benefit) for income taxes for the years ended June 30, 1999, 1998 and 1997 consisted of the following (amounts in thousands):
Years Ended June 30, -------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Current provision: Federal $ 60 $ 1,044 $ 1,268 State 100 36 47 -------- ----- ----- 160 1,080 1,315 -------- ----- ----- Deferred taxes arising from temporary differences: State income taxes (144) (23) (31) Accrued expenses 706 448 (629) Deferred gain on debt restructure - (519) (368) Reserves 958 182 31 Depreciation and amortization (1,383) (802) (216) Utilization of net operating losses (346) - - Change in valuation allowance (3,350) - - Other 209 65 325 -------- ----- ----- (3,350) (649) (888) -------- ----- ----- Total provision (benefit) $ (3,190) $ 431 $ 427 -------- ----- ----- -------- ----- -----
39 The components of the Company's deferred tax asset as of June 30, 1999 and 1998, respectively, which arise due to timing differences between financial and tax reporting and net operating loss (NOL) carryforwards are as follows (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Reserves $ 2,854 $ 1,896 Accrued expenses (not currently deductible) 1,785 1,052 Depreciation and amortization (2,324) (941) Other 101 54 NOL carryforwards 15,806 16,152 Valuation allowances (13,522) (18,213) ------- ------- $ 4,700 $ -- ------- ------- ------- -------
As of June 30, 1999, the Company had NOL carryforwards of approximately $46.5 million, expiring in 2004 through 2011. 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 against a component of the deferred tax asset, as, in management's best estimate, it is not likely to be realized in the near term. Approximately $1.3 million of the change in valuation allowance relates to the merger of the Company, IHC and MHC and has been recorded as a reduction to goodwill. 12. 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 approximately $0.6 million, $0.4 million and $0.3 million were made for the years ended June 30, 1999, 1998 and 1997, respectively. 13. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS The Company has direct ownership in two Partnerships at June 30, 1999, both of which operate Centers. The Company owns between 35 percent and 50 percent 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 Partnerships' long-term debt. Set forth below is certain financial data of these Partnerships (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Combined Financial Position: Current assets: Cash $ 685 $ 1,035 Trade accounts receivables, less allowances 1,508 1,539 Other 95 37 Property and equipment, net 2,989 667 Intangible assets, net 583 638 ------- ------- Total assets 5,860 3,916 Current liabilities (917) (510) Due to the Company (131) (142) Long-term liabilities (1,751) (35) ------- ------- Net assets $ 3,061 $ 3,229 ------- ------- ------- -------
40 Set forth below are the combined operating results of the Partnerships and the Company's equity in earnings of the Partnerships (amounts in thousands):
Years Ended June 30, -------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Operating Results: Net revenues $ 5,673 $ 5,723 $ 5,143 Expenses 4,334 4,058 3,793 ------- ------- ------- Net income $ 1,339 $ 1,665 $ 1,350 ------- ------- ------- ------- ------- ------- Equity in earnings of Partnerships $ 548 $ 707 $ 566 ------- ------- ------- ------- ------- -------
The Company has direct ownership in two additional Partnerships, one of which operates a Center. The Company transferred ownership of one Center in 1998 to its hospital partner and is in process of dissolving the Partnership. The Company owns 50 percent of the Partnerships. 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 financial statements. Set forth below is the summarized combined financial data of the Company's 50 percent controlled entities which are consolidated (amounts in thousands):
June 30, -------------------------------- 1999 1998 --------------- --------------- Condensed Combined Balance Sheet Data: Current assets $ 1,494 $ 1,825 Total assets 1,637 1,896 Current liabilities 640 644 Minority interest equity 515 642
Years Ended June 30, -------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Condensed Combined Statement of Income Data: Net revenues $ 5,551 $ 5,875 $ 6,316 Expenses 3,973 4,147 4,642 Provision for center profit distribution 789 864 837 ------- ------- ------- Net income $ 789 $ 864 $ 837 ------- ------- ------- ------- ------- -------
14. INCOME PER COMMON AND CONVERTED PREFERRED SHARE The Company has adopted SFAS No. 128, which replaces primary EPS and fully diluted EPS with basic EPS and diluted EPS. The number of shares used in computing EPS is equal to the weighted average number of common and converted preferred shares outstanding during the respective period. Since the preferred stock has no stated dividend rate and participates in any dividends paid with respect to the common stock, the as-if-converted amounts are included in the computation of basic EPS. There were no adjustments to net income (the numerator) for purposes of computing EPS. 41 A reconciliation of basic and diluted share computations is as follows:
Years Ended June 30, --------------------------------------------------- 1999 1998 1997 ---------------- --------------- --------------- Average common stock outstanding 2,835,385 2,751,212 2,712,771 Effect of preferred stock 6,322,656 5,213,026 2,501,760 ---------- ---------- ---------- Denominator for basic EPS 9,158,041 7,964,238 5,214,531 Dilutive effect of stock options and warrants 217,490 307,060 225,784 ---------- ---------- ---------- 9,375,531 8,271,298 5,440,315 ---------- ---------- ---------- ---------- ---------- ----------
15. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION The Company's payment obligations under the senior subordinated Notes (Note 8) are guaranteed by certain of the Company's wholly owned subsidiaries (the Guarantor Subsidiaries). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company's management has determined that they would not be material to investors. The following supplemental financial information sets forth, on an unconsolidated basis, balance sheets, statements of income, and statements of cash flows information for the Company (Parent Company Only), for the Guarantor Subsidiaries and for the Company's other subsidiaries (the Non-Guarantor Subsidiaries). The supplemental financial information reflects the investments of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. 42 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1999
PARENT COMPANY GUARANTOR NON-GUARANTO ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ --------------------------------- --------------- -------------- (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents $ -- $ 12,709 $ 1,585 $ -- $ 14,294 Trade accounts receivables, net -- 32,164 3,823 -- 35,987 Other current assets -- 3,838 114 -- 3,952 Deferred income taxes -- 3,350 -- -- 3,350 Intercompany accounts receivable 225,140 11,027 -- (236,167) -- ----------- ----------- ----------- ----------- ----------- Total current assets 225,140 63,088 5,522 (236,167) 57,583 Property and equipment, net -- 82,544 8,127 -- 90,671 Investments in partnerships -- 1,415 -- -- 1,415 Investments in consolidated subsidiaries (19,234) 2,691 -- 16,543 -- Other assets -- 8,308 -- -- 8,308 Intangible assets, net -- 79,606 721 -- 80,327 ----------- ----------- ----------- ----------- ----------- $ 205,906 $ 237,652 $ 14,370 $ (219,624) $ 238,304 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital leases $ 9,945 $ 2,374 $ 124 $ -- $ 12,443 and other notes Accounts payable and other accrued expenses -- 20,128 361 -- 20,489 Intercompany accounts payable -- 225,140 11,027 (236,167) -- ----------- ----------- ----------- ----------- ----------- Total current liabilities 9,945 247,642 11,512 (236,167) 32,932 Equipment, capital leases and other notes, less 151,855 8,315 17 -- 160,187 current portion Other long-term liabilities -- 929 -- -- 929 Minority interest -- -- 150 -- 150 Stockholders' equity (deficit) 44,106 (19,234) 2,691 16,543 44,106 ----------- ----------- ----------- ----------- ----------- $ 205,906 $ 237,652 $ 14,370 $ (219,624) $ 238,304 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
43 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ------------ ----------------- ----------------- --------------- ---------------- (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents $ -- $ 43,250 $ 1,490 $ -- $ 44,740 Trade accounts receivables, net -- 22,909 2,754 -- 25,663 Other current assets -- 2,751 299 -- 3,050 Intercompany accounts receivable 211,995 4,903 -- (216,898) -- --------- --------- --------- --------- --------- Total current assets 211,995 73,813 4,543 (216,898) 73,453 Property and equipment, net -- 71,695 3,451 -- 75,146 Investments in partnerships -- 1,523 -- -- 1,523 Investments in consolidated subsidiaries (24,137) 1,482 -- 22,655 -- Other assets -- 6,639 -- -- 6,639 Intangible assets, net -- 74,711 120 -- 74,831 --------- --------- --------- --------- --------- $ 187,858 $ 229,863 $ 8,114 $(194,243) $ 231,592 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of equipment, capital $ 7,500 $ 2,497 $ 143 $ -- $ 10,140 leases and other notes Accounts payable and other accrued expenses -- 26,535 669 -- 27,204 Intercompany accounts payable -- 211,995 4,903 (216,898) -- --------- --------- --------- --------- --------- Total current liabilities 7,500 241,027 5,715 (216,898) 37,344 Equipment, capital leases and other notes, 142,500 11,989 169 -- 154,658 less current portion Other long-term liabilities -- 984 -- -- 984 Minority interest -- -- 748 -- 748 Stockholders' equity (deficit) 37,858 (24,137) 1,482 22,655 37,858 --------- --------- --------- --------- --------- $ 187,858 $ 229,863 $ 8,114 $(194,243) $ 231,592 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
44 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1999
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- ------------- ----------------- -------------- -------------- (Amounts in thousands) Revenues $ -- $ 143,205 $ 18,787 $ -- $ 161,992 Costs of operations -- 114,812 16,113 -- 130,925 --------- --------- --------- --------- --------- Gross profit -- 28,393 2,674 -- 31,067 Provision for reorganization and other costs -- 3,300 -- -- 3,300 Corporate operating expenses -- 10,893 -- -- 10,893 --------- --------- --------- --------- --------- Income from company operations -- 14,200 2,674 -- 16,874 Equity in earnings of unconsolidated partnerships -- 548 -- -- 548 --------- --------- --------- --------- --------- Operating income -- 14,748 2,674 -- 17,422 Interest expense, net -- 13,453 1,047 -- 14,500 --------- --------- --------- --------- --------- Income before income taxes -- 1,295 1,627 -- 2,922 Provision (benefit) for income taxes -- (3,190) -- -- (3,190) --------- --------- --------- --------- --------- Income before equity in income of consolidated subsidiaries -- 4,485 1,627 -- 6,112 Equity in income of consolidated subsidiaries 6,112 1,627 -- (7,739) -- --------- --------- --------- --------- --------- Net income $ 6,112 $ 6,112 $ 1,627 $ (7,739) $ 6,112 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
45 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ----------- ------------- ----------------- -------------- -------------- (Amounts in thousands) Revenues $ -- $ 104,707 $ 14,311 $ -- $ 119,018 Costs of operations -- 84,021 12,692 -- 96,713 --------- --------- --------- --------- --------- Gross profit -- 20,686 1,619 -- 22,305 Provision for supplemental service fee termination -- 6,309 -- -- 6,309 Corporate operating expenses -- 8,933 -- -- 8,933 --------- --------- --------- --------- --------- Income from company operations -- 5,444 1,619 -- 7,063 Equity in earnings of unconsolidated partnerships -- 707 -- -- 707 --------- --------- --------- --------- --------- Operating income -- 6,151 1,619 -- 7,770 Interest expense, net -- 6,442 385 -- 6,827 --------- --------- --------- --------- --------- Income (loss) before income taxes -- (291) 1,234 -- 943 Provision for income taxes -- 431 -- -- 431 --------- --------- --------- --------- --------- Income (loss) before equity in income of consolidated subsidiaries -- (722) 1,234 -- 512 Equity in income of consolidated subsidiaries 512 1,234 -- (1,746) -- --------- --------- --------- --------- --------- Net income $ 512 $ 512 $ 1,234 $ (1,746) $ 512 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
46 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1997
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED ------------ -------------- ------------------ --------------- ---------------- (Amounts in thousands) Revenues $ -- $ 78,294 $ 13,979 $ -- $ 92,273 Costs of operations -- 67,505 12,129 -- 79,634 -------- -------- -------- -------- -------- Gross profit -- 10,789 1,850 -- 12,639 Corporate operating expenses -- 7,431 -- -- 7,431 -------- -------- -------- -------- -------- Income from company operations -- 3,358 1,850 -- 5,208 Equity in earnings of unconsolidated partnerships -- 566 -- -- 566 -------- -------- -------- -------- -------- Operating income -- 3,924 1,850 -- 5,774 Interest expense, net -- 3,946 120 -- 4,066 -------- -------- -------- -------- -------- Income (loss) before income taxes -- (22) 1,730 -- 1,708 Provision for income taxes -- 427 -- -- 427 -------- -------- -------- -------- -------- Income (loss) before equity in income of consolidated subsidiaries -- (449) 1,730 -- 1,281 Equity in income of consolidated subsidiaries 1,281 1,730 -- (3,011) -- -------- -------- -------- -------- -------- Net income $ 1,281 $ 1,281 $ 1,730 $ (3,011) $ 1,281 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
47 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1999
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ----------- -------------- ------------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 6,112 $ 6,112 $ 1,627 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization -- 21,977 2,910 Amortization of deferred gain on debt restructure -- (75) -- Equity in income of consolidated subsidiaries (6,112) (1,627) -- Cash provided by (used in) changes in operating assets and liabilities: -- Trade accounts receivables -- (7,255) (1,069) Intercompany receivables, net (11,936) 6,230 5,706 Other current assets -- (4,291) 185 Accounts payable and other accrued expenses -- (7,294) (308) -------- -------- -------- Net cash provided by (used in) operating activities (11,936) 13,777 9,051 -------- -------- -------- INVESTING ACTIVITIES: Cash acquired in acquisitions -- 850 -- Acquisitions of Centers and Mobile Facilities -- (28,046) -- Additions to property and equipment -- (11,112) (7,328) Other -- (706) (859) -------- -------- -------- Net cash used in investing activities -- (39,014) (8,187) -------- -------- -------- FINANCING ACTIVITIES: Proceeds from stock options and warrants exercised 115 -- -- Proceeds for issuance of common stock 21 -- -- Principal payments of debt and capital lease obligations (11,200) (6,124) (171) Proceeds from issuance of debt 23,000 820 -- Other -- -- (598) -------- -------- -------- Net cash provided by (used in) financing activities 11,936 (5,304) (769) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (30,541) 95 CASH AND CASH EQUIVALENTS: Cash, beginning of year -- 43,250 1,490 -------- -------- -------- Cash, end of year $ -- $ 12,709 $ 1,585 -------- -------- -------- -------- -------- --------
ELIMINATION CONSOLIDATED --------------- --------------- (Amounts in thousands) OPERATING ACTIVITIES: Net income $ (7,739) $ 6,112 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization -- 24,887 Amortization of deferred gain on debt restructure -- (75) Equity in income of consolidated subsidiaries 7,739 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (8,324) Intercompany receivables, net -- -- Other current assets -- (4,106) Accounts payable and other accrued expenses -- (7,602) -------- -------- Net cash provided by (used in) operating activities -- 10,892 -------- -------- INVESTING ACTIVITIES: Cash acquired in acquisitions -- 850 Acquisitions of Centers and Mobile Facilities -- (28,046) Additions to property and equipment -- (18,440) Other -- (1,565) -------- -------- Net cash used in investing activities -- (47,201) -------- -------- FINANCING ACTIVITIES: Proceeds from stock options and warrants exercised -- 115 Proceeds from issuance of common stock -- 21 Principal payments of debt and capital lease obligations -- (17,495) Proceeds from issuance of debt -- 23,820 Other -- (598) -------- -------- Net cash provided by (used in) financing activities -- 5,863 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (30,446) CASH AND CASH EQUIVALENTS: Cash, beginning of year -- 44,740 -------- -------- Cash, end of year $ -- $ 14,294 -------- -------- -------- --------
48 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1998
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ----------- -------------- ------------------ (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 512 $ 512 $ 1,234 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization -- 14,686 1,063 Amortization of deferred gain on debt restructure -- (1,384) -- Provision for supplemental service fee termination -- 6,309 -- Equity in income of consolidated subsidiaries (512) (1,234) -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (5,726) (127) Intercompany receivables, net (173,661) 171,307 2,354 Other current assets -- (289) (27) Accounts payable and other accrued expenses -- 3,458 (259) --------- --------- --------- Net cash provided by (used in) operating activities (173,661) 187,639 4,238 --------- --------- --------- INVESTING ACTIVITIES: Cash acquired in acquisitions -- 4,174 -- Acquisitions of Centers and Mobile Facilities -- (56,720) -- Additions to property and equipment -- (20,848) (2,796) Other -- (1,817) (161) --------- --------- --------- Net cash used in investing activities -- (75,211) (2,957) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock 23,346 -- -- Proceeds from stock options and warrants exercised 315 -- -- Payment of loan financing costs -- (6,483) -- Principal payments of debt and capital lease obligations (70,900) (79,198) (830) Proceeds from issuance of debt 220,900 10,580 -- Other -- 78 -- --------- --------- --------- Net cash provided by (used in) financing activities 173,661 (75,023) (830) --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS -- 37,405 451 CASH AND CASH EQUIVALENTS: Cash, beginning of year -- 5,845 1,039 --------- --------- --------- Cash, end of year $ -- $ 43,250 $ 1,490 --------- --------- --------- --------- --------- ---------
ELIMINATION CONSOLIDATED -------------- --------------- (Amounts in thousands) OPERATING ACTIVITIES: Net income $ (1,746) $ 512 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization -- 15,749 Amortization of deferred gain on debt restructure -- (1,384) Provision for supplemental service fee termination -- 6,309 Equity in income of consolidated subsidiaries 1,746 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (5,853) Intercompany receivables, net -- -- Other current assets -- (316) Accounts payable and other accrued expenses -- 3,199 --------- --------- Net cash provided by (used in) operating activities -- 18,216 --------- --------- INVESTING ACTIVITIES: Cash acquired in acquisitions -- 4,174 Acquisitions of Centers and Mobile Facilities -- (56,720) Additions to property and equipment -- (23,644) Other -- (1,978) --------- --------- Net cash used in investing activities -- (78,168) --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock -- 23,346 Proceeds from stock options and warrants exercised -- 315 Payment of loan financing costs -- (6,483) Principal payments of debt and capital lease obligations -- (150,928) Proceeds from issuance of debt -- 231,480 Other -- 78 --------- --------- Net cash provided by (used in) financing activities -- 97,808 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS -- 37,856 CASH AND CASH EQUIVALENTS: Cash, beginning of year -- 6,884 --------- --------- Cash, end of year $ -- $ 44,740 --------- --------- --------- ---------
49 INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1997
PARENT COMPANY GUARANTOR NON-GUARANTOR ONLY SUBSIDIARIES SUBSIDIARIES ------------- ------------- ---------------- (Amounts in thousands) OPERATING ACTIVITIES: Net income $ 1,281 $ 1,281 $ 1,730 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization -- 9,511 229 Amortization of deferred gain on debt restructure -- (1,047) -- Equity in income of consolidated subsidiaries (1,281) (1,730) -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (1,304) (214) Intercompany receivables, net -- 890 (890) Other current assets -- 141 19 Accounts payable and other accrued expenses -- (1,117) (21) -------- -------- -------- Net cash provided by operating activities -- 6,625 853 -------- -------- -------- INVESTING ACTIVITIES: Acquisitions of Centers and Mobile Facilities -- (18,566) -- Additions to property and equipment -- (6,459) (409) Other -- (4,943) -- -------- -------- -------- Net cash used in investing activities -- (29,968) (409) -------- -------- -------- FINANCING ACTIVITIES: Principal payments of debt and capital lease obligations -- (10,913) (85) Proceeds from issuance of debt -- 33,728 -- Other -- 819 (345) -------- -------- -------- Net cash provided by (used in) financing activities -- 23,634 (430) -------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS -- 291 14 CASH AND CASH EQUIVALENTS: Cash, beginning of year -- 5,554 1,025 -------- -------- -------- Cash, end of year $ -- $ 5,845 $ 1,039 -------- -------- -------- -------- -------- --------
ELIMINATION CONSOLIDATED -------------- --------------- (Amounts in thousands) OPERATING ACTIVITIES: Net income $ (3,011) $ 1,281 Adjustments to reconcile net income to net cash provided by operating activities: Total depreciation and amortization -- 9,740 Amortization of deferred gain on debt restructure -- (1,047) Equity in income of consolidated subsidiaries 3,011 -- Cash provided by (used in) changes in operating assets and liabilities: Trade accounts receivables -- (1,518) Intercompany receivables, net -- -- Other current assets -- 160 Accounts payable and other accrued expenses -- (1,138) -------- -------- Net cash provided by operating activities -- 7,478 -------- -------- INVESTING ACTIVITIES: Acquisitions of Centers and Mobile Facilities -- (18,566) Additions to property and equipment -- (6,868) Other -- (4,943) -------- -------- Net cash used in investing activities -- (30,377) -------- -------- FINANCING ACTIVITIES: Principal payments of debt and capital lease obligations -- (10,998) Proceeds from issuance of debt -- 33,728 Other -- 474 -------- -------- Net cash provided by (used in) financing activities -- 23,204 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS -- 305 CASH AND CASH EQUIVALENTS: Cash, beginning of year -- 6,579 -------- -------- Cash, end of year $ -- $ 6,884 -------- -------- -------- --------
50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the SEC in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the SEC in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the SEC in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be included in the Company's definitive proxy statement, which will be filed with the SEC in connection with the Company's next Annual Meeting of Stockholders, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14 (a) (1). FINANCIAL STATEMENTS Included in Part II of this report: Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements ITEM 14 (a) (2). FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants Schedule IX - Valuation and Qualifying Accounts All other schedules have been omitted because they are either not required or not applicable, or the information is presented in the consolidated financial statements or notes thereto. 51 ITEM 14 (a) (3). EXHIBITS EXHIBIT NUMBER DESCRIPTION AND REFERENCES *2.1 Asset Purchase and Liabilities Assumption Agreement dated as of January 3, 1997, by and among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. *2.2 Amendment No. 1 to Asset Purchase and Liabilities Assumption Agreement dated as of May 30, 1997, by and among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. *2.3 Asset Purchase and Liabilities Assumption Agreement dated as of June 20, 1997, by and between InSight Health Corp. and Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient Center), previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed July 14, 1997. *2.4 Agreement and Plan of Merger dated as of April 15, 1998, by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed May 13, 1998. *2.5 First Amendment to Agreement and Plan of Merger dated as of May 15, 1998, by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 2, 1998. *2.6 Second Amendment to Agreement and Plan of Merger dated as of May 18, 1998 by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 2, 1998. *3.1 Certificate of Incorporation of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *3.2 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.3 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.4 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.5 Amended and Restated Bylaws of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *4.1 Indenture dated as of June 1, 1998, by and among the Company, the Subsidiary Guarantors (as defined therein) and State Street Bank and Trust Company, N.A. as Trustee (includes forms of the Outstanding Notes and Exchange Notes (as defined therein)), previously filed 52 and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *4.2 Purchase Agreement, dated as of June 9, 1998, by and among the Company, the Subsidiary Guarantors (as defined therein) and the Initial Purchasers (as defined therein), previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *10.1 Credit Agreement dated as of October 14, 1997, as amended November 17, 1997, December 19, 1997, March 23, 1998 and amended and restated as of June 12, 1998, among the Company, the Subsidiary Guarantors (as defined therein), Bank of America, N.A. (formerly NationsBank, N.A.) as Agent and the Lenders (as defined therein), previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *10.2 Master Service Agreement Addendum by and among General Electric Company acting through GE Medical Systems, InSight, AHS and MHC, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.3 InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333- 02935), filed April 29, 1996. *10.4 InSight's 1996 Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333- 02935), filed April 29, 1996. *10.7 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. *10.8 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. *10.9 AHS 1989 Stock Incentive Plan, previously filed and incorporated herein by reference from AHS's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, filed April 15, 1991. *10.10 AHS 1992 Option and Incentive Plan, previously filed and incorporated herein by reference from AHS's Registration Statement on Form S-8 (Registration No. 33-51532), filed September 1, 1992. *10.11 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. *10.12 InSight's 1998 Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333- 60573), filed August 4, 1998. *10.13 Form of Stock Option Agreement between InSight and former officers of Signal Medical Services, Inc. relative to InSight's 1998 Employee Stock Option Plan, previously filed and incorporated by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.14 InSight's 1997 Management Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. 53 *10.15 Form of Stock Option Agreement between InSight and certain senior officers of InSight relative to InSight's 1997 Management Stock Option Plan, previously filed and incorporated by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.16 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. *10.17 Executive Employment Agreement between InSight and E. Larry Atkins dated as of February 25, 1996, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.18 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. *10.19 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. *10.20 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. *10.21 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. *10.22 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. *10.23 Form of Stock Option Agreement between InSight and non -employee directors of InSight relative to InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *10.24 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. *10.25 Executive Employment Agreement between InSight and Brian P. Stone dated as of May 18, 1998, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.26 Form of Warrant Certificate relative to the grants of warrants to InSight's non-employee directors, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.27 Form of Warrant Certificate relative to the grants of warrants to Carlyle and GE in lieu of director stock options, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. 10.28 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated July 7, 1999, filed herewith. 10.29 Warrant Certificate No. E-1 dated July 7, 1999 in the name of Frank E. Egger, filed herewith. 54 10.30 Separation Agreement between InSight and E. Larry Atkins dated as of July 19, 1999, filed herewith. 21 Subsidiaries of InSight, filed herewith. 23 Consent of Independent Public Accountants, filed herewith. 27 Financial Data Schedule, filed herewith. - - *Previously filed. ITEM 14 (b). REPORTS ON FORM 8-K. The Company did not file any Current Report on Form 8-K with the SEC for the quarter ended June 30, 1999. ITEM 14 (c). The Exhibits described above in Item 14(a)(3) are attached hereto or incorporated by reference herein, as noted. ITEM 14 (d). Not applicable. 55 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSIGHT HEALTH SERVICES CORP. By /s/ Frank E. Egger ------------------------------------ Frank E. Egger, Acting President and Chief Executive Officer Date: September 28, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date Director, Acting President and September 28, 1999 /s/ Frank E. Egger Chief Executive Officer - ----------------------------------- (Principal Executive Officer) Frank E. Egger Executive Vice President, September 28, 1999 /s/ Thomas V. Croal and Chief Financial Officer - ----------------------------------- (Principal Accounting Officer) Thomas V. Croal Director September 28, 1999 /s/ Michael E. Aspinwall - ----------------------------------- Michael E. Aspinwall Director - ----------------------------------- Grant R. Chamberlain Director September 28, 1999 /s/ David W. Dupree - ----------------------------------- David W. Dupree Director - ----------------------------------- Leonard H. Habas Director September 28, 1999 /s/ Ronald G. Pantello - ----------------------------------- Ronald G. Pantello Director - ----------------------------------- Glenn A. Youngkin
56 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To InSight Health Services Corp.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of INSIGHT HEALTH SERVICES CORP. and subsidiaries included in this Form 10-K and have issued our report thereon dated September 24, 1999. 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 the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Orange County, California September 24, 1999 57 SCHEDULE IX INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (amounts in thousands)
Balance at Charges to Balance at Beginning of Cost and End of Year Expenses Other (A) Year -------- --------- --------- ---------- June 30, 1997: Allowance for doubtful accounts $ 2,274 $ 1,483 $ (1,435) $ 2,322 Allowance for contractual adjustments 5,417 17,483 (17,852) 5,048 -------- -------- -------- -------- Total $ 7,691 $ 18,966 $(19,287) $ 7,370 -------- -------- -------- -------- -------- -------- -------- -------- June 30, 1998: Allowance for doubtful accounts $ 2,322 $ 1,871 $ (711) $ 3,482 Allowance for contractual adjustments 5,048 29,447 (26,578) 7,917 -------- -------- -------- -------- Total $ 7,370 $ 31,318 $(27,289) $ 11,399 -------- -------- -------- -------- -------- -------- -------- -------- June 30, 1999: Allowance for doubtful accounts $ 3,482 $ 2,618 $ (2,349) $ 3,751 Allowance for contractual adjustments 7,917 41,293 (35,139) 14,071 -------- -------- -------- -------- Total $ 11,399 $ 43,911 $(37,488) $ 17,822 -------- -------- -------- -------- -------- -------- -------- --------
(A) Write offs of uncollectible accounts. 58 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION AND REFERENCES *2.1 Asset Purchase and Liabilities Assumption Agreement dated as of January 3, 1997, by and among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. *2.2 Amendment No. 1 to Asset Purchase and Liabilities Assumption Agreement dated as of May 30, 1997, by and among InSight Health Corp., Mobile Imaging Consortium, Limited Partnership and Mobile Imaging Consortium-New Hampshire, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 16, 1997. *2.3 Asset Purchase and Liabilities Assumption Agreement dated as of June 20, 1997, by and between InSight Health Corp. and Desmond L. Fischer, M.D. (d/b/a Chattanooga Outpatient Center), previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed July 14, 1997. *2.4 Agreement and Plan of Merger dated as of April 15, 1998, by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed May 13, 1998. *2.5 First Amendment to Agreement and Plan of Merger dated as of May 15, 1998, by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 2, 1998. *2.6 Second Amendment to Agreement and Plan of Merger dated as of May 18, 1998 by and among InSight, SMSI Acquisition Company, Signal Medical Services, Inc., SMSI Holdings, Inc., Brian P. Stone, Thomas W. Crucitti and Todd Stowell, previously filed and incorporated herein by reference from the Company's Current Report on Form 8-K, filed June 2, 1998. *3.1 Certificate of Incorporation of InSight, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *3.2 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series B, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.3 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series C, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.4 Certificate of Designation, Preferences and Rights of Convertible Preferred Stock, Series D, of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *3.5 Amended and Restated Bylaws of InSight, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *4.1 Indenture dated as of June 1, 1998, by and among the Company, the Subsidiary Guarantors (as defined therein) and State Street Bank and Trust Company, N.A. as Trustee (includes forms of the Outstanding Notes and Exchange Notes (as defined therein)), previously filed 59 and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *4.2 Purchase Agreement, dated as of June 9, 1998, by and among the Company, the Subsidiary Guarantors (as defined therein) and the Initial Purchasers (as defined therein), previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *10.1 Credit Agreement dated as of October 14, 1997, as amended November 17, 1997, December 19, 1997, March 23, 1998 and amended and restated as of June 12, 1998, among the Company, the Subsidiary Guarantors (as defined therein), Bank of America, N.A. (formerly NationsBank, N.A.) as Agent and the Lenders (as defined therein), previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. *10.2 Master Service Agreement Addendum by and among General Electric Company acting through GE Medical Systems, InSight, AHS and MHC, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.3 InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333- 02935), filed April 29, 1996. *10.4 InSight's 1996 Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333- 02935), filed April 29, 1996. *10.7 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. *10.8 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. *10.9 AHS 1989 Stock Incentive Plan, previously filed and incorporated herein by reference from AHS's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, filed April 15, 1991. *10.10 AHS 1992 Option and Incentive Plan, previously filed and incorporated herein by reference from AHS's Registration Statement on Form S-8 (Registration No. 33-51532), filed September 1, 1992. *10.11 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. *10.12 InSight's 1998 Employee Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333- 60573), filed August 4, 1998. *10.13 Form of Stock Option Agreement between InSight and former officers of Signal Medical Services, Inc. relative to InSight's 1998 Employee Stock Option Plan, previously filed and incorporated by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.14 InSight's 1997 Management Stock Option Plan, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-60573), filed August 4, 1998. 60 *10.15 Form of Stock Option Agreement between InSight and certain senior officers of InSight relative to InSight's 1997 Management Stock Option Plan, previously filed and incorporated by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.16 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. *10.17 Executive Employment Agreement between InSight and E. Larry Atkins dated as of February 25, 1996, previously filed and incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-02935), filed April 29, 1996. *10.18 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. *10.19 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. *10.20 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. *10.21 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. *10.22 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. *10.23 Form of Stock Option Agreement between InSight and non -employee directors of InSight relative to InSight's 1996 Directors' Stock Option Plan, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed October 14, 1997. *10.24 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. *10.25 Executive Employment Agreement between InSight and Brian P. Stone dated as of May 18, 1998, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.26 Form of Warrant Certificate relative to the grants of warrants to InSight's non-employee directors, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. *10.27 Form of Warrant Certificate relative to the grants of warrants to Carlyle and GE in lieu of director stock options, previously filed and incorporated herein by reference from the Company's Annual Report on Form 10-K, filed September 28, 1998. 10.28 Letter Agreement for Consulting Services between InSight and Frank E. Egger dated July 7, 1999, filed herewith. 10.29 Warrant Certificate No. E-1 dated July 7, 1999 in the name of Frank E. Egger, filed herewith. 61 10.30 Separation Agreement between InSight and E. Larry Atkins dated as of July 19, 1999, filed herewith. 21 Subsidiaries of InSight, filed herewith. 23 Consent of Independent Public Accountants, filed herewith. 27 Financial Data Schedule, filed herewith. - - *Previously filed. 62 EX-10.28 2 EXHIBIT 10.28 July 7, 1999 Mr. Frank E. Egger 10301 S. W. 13th Street Pembroke Pines, Florida 33025 RE: CONSULTING AGREEMENT Dear Frank: This letter is to confirm our agreement that you will be retained by InSight on the following terms: (1) Effective July 12, 1999, you will act as interim President and CEO of InSight until a replacement is identified and hired. (2) The initial term of this arrangement is four (4) months. We have agreed that either of us may cancel this arrangement upon sixty (60) days' written notice. (3) You will provide InSight with a minimum of 40 hours per week of services. InSight will provide you telephone, facsimile and copy services, office space, secretarial support and office supplies. (4) InSight will compensate you at the rate of $15,000.00 monthly, payable at the beginning of each calendar month in advance effective as of July 8, 1999. InSight will also reimburse you for all reasonable out-of-pocket expenses. Expenses shall be submitted monthly and InSight will pay for expenses according to its established policy. (5) You are an independent contractor with respect to InSight and not an employee of InSight. InSight will not provide you with any fringe benefits, including life insurance, FRANK E. EGGER July 7, 1999 Page 2 medical, health, accident or disability plan or program, paid vacation or any other employee benefit. (6) You have agreed that by reason of your position with InSight, you have access to InSight's confidential information and materials and trade secrets with regard to InSight's business affairs and you have agreed that you have held, and will hold, all such information strictly confidential and that you will not disclose or use such information for any reason without the prior written consent of InSight. (7) We have agreed that your March 28, 1996 Consulting Agreement will remain in full force and effect. (8) We have agreed that you will also be granted today a warrant for 15,000 shares of InSight common stock which will vest over a period of four months and will remain exercisable for ten years. If the above accurately sets forth our arrangement, please execute the enclosed copy of this Agreement and return the same to me. Very truly yours, /s/ Leonard H. Habas LEONARD H. HABAS, Chairman Compensation Committee AGREED TO: /s/ Frank E. Egger - ----------------------------------------- Frank E. Egger EX-10.29 3 EXHIBIT 10.29 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, OFFERED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. No. E - 1 Certificate for 15,000 Warrants EXERCISABLE COMMENCING ON THE DATES SPECIFIED HEREIN AND ENDING 5:00 P.M., NEWPORT BEACH, CALIFORNIA TIME, ON THE EXPIRATION DATE INSIGHT HEALTH SERVICES CORP. WARRANT CERTIFICATE THIS CERTIFIES that Frank E. Egger is the registered holder (the "Warrantholder") of the number of warrants (the "Warrants") set forth above, each of which represents the right to purchase one fully paid and non-assessable share of common stock, par value $.001 per share (the "Common Shares"), of InSight Health Services Corp., a Delaware corporation (the "Company"), at the exercise price of $6.00 per share (the "Exercise Price"), at any time prior to the Expiration Date hereinafter referred to, by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon duly executed, at the Company's principal executive office, 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660 (the "Office"), and by paying in full the Exercise Price, plus transfer taxes, if any, in United States currency by certified check, bank cashier's check or money order payable to the order of the Company. SECTION 1. DURATION AND EXERCISE OF WARRANTS. (a) The Warrants represented by this Warrant Certificate shall vest cumulatively and be exercisable at the rate of 3,750 Warrants each month commencing on July 7, 1999 until fully vested so long as continuously during such time period the Warrantholder remains a director of the Company. The Warrants shall expire at 5:00 p.m. Newport Beach, California time, on the earlier of (i) 90 days after the Warrantholder ceases to be a director of the Company (other than by death or permanent or total disability within the meaning of the Internal Revenue Code of 1986, as amended, ("Internal Revenue Code")), (ii) twelve months after the Warrantholder's death or permanent or total disability within the meaning of the Internal Revenue Code or (iii) on July 7, 2009 (the "Expiration Date"); provided however, that if the Warrantholder ceases to be a director of the Company, other than by death or permanent or total disability within the meaning of the Internal Revenue Code, the Warrantholder shall have the right until the Expiration Date to purchase from the Company the Common Shares issuable upon exercise of the Warrants which shall have vested prior to such termination. -1- (b) Subject to the provisions of this Warrant Certificate, after the date of this Warrant Certificate and prior to the close of business on the Expiration Date, the Warrantholder shall have the right to purchase from the Company the number of Common Shares specified above at the Exercise Price. In order to exercise such right, the Warrantholder shall surrender the Warrant Certificate(s) evidencing such Warrants to the Company at the Office with the form of Election to Purchase set forth hereon duly completed and signed, and shall tender payment in full to the Company for the Company's account of the Exercise Price, together with such taxes as are specified in Section 4 hereof, for each Common Share with respect to which such Warrants are being exercised. Such Exercise Price and taxes shall be paid in full by certified check, bank cashier's check or money order, payable in United States currency to the order of the Company. In addition, if the Common Shares deliverable upon exercise have not been registered pursuant to the Securities Act, the Warrantholder shall deliver a duly executed certificate substantially in the form of Exhibit A hereto. (c) The Warrants evidenced by this Warrant Certificate shall be exercisable only in multiples of one (l) Warrant. If less than all of the Warrants evidenced by this Warrant Certificate are exercised at any time prior to the close of business on the Expiration Date, a new Warrant Certificate(s) shall be issued to the Warrantholder, or his duly authorized assigns, by the Company for the remaining number of Warrants evidenced by the Warrant Certificate so surrendered. SECTION 2. ISSUANCE OF SHARE CERTIFICATES. Upon surrender of this Warrant Certificate and payment of the Exercise Price, and, if the Common Shares deliverable on exercise have not been registered under the Securities Act, upon delivery of a certificate in the form of Exhibit A hereto, the Company shall issue certificates representing Common Shares ("Share Certificates") for the number of full Common Shares to which the holder of such Warrants is entitled, registered in accordance with the instructions set forth in the Election to Purchase. If such Common Shares have not been registered under the Securities Act, the Share Certificates shall bear a legend substantially similar to the legend on this Warrant Certificate. SECTION 3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF COMMON SHARES PURCHASABLE PER NUMBER OF WARRANTS. The Exercise Price and the number of Common Shares purchasable upon the exercise of each Warrant are subject to adjustment from time to time upon the occurrence of the events specified in this Section 3: (a) If the Company at any time after the date of this Warrant Certificate (i) declares a dividend or makes a distribution on the outstanding Common Shares payable in Common Shares, (ii) subdivides or reclassifies the outstanding Common Shares into a greater number of shares or (iii) combines or reclassifies the outstanding Common Shares into a smaller number of Common Shares, the Exercise Price in effect immediately after the record date for such dividend or distribution or at the effective date of such subdivision, combination or reclassification, shall be adjusted to equal the quotient obtained by multiplying the Exercise Price in effect immediately prior to such date by a fraction, the numerator of which shall be the number of Common Shares outstanding immediately prior to such dividend, distribution, subdivision, combination or reclassification, and the denominator of which shall be the number of Common Shares outstanding immediately after such dividend, distribution, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. -2- (b) If at any time, as a result of an adjustment made pursuant to subsection (a), the holder of any Warrant thereafter exercised shall become entitled to receive any additional Common Shares (the "New Shares"), thereafter the number of such New Shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in paragraph (a), and the provisions of this Warrant Certificate with respect to the Common Shares shall apply on like terms to any such New Shares. (c) All calculations of the Exercise Price under this Section 3 shall be made to the nearest one hundredth of a cent. No adjustment in the Exercise Price in accordance with the provisions of subsection (a) hereof need be made if such adjustment, together with other adjustments carried forward pursuant to this subsection (c), would amount to a change in such Exercise Price of less than 1%; PROVIDED, HOWEVER, that the amount by which any adjustment is not made by reason of this subsection (c) shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. (d) Unless the Company shall have exercised its election as provided in subsection (e), upon each adjustment of the Exercise Price as a result of the calculations made in subsection (a), each Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price that number of Common Shares obtained by (i) multiplying (A) the number of Common Shares purchasable upon exercise of a Warrant immediately prior to such adjustment of the Exercise Price by (B) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (e) The Company may elect, on or after the date of any adjustment of the Exercise Price, to adjust the number of Warrants in substitution for an adjustment in the number of Common Shares purchasable upon the exercise of a Warrant as provided in subsection (d). (f) In case of any reorganization of the Company, or in case of the consolidation or merger of the Company with or into any other legal entity or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other legal entity (collectively, "Reorganization"), all vested Warrants shall be exercisable, and any unvested Warrants shall become immediately exercisable, after such Reorganization, upon the terms and conditions specified in this Warrant Certificate, for the stock or other securities or property (including cash) to which a holder of the number of Common Shares purchasable (at the time of such Reorganization) upon exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization; and in any such case, if necessary, the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any such stock or other securities or property thereafter deliverable upon exercise of the Warrants. The Company shall not effect any such Reorganization unless prior to or simultaneously with the consummation thereof the successor (if other than the Company) resulting from such Reorganization or the legal entity purchasing such assets shall assume, by written instrument executed and delivered to the holder of each Warrant, the obligation to deliver to the holder of each Warrant such stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase, and the other obligations under this Warrant Certificate. -3- SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes that may be imposed by the United States of America or any state or territory thereof ("Taxes") attributable to the initial issuance of Common Shares upon the exercise of Warrants prior to the close of business on the Expiration Date; PROVIDED, HOWEVER, that the Company shall not be required to pay any Taxes which may be payable in respect of any transfer involved in the issuance of any Warrant Certificates or any Share Certificates in a name other than that of the Warrantholder of record surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Share Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such Taxes or shall have established to the satisfaction of the Company that such Taxes have been paid. SECTION 5. REGISTRATION. (a) This Warrant Certificate shall be registered in the name of the record holder to whom it is distributed, and the Company shall maintain a list showing the name, address and number of Warrants held by each of the Warrantholders of record. (b) The Company may deem and treat the Warrantholder of record as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing thereon made by anyone) for the purpose of any exercise thereof and any distribution to the holder thereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. SECTION 6. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) The Company shall register the transfer of this Warrant Certificate upon the records to be maintained by it for that purpose, upon surrender of this Warrant Certificate accompanied (if so required by the Company) by (i) a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the registered holder(s) thereof or by the duly appointed legal representative thereof or by a duly authorized attorney, and (ii) an opinion of counsel, reasonably satisfactory to the Company, that such transfer is exempt from registration under the Securities Act. Upon any such registration or transfer, a new Warrant Certificate shall be issued to the transferee, and the surrendered Warrant Certificate shall be canceled by the Company. (b) This Warrant Certificate may be exchanged at the option of the holder, when surrendered to the Company at the Office, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange, transfer or exercise shall be canceled by the Company. SECTION 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for any Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and an indemnity or bond, if requested, also satisfactory to the Company. Applicants for such substitute Warrant Certificate shall also comply with such other reasonable charges as the Company may prescribe. -4- SECTION 8. NOTICES. (a) Any notice or demand authorized by this Warrant Certificate to be given or made by the Warrantholder to or on the Company shall be in writing and shall be sufficiently given or made if personally delivered or sent by mail or by telegram or telex confirmed by letter addressed (until another address is given in writing by the Company) to the Office. (b) Any notice pursuant to this Warrant Certificate to be given by the Company to the Warrantholder shall be in writing and shall be sufficiently given if personally delivered or sent by mail or telegram or telex confirmed by letter, addressed (until another address is filed in writing by the Warrantholder with the Company) to the address specified in the Warrant register maintained by the Company. SECTION 9. RIGHTS OF WARRANTHOLDERS; VOTING. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Warrantholder any of the rights of a stockholder of the Company, including without limitation the right to vote, to receive dividends and other distributions, to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company. SECTION 10. SUPPLEMENTS AND AMENDMENTS. The Company may from time to time supplement or amend this Warrant Certificate without the consent or concurrence of the Warrantholder in order to cure any ambiguity, manifest error or other mistake in this Warrant Certificate, or to make provision in regard to any matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not adversely affect, alter or change the interests of the Warrantholder. SECTION 11. WARRANT AGENT. The Company may, by written notice to the Warrantholder, appoint an agent for the purpose of issuing Common Shares on the exercise of the Warrants, exchanging Warrants, replacing Warrants or any of the foregoing, and thereafter any such issuance, exchange or replacement shall be made at such office by such agent. SECTION 12. SUCCESSORS. All the representations, warranties, covenants and provisions of this Warrant Certificate by or for the benefit of the Company or the Warrantholder shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 13. GOVERNING LAW. This Warrant Certificate shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed in accordance with the laws of said State, regardless of the laws that might be applied under applicable principles of conflicts of laws. SECTION 14. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Warrantholder any legal or equitable right, remedy or claim under this Warrant Certificate, and this Warrant Certificate shall be for the sole and exclusive benefit of the Company and the Warrantholder. SECTION 15. INTERPRETATION. The headings contained in this Warrant Certificate are for reference purposes only and shall not affect in any way the meaning or interpretation of this Warrant Certificate. -5- SECTION 16. INVALIDITY OF PROVISIONS. If any provision of this Warrant Certificate is or becomes invalid, illegal or unenforceable in any respect, such provision shall be amended to the extent necessary to cause it to express the intent of the parties and be valid, legal and enforceable. The amendment of such provision shall not affect the validity, legality or enforceability of any other provision hereof. SECTION 17. REGISTRATION RIGHTS. (a) If at any time or from time to time the Company proposes to file a registration statement on any appropriate form (a "Registration Statement") (other than in connection with an exchange offer or a registration statement on Form S-4 or S-8 or otherwise unsuitable registration statements) under the Securities Act with respect to any Common Shares, whether or not for sale for its own account, on a form and in a manner which would permit registration of Common Shares received upon exercise of the Warrants ("Warrant Shares") for sale to the public under the Securities Act, the Company shall (i) promptly give to the Warrantholder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities law); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Warrant Shares specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by the Warrantholder. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Warrantholder as a part of the written notice given pursuant to Section 17(a)(i). In such event the right of the Warrantholder to registration pursuant to this Section 17 shall be conditioned upon the Warrantholder's participation, as a selling security holder, in such underwriting and the inclusion of the Warrant Shares in the underwriting to the extent provided herein. The Warrantholder shall (together with the Company and the other holders of Common Shares distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriters selected for such underwriting by the Company. The Warrantholder shall not be required to make any representations or warranties to the Company or the underwriters other than those relating to the Warrantholder, the Warrant Shares and the intended method of distribution and information about the Warrantholder provided by the Warrantholder for use in the Registration Statement. (c) Notwithstanding any other provision of this Section 17: (i) subject to subsection (iii) below, if the registration is an underwritten primary registration on behalf of the Company and the managing underwriters of such offering determine in good faith that the aggregate amount of Common Shares which the Warrantholder and the Company propose to include in such Registration Statement exceeds the maximum amount of Common Shares that could practicably be included therein, the Company will include in such registration, first, the Common Shares which the Company proposes to sell, and second, the Warrant Shares and the Common Shares of any holders of other piggyback registration rights, if any, which can practicably be included therein, pro -6- rata among all such holders, taken together, on the basis of the relative amount of Common Shares owned by the Warrantholder and such other holders who have requested that Common Shares owned by them be included; (ii) subject to subsection (iii) below, if the registration is an underwritten secondary registration on behalf of any of the other security holders of the Company and the managing underwriters determine in good faith that the aggregate amount of Common Shares which the Warrantholder and such security holders propose to include in such registration exceeds the maximum amount of Common Shares that could practicably be included therein, the Company will include in such registration, first, the Common Shares to be sold for the account of any other holders entitled to demand registration and, second, the Warrant Shares and other Common Shares to be sold for the account of other holders electing to include (but not being entitled to demand inclusion of) Common Shares in such registration, pro rata among all such holders, taken together, on the basis of the relative amount of Common Shares owned by the Warrantholder and such other holders who have requested that Common Shares owned by them be included; and (iii) in the event of a conflict between the rights of the Warrantholder set forth in this Section 17 and the registration rights of General Electric Company, the rights hereunder shall be subordinate to such other rights and the Company's obligations shall be limited to those that can be performed without violating the terms of such other registration rights. (d) The Company may withdraw any Registration Statement at any time before it becomes effective, or postpone the offering of Common Shares, without obligation or liability to the Warrantholder. (e) With respect to a Registration Statement in which any of the Warrant Shares are included, the Warrantholder agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of Common Shares, including a sale pursuant to Rule 144 under the Securities Act (except as part of such registration), during the 180-day period beginning on the effective date of such Registration Statement; PROVIDED, HOWEVER, that such agreement shall be applicable only to the first three such Registration Statements which cover Common Shares (or other securities) to be sold on the Company's behalf to the public in an underwritten offering. (f) All Registration Expenses (as defined below) incurred in connection with any registration, qualification or compliance pursuant to this Section 17 shall be borne by the Company. All Selling Expenses (as defined below) incurred in connection with any registrations hereunder shall be borne by the holders of the Common Shares so registered pro rata on the basis of the number of shares so registered. For purposes of this Section 17, (i) "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with this Section 17, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Warrantholder and all other holders of Common Shares to be registered, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of the Company's regular employees which shall be paid in any event by the Company) and (ii) "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. -7- (g) In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 17, the Company will keep the Warrantholder advised in writing as to the qualification and compliance and as to the completion thereof. At its expense the Company will: (i) Keep such registration, qualification or compliance effective for a period of 120 days or until the Warrantholder has completed the distribution described in the Registration Statement relating thereto, whichever first occurs; (ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the requisite period; (iii) Furnish such number of prospectuses and other documents incident thereto as the Warrantholder from time to time may reasonably request; (iv) Use its reasonable efforts to register or qualify such Warrant Shares under the securities or blue sky laws of such jurisdictions as the Warrantholder reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable the Warrantholder to consummate the disposition in such jurisdictions of the Warrant Shares owned by the Warrantholder (PROVIDED that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 17, (B) subject itself to taxation in any such jurisdiction, (C) consent to general service of process in any such jurisdiction, or (D) qualify such Warrant Shares in a given jurisdiction where, in the sole discretion of the Company, expressions of investment interest are not sufficient in such jurisdiction to reasonably justify the expense of qualification in that jurisdiction or where such qualification would require the Company to register as a broker or dealer in such jurisdiction); (v) Notify the Warrantholder at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event known to the Company as a result of which the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and in such event, at the request of the Warrantholder, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Warrant Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (vi) Cause all such Warrant Shares to be listed on each securities exchange on which similar securities issued by the Company are then listed and qualify such Warrant Shares for trading on each system on which similar securities issued by the Company are from time to time qualified; (vii) Provide a transfer agent and registrar for all such Warrant Shares not later than the effective date of such Registration Statement and thereafter maintain such a transfer agent and registrar; (viii) Permit the Warrantholder, if in the Company's sole and exclusive judgment, such holder might be deemed to be an underwriter or a controlling person of the Company, to -8- participate in the preparation of such Registration Statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and his counsel should be included; and (ix) In the event of the issuance of any stop order suspending the effectiveness of a Registration Statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such Registration Statement for sale in any jurisdiction, the Company will use its reasonable efforts promptly to obtain the withdrawal of such order. (h) The Warrantholder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 17(g)(v) or (ix), such holder will forthwith discontinue disposition of Warrant Shares pursuant to a registration hereunder until receipt of the copies of an appropriate supplement or amendment to the prospectus under Section 17(g)(ii) or until the withdrawal of such order under Section 17(g)(ix). (i) No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Common Shares on the basis provided in any underwriting arrangements approved by the persons entitled to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements and (iii) furnishes to the Company such information regarding such person and the distribution proposed by such person as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 17. (j) The Company agrees to indemnify, to the extent permitted by law, the Warrantholder, its officers, directors and trustees and each person who controls (within the meaning of the Securities Act) such holder against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the Registration Statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters at least to the same extent as provided above with respect to the indemnification of the Warrantholder. (k) In connection with any Registration Statement in which Warrantholder is participating, such Warrantholder will furnish to the Company in writing such information as the Company reasonably requests for use in connection with any such Registration Statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each person who controls (within the meaning of the Securities Act) the Company against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein -9- or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information so furnished in writing by such Holder; PROVIDED that the obligation to indemnify will be limited to the net amount of proceeds received by such holder from the sale of Warrant Shares pursuant to such Registration Statement. In connection with an underwritten offering, such holder will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters at least to the same extent as provided above with respect to the indemnification of the Company. (l) Any person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (m) The indemnification provided for under this Section 17 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. The Warrantholder also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event such holder's indemnification is unavailable for any reason. (n) The provisions of this Section 17 shall apply until such time as all Warrant Shares that have not been resold to the public may be resold pursuant to Rule 144 under the Securities Act within a three month period. SECTION 18. CERTAIN REPRESENTATIONS. The Warrantholder, by his acceptance of this Warrant Certificate, as evidenced by delivery of the Warrant Certificate to the Warrantholder, has made the following representations to the Company and agreed as follows: The Warrantholder is a director of the Company and understands that, in connection with complying with California law, the Company (i) may issue Warrants to no more than thirty-five (35) purchasers in connection with an offering of such Warrants, excluding executive officers and directors of the Company and certain other persons as provided under California law, (ii) the Warrantholder is not included in the foregoing thirty-five (35) purchaser number, and (iii) the Company, in compliance with California -10- law, is granting the Warrants pursuant to this Warrant Certificate in part in reliance on Warrantholder's representations made herein. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed. INSIGHT HEALTH SERVICES CORP. Attest: /s/Marilyn U. MacNiven-Young By: /s/Leonard H. Habas - ------------------------------------ ------------------------------- Marilyn U. MacNiven-Young Leonard H. Habas Secretary Chairman, Compensation Committee -11- EX-10.30 4 EXHIBIT 10.30 CONFIDENTIAL CONFIDENTIAL SEPARATION AGREEMENT This Separation Agreement ("Agreement") is made as of July 19, 1999 and is entered into by and between InSight Health Services Corp., a Delaware corporation ("Company") and E. Larry Atkins ("Atkins"). RECITALS A. Until July 12, 1999, Atkins was President and CEO of the Company. B. Atkins and the Company are parties to an Employment Agreement dated February 23, 1996 ("Employment Agreement"). C. Atkins and the Company (or its subsidiaries) are also parties to Stock Option Agreements dated January 18, 1995, October 2, 1996, July 18, 1997, and November 7, 1997 (collectively, "Stock Option Agreements"). D. The Company and Atkins have agreed that Atkins will voluntarily resign from his employment with the Company and that the Company will make certain payments and grant certain other benefits to Atkins upon the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises and agreements set forth in this Agreement, the parties agree as follows: 1. RESIGNATION. Atkins hereby voluntarily resigns as President and CEO of the Company, effective as of July 12, 1999, and from his employment with the Company, effective as of July 31, 1999. Without limiting the foregoing, Atkins also hereby resigns, effective as of July 12, 1999, as a director of the Company, from any other Board committees and management committees of the Company and as an officer of its subsidiaries and affiliates. Concurrently with the execution of this Agreement, Atkins will provide the Company with an original letter of resignation in the form attached hereto as Exhibit "A." Atkins agrees to assist the Company in effectuating a smooth transition of his responsibilities. 2. SEPARATION PAYMENTS AND BENEFITS. (a) SALARY. The Company agrees to continue to pay to Atkins an amount equal to his regular annual base salary ($292,000), less applicable deductions and withholdings required by law, for the months of August 1999 through and including July 2001, ("Separation Payment Period") on the Company's regular payroll dates. In the event that there is a Change of Control (as defined in the Employment Agreement) of the Company other than a transaction in which the current Series B and Series C Preferred Stockholders acquire a majority of the outstanding Company Common Stock owned by the public, Atkins shall be 1 CONFIDENTIAL CONFIDENTIAL paid on the effective date thereof in a lump sum the remaining monthly payments due hereunder. (b) EMPLOYEE BENEFIT PLANS. The Company agrees to maintain, at the Company's expense, in full force and effect, for Atkins' (and his dependants) continued benefit until the earlier of (i) twenty-four (24) months following termination of employment or (ii) Atkins' eligibility to participate in another life insurance, medical, health and accident and disability plan or program, all life insurance, medical, health and accident, and disability plans or programs, in which Atkins was entitled to participate immediately prior to the date of termination of employment; provided that Atkins' participation in any such plan or program is permitted under the general terms and provisions of such plans or programs. (c) REFERENCE. The Company agrees to provide Atkins with a reference letter in the form attached hereto as Exhibit "B." (d) OFFICE SPACE. The Company agrees to provide Atkins with reasonable office space, telephone, voicemail and e-mail services through August 31, 1999 for the purpose of facilitating a smooth transition of his responsibilities. (e) MAINTENANCE OF BUSINESS RELATIONSHIPS. During the Separation Payment Period, Atkins agrees, upon the reasonable request of the Company, to use his best efforts to assist the Company in maintaining its business relationships with the customers, vendors and partners of the Company existing on the date of this Agreement. Atkins will be reimbursed for all reasonable out-of-pocket expenses incurred in connection with this assistance. If Atkins breaches in any material respect his obligations under this Paragraph 2(e), the separation payments and employee benefits to which he would otherwise be entitled under Paragraph 2 (a) and (b) for the months of August 2000 through and including July 2001, (or any shorter period, commencing with the date of breach) shall no longer be paid by the Company. 3. STOCK OPTIONS. As of the date hereof, Atkins holds unvested options covering an aggregate of 200,000 shares of Company Common Stock pursuant to the Stock Option Agreements. In addition, Atkins holds vested options covering an aggregate of 117,500 shares of Company Common Stock. Pursuant to amendments to the Stock Option Agreements, Atkins and the Company agree that (i) the unvested stock options will continue to vest for twelve (12) months following termination of employment in accordance with the vesting schedule set forth in the Stock Option Agreements and as described on Exhibit "C" attached hereto, as if Atkins' employment had not been terminated and (ii) the vested stock options and the unvested stock options which will vest in accordance with (i) above, will be exercisable until their expiration in accordance with the terms of the Stock Option Agreements as if Atkins' employment had not been terminated. Atkins agrees that he will provide at least three (3) business days prior written notice to the Company of his intention to sell any or all shares of Company Common Stock which he owns. 4. WAIVER OF ATKINS' RIGHTS UNDER EMPLOYMENT AGREEMENT. Except for the continuing obligations of Atkins under Article V of the Employment Agreement, the parties agree that said Employment Agreement is terminated in its entirety, and both parties 2 CONFIDENTIAL CONFIDENTIAL expressly waive any notice periods for termination of the Employment Agreement. Atkins agrees that he is not entitled to receive, and will not claim, any damages, profits, compensation, bonuses, benefits, vacation, stock options or rights other than those which are expressly set forth in this Agreement. Atkins acknowledges that the consideration he is receiving under this Agreement is in lieu of, and he hereby waives any other rights he may have had under, the Employment Agreement, the Stock Option Agreements, and/or any other agreements, express or implied, he may have had with the Company. Except as otherwise provided herein, this Agreement supersedes all rights and/or benefits Atkins may have or claim arising out of the Employment Agreement, the Stock Option Agreements and other agreements he may have had with the Company. Atkins acknowledges that this Agreement provides him with consideration in addition to anything of value to which he is already entitled. 5. NON-DISPARAGEMENT. Atkins represents and agrees that he has no disagreement with the Company on any matter relating to his employment, the termination of his employment or the Company's operations, policies, or practices. In addition, Atkins covenants not to make any negative, harassing or disparaging statements concerning the Company or any of its officers, directors, employees, attorneys, stockholders, vendors, representatives, agents or affiliates, either orally or in writing. The Company covenants not to make any negative, harassing or disparaging statements concerning Atkins, either orally or in writing. 6. RETURN OF COMPANY PROPERTY; EXPENSES. (a) On or before July 31, 1999, Atkins will return all Company property and equipment in his possession or under his control, including, but not limited to, cell phones, computers, keys, credit cards, manuals, notebooks, financial statements, reports and other property of the Company; however, the Company agrees that the Toshiba laptop computer and Hewlett Packard printer which are currently in Atkins' possession may be retained by Atkins. (b) On or before August 31, 1999, Atkins must submit to the Company all outstanding business expenses for reconciliation and payment. The Company will pay only for business expenses incurred through July 31, 1999, according to its established policy. 7. RELEASE BY ATKINS. Excepting only the obligations undertaken by the Company in accordance with this Agreement, and in exchange for the consideration provided to Atkins under this Agreement, Atkins hereby releases, acquits, relieves, and forever discharges the Company and its successors, heirs, assigns, employees, officers, directors, investors, stockholders, agents, representatives, attorneys, benefit plans, parent corporations, subsidiaries, divisions or affiliated corporations or organizations, whether previously or hereinafter affiliated in any manner (collectively, "Released Parties"), from any and all claims, rights, actions, complaints, demands, causes of action, wage claims, obligations, promises, contracts, agreements, controversies, suits, debts, expenses, damages, attorneys' fees, costs, and liabilities of any nature whatsoever, matured or unmatured, fixed or contingent, which Atkins ever had, now has, or may claim to have from the beginning of time to the moment he signs 3 CONFIDENTIAL CONFIDENTIAL this Agreement against the Released Parties (whether directly or indirectly), or any of them, by reason of any act, event or omission concerning any matter, cause or thing, including, without limiting the generality of the foregoing, any claims related to or arising out of: (a) Atkins' employment with the Company or the termination of that employment; (b) any common law torts, including, without limitation, infliction of emotional distress; (c) any federal, state or governmental constitution, statute, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the California Fair Employment and Housing Act, and the Age Discrimination in Employment Act; (d) any agreement, express or implied, between Atkins and any of the Released Parties, including the Employment Agreement and the Stock Option Agreements; (e) any impairment of his ability to compete in the open labor market; or (f) any permanent or temporary disability or loss of future earnings as a result of injury or disability arising from or associated with his employment or termination of his employment relationship with the Company; provided, however, that this Paragraph is not intended to release claims for indemnification in connection with his business activities as an officer and director of the Company during the term of his employment with the Company, which are covered under the Indemnification Agreement between the Company and Atkins dated September 19, 1996, a copy of which is attached hereto as Exhibit "D". 8. TRADE SECRETS AND PROPRIETARY INFORMATION. Atkins acknowledges and agrees that: (a) by reason of his position with the Company, he has been given access to procedures, plans, designs and expertise unique to the Company, as well as the Company's expansion and marketing plans and other confidential materials and information; and (b) the foregoing constitute trade secrets and/or confidential information respecting the Company's business affairs. Atkins acknowledges and agrees to comply with his continuing obligations under Article V of the Employment Agreement. Atkins also agrees, covenants and represents that he has held, and will hold, all such information strictly confidential and that he will not disclose or use such information for any reason without the prior written consent of the Company. Atkins agrees to immediately return all documents and writings of any kind, including both originals and copies within his custody, possession or control, which contain any information which in any way relates or refers to the Company. 9. ASSISTANCE/COOPERATION WITH LITIGATION. In connection with the Company's participation in current or future litigation relating to events which occurred during Atkins's employment or about which Atkins has information, Atkins agrees to cooperate fully and devote all time which may be reasonably required in the preparation, prosecution or defense of the Company's case, including, but not limited to, the execution of truthful declarations or providing information and/or documents requested by the Company. In addition, Atkins shall be entitled to receive from the Company reasonable travel and out-of-pocket expenses incurred by Atkins in connection with his preparation for and/or participation in such litigation. Atkins further agrees not to voluntarily assist any party and/or attorney in any claim, dispute, charge, or litigation adverse to the Company. Nothing in this Paragraph shall prohibit Atkins from testifying truthfully pursuant to a subpoena or lawful court order. 10. LEGAL REPRESENTATION. Atkins is hereby advised to consult with an attorney prior to executing this Agreement. The parties acknowledge that they have had the opportunity to 4 CONFIDENTIAL CONFIDENTIAL receive the advice of independent legal counsel prior to the execution of this Agreement and the opportunity to receive an explanation from legal counsel of the legal nature and effect of the Agreement, and each party has fully exercised that opportunity to the extent desired and understands the terms and provisions of this Agreement and its nature and effect. Each party further represents that it also is entering into this Agreement freely and voluntarily, and not relying on the representations of any other party or of the counsel of any other party. Each party expressly agrees that this Agreement shall not be construed or interpreted for or against the party drafting the Agreement. 11. NO ADMISSION. Nothing contained in this Agreement or the fact that the parties have signed this Agreement shall be considered an admission of any liability whatsoever. 12. CONFIDENTIALITY. Atkins agrees that this Agreement, including the separation payments referred to in Paragraph 2 above, shall be and remain confidential, and the parties promise and covenant not to disclose, publicize, or cause to be disclosed or publicized in any manner, directly or indirectly, any of the terms and conditions of this Agreement except: (a) to his accountants, financial advisors, attorneys, and immediately family members, provided such persons also agree to this pledge of confidentiality; (b) state and federal taxing authorities; and (c) as legally required by applicable law. 13. INJUNCTIVE RELIEF. Atkins agrees that it would be difficult to measure the damage to the Company from any breach by Atkins of the covenants set forth in Paragraphs 8 and 12 above, and in Article V of the Employment Agreement, that injury to the Company from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, Atkins agrees that if Atkins breaches any term of this Agreement, the Company shall be entitled, in addition to and without limitation of all other remedies it may have, to obtain injunctive or other relief to restrain any such breach without showing or proving any such actual damage to the Company. 14. FEES AND COSTS. Atkins and the Company agree that in the event of litigation relating to this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs. 15. SUCCESSORS AND ASSIGNS. This Agreement, and all the terms and provisions hereof, shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns. 16. WAIVER. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar. No waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party charged with the waiver. 17. SEVERABILITY. In the event any provision of this Agreement shall finally be determined to be unlawful, such provision shall be deemed to be severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason 5 CONFIDENTIAL CONFIDENTIAL be held to be excessively broad, it shall be construed, by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 18. MISCELLANEOUS. Atkins and the Company agree that: (a) Atkins has until 5:00 p.m. on August 10, 1999, or twenty-one (21) days from receipt of this Agreement, whichever is later, to consider it. The Company hereby advises Atkins to consult with an attorney before signing this Agreement; (b) for a period of seven (7) days following the signing of this Agreement, Atkins may revoke the Agreement. This Agreement does not become effective or enforceable until the revocation period has expired; (c) this Agreement constitutes the entire agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the parties with respect to the subject matter of this Agreement; (d) this Agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument; (e) this Agreement may not be amended except by an agreement in writing signed by the parties to this Agreement of their respective successors in interest and expressly stating that it is an amendment of this Agreement; and (f) this Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California. The parties have executed this Agreement as of the date written above. COMPANY INSIGHT HEALTH SERVICES CORP., a Delaware corporation Dated: July 19, 1999 By: /s/ Frank E. Egger ------------------------------------ Frank E. Egger Chairman of the Board 6 CONFIDENTIAL CONFIDENTIAL I, E. Larry Atkins, have read and understand the foregoing Agreement, have been provided the opportunity to consult with an attorney or other persons of my choice before signing it, and I acknowledge that I am signing this Agreement freely and voluntarily. Dated: July 20, 1999 By: /s/ E. Larry Atkins -------- ---------------------- E. Larry Atkins 7 EX-21 5 EXHIBIT 21 EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- InSight Health Corp. Delaware Mississippi Mobile Technology, Inc. Mississippi Radiosurgery Centers, Inc. Delaware Maxum Health Corp. Delaware Quest Financial Services, Inc. Delaware Maxum Health Services Corp. Delaware DiagnosTemps, Inc. Delaware Diagnostic Solutions Corp. Delaware Maxum Health Services of North Texas, Inc. Texas Maxum Health Services of Arlington, Inc. Texas Maxum Health Services of Dallas, Inc. Texas MTS Enterprises, Inc. Texas NDDC, Inc. Texas Open MRI, Inc. Delaware Radiology Services Corp. Delaware Signal Medical Services, Inc. Delaware
EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the previously filed Registration Statement (Form S-8, No. 333-16123) of our report dated September 24, 1999, with respect to the consolidated financial statements of InSight Health Services Corp. included in the Form 10-K for the year ended June 30, 1999. /s/ ARTHUR ANDERSEN LLP Orange County, California September 24, 1999 EX-27 7 EXHIBIT 27
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 14,294 0 60,785 (24,798) 0 57,583 134,282 (43,611) 238,304 32,932 161,116 0 37,096 3 7,007 238,304 0 161,992 0 128,307 14,193 2,618 14,500 2,922 (3,190) 6,112 0 0 0 6,112 0.67 0.65
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