AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 2002
REGISTRATION NO. 333-75984
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INSIGHT HEALTH SERVICES CORP.*
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 621510 33-0702770
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
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*SEE TABLE OF ADDITIONAL REGISTRANTS
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4400 MACARTHUR BOULEVARD, SUITE 800
NEWPORT BEACH, CA 92660
(949) 476-0733
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
MARILYN U. MACNIVEN-YOUNG, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
4400 MACARTHUR BOULEVARD
NEWPORT BEACH, CA 92660
(949) 476-0733
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
STEPHEN C. KOVAL, ESQ.
KAYE SCHOLER LLP
425 PARK AVENUE
NEW YORK, NEW YORK 10022
(212) 836-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The
exchange will occur as soon as practicable after this Registration Statement
becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement under the earlier effective registration statement for
the same offering. [ ]
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
I.R.S. EMPLOYER
STATE OR OTHER JURISDICTION OF IDENTIFICATION
EXACT NAME OF ADDITIONAL REGISTRANTS* INCORPORATION NUMBER
- ------------------------------------- ------------------------------ ---------------
InSight Health Services Holdings Corp.................. Delaware 04-3570028
InSight Health Corp.................................... Delaware 52-1278857
Signal Medical Services, Inc........................... Delaware 33-0802413
Open MRI, Inc.......................................... Delaware 94-3251529
Maxum Health Corp...................................... Delaware 75-2287276
Radiosurgery Centers, Inc.............................. Delaware 33-0522445
Maxum Health Services Corp............................. Delaware 75-2135957
MRI Associates, L.P.................................... Indiana 35-1881106
Maxum Health Services of North Texas, Inc.............. Texas 75-2435797
Maxum Health Services of Dallas, Inc................... Texas 75-2615132
NDDC, Inc.............................................. Texas 75-2407830
Diagnostic Solutions Corp.............................. Delaware 75-2565249
Wilkes-Barre Imaging, L.L.C. .......................... Pennsylvania 52-2238781
</Table>
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* The address of each additional registrant is c/o InSight Health Services
Corp., 4400 MacArthur Boulevard, Newport Beach, CA 92660, telephone (949)
476-0733. The primary standard industrial classification number for InSight
Health Services Holdings Corp. is 6719. The primary standard industrial
classification number for each of the other additional registrants is 621510.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 25, 2002
INSIGHT HEALTH SERVICES CORP.
OFFER TO EXCHANGE
$225,000,000 9 7/8% SENIOR SUBORDINATED NOTES DUE 2011
FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011
We are offering to exchange all of our $225,000,000 9 7/8% senior
subordinated notes, which we refer to as the outstanding notes, for $225,000,000
in registered 9 7/8% Series B senior subordinated notes, which we refer to as
the exchange notes. The outstanding notes and the exchange notes are
collectively referred to as the notes. The outstanding notes were issued on
October 30, 2001. The exchange notes represent the same indebtedness as the
outstanding notes. The terms of the exchange notes are identical to the terms of
the outstanding notes except that the exchange notes are registered under the
Securities Act of 1933 and therefore are freely transferable, subject to certain
conditions.
You should consider the following:
- PARTICIPATING IN THE EXCHANGE OFFER INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
- Our offer to exchange the outstanding notes for exchange notes will
expire at 5:00 p.m. New York City time on , 2002 unless we
extend the time of expiration. You may withdraw your tender of
outstanding notes at any time before the expiration of this exchange
offer.
- No public market currently exists for the notes. We do not intend to list
the exchange notes on any securities exchange or seek approval for
quotation through any automated trading system and, therefore, no active
public market is anticipated.
- We have been advised by counsel that the exchange of outstanding notes
for exchange notes will not be a taxable event for U.S. federal income
tax purposes.
- The exchange offer is subject to customary conditions, including that it
does not violate applicable law or any applicable interpretation of the
staff of the SEC.
- We will not receive any proceeds from the exchange offer.
- Each broker-dealer that receives exchange notes pursuant to the exchange
offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. If the holder of the notes is a
broker-dealer that will receive exchange notes for its own account in
exchange for outstanding notes that were acquired as a result of
market-making activities or other trading activities, it will be required
to acknowledge that it will deliver this prospectus, as it may be amended
or supplemented, in connection with any resale of the exchange notes.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 2002
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR REPRESENT ANYTHING
TO YOU OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 13
The Acquisition and Related Financing Transactions.......... 26
Exchange Offer.............................................. 27
Use of Proceeds............................................. 34
Capitalization.............................................. 35
Ratio of Earnings to Fixed Charges.......................... 35
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 36
Selected Historical Financial and Operating Data............ 41
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 43
The Diagnostic Imaging Industry............................. 56
Business.................................................... 59
Management.................................................. 75
Security Ownership of Certain Beneficial Owners and
Management................................................ 84
Certain Relationships and Related Transactions.............. 87
Description of New Senior Credit Facilities................. 88
Description of Notes........................................ 90
Certain Federal Income Tax Considerations................... 125
Plan of Distribution........................................ 129
Legal Matters............................................... 129
Experts..................................................... 130
Available Information....................................... 130
Index to Consolidated Financial Statements.................. F-1
</Table>
i
MARKET, RANKING AND OTHER DATA
The data included in this prospectus regarding markets and ranking,
including the size of certain markets and our position and the position of our
competitors within these markets, are based on independent industry
publications, reports of government agencies or other published industry sources
and our estimates based on our management's knowledge and experience in the
markets in which we operate. Our estimates have been based on information
obtained from our customers, suppliers, trade and business organizations and
other contacts in the markets in which we operate. We believe these estimates to
be accurate as of the date of this prospectus. However, this information may
prove to be inaccurate because of the method by which we obtained some of the
data for our estimates or because this information cannot always be verified
with complete certainty due to the limits on the availability and reliability of
raw data, the voluntary nature of the data gathering process and other
limitations and uncertainties inherent in a survey of market size. As a result,
you should be aware that market, ranking and other similar data included in this
prospectus, and estimates and beliefs based on that data, may not be reliable.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions, our competitive
strengths and weaknesses, our business strategy and the trends we anticipate in
the industry and economies in which we operate and other information that is not
historical information and, in particular, appear under the heading "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "The Diagnostic Imaging Industry" and "Business." When
used in this prospectus, the words "estimates," "expects," "anticipates,"
"projects," "plans," "intends," "believes" and variations of such words or
similar expressions are intended to identify forward-looking statements. All
forward-looking statements, including, without limitation, our examination of
historical operating trends, are based upon our current expectations and various
assumptions. Our expectations, beliefs and projections are expressed in good
faith, and we believe there is a reasonable basis for them, but we cannot assure
you that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in
this prospectus. Important factors that could cause our actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth in this prospectus, including the factors described in the section
entitled "Risk Factors," and the following:
- limitations and delays in reimbursement by third-party payors;
- contract renewals and financial stability of customers;
- conditions within the healthcare environment;
- adverse utilization trends for certain diagnostic imaging procedures;
- our ability to successfully integrate acquisitions;
- competition in our markets;
- the potential for rapid and significant changes in technology and their
effect on our operations;
- operating, legal, governmental and regulatory risks; and
- economic, political and competitive forces affecting our business.
If any of these risks or uncertainties materialize, or if any of our
underlying assumptions are incorrect, our actual results may differ
significantly from the results that we express in or imply by any of our
forward-looking statements. We do not undertake any obligation to revise these
forward-looking statements to reflect future events or circumstances.
ii
PROSPECTUS SUMMARY
In this prospectus, the words "InSight," "our company," "we," "us" or "our"
refer to the combined business of InSight Health Services Corp. and all of its
subsidiaries, "the issuer" refers to InSight Health Services Corp., exclusive of
its subsidiaries, "InSight Holdings" refers to InSight Health Services Holdings
Corp., the parent company of InSight and "EBITDA" refers to operating income
plus depreciation and amortization. This summary highlights the information
contained elsewhere in this prospectus. Because this is only a summary, it does
not contain all of the information that may be important to you. For a more
complete understanding of this offering, we encourage you to read this entire
prospectus and documents to which we refer you. You should read the following
summary together with the more detailed information and consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus. We report our financial results on a fiscal year rather than a
calendar year basis. When we refer to a particular fiscal year in this
prospectus, we mean the twelve months ended June 30 of that year. When we refer
to contract services, we are generally referring to our mobile business. When we
refer to patient services, we are generally referring to our fixed-site
business.
When we refer to our results of operations for the six months ended
December 31, 2001, these results have been derived by combining the results of
InSight Holdings for the six months ended December 31, 2001 and the results of
InSight from July 1, 2001 to October 17, 2001 when the acquisition was
consummated. The results of InSight for the period prior to the acquisition do
not reflect any purchase accounting adjustments and thus are not directly
comparable to the results of InSight Holdings for the period after the
acquisition. We nonetheless believe that a discussion of the combined operating
results is more meaningful than splitting up the results between pre- and
post-acquisition periods because operating revenues and expenses were not
affected by the acquisition and splitting up the results would make period-
to-period comparisons very different. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
GENERAL
On October 30, 2001, we issued an aggregate principal amount of $225
million of 9 7/8% senior subordinated notes due 2011 in an offering exempt from
registration under the Securities Act. We refer to the notes issued in October
2001 as the "outstanding notes." The term "exchange notes" refers to the 9 7/8%
Series B senior subordinated notes due 2011 newly offered under this prospectus.
In connection with the private offering of the outstanding notes, we
entered into a registration rights agreement. Under the registration rights
agreement, we are obligated, among other things, to deliver to you this
prospectus and complete the exchange offer. This exchange offer allows you to
exchange your outstanding notes for newly registered exchange notes with
substantially similar terms. If the exchange offer is not completed as
contemplated in the registration rights agreement, we will be required to pay
liquidated damages to holders of the outstanding notes, and to holders of the
exchange notes under limited circumstances. You should read the registration
rights agreement in its entirety for more information. Refer to the section in
this prospectus entitled "Available Information" for information on how to
obtain a copy of the registration rights agreement.
OUR COMPANY
We are a leading nationwide provider of outsourced diagnostic imaging
services, serving a diverse portfolio of customers, including healthcare
providers, such as hospitals and physicians, and payors, such as managed care
organizations and insurance companies. As the largest integrated network of
mobile facilities and fixed-site imaging centers in the United States, we
believe we are unique in our ability to offer healthcare providers a broad range
of comprehensive imaging solutions, from mobile magnetic resonance imaging, or
MRI, services to MRI-only and multi-modality fixed-site centers, many of which
we jointly own with hospitals, physician groups or other healthcare providers.
1
We deliver our services through regional networks of diagnostic imaging
facilities, comprised of:
- 95 mobile, including 84 MRI and seven positron emission tomography, or
PET, facilities. The revenues generated primarily from our mobile
facilities, which we refer to as our contract services revenues,
represent approximately 48% of our total revenues; and
- 69 fixed-site centers operating 73 MRI systems. Approximately 38% of
these are multi-modality centers, which typically include MRI and one or
more of computed tomography, or CT, x-ray, mammography, ultrasound,
nuclear medicine and bone densitometry services. The revenues generated
primarily from our fixed-site centers, which we refer to as our patient
services revenues, represent approximately 52% of our total revenues.
Healthcare providers contract with us for our outsourced imaging services
because they may lack:
- the financial resources to make the significant capital investments
associated with the purchase of an imaging system;
- the patient volume to utilize their own imaging system in a
cost-effective manner;
- the management and marketing expertise or the billing and collections
capabilities to operate an imaging facility or center efficiently and
profitably; or
- the ability to add capacity independently to meet local demand.
In addition, hospitals may use our outsourced imaging services to take
advantage of recent federal healthcare regulatory changes that favor the
outsourcing of radiology services to facilities managed by and jointly owned
with a third party.
We have contracts with approximately 240 hospitals and have over 850
contracts with managed care organizations across 28 states. In the six months
ended December 31, 2001, we completed over 371,000 procedures, and MRI services
accounted for approximately 77% of our total revenues. For the year ended June
30, 2001, we had revenues of $211.5 million and EBITDA of $81.0 million. For the
six months ended December 31, 2001, we had revenues of $106.8 million and EBITDA
of $40.7 million.
DIAGNOSTIC IMAGING INDUSTRY OVERVIEW
Diagnostic imaging involves the use of non-invasive techniques to generate
representations of internal anatomy on film or video. Based on government and
industry sources, in calendar year 2000, the diagnostic imaging industry
generated revenues in excess of $70 billion in the United States, or
approximately 6% of total healthcare spending. MRI and CT services constituted
approximately $10 billion or approximately 13% of the diagnostic imaging
industry in 2000. MRI services have experienced substantial scan volume growth,
which increased at a compounded annual growth rate, or CAGR, of 10.7% from 9.8
million in 1996 to 13.3 million in 1999 and is projected to grow at a CAGR of
approximately 10.4% to 26.6 million in 2006. We believe that growth in the
diagnostic imaging industry as a whole, and MRI in particular, is attributable
to:
- strong demand for healthcare services due to an aging population;
- wider physician and payor acceptance of MRI as a cost-effective,
non-invasive diagnostic tool, with superior image quality;
- expanding applications for MRI technology;
- a currently relatively stable reimbursement environment with respect to
non-governmental payors; and
- the increased role of preventive medicine.
2
COMPETITIVE STRENGTHS
We believe we are well-positioned to capitalize on the favorable trends in
the diagnostic imaging industry. We attribute our leading market position to the
following strengths:
COMPREHENSIVE OUTSOURCED IMAGING SOLUTIONS. Unlike most of our
competitors, we operate integrated, regional networks comprised of both mobile
facilities and fixed-site imaging centers. Through these networks, we believe we
have a unique ability to offer healthcare providers a broad range of outsourcing
solutions to meet their diverse and developing imaging needs, whether through
mobile MRI, MRI-only or multi-modality fixed-site centers or joint venture
facilities. In addition to providing these customers with imaging equipment and
technical expertise, we can tailor solutions, based on customers' needs, to
include day-to-day management, marketing support, billing and collection
assistance, as well as site design and development.
STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. We have
developed a substantial presence in our targeted markets by forming regional
networks of imaging facilities that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service to our
customers. Clustering our facilities in regional networks enables us to:
- offer a broad range of imaging services;
- provide access to convenient locations and greater scheduling
flexibility;
- maximize our equipment utilization;
- leverage our marketing efforts; and
- benefit from economies of scale in purchasing, negotiating payor
contracts and reducing overhead through the centralization of certain
administrative functions.
WELL ESTABLISHED RELATIONSHIPS WITH HOSPITAL AND MANAGED CARE
CUSTOMERS. Our hospital and managed care customers accounted for approximately
50% and 33%, respectively, of total revenues for the fiscal year ended June 30,
2001. Our 60-member sales force focuses its marketing efforts on maintaining and
expanding our relationships with hospital and managed care customers.
Hospitals. We have approximately 240 exclusive contracts with hospitals,
including 200 for mobile facility services and 40 for fixed-site services.
- Our mobile facilities typically operate under contracts with average
terms of three to five years with an overall renewal rate of
approximately 85% since July 2000. Our mobile facilities operate under a
wholesale model in which we provide a specified schedule of services and
bill the hospital directly, typically on a fee-per-scan basis. Our mobile
facilities are rotated among multiple hospitals in a manner intended to
optimize equipment utilization.
- Our contracts with hospitals for fixed-site services generally have terms
of five to 15 years. We primarily operate our fixed-site centers under a
retail model in which we bill our payor customers and patients directly
on a fee-for-service basis.
As one of the largest networks of hospital outsourced radiology services,
we believe we are a preferred joint venture partner for hospitals and are
uniquely positioned to convert mobile customers into long-term fixed-site center
relationships as these customers' scan volumes increase and it becomes more
economical for them to establish a fixed-site center. These conversions also
decrease the risk associated with mobile contract renewal. To date, we have
completed 19 mobile to fixed-site conversions.
Managed Care Organizations. Through our regional networks, we offer
managed care organizations "one-stop shopping," which includes centralized
scheduling, single invoices, multiple locations and quality assurance. Since the
fiscal year ended June 30, 1997, we have more than doubled the number of our
managed care contracts, and we currently have over 850 contracts at our
fixed-site centers. Due to our extensive relationships with managed care payors,
we are able to provide services for a large base of referring physicians and as
a result, increase scan volumes at our centers.
3
TECHNOLOGICALLY ADVANCED MRI SYSTEMS. We operate our mobile facilities and
fixed-site centers with state-of-the-art equipment that allows us to perform the
variety, quality and volume of scans required by our customers. Of our 130
conventional MRI systems, 72% have a magnet field strength of 1.5 Tesla, which
is the industry's highest commercial standard, and 96% have a magnet field
strength of 1.0 Tesla or greater. We maintain our imaging systems with software
enhancements and upgrades to increase capacity and to perform new applications,
such as stroke and cardiac evaluation and cancer detection. The average age of
our MRI equipment is 3.1 years with an estimated useful life of 10 years.
EXPERIENCED MANAGEMENT TEAM. We have a highly experienced senior
management team with an average of 17 years of experience in the healthcare
services industry. Management has demonstrated its ability to generate
significant growth through a combination of same-store growth, developing new
mobile customers and routes, establishing fixed-site centers and successfully
integrating 12 acquisitions since the fiscal year ended June 30, 1996. From the
fiscal year ended June 30, 1997 to the fiscal year ended June 30, 2001, revenues
increased from $92.3 million to $211.5 million, reflecting a 23.0% CAGR, while
EBITDA increased from $15.5 million to $81.0 million, a 51.1% CAGR.
BUSINESS STRATEGY
Our objective is to be the leading provider of outsourced diagnostic
imaging services in our target markets by further developing and expanding our
regional networks. We plan to realize our objective by:
MAXIMIZING UTILIZATION OF OUR EXISTING FACILITIES. We intend to expand in
our regional markets by leveraging our existing facility network and customer
relationships, while reducing costs through economies of scale and ongoing cost
reduction measures. To this end, we intend to:
- broaden our physician referral base and generate new sources of revenues
through selective marketing activities, such as educating physicians on
new applications for diagnostic imaging equipment, providing technology
training for physicians and their staffs, and other customer service
programs;
- focus our marketing efforts on attracting additional managed care
customers;
- add new modalities such as CT, ultrasound and bone densitometry to
increase scan volume and economies of scale by leveraging our existing
fixed-site infrastructure;
- expand MRI applications to increase scan volume;
- continue to focus on our unique ability to convert developing mobile
operations into fixed-site centers; and
- maximize cost efficiencies through increased purchasing power and the
continual reduction of overhead expenses.
DEVELOPING DE NOVO OPPORTUNITIES. We will continue to pursue growth
opportunities within our existing regional networks by opening new fixed-site
centers and adding new mobile routes where attractive returns on investment can
be achieved and sustained. We will also selectively implement additional mobile
PET systems and routes. Mobile PET presents an attractive growth opportunity due
to increased physician acceptance of PET as a diagnostic tool and recently
expanded Medicare coverage of PET procedures. In addition, we will continue to
pursue partnerships with hospitals because we believe that they have the
potential to provide us with a steady source of scan volume. We believe this
will be an area for additional growth for us because we expect that hospitals
may respond to recent federal healthcare regulatory changes by outsourcing
radiology services to facilities that are managed by and jointly owned with
third parties.
PURSUING STRATEGIC ACQUISITIONS. Acquisitions have been an integral part
of our strategy. We expect to selectively acquire imaging centers to augment our
penetration in existing regional markets and increase economies of scale. We may
also enter new markets where we believe we can establish a strong regional
network. Diagnostic imaging remains a highly fragmented industry as
multi-facility chains account for less
4
than half of the total imaging centers. We believe we are well positioned to
capitalize on the ongoing consolidation of the imaging industry. Our management
team is experienced at successfully identifying, negotiating, completing and
integrating acquisitions. Since the fiscal year ended June 30, 1996, we have
completed 12 acquisitions comprising over 45 imaging facilities.
THE EQUITY SPONSORS
The acquisition and refinancing of InSight referred to below was sponsored
by J.W. Childs Associates, L.P., The Halifax Group, L.L.C. and certain of their
affiliates.
J.W. Childs Associates, a Boston-based private investment firm, manages
$1.5 billion of institutional private equity through J.W. Childs Equity
Partners, L.P. and J.W. Childs Equity Partners II, L.P. J.W. Childs Associates'
investment strategy is to invest, in partnership with management, in
middle-market growth companies. J.W. Childs Associates' principal executive
offices are located at 111 Huntington Avenue, Suite 2900, Boston, Massachusetts
02199. J.W. Childs Associates, J.W. Childs Equity Partners and J.W. Childs
Equity Partners II are Delaware limited partnerships.
The Halifax Group, L.L.C., a private equity firm with $200 million under
management through Halifax Capital Partners, L.P., operates from offices in
Washington, D.C., Fort Worth, Texas, Los Angeles, California, and Raleigh, North
Carolina. Halifax was launched in January 1999 to capitalize on opportunities
for equity investments in small and mid-cap companies. Halifax looks to partner
with management teams to make investments that demonstrate sustainable long-term
growth potential and compelling long-term value propositions. The Halifax
Group's principal executive offices are located at 1133 Connecticut Avenue,
N.W., Suite 700, Washington, D.C. 20036, and 201 Main Street, Suite 2420, Fort
Worth, Texas 76102. The Halifax Group is a Delaware limited liability company
and Halifax Capital Partners is a Delaware limited partnership.
We refer to these entities and their affiliates as the equity sponsors.
THE ACQUISITION AND RELATED FINANCING TRANSACTIONS
On October 17, 2001, InSight was acquired by and became a wholly-owned
subsidiary of InSight Holdings. Concurrently with the closing of the
acquisition, J.W. Childs Equity Partners II, Halifax Capital Partners and
certain of their affiliates made an equity contribution to InSight Holdings of
approximately $98.1 million. J.W. Childs Equity Partners II and an affiliate own
approximately 80% of the outstanding common stock of InSight Holdings and
Halifax Capital Partners and an affiliate own approximately 20% of the
outstanding common stock of InSight Holdings. In addition, concurrently with the
closing of the acquisition, certain members of our senior management rolled over
a portion of their InSight stock options into stock options of InSight Holdings.
Also in connection with the acquisition, we incurred $200 million of
indebtedness under a senior subordinated bridge financing, entered into a credit
agreement providing up to a maximum of $275 million of new senior credit
facilities, and repurchased by tender offer all of our 9 5/8% senior
subordinated notes due 2008 in an aggregate principal amount of $100 million.
The new senior credit facilities consist of:
- a $50 million six-year revolving credit facility;
- a $150 million seven-year term loan B (all of which was drawn in
connection with the acquisition); and
- a $75 million seven-year delayed-draw term loan facility (which is only
available for draw for two years following the closing of the
acquisition).
5
The funds from the equity contribution, the senior subordinated bridge
financing and the new senior credit facilities, along with a portion of our
cash, were used to:
- pay the merger consideration, the warrant consideration and the option
consideration pursuant to the merger agreement;
- complete a tender offer to purchase our existing 9 5/8% senior
subordinated notes due in 2008 in the aggregate principal amount of $100
million and the related consent solicitation;
- refinance most of our other indebtedness; and
- pay related fees and expenses.
We will use availability under our new senior credit facilities to fund our
future working capital requirements, capital expenditures, acquisitions and for
other general corporate purposes.
We refer to these events as the acquisition and related financing
transactions. For additional information, see "The Acquisition and Related
Financing Transactions," "Capitalization" and "Description of New Senior Credit
Facilities."
Following the closing of the acquisition on October 17, 2001, our common
stock ceased to be publicly traded, and we terminated the registration of our
common stock under the Exchange Act effective January 15, 2002.
InSight is a Delaware corporation. Our principal executive offices are
located at 4400 MacArthur Boulevard, Suite 800, Newport Beach, California 92660
and our telephone number is (949) 476-0733.
SUMMARY OF THE EXCHANGE OFFER
The Initial Offering of
Outstanding Notes............. We refinanced the senior subordinated bridge
financing by issuing the outstanding notes on
October 30, 2001 to Banc of America Securities
LLC and First Union Securities, Inc. We
collectively refer to those parties in this
prospectus as the "initial purchasers." The
initial purchasers subsequently resold the
outstanding notes to qualified institutional
buyers pursuant to Rule 144A under the
Securities Act of 1933 and to non-U.S. Persons
within the meaning of Regulation S under the
Securities Act.
Registration Rights
Agreement..................... Simultaneously with the issuance of the
outstanding notes, we entered into a
registration rights agreement for the exchange
offer. In the registration rights agreement, we
agreed, among other things, to file a
registration statement with the SEC within 120
days of the issue date of the outstanding notes
and to use our reasonable best efforts to
complete the exchange offer within 210 days of
the issue date of the outstanding notes. The
exchange offer is intended to satisfy our
obligations under the registration rights
agreement. After the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to
your outstanding notes.
The Exchange Offer............ We are offering to exchange the exchange notes,
which have been registered under the Securities
Act, for your outstanding notes. In order to be
exchanged, an outstanding note must be properly
tendered and accepted. All outstanding notes
that are validly tendered and not validly
withdrawn will be exchanged.
6
We will issue exchange notes promptly after the
expiration of the exchange offer.
Resales....................... We believe that the exchange notes issued in
the exchange offer may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act
provided that:
- the exchange notes are being acquired in the
ordinary course of your business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
in the distribution of the exchange notes
issued to you in the exchange offer; and
- you are not an affiliate of ours.
If any of these conditions are not satisfied
and you transfer any exchange notes issued to
you in the exchange offer without delivering a
prospectus meeting the requirements of the
Securities Act or without an exemption from
registration of your exchange notes from these
requirements, you may incur liability under the
Securities Act. We will not assume, nor will we
indemnify you against, any such liability.
Each broker-dealer that is issued exchange
notes in the exchange offer for its own account
in exchange for outstanding notes that were
acquired by that broker-dealer as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resale of the exchange
notes. A broker-dealer may use this prospectus
for an offer to resell, resale or other
transfer of the exchange notes issued to it in
the exchange offer.
Record Date................... We mailed this prospectus and the related
exchange offer documents to registered holders
of outstanding notes on , 2002.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, , 2002, unless we
decide to extend the expiration date.
Conditions to the Exchange
Offer......................... The exchange offer is subject to customary
conditions, including that it does not violate
applicable law or any applicable interpretation
of the staff of the SEC.
Procedures for Tendering
Outstanding Shares............ If you wish to tender your outstanding notes
for exchange in this exchange offer, you must
transmit to the exchange agent on or before the
expiration date either:
- an original or a facsimile of a properly
completed and duly executed letter of
transmittal, which accompanies this
prospectus, together with your outstanding
notes and any other documentation required by
the letter of transmittal, at the
7
address provided on the cover page of the
letter of transmittal; or
- if the notes you own are held of record by
The Depositary Trust Company, or DTC, in
book-entry form and you are making delivery
by book-entry transfer, a computer-generated
message transmitted by means of the Automated
Tender Offer Program System of DTC, or ATOP,
in which you acknowledge and agree to be
bound by the terms of the letter of
transmittal and which, when received by the
exchange agent, forms a part of a
confirmation of book-entry transfer. As part
of the book-entry transfer, DTC will
facilitate the exchange of your notes and
update your account to reflect the issuance
of the exchange notes to you. ATOP allows you
to electronically transmit your acceptance of
the exchange offer to DTC instead of
physically completing and delivering a letter
of transmittal to the notes exchange agent.
In addition, you must deliver to the exchange
agent on or before the expiration date:
- if you are effecting delivery by book-entry
transfer, a timely confirmation of book-entry
transfer of your outstanding notes into the
account of the notes exchange agent at DTC;
or
- if necessary, the documents required for
compliance with the guaranteed delivery
procedures.
Special Procedures for
Beneficial Owners............. If you are the beneficial owner of book-entry
interests and your name does not appear on a
security position listing of DTC as the holder
of the book-entry interests or if you are a
beneficial owner of outstanding notes that are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender the book-entry interest
or outstanding notes in the exchange offer, you
should contact the person in whose name your
book-entry interests or outstanding notes are
registered promptly and instruct that person to
tender on your behalf.
Withdrawal Rights............. You may withdraw the tender of your outstanding
notes at any time prior to 5:00 p.m., New York
City time on , 2002.
Federal Income Tax
Considerations................ Based on the advice of counsel, the exchange of
outstanding notes will not be a taxable event
for U.S. federal income tax purposes.
Use of Proceeds............... We will not receive any proceeds from the
issuance of exchange notes pursuant to the
exchange offer. We will pay all of our expenses
incident to the exchange offer.
Exchange Agent................ State Street Bank and Trust Company, N.A. is
serving as the exchange agent in connection
with the exchange offer.
8
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes, except that the exchange notes will be registered
under the Securities Act. As a result, the exchange notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damage provisions contained in the outstanding notes. The exchange
notes represent the same debt as the outstanding notes. Both the outstanding
notes and the exchange notes are governed by the same indenture. Unless
otherwise required by the context, we use the term "notes" in this prospectus to
collectively refer to the outstanding notes and the exchange notes.
Issuer........................ InSight Health Services Corp., a Delaware
corporation.
Securities.................... $225.0 million in principal amount of 9 7/8%
Series B Senior Subordinated Notes due 2011.
Maturity...................... November 1, 2011.
Interest...................... Annual rate: 9 7/8%.
Payment frequency: every six months on May 1
and November 1. First payment: May 1, 2002.
Ranking....................... The notes are senior subordinated debt.
Accordingly, they will rank:
- behind all of the issuer's and the
guarantors' existing and future senior debt;
- equally with all of the issuer's existing and
future senior subordinated, unsecured debt
that does not expressly provide that it is
subordinated to the notes;
- ahead of any of the issuer's future debt that
expressly provides that it is subordinated to
the notes; and
- structurally behind the liabilities of any of
the issuer's subsidiaries that do not
guarantee the notes.
At December 31, 2001, the notes were
subordinated to approximately $149.6 million of
senior debt of the issuer and the guarantees
were subordinated to approximately $153.3
million of senior debt of the guarantors,
$149.6 million of which represented guarantees
of the issuer's senior debt.
Guarantees.................... The notes will be unconditionally guaranteed on
a senior subordinated basis by InSight
Holdings, our parent company, and each of our
existing and future domestic wholly-owned
subsidiaries. If we cannot make payments on the
notes when they are due, the guarantors must
make them instead.
Optional Redemption........... On or after November 1, 2006, we may redeem
some or all of the notes at any time at the
redemption prices described in the section
"Description of Notes -- Optional Redemption."
Prior to November 1, 2004, we may redeem up to
35% of the notes with the proceeds of qualified
sales of our equity at the price listed in the
section "Description of Notes -- Optional
Redemption."
9
Mandatory Offer to
Repurchase.................... If we sell certain assets or if we or InSight
Holdings experience specific kinds of changes
of control, we must offer to repurchase the
notes at the prices listed in the section
"Description of Notes--Repurchase at the Option
of Holders."
Basic Covenants of the
Indenture..................... The indenture under which the outstanding notes
were issued will govern the exchange notes.
This indenture contains certain covenants which
will, among other things, restrict our ability
and the ability of our restricted subsidiaries
to:
- borrow money;
- pay dividends on or redeem or repurchase our
stock;
- make investments;
- create liens;
- use assets as security in other transactions;
- sell certain assets or merge with or into
other companies;
- enter into certain transactions with
affiliates;
- sell stock in our subsidiaries; and
- restrict dividends, distributions or other
payments from our subsidiaries.
For more details, see the section "Description
of Notes -- Certain Covenants."
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF CERTAIN RISKS OF PARTICIPATING IN THE EXCHANGE OFFER.
10
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table contains summary historical financial information
derived from our audited consolidated financial statements for the five fiscal
years ended June 30, 1997, 1998, 1999, 2000 and 2001 and our unaudited
consolidated financial statements for the six months ended December 31, 2000 and
2001. The table also contains summary unaudited pro forma financial information
derived from the financial information set forth under "Unaudited Pro Forma
Condensed Consolidated Financial Statements." This summary financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Selected Historical Financial and
Operating Data" and our consolidated financial statements and related notes
contained elsewhere in this prospectus.
The data under the "Pro Forma Data" caption adjusts the historical
information to give effect to (1) the acquisition and related financing
transactions and (2) the issuance of the outstanding notes and extinguishment of
the senior subordinated bridge financing. The pro forma income statement related
data for the fiscal year ended June 30, 2001 and six months ended December 31,
2001 are presented as if these transactions had occurred on July 1, 2000. The
pro forma information is presented for illustration purposes only and does not
purport to represent what our results of operations would have been had these
transactions actually been completed for the periods indicated and is not
necessarily indicative of our future results of operations.
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001(3) 2000
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues................................... $92,273 $119,018 $161,992 $188,574 $211,503 $106,789 $104,014
Costs of operations........................ 79,634 96,887 131,343 151,429 161,872 78,890 80,891
------- -------- -------- -------- -------- -------- --------
Gross profit............................... 12,639 22,131 30,649 37,145 49,631 27,899 23,123
Corporate operating expenses............... 7,431 8,759 10,475 10,946 10,783 5,313 5,277
Provision for reorganization and other
costs.................................... -- -- 3,300 -- -- -- --
Provision for supplemental service fee
termination.............................. -- 6,309 -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Income from company operations............. 5,208 7,063 16,874 26,199 38,848 22,586 17,846
Equity in earnings of unconsolidated
partnerships............................. 566 707 548 817 971 492 425
Acquisition related compensation charge.... -- -- -- -- -- (15,616) --
------- -------- -------- -------- -------- -------- --------
Operating income........................... 5,774 7,770 17,422 27,016 39,819 7,462 18,271
Interest expense, net...................... 4,066 6,827 14,500 18,696 23,394 14,011 11,907
------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.......... 1,708 943 2,922 8,320 16,425 (6,549) 6,364
Provision (benefit) for income taxes....... 427 431 (3,190) 1,131 2,624 (2,100) 636
------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item.... 1,281 512 6,112 7,189 13,801 (4,499) 5,728
Extraordinary item-loss on debt
extinguishment........................... -- -- -- -- -- (7,378) --
------- -------- -------- -------- -------- -------- --------
Net income (loss).......................... $ 1,281 $ 512 $ 6,112 $ 7,189 $ 13,801 $(11,827) $ 5,728
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 6,884 $ 44,740 $ 14,294 $ 27,133 $ 23,254 $ 22,891 $ 15,147
Working capital (deficit).................. (6,162) 36,109 24,651 20,814 16,791 43,902 14,037
Total assets............................... 97,271 231,592 238,304 328,872 321,056 490,563 327,106
Total debt (including current
maturities).............................. 73,195 164,798 172,630 248,232 228,253 379,743 243,062
Stockholders' equity....................... 6,685 37,858 44,106 51,487 65,471 80,519 57,304
</Table>
11
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001(3) 2000
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(2).................................. $15,514 $ 29,694 $ 45,608 $ 60,646 $ 80,953 $ 40,724 $ 39,207
EBITDA margin.............................. 16.8% 24.9% 28.2% 32.2% 38.3% 38.14% 37.69%
Depreciation and amortization.............. 9,740 15,615 24,886 33,630 41,134 17,646 20,936
Capital expenditures....................... 6,868 23,644 18,440 23,170 22,911 32,288 18,642
Ratio of earnings to fixed charges......... 1.1x 1.0x 1.1x 1.3x 1.6x -- 1.4x
Fixed charge coverage deficiency........... -- -- -- -- -- $ (6,590) --
Number of mobile facilities................ 40 67 86 82 88 93 87
Number of fixed-site centers............... 39 52 59 68 69 70 69
PRO FORMA DATA (UNAUDITED):
Interest expense, net...................... $ 36,678 $ 18,506
Ratio of EBITDA to interest expense,
net(1)................................... 2.2x 2.2x
Ratio of net debt to EBITDA(1)(2).......... 4.4x
</Table>
- ---------------
(1) EBITDA is defined as operating income plus depreciation and amortization.
This measurement has been included because management believes that certain
investors will find it to be a useful tool for measuring our ability to meet
debt service, capital expenditure and working capital requirements. EBITDA
should not be considered an alternative to, or more meaningful than, income
from company operations or other traditional indicators of operating
performance and cash flow from operating activities determined in accordance
with accounting principles generally accepted in the United States. EBITDA
excludes the provision for supplemental service fee termination in 1998, the
provision for reorganization and other costs in 1999, and the acquisition
related compensation charge in 2001.
(2) Net debt is total debt, including current maturities, less cash and cash
equivalents.
(3)The results of operations for the six months ended December 31, 2001 have
been derived by combining the results of operations of InSight Holdings for
the six months ended December 31, 2001 with the results of operations of
InSight from July 1, 2001 to October 17, 2001.
12
RISK FACTORS
You should read and carefully consider the following factors and other
information in this prospectus before deciding to participate in the exchange
offer.
RISKS RELATING TO THE EXCHANGE OFFER
BECAUSE THERE IS NO PUBLIC MARKET FOR THE NOTES, YOU MAY NOT BE ABLE TO RESELL
YOUR NOTES.
The exchange notes will be registered under the Securities Act, but will
constitute a new issue of securities with no established trading market, and
there can be no assurance as to:
- the liquidity of any trading market that may develop;
- the ability of holders to sell their exchange notes; or
- the price at which the holders would be able to sell their exchange
notes.
If a trading market were to develop, the exchange notes might trade at
higher or lower prices than their principal amount or purchase price, depending
on many factors, including prevailing interest rates, the market for similar
notes and our financial performance.
We understand that the initial purchasers presently intend to make a market
in the notes. However, the initial purchasers may stop their market-making
activities at any time. Any market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act, and may be limited during
the exchange offer or the pendency of an applicable shelf registration
statement. In addition, the liquidity of the trading market in these notes, and
the market price quoted for these notes, may be adversely affected by changes in
the overall market for high-yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally. As a result, you cannot be sure that an active trading market will
develop for these notes.
In addition, any holder of outstanding notes who tenders in the exchange
offer for the purpose of participating in a distribution of the exchange notes
may be deemed to have received restricted securities, and if so, will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. For a description
of these requirements, see "Exchange Offer."
YOUR NOTES WILL NOT BE ACCEPTED FOR EXCHANGE IF YOU FAIL TO FOLLOW THE EXCHANGE
OFFER PROCEDURES AND, AS A RESULT, YOUR NOTES WILL CONTINUE TO BE SUBJECT TO
EXISTING TRANSFER RESTRICTIONS AND YOU MAY NOT BE ABLE TO SELL YOUR NOTES.
We will not accept your notes for exchange if you do not follow the
exchange offer procedures. We will issue exchange notes as part of this exchange
offer only after a timely receipt of your outstanding notes, a properly
completed and duly executed letter of transmittal and all other required
documents. Therefore, if you want to tender your notes, please allow sufficient
time to ensure timely delivery. If we do not receive your notes, letter of
transmittal and other required documents by the expiration date of the exchange
offer, we will not accept your notes for exchange. We are under no duty to give
notification of defects or irregularities with respect to the tenders of
outstanding notes for exchange. If there are defects or irregularities with
respect to your tender of notes, we will not accept your notes for exchange.
IF YOU DO NOT EXCHANGE YOUR NOTES, YOUR NOTES WILL CONTINUE TO BE SUBJECT TO THE
EXISTING TRANSFER RESTRICTIONS AND YOU MAY NOT BE ABLE TO SELL YOUR NOTES.
We did not register the outstanding notes, nor do we intend to do so
following the exchange offer. Outstanding notes that are not tendered will
therefore continue to be subject to the existing transfer restrictions and may
be transferred only in limited circumstances under the securities laws. If you
do not exchange your notes, you will lose your right to have such notes
registered under the federal securities
13
laws. As a result, if you hold outstanding notes after the exchange offer, you
may not be able to sell your outstanding notes.
RISKS RELATING TO THE NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT THE ISSUER FROM FULFILLING ITS OBLIGATIONS UNDER THESE NOTES.
At December 31, 2001, we had total indebtedness of approximately $379.7
million. In addition, the following table sets forth our ratio of earnings to
fixed charges, assuming we had completed the acquisition and the related
financing transactions and applied the net proceeds as intended at July 1, 2001:
<Table>
<Caption>
PRO FORMA
SIX MONTHS ENDED
DECEMBER 31, 2001
------------------
(UNAUDITED)
Ratio of earnings to fixed charges.......................... 1.2x
</Table>
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for the issuer to satisfy its obligations with
respect to these notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions and investments and other general corporate
purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the markets in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit, among other things, our ability to borrow additional funds.
In addition, we may be able to incur substantial additional indebtedness in
the future. The terms of the indenture governing the notes and the new senior
credit facilities allow us to issue and incur additional debt upon satisfaction
of certain conditions. If new debt is added to current debt levels, the related
risks described above could intensify.
YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS JUNIOR TO THE ISSUER'S EXISTING
SENIOR INDEBTEDNESS AND POSSIBLY ALL OF ITS FUTURE BORROWINGS. FURTHER, THE
GUARANTEES OF THESE NOTES ARE JUNIOR TO ALL OF THE GUARANTORS' EXISTING SENIOR
INDEBTEDNESS AND POSSIBLY TO ALL THEIR FUTURE BORROWINGS.
These notes and the guarantees rank behind all of the issuer's and the
guarantors' existing senior indebtedness and all of the issuer's and the
guarantors' future senior indebtedness. At December 31, 2001, the notes were
subordinated to approximately $149.6 million of senior debt of the issuer and
the guarantees were subordinated to approximately $153.3 million of senior debt
of the guarantors, $149.6 million of which represented guarantees of the
issuer's senior debt. In addition, our new senior credit facilities permit
additional borrowings up to approximately $125.0 million, subject to compliance
with the covenants and conditions to borrowing under the new senior credit
facilities, and all of these borrowings would be senior to the notes and the
guarantees. We will be permitted to borrow substantial additional indebtedness,
including senior debt, in the future.
As a result of this subordination, upon any distribution to the issuer's
creditors or the creditors of the guarantors in a bankruptcy, liquidation or
reorganization or similar proceeding relating to the issuer or the guarantors or
the issuer's or the guarantors' property, the holders of senior debt of the
issuer and the guarantors will be entitled to be paid in full in cash before any
payment may be made with respect to these notes or the guarantees.
14
In addition, all payments on the notes and the guarantees will be blocked
in the event of a payment default on senior debt and may be blocked for up to
179 consecutive days in the event of certain non-payment defaults on designated
senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to the issuer or the guarantors, holders of the notes will
participate with trade creditors and all other holders of subordinated
indebtedness of the issuer and the guarantors in the assets remaining after the
issuer and the guarantors have paid all of the senior debt. However, because the
indenture relating to the notes requires that amounts otherwise payable to
holders of the notes in a bankruptcy or similar proceeding be paid to holders of
senior debt instead, holders of the notes may receive less, ratably, than
holders of trade payables in any such proceeding. In any of these cases, the
issuer and the guarantors may not have sufficient funds to pay all of their
creditors and holders of notes may receive less, ratably, than the holders of
senior debt.
SINCE THE NOTES ARE UNSECURED, YOUR RIGHT TO ENFORCE REMEDIES IS LIMITED BY THE
RIGHTS OF HOLDERS OF SECURED DEBT.
In addition to being contractually subordinated to all existing and future
senior indebtedness, the issuer's obligations under the notes will be unsecured
while obligations under the new senior credit facilities are secured by
substantially all of its assets and those of its parent and its subsidiaries. If
the issuer becomes insolvent or is liquidated, or if payment under the new
senior credit facilities is accelerated, the lenders under the new senior credit
facilities are entitled to exercise the remedies available to a secured lender
under applicable law. These lenders have a claim on all assets securing the new
senior credit facilities before the holders of unsecured debt, including the
notes. See "Description of New Senior Credit Facilities."
YOU SHOULD NOT RELY ON OUR PARENT COMPANY'S GUARANTEE IN EVALUATING AN
INVESTMENT IN THE NOTES.
InSight Holdings, our parent company, was formed as a holding company in
connection with the acquisition. Its sole source of operating income and cash
flow is derived from us and its only material asset is our capital stock. As a
result, our parent company's guarantee provides little, if any, additional
credit support for the notes. Furthermore, the indenture will not impose any
restrictions on the business or operations of our parent company or on, among
other things, the amount of indebtedness that our parent company may incur.
NOT ALL OF OUR SUBSIDIARIES GUARANTEE OUR OBLIGATIONS UNDER THE NOTES, AND THE
ASSETS OF THE NON-GUARANTOR SUBSIDIARIES MAY NOT BE AVAILABLE TO MAKE PAYMENTS
ON THE NOTES.
Our subsidiaries that are not wholly-owned by us will not be guarantors of
the notes. Our present and future wholly-owned domestic subsidiaries will
guarantee the notes. Payments on the notes are only required to be made by us,
our parent company and the subsidiary guarantors. As a result, no payments are
required to be made from assets of subsidiaries that do not guarantee the notes,
unless those assets are transferred by dividend or otherwise to us or a
subsidiary guarantor. In addition, the historical consolidated financial
statements included in this prospectus are represented on a consolidated basis,
including all of our domestic subsidiaries. The aggregate revenues, EBITDA and
total assets for the fiscal year ended June 30, 2001 of our subsidiaries which
are not guarantors were $45.1 million, $16.8 million and $43.6 million,
respectively, or 21.3%, 20.7% and 13.6%, respectively, of our total revenues,
EBITDA and total assets for the fiscal year ended June 30, 2001. The aggregate
revenues, EBITDA and total assets for the six months ended December 31, 2001 of
our subsidiaries which are not guarantors were $22.8 million, $7.8 million and
$44.8 million, respectively, or 21.3%, 19.2% and 9.1%, respectively, of our
total revenues, EBITDA and total assets for the six months ended December 31,
2001. We expect that as a result of our strategy of entering into partnerships
and joint ventures with hospitals, an increasing portion of our revenues, EBITDA
and total assets will be attributable to the operations of subsidiaries that are
not guarantors.
In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their liabilities, including their trade
creditors, will generally be entitled to payment of their
15
claims from the assets of those subsidiaries before any assets are made
available for distribution to us. As a result, the notes are effectively
subordinated to the indebtedness of the non-guarantor subsidiaries. As of
December 31, 2001, the total liabilities of our non-guarantor subsidiaries,
excluding intercompany liabilities, were $5.0 million.
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including these notes and amounts borrowed under the new senior credit
facilities, and to fund planned capital expenditures and expansion efforts and
any strategic acquisitions we may make in the future, if any, will depend on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive and other factors that are beyond our
control.
Based on our current level of operations, we believe our cash flow from
operations, together with available cash and available borrowings under the new
senior credit facilities, will be adequate to meet future liquidity needs for at
least the next twelve months. However, we cannot assure you that our business
will generate sufficient cash flow from operations in the future, that our
currently anticipated growth in revenues and cash flow will be realized on
schedule or that future borrowings will be available to us under the new senior
credit facilities in an amount sufficient to enable the issuer to repay
indebtedness, including these notes, or to fund other liquidity needs. We may
need to refinance all or a portion of our indebtedness, including these notes,
on or before maturity. We cannot assure you that we will be able to refinance
any of our indebtedness, including the new senior credit facilities and these
notes, on commercially reasonable terms or at all.
THE INDENTURE RELATED TO THE NOTES AND THE NEW SENIOR CREDIT FACILITIES CONTAIN
VARIOUS COVENANTS WHICH LIMIT OUR MANAGEMENT'S DISCRETION IN THE OPERATION OF
OUR BUSINESS.
The indenture under which the outstanding notes were issued will govern the
exchange notes. The new senior credit facilities, and the indenture related to
the notes contain various provisions which limit our management's discretion by
restricting our, our subsidiaries' and our parent's ability to:
- borrow money;
- pay dividends on stock or purchase stock;
- make investments and other restricted payments;
- use assets as security in other transactions;
- sell certain assets or merge with or into other companies;
- enter into certain transactions with affiliates;
- sell stock in certain of our subsidiaries; and
- restrict dividends or other payments to the issuer.
In addition, the new senior credit facilities require us to meet certain
financial ratios. Covenants in our new senior credit facilities also require us
to use a portion of the proceeds we receive in specified debt or equity
issuances to repay outstanding borrowings under our new senior credit
facilities.
Any failure to comply with the restrictions of the new senior credit
facilities, the indenture related to the notes or any other subsequent financing
agreements may result in an event of default. An event of default may allow the
creditors, if the agreements so provide, to accelerate the related debt as well
as any other debt to which a cross-acceleration or cross-default provision
applies. In addition, the syndicate of lenders may be able to terminate any
commitments they had made to supply us with further funds.
16
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all notes. However, it is possible
that we will not have sufficient funds at the time of the change of control to
make the required repurchase of notes or that restrictions in the new senior
credit facilities will not allow such repurchases. In addition, certain
important corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a "change of
control" under the indenture related to the notes. Our ability to repurchase
these notes upon certain specific kinds of change of control events may be
limited by the terms of our senior indebtedness and the subordination provisions
of the indenture. For example, the new senior credit facilities prohibit us from
repurchasing these notes after certain specific kinds of change of control
events until we first repay debt under the new senior credit facilities in full
or obtain a waiver from the syndicate of lenders under the new senior credit
facilities. If we fail to repurchase these notes in that circumstance, we will
go into default under the indenture related to these notes and the new senior
credit facilities. Any future debt which we incur may also contain restrictions
on repayment which come into effect upon certain specific kinds of change of
control events. If a change of control occurs, we cannot assure you that we will
have sufficient funds to repay other debt obligations which will be required to
be repaid, in addition to these notes. See "Description of Notes -- Repurchase
at the Option of Holders -- Change of Control" and "Description of New Senior
Credit Facilities."
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
If a bankruptcy case or lawsuit is initiated by unpaid creditors of any
guarantor, the debt represented by the guarantees entered into by the guarantors
may be reviewed under the federal bankruptcy law and comparable provisions of
state fraudulent transfer laws. Under these laws, a guarantee could be voided,
or claims in respect of the guarantee could be subordinated to certain
obligations of a guarantor if, among other things, the guarantor, at the time it
entered into the guarantee:
- received less than reasonably equivalent value or fair consideration for
entering into the guarantee; and
- either:
- was insolvent or rendered insolvent by reason of entering into a
guarantee; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts or contingent
liabilities beyond its ability to pay them as they become due.
In addition, any payment by a guarantor could be voided and required to be
returned to the guarantor or to a fund for the benefit of the guarantor's
creditors under those circumstances.
If a guarantee of a subsidiary were voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of the notes would be solely
creditors of our company and creditors of our parent company and our other
subsidiaries that have validly guaranteed the notes. These notes then would be
effectively subordinated to all obligations of the subsidiary whose guarantee
was voided.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
17
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts or contingent liabilities as they become due.
If the claims of the holders of the notes against any subsidiary were
subordinated in favor of other creditors of the subsidiary, the other creditors
would be entitled to be paid in full before any payment could be made on the
notes. If one or more of the guarantees is voided or subordinated, we cannot
assure you that after providing for all prior claims, there would be sufficient
assets remaining to satisfy the claims of the holders of the notes.
Based upon financial and other information, we believe that the guarantees
are being incurred for proper purposes and in good faith and that we, our parent
company and our subsidiaries that are guarantors, on a consolidated basis, are
solvent and will continue to be solvent after this offering is completed, will
have sufficient capital for carrying on our business after the issuance of the
exchange notes and will be able to pay our debts as they mature. We cannot
assure you, however, as to the standard a court would apply in making these
determinations or that a court would agree with our conclusions in this regard.
RISKS RELATING TO OUR COMPANY AND OUR INDUSTRY
CHANGES IN THE RATES OR METHODS OF THIRD-PARTY REIMBURSEMENTS FOR DIAGNOSTIC
IMAGING AND THERAPEUTIC SERVICES COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES
OR CREATE DOWNWARD PRICING PRESSURE, WHICH WOULD RESULT IN A DECLINE IN OUR
REVENUES AND HARM OUR FINANCIAL POSITION.
We derive approximately 52% of our revenues from direct billings to
patients and third-party payors such as Medicare, Medicaid, managed care and
private health insurance companies. Changes in the rates or methods of
reimbursement for the services we provide could have a significant negative
impact on those revenues. Moreover, our healthcare provider customers on whom we
depend for approximately 48% of our revenues generally rely on reimbursement
from third-party payors. In the past, initiatives have been proposed which, if
implemented, would have the effect of substantially decreasing reimbursement
rates for diagnostic imaging services provided at non-hospital facilities. Most
recently, effective January 1, 2002, the Medicare Program adopted final
regulations reducing Medicare payment across-the-board for all services provided
under the Medicare Physician Fee Schedule (including MRI and other services we
provide in non-hospital settings) by approximately 5.4%. In addition these
regulations reduce Medicare payment for the technical component of virtually all
services reimbursed under the Medicare Physician Fee Schedule (including those
we provide in non-hospital settings) by approximately 2% to 3%. Thus, in the
aggregate, Medicare payment for diagnostic imaging services covered by Medicare
will be reduced by approximately 7% to 9%. Similar initiatives enacted in the
future may have an adverse impact on our financial condition and our operations.
In addition, effective August 2000, the Medicare program implemented a new
prospective payment system for hospital outpatient services which establishes
rates for hospital-based diagnostic imaging services that are unrelated to
hospital costs. In the case of MRI services, these rates are lower than the
amounts generally paid to non-hospital facilities. While Congress enacted
additional legislation in 2000 intended to ease the effect of the new hospital
outpatient prospective payment system (OPPS), the transitional provisions will
phase out at the end of 2003. Moreover, rates have been modified significantly,
effective January 1, 2002, to differentiate between contrast-enhanced and
unenhanced procedures.
Any change in the rates of or conditions for reimbursement could
substantially reduce the number of procedures for which we or our customers can
obtain reimbursement or the amounts reimbursed to us or our customers for
services provided by us. If third-party payors reduce the amount of their
payments to our customers, our customers may seek to reduce their payments to us
or seek an alternate supplier of diagnostic imaging services. Because
unfavorable reimbursement policies have constricted and may continue to
constrict the profit margins of the hospitals and clinics we bill directly, we
have lowered and may continue to need to lower our fees to retain existing
customers and attract new ones. These reductions
18
could have a significant adverse effect on our revenues and financial results by
decreasing demand for our services or creating downward pricing pressure.
OUR REVENUES MAY FLUCTUATE OR BE UNPREDICTABLE AND THIS MAY HARM OUR FINANCIAL
RESULTS.
The amount and timing of revenues that we may derive from our business will
fluctuate based on:
- variations in the rate at which customers renew their contracts;
- the extent to which our mobile customers convert into a fixed-site
operation and choose not to continue using our services;
- changes in the number of days of service we can offer with respect to a
given diagnostic imaging or therapeutic system due to equipment
malfunctions or seasonal factors; and
- the mix of wholesale and retail billing for our services.
We may not be able to reduce our expenses, including our debt service
obligations, quickly enough to respond to these declines in revenues, which
would make our business difficult to operate and would harm our financial
results.
A FAILURE TO MEET OUR CAPITAL EXPENDITURE REQUIREMENTS CAN ADVERSELY AFFECT OUR
BUSINESS.
We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expenses of de novo centers, or new operations, and the
acquisition of additional businesses and new imaging equipment. We incur capital
expenditures to, among other things:
- upgrade our imaging systems and software;
- purchase systems upon termination of operating leases; and
- purchase new systems.
To the extent we are unable to generate sufficient cash from our operations
or funds are no longer available under our senior credit facilities, we may be
unable to meet our capital expenditure requirements and therefore unable to
achieve our estimates of EBITDA growth. Furthermore, we cannot assure you that
we will be able to raise any necessary additional funds through bank financing
or the issuance of equity or debt securities on terms acceptable to us, if at
all.
WE MAY EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES AND THIS
COMPETITION COULD ADVERSELY AFFECT OUR REVENUES AND OUR BUSINESS.
The market for diagnostic imaging services and systems is competitive. We
compete principally on the basis of our reputation for our productive and
cost-effective superior services. We compete with groups of radiologists,
established hospitals and certain other independent organizations, including
equipment manufacturers and leasing companies, that own and operate imaging
equipment. Our major competitors include Alliance Imaging, Inc., Shared Medical
Services, Medical Resources, Inc., Radiologix, Inc., U.S. Diagnostic Inc. and
Syncor International Corporation. Some of our direct competitors which provide
diagnostic imaging services may now or in the future have access to greater
financial resources than we do and may have access to newer, more advanced
equipment. In addition, some customers have in the past elected to provide
imaging services to their patients directly rather than renewing their contracts
with us. Finally, we face competition from providers of competing technologies
such as PET and ultrasound and may face competition from providers of new
technologies in the future. If we are unable to successfully compete, our
customer base would decline and our business, financial condition and results of
operations would be harmed.
Certain hospitals, particularly the larger hospitals, may directly acquire
and operate imaging and treatment equipment on-site as part of their overall
inpatient servicing capability, subject only to their
19
decision to acquire a high-cost diagnostic imaging system, assume the associated
financial risk, employ the necessary technologists and satisfy applicable
licensure and certificate of need requirements, if any. Historically, smaller
hospitals have often been reluctant to purchase imaging and treatment equipment.
This reluctance, however, has in the past encouraged the entry of start-up
ventures and more established business operations into the diagnostic and
treatment services business. As a result, there have been periods in the recent
past when there has been significant excess capacity in the diagnostic imaging
business in the United States, which can negatively affect utilization and
reimbursement.
In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging facilities because of
the federal physician self-referral legislation. Final regulations issued in
January 2001 clarify certain of the exceptions to the physician self-referral
legislation, which may create opportunities for and encourage some physician
practices to establish their own diagnostic imaging facilities which may compete
with us.
MANAGED CARE ORGANIZATIONS MAY PREVENT HEALTHCARE PROVIDERS FROM USING OUR
SERVICES, CAUSING US TO LOSE CURRENT AND PROSPECTIVE CUSTOMERS.
Healthcare providers participating as providers under managed care plans
may be required to refer diagnostic imaging tests to specific imaging service
providers depending on the plan in which each covered patient is enrolled. These
requirements currently inhibit healthcare providers from using our diagnostic
imaging services in some cases. The proliferation of managed care may prevent an
increasing number of healthcare providers from using our services in the future,
which would cause our revenues to decline.
OUR FIXED-SITE CENTERS DEPEND ON PHYSICIAN REFERRALS AND CONTRACTUAL
ARRANGEMENTS WITH INSURANCE CARRIERS FOR THEIR BUSINESS.
Our fixed-site centers are principally dependent on our ability to attract
referrals from physicians and other healthcare providers representing a variety
of specialties. Our eligibility to provide service in response to a referral is
often dependent on the existence of a contractual arrangement with the referred
patient's health plan. We currently have in excess of 850 contracts with managed
care organizations for diagnostic imaging services provided at our fixed-site
centers, primarily on a discounted fee-for-service basis. A significant decline
in referrals would have a material adverse effect on our business, financial
condition and results of operations.
WE MAY BE UNABLE TO RENEW OR MAINTAIN OUR CUSTOMER CONTRACTS WHICH WOULD HARM
OUR BUSINESS AND FINANCIAL RESULTS.
Upon expiration of our customer contracts, we are subject to the risk that
customers will cease using our imaging services and purchase or lease their own
imaging systems or use our competitors' imaging systems. 29% of our MRI
contracts will expire in the fiscal year ending June 30, 2002 and an additional
16% will expire in the fiscal year ending June 30, 2003. If these contracts are
not renewed or are renewed at lower prices, we could experience a significant
negative impact on our business. Our mobile contract renewal rate for the fiscal
year ended June 30, 2001 was approximately 85%. It is not always possible to
immediately obtain replacement customers, and historically many replacement
customers have been smaller facilities which have a lower number of scans than
lost customers. Although the non-renewal of a single customer contract would not
have a material impact on our contract services revenues, non-renewal of several
contracts could have a material impact on contract services revenues.
WE MAY BE SUBJECT TO PROFESSIONAL LIABILITY RISKS WHICH COULD BE COSTLY AND
NEGATIVELY IMPACT OUR BUSINESS AND FINANCIAL RESULTS.
We have not experienced any material losses due to claims for malpractice.
However, claims for malpractice have been asserted against us in the past and
any future claims, if successful, could entail significant defense costs and
could result in substantial damage awards to the claimants, which may exceed the
limits of any applicable insurance coverage. While we maintain professional
liability insurance, there
20
can be no assurance that any claim against us will not exceed the amount of our
insurance. Successful malpractice claims asserted against us, to the extent not
covered by our liability insurance, could have a material adverse effect on our
business, financial condition and results of operations.
In addition to being exposed to claims for malpractice, there are other
professional liability risks to which we are exposed through our operation of
diagnostic imaging systems. Equipment literature recommends that, until further
information is available, pregnant women should be scanned only under limited
circumstances. Furthermore, MRI magnets may disrupt the operation of cardiac
pacemakers and may react with metal implants utilized in various surgical
procedures. Additionally, some MRI examinations require injection of a
paramagnetic contrast material and certain CT examinations require the injection
of an iodine-based contrast material, allowing for better visualization of the
anatomy. Although it is unusual, some patients may develop a significant adverse
reaction to these contrast materials; however, chances of fatalities as a result
of such reaction are remote. Patients are screened to safeguard against
potential risks, but screening may nevertheless fail to identify the hazard.
To protect against possible professional liability either from malpractice
claims or the other risks described above, we maintain professional liability
insurance. However, if we are unable to maintain insurance in the future at an
acceptable cost or at all or if our insurance does not fully cover us, and a
successful claim was made against us, we could incur substantial losses. Any
successful malpractice or other professional liability claim made against us not
fully covered by insurance could be costly to defend against, result in a
substantial damage award against us and divert the attention of our management
from our operations, which could have a material adverse effect on our business,
financial condition and results of operations.
TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR SERVICES
AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT.
Technological change in the MRI industry has been gradual since the last
technological advancements were made in 1994. Although we believe that
substantially all of our MRI and other diagnostic imaging systems are
upgradeable to maintain their state-of-the-art character, the development of new
technologies or refinements of existing ones might make our existing systems
technologically or economically obsolete, or cause a reduction in the value of,
or reduce the need for, our systems. MRI and other diagnostic imaging systems
are currently manufactured by numerous companies. Competition among
manufacturers for a greater share of the MRI and other diagnostic imaging
systems market may result in technological advances in the speed and imaging
capacity of these new systems. Consequently, the obsolescence of our systems may
be accelerated. Although we are aware of no imminent substantial technological
changes, should such changes occur, we cannot assure you that we would be able
to acquire the new or improved systems.
The development of new scanning technology or new diagnostic applications
for existing technology may require us to adapt our existing technology or
acquire new or technologically improved systems in order to successfully
compete. In the future, however, we may not have the financial resources to do
so, particularly given our indebtedness. In addition, advancing technology may
enable hospitals, physicians or other diagnostic service providers to perform
tests without the assistance of diagnostic service providers such as ourselves.
OUR FAILURE TO EFFECTIVELY MAKE OR INTEGRATE ACQUISITIONS AND ESTABLISH
CO-SOURCING ARRANGEMENTS THROUGH PARTNERSHIPS WITH HOSPITALS AND OTHER
HEALTHCARE PROVIDERS COULD IMPAIR OUR BUSINESS.
As part of our business strategy, we have pursued and intend to continue to
pursue strategic acquisitions and establish co-sourcing arrangements through
partnerships and joint ventures with hospitals and other healthcare providers.
We are continuously evaluating acquisition opportunities and consolidation
possibilities, and, at any given time, may be in various stages of due diligence
or preliminary discussions with respect to a number of potential transactions.
From time to time we may enter into non-binding letters of intent, but we are
not currently subject to any definitive agreement with respect to any
21
transaction or otherwise so far advanced in any discussions as to make a
transaction material to our operations reasonably certain. Nevertheless, one of
these potential transactions, a definitive agreement for which is currently
under negotiation, if we were to complete our business and legal due diligence
and enter into a definitive agreement, would, if consummated, be material to our
operations and to our financial condition. We cannot assure you that we will
succeed in identifying suitable acquisition or co-sourcing candidates or in
consummating any such acquisitions or co-sourcing arrangements. Our acquisition
and co-sourcing strategies require substantial capital which may exceed the
funds available to us from internally generated funds and under the new senior
credit facilities. We cannot assure you that we will be able to raise any
necessary additional funds through bank financing or through the issuance of
equity or debt securities on terms acceptable to us, if at all.
Additionally, acquisitions involve the integration of acquired operations
with our operations. Integration involves a number of risks, including:
- demands on management related to the increase in our size after an
acquisition;
- the diversion of our management's attention from the management of daily
operations to the integration of operations;
- integration of information systems;
- difficulties in the assimilation and retention of employees;
- potential adverse effects on operating results; and
- challenges in retaining customers and referral sources.
Although we believe we have successfully integrated acquisitions in the
past, we cannot assure you that we will be able to successfully integrate the
operations of any future acquisitions. If we do not successfully integrate
acquisitions, we may not realize anticipated operating advantages, economies of
scale and cost savings. Also, we may not be able to maintain the levels of
operating efficiency acquired companies will have achieved or might achieve
separately. Successful integration of each of their operations will depend upon
our ability to manage those operations and to eliminate redundant and excess
costs.
LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGERS, TECHNOLOGISTS
AND SALESPERSONS COULD LIMIT OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS.
We depend upon our management team to a substantial extent. During the
fiscal year ended June 30, 2001, we added approximately 80 employees. As we
grow, we will increasingly require field managers and salespersons with
experience in our industry and skilled technologists to operate our diagnostic
equipment. It is impossible to predict the availability of qualified field
managers, salespersons and technologists or the compensation levels that will be
required to hire them. In particular, there is a very high demand for qualified
technologists who are necessary to operate our systems. We may not be able to
hire and retain a sufficient number of technologists, and we may be required to
pay bonuses and higher salaries to our technologists, which would increase our
expenses. The loss of the services of any member of our senior management or our
inability to hire qualified field managers, salespersons and skilled
technologists at economically reasonable compensation levels could adversely
affect our ability to operate and grow our business.
OUR PET SERVICE AND SOME OF OUR OTHER IMAGING SERVICES REQUIRE THE USE OF
RADIOACTIVE MATERIALS, WHICH COULD SUBJECT US TO REGULATION, RELATED COSTS AND
DELAYS AND POTENTIAL LIABILITIES FOR INJURIES OR VIOLATIONS OF ENVIRONMENTAL,
HEALTH AND SAFETY LAWS.
Our PET service and some of our other imaging and therapeutic services
require radioactive materials. While this radioactive material has a short
half-life, meaning it quickly breaks down into inert, or non-radioactive
substances, storage, use and disposal of these materials present the risk of
accidental environmental contamination and physical injury. We are subject to
federal, state and local regulations
22
governing storage, handling and disposal of these materials and waste products.
Although we believe that our safety procedures for storing, handling and
disposing of these hazardous materials comply with the standards prescribed by
law and regulation, we cannot completely eliminate the risk of accidental
contamination or injury from those hazardous materials. In the event of an
accident, we would be held liable for any resulting damages, and any liability
could exceed the limits of or fall outside the coverage of our insurance. We may
not be able to maintain insurance on acceptable terms, or at all. We could incur
significant costs and the diversion of our management's attention in order to
comply with current or future environmental, health and safety laws and
regulations.
WE MAY BE UNABLE TO EFFECTIVELY MAINTAIN OUR IMAGING AND THERAPEUTIC SYSTEMS OR
GENERATE REVENUES WHEN OUR SYSTEMS ARE NOT FULLY OPERATIONAL.
Timely, effective service is essential to maintaining our reputation and
high utilization rates on our imaging systems. Repairs to one of our systems can
take up to two weeks and result in a loss of revenues. Our warranties and
maintenance contracts do not compensate us for loss of revenues when our systems
are not fully operational. The principal components of our operating costs
include depreciation, salaries paid to technologists and drivers, annual system
maintenance costs, insurance and transportation costs. Because the majority of
these expenses are fixed, a reduction in the number of scans performed due to
out-of-service equipment will result in lower revenues and margins. Repairs of
our equipment are performed for us by the equipment manufacturers. These
manufacturers may not be able to perform repairs or supply needed parts in a
timely manner. Thus, if we experience more system malfunctions than anticipated
or if we are unable to promptly obtain the service necessary to keep our systems
functioning effectively, our revenues could decline and our ability to provide
services would be harmed.
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS COULD CONFLICT WITH THOSE OF THE
HOLDERS OF THE NOTES OFFERED HEREBY.
We are a wholly-owned subsidiary of InSight Holdings which is a corporation
controlled by J.W. Childs Equity Partners II and Halifax Capital Partners. As a
result, J.W. Childs Equity Partners II and Halifax Capital Partners, through
InSight Holdings, have the ability to elect all of the members of our board of
directors, appoint new management and approve any action requiring the approval
of our stockholders. The board of directors has the authority to make decisions
affecting our capital structure, including the issuance of additional
indebtedness and the declaration of dividends. In addition, transactions may be
pursued that could enhance the equity sponsors' equity investment while
involving risks to your interests. There can be no assurance that the interests
of the equity sponsors will not conflict with your interests.
RISKS RELATING TO GOVERNMENT REGULATION OF OUR BUSINESS
COMPLYING WITH FEDERAL AND STATE REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL PENALTIES.
We are directly or indirectly through our customers subject to extensive
regulation by both the federal government and the states in which we conduct our
business, including:
- the federal False Claims Act;
- the federal Medicare and Medicaid Anti-kickback Law, and state
anti-kickback prohibitions;
- federal and state billing and claims submission laws and regulations;
- the federal Health Insurance Portability and Accountability Act of 1996;
- the federal physician self-referral prohibition commonly known as the
Stark Law and the state law equivalents of the Stark Law;
- state laws that prohibit the practice of medicine by non-physicians, and
prohibit fee-splitting arrangements involving physicians; and
23
- federal and state laws governing the diagnostic imaging and therapeutic
equipment we use in our business concerning patient safety, equipment
operating specifications and radiation exposure levels.
If our operations are found to be in violation of any of the laws and
regulations to which we or our customers are subject, we may be subject to the
applicable penalty associated with the violation, including civil and criminal
penalties, damages, fines and the curtailment of our operations. Any penalties,
damages, fines or curtailment of our operations, individually or in the
aggregate, could adversely affect our ability to operate our business and our
financial results. The risks of our being found in violation of these laws and
regulations is increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and their provisions
are open to a variety of interpretations. Any action brought against us for
violation of these laws or regulations, even if we successfully defend against
it, could cause us to incur significant legal expenses and divert our
management's attention from the operation of our business. For a more detailed
discussion of the various state and federal regulations to which we are subject,
see "Business -- Government Regulation."
FUTURE FEDERAL LEGISLATION COULD LIMIT THE PRICES WE CAN CHARGE FOR OUR
SERVICES, WHICH WOULD REDUCE OUR REVENUES AND HARM OUR OPERATING RESULTS.
In addition to extensive existing government healthcare regulation, there
are numerous initiatives affecting the coverage of and payment for healthcare
services, including proposals that would significantly limit reimbursement under
the Medicare and Medicaid programs. Most recently, for example, the Medicare
Program issued its Physician Fee Schedule for calendar year 2002, which reduces
Medicare payment for MRI services by approximately 7% to 9%. In addition, also
effective January 1, 2002, the Medicare Program announced new rates under the
hospital outpatient prospective payment system that reduces Medicare payment for
unenhanced MRI procedures and increases Medicare payment for certain
contrast-enhanced procedures. Limitations on reimbursement amounts and other
cost containment pressures have in the past resulted in a decrease in the
revenues we receive for each scan we perform. It is not clear at this time what
additional proposals, if any, will be made or adopted or, if adopted, what
effect these proposals would have on our business.
THE APPLICATION OR REPEAL OF STATE CERTIFICATE OF NEED REGULATIONS COULD HARM
OUR BUSINESS AND FINANCIAL RESULTS.
Some states require a certificate of need or similar regulatory approval
prior to the acquisition of high-cost capital items including diagnostic imaging
systems or provisions of diagnostic imaging services by us or our customers.
Twelve of the 28 states in which we operate mobile and fixed-site centers have
some form of certificate of need regulation and more states may adopt similar
licensure frameworks in the future. In many cases, a limited number of these
certificates are available in a given state. If we are unable to obtain the
applicable certificate or approval or additional certificates or approvals
necessary to expand our operations, these regulations may limit or preclude our
operations in the relevant jurisdictions.
Conversely, states in which we have obtained a certificate of need may
repeal existing certificate of need regulations or liberalize exemptions from
the regulations. The repeal of certificate of need regulations in states in
which we have obtained a certificate of need or a certificate of need exemption
would lower barriers to entry for competition in those states and could
adversely affect our business.
RECENTLY PROMULGATED FEDERAL REGULATIONS AND GUIDELINES MAY PREVENT OUR
CUSTOMERS FROM QUALIFYING OUR SERVICES FOR PROVIDER-BASED STATUS, AND MAY IMPOSE
PHYSICIAN SUPERVISION GUIDELINES WITH WHICH WE MAY HAVE DIFFICULTY COMPLYING.
Recent regulations may affect the ability of a Medicare provider, such as a
hospital, to include a service or facility as provider-based, as opposed to
treating the service as if it were offered offsite from the hospital, for
purposes of Medicare reimbursement. The application of these regulations to
mobile facilities is uncertain. While the Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA) offers some relief for facilities
recognized as provider-based on October 1, 2000, under these new
24
regulations some of our customers may have difficulty qualifying our services
for provider-based status. If a hospital customer cannot obtain provider-based
status for our services, then the hospital might decide not to contract with us,
which could have a material adverse effect on our business, financial condition
and results of operations.
In addition, the Medicare program has recently implemented regulations and
guidelines establishing the level of physician supervision required for various
diagnostic services. It is unclear how these medical supervision requirements
will be implemented, especially with regard to mobile facilities. Strict
implementation of these guidelines may render it impracticable for some of our
hospital customers to continue to contract with us or to otherwise provide
diagnostic imaging services through an outside supplier, and this would have a
material adverse effect on our business, financial condition and results of
operations.
IF WE FAIL TO COMPLY WITH VARIOUS LICENSURE, CERTIFICATION AND ACCREDITATION
STANDARDS, WE MAY BE SUBJECT TO LOSS OF LICENSURE, CERTIFICATION OR
ACCREDITATION, WHICH WOULD ADVERSELY AFFECT OUR OPERATIONS.
All of the states in which we operate require that the imaging
technologists that operate our CT and PET systems be licensed or certified.
Certain states in which we operate require that our centers be licensed or
specifically exempt from licensure, and that the imaging technologists that
operate our MRI and ultrasound systems be licensed or certified. Also, each of
our fixed-site centers must continue to meet various requirements in order to
receive payments from the Medicare program. All of our mammography units are
required to be accredited under the Mammography Quality Standards Act of 1992
(MQSA). In addition, a number of our facilities are currently accredited by the
Joint Commission on Accreditation of Healthcare Organizations, an independent,
non-profit organization that accredits various types of healthcare providers
such as hospitals, nursing homes and providers of diagnostic imaging services.
In the healthcare industry, various types of organizations are accredited to
meet certain Medicare certification requirements, expedite third-party payment,
and fulfill state licensure requirements. Some managed care providers prefer to
contract with accredited organizations. Any lapse in our licenses,
certifications or accreditations, or those of our technologists or physicians,
or the failure of any of our fixed-site centers to satisfy the necessary
requirements under Medicare or MQSA, could have a material adverse effect on our
business, financial condition and results of operations.
25
THE ACQUISITION AND RELATED FINANCING TRANSACTIONS
On October 17, 2001, a corporation organized by the equity sponsors and
wholly-owned by InSight Health Services Holdings Corp., merged with and into
InSight. InSight was the surviving corporation and became a wholly-owned
subsidiary of InSight Holdings. J.W. Childs Equity Partners II and an affiliate
own approximately 80% of the outstanding common stock of InSight Holdings and
Halifax Capital Partners and an affiliate own approximately 20% of the
outstanding common stock of InSight Holdings. In addition, certain members of
our senior management rolled over a portion of their InSight stock options into
stock options of InSight Holdings at the consummation of the acquisition. Upon
consummation of the acquisition, each of our stockholders became entitled to
receive $18.00 in cash for each share of our common stock that they owned prior
to the acquisition. Holders of options and warrants, which prior to the
acquisition were exercisable for our common stock, received the difference
between $18.00 and the exercise price for each share of common stock the holder
could have acquired pursuant to the terms of the options or warrants, and the
options and warrants were terminated. Our stockholders, option holders and
warrant holders immediately prior to the acquisition became entitled to receive
aggregate cash consideration of approximately $187.7 million as a result of the
acquisition.
Concurrently with the acquisition, we repurchased by tender offer all of
our 9 5/8% senior subordinated notes due 2008 in an aggregate principal amount
of $100 million. Additionally, upon consummation of the acquisition, we repaid
our then outstanding senior credit facilities and certain other indebtedness and
paid fees and expenses relating to the acquisition and related financing
transactions.
These transactions were financed through:
- borrowings of $150 million under the $275 million new senior credit
facilities;
- a $200 million senior subordinated bridge financing; and
- the investment by the equity sponsors of $98.1 million; management
options and common stock rollover with a total net value of approximately
$1.9 million.
26
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The issuer, the guarantors and the initial purchasers entered into a
registration rights agreement in connection with the issuance of the outstanding
notes. The registration rights agreement provides that we will take the
following actions, at our expense, for the benefit of the holders of the
outstanding notes:
- within 120 days after the date on which the outstanding notes were
issued, file the exchange offer registration statement, of which this
prospectus is a part, relating to the exchange offer;
- cause the exchange offer registration statement to be declared effective
under the Securities Act within 180 days after the date on which the
outstanding notes were issued; and
- keep the exchange offer open for at least 30 business days, or longer if
required by applicable law, after the date notice of the exchange offer
is mailed to the holders of the outstanding notes.
For each of the outstanding notes surrendered in the exchange offer, the
holder who surrendered the note will receive an exchange note having a principal
amount equal to that of the surrendered note. Interest on each exchange note
will accrue from the later of (1) the last interest payment date on which
interest was paid on the outstanding note surrendered or (2) if no interest has
been paid on the outstanding note, from the date on which the outstanding notes
were issued. If the note is surrendered for exchange on a date after the record
date for the payment of interest to occur on or after the date of exchange,
interest on the exchange note will accrue from that interest payment date.
We will be required to file a shelf registration statement covering resales
of the outstanding notes if:
- because of any change in law or in currently prevailing interpretations
of the staff of the SEC, we are not permitted to effect an exchange
offer,
- in some circumstances, the holders of outstanding notes so request, or
- in the case of any holder that participates in the exchange offer, the
holder does not receive exchange notes on the date of the exchange that
may be sold without restriction under state and federal securities laws.
Following the consummation of the exchange offer, holders of the
outstanding notes who were eligible to participate in the exchange offer, but
who did not tender their outstanding notes, will not have any further
registration rights and the outstanding notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the outstanding notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all outstanding notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the expiration date of the exchange offer. We will issue $1,000 principal amount
of exchange notes in exchange for each $1,000 principal amount of outstanding
notes accepted in the exchange offer. Any holder may tender some or all of its
outstanding notes pursuant to the exchange offer. However, outstanding notes may
be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes except that:
(1) the exchange notes bear a Series B designation and a different CUSIP
Number from the outstanding notes;
(2) the exchange notes have been registered under the Securities Act and
hence will not bear legends restricting their transfer; and
27
(3) the holders of the exchange notes will not be entitled to certain
rights under the registration rights agreement, including the
provisions providing for an increase in the interest rate on the
outstanding notes in certain circumstances relating to the timing of
the exchange offer, all of which rights will terminate when the
exchange offer is terminated.
The exchange notes will evidence the same indebtedness as the outstanding
notes and will be entitled to the benefits of the indenture.
As of the date of this prospectus, $225,000,000 aggregate principal amount
of the outstanding notes were outstanding. We have fixed the close of business
on , 2002 as the record date for the exchange offer for purposes of
determining the persons to whom this prospectus and the letter of transmittal
will be mailed initially.
Holders of outstanding notes do not have any appraisal or dissenters'
rights under the Delaware General Corporation Law. We intend to conduct the
exchange offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the SEC thereunder.
We will be deemed to have accepted validly tendered outstanding notes when,
as and if we have given oral or written notice thereof to the exchange agent.
The exchange agent will act as agent for the tendering holders for the purpose
of receiving the exchange notes from us.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of specified other events set forth in this
prospectus or otherwise, the certificates for any unaccepted outstanding notes
will be returned, without expense, to the tendering holder thereof as promptly
as practicable after the expiration date of the exchange offer.
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes pursuant to the exchange offer. We will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the exchange offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" will mean 5:00 p.m., New York City time, on
, 2002, unless we, in our sole discretion, extend the exchange offer,
in which case the term "expiration date" will mean the latest date and time to
which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will mail to the registered holders
an announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion, (1) to delay accepting any
outstanding notes, to extend the exchange offer or to terminate the exchange
offer if any of the conditions set forth below under "-- Conditions" have not
been satisfied, by giving oral or written notice of any delay, extension or
termination to the exchange agent or (2) to amend the terms of the exchange
offer in any manner. Any delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from their date of issuance. Holders
of outstanding notes that are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the date of issuance of the
exchange notes. Such interest will be paid with the first interest payment on
the exchange notes on May 1, 2002. Interest on the outstanding notes accepted
for exchange will cease to accrue upon issuance of the exchange notes.
28
Interest on the exchange notes is payable semi-annually on each May 1 and
November 1, commencing on May 1, 2002.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must complete, sign
and date the letter of transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the letter of transmittal or transmit an
agent's message in connection with a book-entry transfer, and mail or otherwise
deliver the letter of transmittal or the facsimile, together with the
outstanding notes and any other required documents, to the exchange agent prior
to 5:00 p.m., New York City time, on the expiration date. To be tendered
effectively, the outstanding notes, letter of transmittal or an agent's message
and other required documents must be completed and received by the exchange
agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m.,
New York City time, on the expiration date. Delivery of the outstanding notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of the book-entry transfer must be received by the exchange
agent prior to the expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that the book-entry transfer facility
has received an express acknowledgment from the participant in the book-entry
transfer facility tendering the outstanding notes that the participant has
received and agree:
(1) to participate in ATOP;
(2) to be bound by the terms of the letter of transmittal; and
(3) that we may enforce the agreement against the participant.
To participate in the exchange offer, each holder will be required to make
the following representations to us:
- Any exchange notes to be received by the holder will be acquired in the
ordinary course of its business.
- At the time of the commencement of the exchange offer, the holder has no
arrangement or understanding with any person to participate in the
distribution, within the meaning of Securities Act, of the exchange notes
in violation of the Securities Act.
- The holder is not our affiliate as defined in Rule 405 promulgated under
the Securities Act.
- If the holder is not a broker-dealer, it is not engaged in, and does not
intend to engage in, the distribution of exchange notes.
- If the holder is a broker-dealer that will receive exchange notes for its
own account in exchange for outstanding notes that were acquired as a
result of market-making or other trading activities, the holder will
deliver a prospectus in connection with any resale of the exchange notes.
We refer to these broker-dealers as participating broker-dealers.
- The holder is not acting on behalf of any person or entity that could not
truthfully make these representations.
The tender by a holder and our acceptance thereof will constitute agreement
between the holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal or
agent's message.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
OR AGENT'S MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT
THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD
BE SENT TO US. HOLDERS MAY REQUEST THEIR
29
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR THEM.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the letter of transmittal. Signatures on a
letter of transmittal or a notice of withdrawal, as the case may be, must be
guaranteed by a member of the Medallion System unless the outstanding notes
tendered pursuant to the letter of transmittal are tendered (1) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the letter of transmittal or
(2) for the account of a member firm of the Medallion System. If signatures on a
letter of transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, the guarantee must be by a member firm of the
Medallion System.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed in this prospectus, the
outstanding notes must be endorsed or accompanied by a properly completed bond
power, signed by the registered holder as the registered holder's name appears
on the outstanding notes with the signature thereon guaranteed by a member firm
of the Medallion System.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, the person signing should so indicate when signing, and evidence
satisfactory to us of its authority to so act must be submitted with the letter
of transmittal.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the
outstanding notes at DTC for the purpose of facilitating the exchange offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of outstanding notes by
causing DTC to transfer the outstanding notes into the exchange agent's account
with respect to the outstanding notes in accordance with DTC's procedures for
the transfer. Although delivery of the outstanding notes may be effected through
book-entry transfer into the exchange agent's account at DTC, unless an agent's
message is received by the exchange agent in compliance with ATOP, an
appropriate letter of transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the exchange agent at its address
set forth below on or prior to the expiration date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under the procedures. Delivery of documents to DTC does not constitute
delivery to the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered outstanding notes and withdrawal of tendered
outstanding notes will be determined by us in our sole discretion, which
determination will be final and binding. We reserve the absolute right to reject
any and all outstanding notes not properly tendered or any outstanding notes our
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right in our sole discretion to waive any defects, irregularities or
conditions of tender as to particular outstanding notes. Our interpretation of
the terms and conditions of the exchange offer, including the instructions in
the letter of transmittal, will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of outstanding
notes must be cured within the time we determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of outstanding
notes, neither we, the exchange agent nor any other person will incur any
liability for failure to give the notification. Tenders of outstanding notes
will not be deemed to have been made until the defects or irregularities have
been cured or waived. Any outstanding notes received by the exchange agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
30
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their outstanding notes and (1) whose
outstanding notes are not immediately available, (2) who cannot deliver their
outstanding notes, the letter of transmittal or any other required documents to
the exchange agent or (3) who cannot complete the procedures for book-entry
transfer, on or prior to the expiration date, may effect a tender if:
(A) the tender is made through a member firm of the Medallion System;
(B) prior to the expiration date, the exchange agent receives from a member
firm of the Medallion System a properly completed and duly executed
Notice of Guaranteed Delivery by facsimile transmission, mail or hand
delivery setting forth the name and address of the holder, the
certificate number(s) of the outstanding notes and the principal amount
of outstanding notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange
trading days after the expiration date, the letter of transmittal or
facsimile thereof together with the certificate(s) representing the
outstanding notes or a confirmation of book-entry transfer of the
outstanding notes into the exchange agent's account at DTC, and any
other documents required by the letter of transmittal will be deposited
by the member firm of the Medallion System with the exchange agent; and
(C) the properly completed and executed letter of transmittal or facsimile
thereof, as well as the certificate(s) representing all tendered
outstanding notes in proper form for transfer or a confirmation of
book-entry transfer of the outstanding notes into the exchange agent's
account at DTC, and all other documents required by the letter of
transmittal are received by the exchange agent within five New York
Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date.
To withdraw a tender of outstanding notes in the exchange offer, a
telegram, telex, letter or facsimile transmission notice of withdrawal must be
received by the exchange agent at its address set forth in this prospectus prior
to 5:00 p.m., New York City time, on the expiration date of the exchange offer.
Any notice of withdrawal must:
(1) specify the name of the person having deposited the outstanding notes
to be withdrawn;
(2) identify the outstanding notes to be withdrawn, including the
certificate number(s) and principal amount of the outstanding notes,
or, in the case of outstanding notes transferred by book-entry
transfer, the name and number of the account at DTC to be credited;
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the outstanding notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to
the outstanding notes register the transfer of the outstanding notes
into the name of the person withdrawing the tender; and
(4) specify the name in which any outstanding notes are to be registered,
if different from that of the person depositing the outstanding notes
to be withdrawn.
All questions as to the validity, form and eligibility, including time of
receipt, of the notices will be determined by us. Our determination will be
final and binding on all parties. Any outstanding notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer and
no exchange notes will be issued with respect thereto unless the outstanding
notes so withdrawn are validly retendered. Any outstanding notes which have been
tendered but which are not accepted for exchange will
31
be returned to the holder thereof without cost to the holder as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn outstanding notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering" at any
time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange notes for, any outstanding notes,
and may terminate or amend the exchange offer as provided in this prospectus
before the acceptance of the outstanding notes, if:
(1) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or any material adverse development has
occurred in any existing action or proceeding with respect to us or any
of our subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of
the SEC is proposed, adopted or enacted, which, in our sole judgment,
might materially impair our ability to proceed with the exchange offer
or materially impair the contemplated benefits of the exchange offer to
us; or
(3) any governmental approval has not been obtained, which approval we
will, in our sole discretion, deem necessary for the consummation of
the exchange offer as contemplated by this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may (1) refuse to accept any outstanding notes and return all
tendered outstanding notes to the tendering holders, (2) extend the exchange
offer and retain all outstanding notes tendered prior to the expiration of the
exchange offer, subject, however, to the rights of holders to withdraw the
outstanding notes (See "-- Withdrawal of Tenders") or (3) waive the unsatisfied
conditions with respect to the exchange offer and accept all properly tendered
outstanding notes which have not been withdrawn.
EXCHANGE AGENT
State Street Bank and Trust Company, N.A. has been appointed as exchange
agent for the exchange offer. Questions and requests for assistance, requests
for additional copies of this prospectus or of the letter of transmittal and
requests for Notice of Guaranteed Delivery should be directed to the exchange
agent addressed as follows:
By Hand, Overnight Delivery or Registered/Certified Mail:
c/o State Street Bank and Trust Company
2 Avenue de Lafayette
Boston, MA 02111
Attention: Ralph Jones
By Facsimile:
(617) 662-1452
Confirm by Telephone:
(617) 662-1548
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telegraph, telecopy, telephone or in person by our and our affiliates' officers
and regular employees.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will, however,
32
pay the exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses incurred in connection
with these services.
We will pay the cash expenses to be incurred in connection with the
exchange offer. Such expenses include fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
We will record the exchange notes at the same carrying value as the
outstanding notes, which is face value, as reflected in our accounting records
on the date of exchange. Accordingly, we will not recognize any gain or loss for
accounting purposes as a result of the exchange offer. The expenses of the
exchange offer will be deferred and charged to expense over the term of the
exchange notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The outstanding notes that are not exchanged for exchange notes pursuant to
the exchange offer will remain restricted securities. Accordingly, the
outstanding notes may be resold only:
(1) to us upon redemption thereof or otherwise;
(2) so long as the outstanding notes are eligible for resale pursuant to
Rule 144A, to a person inside the United States whom the seller
reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act in a transaction meeting
the requirements of Rule 144A, in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act, which other exemption is based upon
an opinion of counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act; or
(4) pursuant to an effective registration statement under the Securities
Act, in each case in accordance with any applicable securities laws of
any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of exchange notes, based on interpretations by the
staff of the SEC set forth in no-action letters issued to third parties, we
believe that a holder or other person who receives exchange notes, whether or
not the person is the holder, other than a person that is our affiliate within
the meaning of Rule 405 under the Securities Act, in exchange for outstanding
notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the exchange notes, will be allowed to
resell the exchange notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the exchange notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
However, if any holder acquires exchange notes in the exchange offer for the
purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the staff of the SEC expressed
in the no-action letters or any similar interpretive letters, and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each broker-dealer that receives exchange notes
for its own account in exchange for outstanding notes, where the outstanding
notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the exchange notes.
33
USE OF PROCEEDS
This exchange offer is intended to satisfy some of our obligations under
the registration rights agreement. We will not receive any cash proceeds from
the issuance of the exchange notes. In consideration for issuing the exchange
notes, we will receive outstanding notes in like principal amount, the form and
terms of which are substantially identical to the form and terms of the exchange
notes, except as otherwise described in this prospectus. We used the proceeds
from the issuance of the outstanding notes to retire in full the $200 million of
indebtedness under a senior subordinated bridge financing and for general
corporate purposes. The senior subordinated bridge financing was used, together
with the related financing transactions, to fund a portion of the cash required
to consummate the acquisition, repay certain indebtedness outstanding prior to
the acquisition and pay related fees and expenses.
34
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization derived from our unaudited consolidated financial statements as
of December 31, 2001. This table should be read in conjunction with "Use of
Proceeds," "Selected Historical Financial and Operating Data," our consolidated
financial statements and related notes and other financial information appearing
elsewhere in this prospectus.
<Table>
<Caption>
AS OF
DECEMBER 31,
2001
--------------
(UNAUDITED)
(IN THOUSANDS)
Cash and cash equivalents................................... $ 22,891
========
Long-term debt (including current maturities):
New senior credit facilities(1)........................... $149,625
Capital leases............................................ 5,118
--------
Total senior debt...................................... 154,743
9 7/8% senior subordinated notes due 2011................. 225,000
--------
Total long-term debt................................... 379,743
Total stockholders' equity.................................. 80,519
--------
Total capitalization................................... $460,262
========
</Table>
- ---------------
(1) The new senior credit facilities consist of a $50.0 million revolving credit
facility, a $150.0 million term loan B and a $75.0 million delayed-draw term
loan facility.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical consolidated ratio of
earnings to fixed charges of our company for the periods indicated.
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEAR ENDED ---------------------------
-------------------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1999 2000 2001 2001 2000
---- ---- ---- ---- ---- ------------ ------------
1.1x 1.0x 1.1x 1.3x 1.6x -- 1.4x
Fixed charge coverage
deficiency................ -- -- -- -- -- $(6,590) --
</Table>
For the purpose of calculating the ratio of earnings to fixed charges,
earnings are defined as (i) pre-tax income from continuing operations before
adjustment for income or loss from equity investments, (ii) fixed charges and
(iii) distributed income of equity investments. Fixed charges are the sum of (i)
interest expense, (ii) amortized premiums, discounts and capitalized expenses
related to indebtedness and (iii) an estimate of the interest within rental
expense.
35
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements have been derived by the application of pro forma adjustments to our
historical consolidated financial statements included elsewhere in this
prospectus and reflect the unaudited pro forma consolidated financial statements
of InSight Health Services Corp. The unaudited pro forma condensed consolidated
statement of income data give effect to 1) the acquisition and related financing
transactions, and the application of the net proceeds and 2) the issuance of the
outstanding notes and extinguishment of the senior subordinated bridge
financing, as if all such transactions had occurred on July 1, 2000. Assumptions
underlying the pro forma adjustments are described in the accompanying notes
which should be read in conjunction with these unaudited pro forma condensed
consolidated financial statements. The pro forma adjustments reflect the
adoption of Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." Among other things, this requires the elimination of goodwill
amortization in the unaudited pro forma condensed consolidated statement of
income, however, amortization of other identifiable intangible assets is
required. After an acquisition, the total consideration of such acquisition will
be allocated to the tangible and intangible assets acquired and liabilities
assumed. The actual purchase accounting and other adjustments described in the
accompanying notes were made as of the closing date of the acquisition and may
differ from the preliminary adjustments reflected in these unaudited pro forma
condensed consolidated financial statements. For example, an increase in the
allocation to identifiable intangible assets with a corresponding reduction in
goodwill will result in an increase in related amortization expense.
The unaudited pro forma condensed consolidated financial statements should
not be considered indicative of actual results that would have been achieved had
the acquisition, related financing transactions and notes offered hereby been
consummated for the periods indicated and do not purport to indicate
consolidated results of operations as of any future period.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the information contained in "Selected Historical
Financial and Operating Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
36
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED
JUNE 30, 2001
(IN THOUSANDS)
<Table>
<Caption>
HISTORICAL(1) ADJUSTMENTS PRO FORMA
------------- ----------- ---------
Revenues.................................................. $211,503 $ -- $211,503
Costs of operations....................................... 161,872 (5,530)(2) 156,342
-------- ------- --------
Gross profit............................................ 49,631 5,530 55,161
Corporate operating expenses.............................. 10,783 -- 10,783
-------- ------- --------
Income from company operations.......................... 38,848 5,530 44,378
Equity in earnings of unconsolidated partnerships......... 971 -- 971
-------- ------- --------
Operating income........................................ 39,819 5,530 45,349
Interest expense, net..................................... 23,394 13,284(3) 36,678
-------- ------- --------
Income before income taxes.............................. 16,425 (7,754) 8,671
Provision for income taxes................................ 2,624 844(4) 3,468
-------- ------- --------
Net income.............................................. $ 13,801 $(8,598) $ 5,203
======== ======= ========
EBITDA.................................................... $ 80,953 -- $ 80,953
Pro forma ratio of earnings to fixed charges.............. 1.1x
</Table>
37
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The unaudited pro forma condensed consolidated income statement for the
year ended June 30, 2001, reflects the following pro forma adjustments:
(1)To reflect the historical results of operations of InSight, as InSight
Holdings did not have operations or significant assets (see audited financial
statements of InSight Holdings included elsewhere herein.)
(2) To record the elimination of goodwill amortization of $5,530 in accordance
with SFAS 142.
(3) To reflect adjustments to interest expense as follows:
<Table>
Interest on the outstanding notes at 9 7/8%(a).............. $ 22,219
Interest on term loan B facility at LIBOR plus 350 bps
(estimated rate of 6.0%).................................. 9,000
Effect of interest rate swap on notional amount of $37,250
of term loan B facility................................... 1,100
Commitment fee on revolving credit facility (0.5% of unused
facility) and delayed-draw term loan facility (2.0% of
unused facility).......................................... 1,750
Amortization of deferred loan fees on new senior credit
facilities ($1,589) and the outstanding notes ($1,352).... 2,941
Elimination of historical interest expense.................. (23,726)
--------
$ 13,284
========
</Table>
The actual interest on the term loan B facility could vary from that used
to compute the above adjustment of interest expense. The effect on pre-tax
income of a 0.125% variance in such rate would be approximately $188.
(a) Incremental interest expense on the senior subordinated bridge
financing is not material to the pro forma presentation due to the
limited period outstanding.
(4) To record the tax effect on the above entries at estimated effective rates.
38
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED
DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Revenues.................................................... $43,111 63,678(1) 106,789
Costs of operations......................................... 33,203 45,687(1) 78,890
------- -------- --------
Gross profit.............................................. 9,908 17,991 27,899
Corporate operating expenses................................ 2,129 3,184(1) 5,313
------- -------- --------
Income from company operations............................ 7,779 14,807 22,586
Equity in earnings of unconsolidated partnerships........... 110 382(1) 492
------- -------- --------
Operating income.......................................... 7,889 15,189 23,078
Interest expense, net....................................... 7,690 10,816(2) 18,506
------- -------- --------
Income before income taxes................................ 199 4,373 4,572
Provision for income taxes.................................. - 1,829(3) 1,829
------- -------- --------
Income before extraordinary item.......................... $ 199 $ 2,544 2,743
======= ======== ========
EBITDA...................................................... $15,712 $ 25,012 40,724
Pro forma ratio of earnings to fixed charges................ 1.4x
</Table>
39
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The unaudited pro forma condensed consolidated income statement for the six
months ended December 31, 2001, reflects the following pro forma adjustments:
(1)To add historical results of operations from the period July 1, 2001 to
October 17, 2001 of InSight.
(2) To reflect interest expense for the period July 1, 2001 to October 17, 2001,
as follows:
<Table>
Interest on the outstanding notes at 9 7/8%................. $ 6,481
Interest on term loan B facility at LIBOR plus 350 bps
(estimated rate of 6.0%).................................. 2,625
Effect of interest rate swap on notional amount of $37,250
of term loan B facility................................... 343
Commitment fee on revolving credit facility (0.5% of unused
facility) and delayed-draw term loan facility (2.0% of
unused facility).......................................... 510
Amortization of deferred loan fees on new senior credit
facilities ($1,589) and the outstanding notes ($1,352).... 857
-------
$10,816
=======
</Table>
The actual interest on the term loan B facility could vary from that used
to compute the above adjustment of interest expense. The effect on pre-tax
income of a 0.125% variance in such rate would be approximately $47.
(3) To record the tax effect on the above entries at estimated effective rates.
40
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth our selected historical financial and other
data as of and for each of the five fiscal years ended June 30, 1997, 1998,
1999, 2000 and 2001 and the six months ended December 31, 2000 and 2001. The
selected historical financial and other data as of and for the fiscal years
ended June 30, 1999, 2000 and 2001 have been derived from our audited
consolidated financial statements and the related notes, which are included
elsewhere in this prospectus. The selected historical financial and other data
as of and for the six months ended December 31, 2000 and 2001 have been derived
from our unaudited consolidated financial statements and the related notes,
which are included elsewhere in this prospectus. The selected historical
financial and other data as of and for the fiscal years ended June 30, 1997 and
1998 have been derived from our audited consolidated financial statements for
the fiscal years ended June 30, 1997 and 1998, which are not included in this
prospectus.
The selected historical financial data set forth below are not necessarily
indicative of the results of future operations and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes and
other financial information appearing elsewhere in this prospectus.
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001(3) 2000
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues....................... $92,273 $119,018 $161,992 $188,574 $211,503 $106,789 $104,014
Costs of operations............ 79,634 96,887 131,343 151,429 161,872 78,890 80,891
Gross profit................... 12,639 22,131 30,649 37,145 49,631 27,899 23,123
Corporate operating expenses... 7,431 8,759 10,475 10,946 10,783 5,313 5,277
Provision for reorganization
and other costs(1)........... -- -- 3,300 -- -- -- --
Provision for supplemental
service fee termination...... -- 6,309 -- -- -- -- --
Income from company
operations................... 5,208 7,063 16,874 26,199 38,848 22,586 17,846
Equity in earnings of
unconsolidated
partnerships................. 566 707 548 817 971 492 425
Acquisition related
compensation charge.......... -- -- -- -- -- (15,616) --
Operating income............... 5,774 7,770 17,422 27,016 39,819 7,462 18,271
Interest expense, net.......... 4,066 6,827 14,500 18,696 23,394 14,011 11,907
Income (loss) before income
taxes........................ 1,708 943 2,922 8,320 16,425 (6,549) 6,364
Provision (benefit) for income
taxes........................ 427 431 (3,190) 1,131 2,624 (2,100) 636
Income (loss) before
extraordinary item........... 1,281 512 6,112 7,189 13,801 (4,499) 5,728
Extraordinary item -- loss on
debt extinguishment.......... -- -- -- -- -- (7,378) --
Net income (loss).............. $ 1,281 $ 512 $ 6,112 $ 7,189 $ 13,801 $(11,827) $ 5,728
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 6,884 $ 44,740 $ 14,294 $ 27,133 $ 23,254 $ 22,891 $ 15,147
Working capital (deficit)...... (6,162) 36,109 24,651 20,814 16,791 43,902 14,037
Total assets................... 97,271 231,592 238,304 328,872 321,056 490,563 327,106
Total debt (including current
maturities).................. 73,195 164,798 172,630 248,232 228,253 379,743 243,062
Stockholders' equity........... 6,685 37,858 44,106 51,487 65,471 80,519 57,304
</Table>
41
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001(3) 2000
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(2)...................... $15,514 $ 29,694 $ 45,608 $ 60,646 $ 80,953 $ 40,724 $ 39,207
EBITDA margin.................. 16.8% 24.9% 28.2% 32.2% 38.3% 38.14% 37.69%
Depreciation and
amortization................. 9,740 15,615 24,886 33,630 41,134 17,646 20,936
Capital expenditures........... 6,868 23,644 18,440 23,170 22,911 32,288 18,642
Net cash provided by operating
activities................... 7,478 18,216 10,892 40,524 50,682 26,137 18,993
Net cash used in investing
activities................... (30,377) (78,168) (47,201) (49,070) (23,442) (212,955) (18,915)
Net cash provided by (used in)
financing activities......... 23,204 97,808 5,863 21,385 (31,119) 194,884 (12,064)
Ratio of earnings to fixed
charges(3)................... 1.1x 1.0x 1.1x 1.3x 1.6x -- 1.4x
Fixed charge coverage
deficiency................... -- -- -- -- -- $ (6,590) --
Number of mobile facilities.... 40 67 86 82 88 95 87
Number of fixed-site centers... 39 52 59 68 69 70 69
PRO FORMA DATA (UNAUDITED):
Interest expense, net.......... $ 36,678 $ 18,506
Ratio of EBITDA to interest
expense, net(1).............. 2.2x 2.2x
Ratio of net debt to
EBITDA(1)(2)................. 4.4x
</Table>
- ---------------
(1) In connection with the recapitalization by The Carlyle Group and General
Electric Company (GE) in October 1997, we recorded a one-time non-cash
charge of $6,309 for the elimination of a supplemental service fee payment
due to GE. In 1999, we recorded a one-time charge of $3,300 related to the
realignment of our corporate and regional organization.
(2) EBITDA is defined as operating income plus depreciation and amortization.
This measurement has been included because management believes that certain
investors will find it to be a useful tool for measuring our ability to meet
debt service, capital expenditure and working capital requirements. EBITDA
should not be considered an alternative to, or more meaningful than, income
from company operations or other traditional indicators of operating
performance and cash flow from operating activities determined in accordance
with accounting principles generally accepted in the United States. EBITDA
excludes the provision for supplemental service fee termination in 1998, the
provision for reorganization and other costs in 1999 and the acquisition
related compensation charge in 2001.
(3)The results of operations for the six months ended December 31, 2001 have
been derived by combining the results of operations of InSight Holdings for
the six months ended December 31, 2001 with the results of operations of
InSight from July 1, 2001 to October 17, 2001.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes and other financial
information appearing elsewhere in this prospectus. This prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those indicated in forward-looking
statements. See "Cautionary Note Regarding Forward-Looking Statements."
OVERVIEW
We are a leading nationwide provider of outsourced diagnostic imaging
services, serving a diverse portfolio of customers, including healthcare
providers, such as hospitals and physicians, and payors, such as managed care
organizations and insurance companies, and are the largest integrated provider
of fixed and mobile diagnostic imaging services in the United States. We have
two reportable segments, the Eastern Division and the Western Division. Our
operations are located throughout the United States, with a substantial presence
in California, Texas, New England, North Carolina, South Carolina, Florida and
the midwest (Indiana and Ohio). While we generated approximately 80% of our
revenues from MRI services during the fiscal year ended June 30, 2001, we
provide a comprehensive offering of diagnostic imaging and treatment services,
including CT, PET, mammography, bone densitometry, diagnostic ultrasound,
lithotripsy and x-ray. We have developed and continue to develop strong regional
networks of diagnostic imaging services, enabling us to increase overall
utilization of our imaging equipment and to benefit from enhanced economies of
scale. We provide our services through 69 fixed-site centers, including 26
multi-modality centers and 95 mobile facilities. At our multi-modality imaging
centers, we typically offer MRI and one or more of CT, x-ray, mammography,
ultrasound, nuclear medicine and bone densitometry services.
Our revenues are primarily generated from contract services and patient
services. Contract services revenues are primarily earned through mobile
facilities. Patient services revenues are primarily earned through fixed-site
centers. Contract services revenues are generally earned from services billed to
hospitals or other healthcare providers, which include: (1) fee-for-service
arrangements in which revenues are based upon a contractual rate per procedure;
(2) management fees; and (3) equipment rental in which revenues are generally
based upon a fixed monthly rental. Patient services revenues are earned from
services billed directly to patients or third-party payors (generally managed
care organizations, Medicare, Medicaid, commercial insurance carriers and
workers' compensation funds). Contract and patient services revenues represented
approximately 49% and 51%, respectively, of our total revenues for the fiscal
year ended June 30, 2001.
During the fiscal year ended June 30, 2001, compared to the fiscal year
ended June 30, 2000, we increased scan volumes at our fixed-site centers by 9%.
During the same period, the average fee-per-scan at our fixed-site centers
remained relatively constant. The average fee-per-scan at our MRI-only
fixed-site centers is higher than at our multi-modality centers, due to the
range of procedures, many of which have a lower fee-per-scan than MRI, provided
at our multi-modality centers.
We maintain a high fixed cost structure, with fixed costs and variable
costs representing 80.1% and 19.9% of total operating expenses, respectively,
for the fiscal year ended June 30, 2001. Four categories of fixed expenses
account for approximately 73.9% of our total operating expenses: (1) salaries
and benefits expenses; (2) equipment lease expenses; (3) contractual maintenance
expenses; and (4) depreciation and amortization, comprising 34.9%, 5.0%, 25.9%
and 8.1%, respectively, of our total operating expenses for the fiscal year
ended June 30, 2001. Due to this high degree of operating leverage with respect
to our equipment, any increase in existing facility scan volumes
disproportionately increases our operating cash flow. Service supplies,
consisting mainly of film and contrast media used in our diagnostic imaging
services, comprised 5.6% of our total operating expenses for the fiscal year
ended June 30, 2001 and were our largest variable operating expense during this
period.
43
We believe that the expansion of our business through the addition of new
facilities and acquisitions is a key factor in achieving our growth. Generally,
acquisition opportunities are aimed at increasing revenues and profits and
maximizing utilization of existing capacity and increasing economies of scale.
Incremental operating profit resulting from future acquisitions will vary
depending on geographic location, whether facilities are mobile or fixed, the
range of services provided and our ability to integrate the acquired businesses
into our existing infrastructure. Since 1996, we have completed 12 acquisitions.
We are continuously evaluating acquisition opportunities and consolidation
possibilities, and, at any given time, may be in various stages of due diligence
or preliminary discussions with respect to a number of potential transactions.
From time to time, we may enter into non-binding letters of intent, but we are
not currently subject to any definitive agreement with respect to any
transaction material to our operations or otherwise so far advanced in any
discussions as to make a transaction material to our operations reasonably
certain. Nevertheless, one of these potential transactions, a definitive
agreement for which is currently under negotiation, if we were to complete our
business and legal due diligence and enter into a definitive agreement, would,
if consummated, be material to our operations and to our financial condition.
Our results of operations for the six months ended December 31, 2001 have
been derived by combining the results of operations of InSight Holdings for the
six months ended December 31, 2001 with the results of operations of InSight
from July 1, 2001 to October 17, 2001, the date of the acquisition and related
financing transactions. Our results of operations for the three months ended
December 31, 2001 have been derived by combining the results of operations of
InSight Holdings from October 1, 2001 to December 31, 2001 with the results of
operations of InSight from October 1, 2001 to October 17, 2001. The results of
operations and cash flows of InSight prior to the acquisition and related
financing transactions incorporated in the discussion of our operating results
for the six and three months ended December 31, 2001 are the historical results
and cash flows of InSight. InSight's results do not reflect any purchase
accounting adjustments included in the results of InSight Holdings after the
acquisition and related financing transactions, and thus are not directly
comparable. Because of the effects of purchase accounting applied as a result of
the acquisition and related financing transactions and the additional interest
expense associated with the debt incurred to finance the acquisition, the
results of InSight Holdings after the acquisition are not comparable in all
respects to the results of operations prior to the acquisition and related
financing transactions. However, management believes a discussion of the
operations by combining the results of InSight Holdings and InSight is more
meaningful as InSight Holdings' operating revenues and expenses have not been
affected by the acquisition and related financing transactions and splitting up
the results between pre- and post-acquisition and related financing transactions
periods would make comparisons of the operating trends to the prior year very
different.
ACQUISITIONS AND NEW FACILITIES
In the fiscal year ended June 30, 2000, we completed two acquisitions in
the Eastern Division: (1) two fixed-site centers in Indianapolis and
Clarksville, Indiana, respectively and (2) a 90% interest in a partnership which
owns a multi-modality fixed-site center in Wilkes-Barre, Pennsylvania. The
aggregate purchase price for these two acquisitions was approximately $24.5
million, which was financed with our acquisition facility under our existing
senior credit facilities.
In the fiscal year ended June 30, 2000, we opened in the Western Division:
(1) a radiology co-source outpatient fixed-site center in Granada Hills,
California, (2) a radiology co-source outpatient multi-modality fixed-site
center in Henderson, Nevada and (3) an Open MRI fixed-site center in Pleasanton,
California. These were financed through both capital leases with General
Electric Company and internally generated funds. In the fiscal year ended June
30, 2000, we closed in the Eastern Division an Open MRI fixed-site center in
Atlanta, Georgia.
In the fiscal year ended June 30, 2001, we opened: (1) in the Western
Division a radiology co-source outpatient fixed-site center in Marina del Rey,
California, which was financed with a capital lease from General Electric
Company and internally generated funds; and (2) in the Eastern Division a PET
fixed-site center in Louisville, Kentucky, which was financed with outside
financing.
44
In the six months ended December 31, 2001, we opened in the Eastern
Division a radiology co-source outpatient fixed-site center in Largo, Florida,
which was financed with an operating lease from General Electric Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We operate in a capital-intensive, high fixed-cost industry that requires
significant amounts of working capital to fund operations, particularly the
initial start-up and development expenses of new operations, but we are
constantly under external pressure both from our customers and competitors to
contain costs and reduce prices.
On October 17, 2001 we entered into new senior credit facilities with Bank
of America, N.A. and a syndicate of other lenders consisting of (1) a $150.0
million seven year term loan B (the entire amount of which was drawn down in
connection with the acquisition), (2) a $75 million seven year delayed-draw term
loan facility and (3) a $50.0 million revolving credit facility. Borrowings
under the new senior credit facilities bear interest at LIBOR plus 3.5%. We are
required to pay an annual unused facility fee of between 0.5% and 2.0%, payable
quarterly, on unborrowed amounts under both facilities. For more information,
see "Description of New Senior Credit Facilities." We expect to use our
delayed-draw facility, which is available through the second anniversary of the
acquisition, to fund future acquisitions and capital expenditures. We expect to
use the revolving credit facility primarily to fund our future working capital
needs.
The new senior credit facilities contain various restrictive covenants.
They prohibit us from prepaying other indebtedness, including the notes
described below, and they require us to maintain specified financial ratios and
satisfy financial condition tests. In addition, the new senior credit facilities
prohibit us from declaring or paying any dividends and prohibit us from making
any payments with respect to the new notes if we fail to perform our obligations
under, or fail to meet the conditions of, the new senior credit facilities or if
payment creates a default under the new senior credit facilities. For more
information, see "Description of New Senior Credit Facilities," "Description of
Notes" and "Risk Factors -- Risks Relating to the Notes."
In addition to the indebtedness under the new senior credit facilities, we
also issued the outstanding notes, consisting of $225 million aggregate
principal amount, in a private placement exempt from registration under the
Securities Act and used the proceeds thereof to retire $200 million of
indebtedness under a senior subordinated bridge financing, which we incurred to
finance the acquisition and related refinancing transactions, and for general
corporate purposes. The indenture governing the outstanding notes, among other
things, (1) restricts our and our restricted subsidiaries' ability, including
the ability of the guarantors of the new notes, to incur additional
indebtedness, issue shares of preferred stock, incur liens, pay dividends or
make certain other restricted payments and enter into certain transactions with
affiliates, (2) places certain restrictions on the ability of certain of our
restricted subsidiaries, including the guarantors of the new notes, to pay
dividends or make certain payments to us and (3) places restrictions on our
restricted subsidiaries' ability, including the ability of the guarantors of the
notes, to merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets.
For details regarding the refinancing and the terms of the new
indebtedness, see "Description of New Senior Credit Facilities" and "Description
of Notes."
Net cash provided by operating activities was approximately $26.1 million
for the six months ended December 31, 2001. Cash provided by operating
activities resulted primarily from net income before depreciation, amortization,
the extraordinary loss on debt extinguishment and the acquisition related
compensation charge (approximately $28.8 million), an increase in accounts
payable and other accrued expenses (approximately $0.4 million) and a decrease
in trade accounts receivables, net (approximately $1.7 million), partially
offset by an increase in other current assets (approximately $4.7 million).
45
Net cash used in investing activities was approximately $213.0 million for
the six months ended December 31, 2001. Cash used in investing activities
resulted primarily from the purchase of our common stock, net of cash acquired
in the acquisition and related financing transactions (approximately $179.3
million) and our purchasing or upgrading diagnostic imaging equipment at our
existing facilities (approximately $32.3 million).
Net cash provided by financing activities was approximately $194.9 million
for the six months ended December 31, 2001. Cash provided by financing
activities resulted primarily from the proceeds from sale of InSight Holdings
common stock, net of equity issuance costs (approximately $85.9 million) and
borrowings of debt (approximately $575.0 million), partially offset by principal
payments of debt and capital lease obligations (approximately $438.6 million),
and payments of deferred loan fees (approximately $27.6 million).
We have committed to purchase or lease in connection with the development
of new fixed-site centers and mobile facilities and replacement or upgrades of
diagnostic imaging equipment at fixed-site centers and mobile facilities, at an
aggregate cost of approximately $18.5 million, 16 diagnostic imaging systems for
delivery through June 2002. We expect to use either internally generated funds
or leases from General Electric Company and others to finance the purchase of
this equipment. We may purchase, lease or upgrade other diagnostic imaging
systems as opportunities arise to place new equipment into service when new
contract services agreements are signed, existing agreements are renewed,
acquisitions are completed, or new fixed-site centers and mobile facilities are
developed in accordance with our business strategy.
Effective December 1, 1999, we purchased 38 pieces of diagnostic imaging
equipment from General Electric Company by converting operating leases to
capital leases. The capital leases bear interest at 9% per annum, have 48 to 72
month terms and contain a $1.00 buyout at the end of each lease. The total
purchase price was approximately $45 million. In connection with the
acquisition, we refinanced all but approximately $5.5 million of these capital
leases through borrowings under the new senior credit facilities. In the future,
we intend to finance purchases of diagnostic imaging equipment primarily with
internally generated funds, capital leases or our new senior credit facilities
rather than entering into operating leases; although we may choose to enter into
operating leases for certain diagnostic imaging equipment.
In addition, in connection with the implementation of the electronic
transaction, security and privacy standards mandated by the Health Insurance
Portability and Accountability Act, or HIPAA, we expect to spend approximately
$1.5 million to make necessary software upgrades to our radiology information
system to make it compliant with the HIPAA transaction standards by late 2002
and with the privacy standards by 2003.
We believe that, based on current levels of operations and anticipated
growth, our cash from operations, together with other available sources of
liquidity, including borrowings available under our new senior credit
facilities, will be sufficient through December 31, 2002 to fund anticipated
capital expenditures and make required payments of principal and interest on our
debt, including payments due on the notes and obligations under our new senior
credit facilities. In addition, we continually evaluate potential acquisitions
and expect to fund such acquisitions from our available sources of liquidity, as
discussed above. Our acquisition strategy may require sources of capital in
addition to those currently available to us. No assurance can be given that such
necessary additional funds will be available on terms acceptable to us or at
all.
RESULTS OF OPERATIONS
For the six months ended December 31, 2001 and 2000, we focused on the
results of operations through the division of our diagnostic imaging business
into two geographical regions of the United States: Western and Eastern
Divisions. We have divided our operations into two Divisions only for the
purposes of the separation of internal management responsibilities and we do not
focus on each of these Divisions as a separate business or make financial
decisions as if they are separate businesses. Each Division provides diagnostic
imaging services and generates both contract services and patient services
revenues. In addition, we allocate resources on an overall basis to each
Division to maximize returns on investment. Our results of operations for the
six months ended December 31, 2001 have been derived by combining the results of
46
operations of InSight Holdings for the six months ended December 31, 2001 with
the results of operations of InSight from July 1, 2001 to October 17, 2001, the
date of the acquisition and related financing transactions. The results of
operations of InSight Holdings for the three months ended December 31, 2001 have
been derived by combining the results of operations of InSight Holdings for the
three months ended December 31, 2001 with the results of operations of InSight
from October 1, 2001 to October 17, 2001.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
Revenues: Revenues increased approximately 2.7% from approximately $104.0
million for the six months ended December 31, 2000, to approximately $106.8
million for the six months ended December 31, 2001. This increase was due
primarily to the opened fixed-site centers discussed above (approximately $0.5
million) and an increase in patient services revenues (approximately $3.6
million) at existing facilities, partially offset by a decrease in contract
services and other revenues (approximately $1.3 million) at existing facilities.
Revenues for the Eastern and Western Division represented approximately 60% and
36%, respectively, of total revenues for the six months ended December 31, 2001.
However, the percentages will be affected by future acquisitions and the
establishment of fixed-site centers and mobile facilities.
Contract services revenues decreased approximately 2.7% from approximately
$52.2 million for the six months ended December 31, 2000, to approximately $50.8
million for the six months ended December 31, 2001. This decrease was due to the
loss of several high volume contracts which were replaced by contracts which
initially have lower volumes. Contract services revenues for the Eastern and
Western Division represented approximately 89% and 5%, respectively, of contract
services revenues for the six months ended December 31, 2001. However, the
percentages will be affected by future acquisitions and the establishment of
fixed-site centers and mobile facilities.
Contract services revenues, primarily earned by our mobile facilities,
represented approximately 48% of total revenues for the six months ended
December 31, 2001. Each year approximately one-quarter to one-third of the
contract services agreements are subject to renewal. It is expected that some
high volume customer accounts will elect not to renew their agreements and
instead will purchase or lease their own diagnostic imaging equipment and some
customers may choose an alternative services provider. In the past, where
agreements have not been renewed, we have been able to obtain replacement
contracts. While some replacement accounts have initially been smaller than the
lost accounts, such replacement accounts revenues have generally increased over
the term of the agreement. The non-renewal of a single customer agreement would
not have a material impact on our contract services revenues, although
non-renewal of several contracts could have a material impact on contract
services revenues.
As a result of the implementation of the OPPS for outpatient services,
effective August 1, 2000 Medicare began paying hospitals for outpatient services
based on ambulatory payment classification (APC) groups rather than on a
hospital's costs. Each APC has been assigned a payment weight by the Centers for
Medicare and Medicaid Services (CMS). Under the new OPPS, the payment due a
hospital for performing an outpatient service will be an amount based on the APC
weight, a dollar based conversion factor, a geographic adjustment factor to
account for area labor cost differences and any other adjustments applicable to
the hospital or case. Because the new OPPS appeared to have a severe adverse
economic effect on hospitals, Congress enacted additional legislation in the
Balanced Budget Refinement Act of 1999 (BBA) to ease such effect through 2003.
Under the BBA, hospitals may receive additional payments for new technologies,
transitional pass-through for innovative medical devices, drugs and biologics,
outlier adjustments and transitional payment corridors. In addition, the BIPA
included certain provisions requiring CMS to revise the APCs to separate
contrast-enhanced diagnostic imaging procedures from those that are not
contrast-enhanced. Payment for unenhanced diagnostic procedures was reduced as a
result of implementation of these provisions effective January 1, 2002, but the
APC rates for certain contrast-enhanced diagnostic procedures were increased.
The APC rates which became effective on January 1, 2002, and revised effective
April 1, 2002, also reduced Medicare payment for PET services provided to
hospital outpatients.
As a result of the implementation of the new OPPS, we believe that our
hospital customers may seek reductions in contractual rates to the extent the
hospital believes it will pay more to us than it will receive
47
from Medicare and other third-party payors. The reduction of contractual rates
for a single customer or loss of a single customer to a competitor prepared to
reduce contractual rates would not have a material adverse impact on our
contract services revenues; however, the reduction in contractual rates for
several customers or loss of several contracts could have a material impact on
our business, financial condition and results of operations.
On the other hand, we believe that the impact of the new OPPS on hospital
payments for diagnostic imaging services, especially for MRI and CT services,
may cause hospitals to consider restructuring their diagnostic outpatient
imaging services as freestanding centers which are unaffected by the new OPPS.
This may provide us with additional opportunities for our radiology co-source
product which involves the joint ownership and management of single and
multi-modality imaging centers with hospitals. Given the infancy and complexity
of the new OPPS, it is difficult to determine whether hospitals will be
receiving less from Medicare (after they take advantage of the transitional
payments that may be available under the BBA) and to what extent they will
attempt to renegotiate existing contractual arrangements.
Patient services revenues, primarily earned by our fixed-site centers,
represented approximately 52% of total revenues for the six months ended
December 31, 2001. Patient services revenues increased approximately 8.0% from
approximately $51.5 million for the six months ended December 31, 2000, to
approximately $55.6 million for the six months ended December 31, 2001. This
increase was due primarily to the opened fixed-site centers discussed above
(approximately $0.5 million) and an increase in revenues at existing facilities
(approximately $3.6 million). The increase at existing facilities was due to
higher utilization (approximately 6%), partially offset by nominal changes in
reimbursement from third party payors. Patient services revenues for the Eastern
and Western Division represented approximately 34% and 65%, respectively, of
patient services revenues for the six months ended December 31, 2001. However,
the percentages will be affected by future acquisitions and the establishment of
fixed-site centers and mobile facilities. We believe our patient services
revenues received from Medicare will not be materially impacted by the new OPPS
because it primarily operates freestanding fixed-site centers which are
unaffected thereby. However, regulations were recently adopted by the Medicare
program which, effective January 1, 2002, reduced Medicare payment for
diagnostic imaging services, including MRI and other services we provide in
non-hospital settings, by approximately 7% to 9%. These regulations are expected
to negatively impact patient services revenues in the annual amount of
approximately $2 million based on current revenues.
Management believes that any future increases in revenues at existing
facilities can be achieved primarily by higher utilization and not by increases
in procedure prices; however, slower start-ups of new operations, excess
capacity of diagnostic imaging equipment, increased competition, and the
expansion of managed care may impact utilization and make it difficult for us to
achieve revenue increases in the future, absent the execution of provider
agreements with managed care companies and other payors, and the execution of
our business strategy, particularly acquisitions.
Costs of Operations: Costs of operations decreased approximately 2.5% from
approximately $80.9 million for the six months ended December 31, 2000, to
approximately $78.9 million for the six months ended December 31, 2001. This
decrease was due to the elimination of goodwill amortization as a result of the
adoption of SFAS 142 discussed below, net of goodwill amortization as a result
of the acquisition and related financing transactions (approximately $2.3
million), and reduced costs at existing facilities (approximately $0.1 million),
partially offset by costs related to the opened fixed-site centers discussed
above (approximately $0.4 million).
Costs of operations, as a percentage of total revenues, decreased from
approximately 77.8% for the six months ended December 31, 2000, to approximately
73.9% for the six months ended December 31, 2001. The percentage decrease is due
to the elimination of goodwill amortization discussed below and reduced costs in
equipment leases, equipment maintenance, occupancy, consulting and travel costs,
partially offset by higher salary and benefits. We are continuing to improve
operating efficiencies through cost reduction initiatives, which are focused
primarily on costs for diagnostic imaging equipment, including lease,
depreciation and maintenance and occupancy, marketing and salary and benefits.
48
Corporate Operating Expenses: Corporate operating expenses increased
approximately 0.6%, from approximately $5.28 million for the six months ended
December 31, 2000, to approximately $5.31 million for the six months ended
December 31, 2001. This increase was due primarily to increased occupancy and
information systems costs, partially offset by reduced travel and consulting
costs. Corporate operating expenses, as a percentage of total revenues,
decreased from approximately 5.1% for the six months ended December 31, 2000, to
approximately 5.0% for the six months ended December 31, 2001.
Acquisition Related Compensation Charge: For the six months ended December
31, 2001, we recorded a charge of approximately $15.6 million related to the
exercise of our common stock options and warrants as a result of the acquisition
and related financing transactions.
Interest Expense, Net: Interest expense, net increased approximately 17.6%
from approximately $11.9 million for the six months ended December 31, 2000, to
approximately $14.0 million for the six months ended December 31, 2001. This
increase was due primarily to additional debt related to the acquisition and
related financing transactions.
Provision for Income Taxes: Provision for income taxes decreased from
approximately $0.6 million for the six months ended December 31, 2000, to a
benefit of approximately $2.1 million for the six months ended December 31,
2001. The decrease in provision is due to our recording a benefit of
approximately $2.1 million to recognize anticipated utilization of certain net
operating loss carrybacks.
EBITDA: Earnings before interest, taxes, depreciation, amortization and
the acquisition related compensation charge (EBITDA) increased approximately
3.8% from approximately $39.2 million for the six months ended December 31,
2000, to approximately $40.7 million for the six months ended December 31, 2001.
This increase was primarily due to higher revenues at existing facilities and
lower costs of services as a result of the cost reduction initiatives discussed
above. EBITDA for the Western Division increased approximately 27.0% from
approximately $12.6 million for the six months ended December 31, 2000 to
approximately $16.0 million for the six months ended December 31, 2001. EBITDA
for the Eastern Division decreased approximately 7.0% from approximately $32.7
million for the six months ended December 31, 2000 to approximately $30.4
million for the six months ended December 31, 2001. The reduction in EBITDA in
the Eastern Division is due primarily to the reduction in contract services
revenues and to the start-up costs relating to certain mobile PET facilities.
Extraordinary Item: We recorded an extraordinary loss of approximately
$7.4 million related to the write-off of associated debt issuance costs, as a
result of the acquisition and related financing transactions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Revenues: Revenues increased approximately 3.7% from approximately $51.8
million for the three months ended December 31, 2000, to approximately $53.7
million for the three months ended December 31, 2001. This increase was due
primarily to an increase in contract services, patient services and other
revenues (approximately $1.7 million) at existing facilities, and to revenues
generated at the opened fixed-site centers discussed above (approximately $0.3
million). Revenues for the Eastern and Western Division represented
approximately 61% and 36%, respectively, of total revenues for the three months
ended December 31, 2001.
Contract services revenues increased approximately 0.4% from approximately
$25.9 million for the three months ended December 31, 2000, to approximately
$26.0 million for the three months ended December 31, 2001. This increase was
due to higher utilization at our existing mobile customer base offset by the
loss of certain high volume contracts which were replaced by contracts which
initially have lower volumes. Contract services revenues for the Eastern and
Western Division represented approximately 89% and 5%, respectively, of contract
services revenues for the three months ended December 31, 2001.
Patient services revenues increased approximately 6.6% from approximately
$25.8 million for the three months ended December 31, 2000, to approximately
$27.5 million for the three months ended December 31, 2001. This increase was
due primarily to an increase in revenues at existing facilities (approximately
$1.5 million) and the opened fixed-site centers discussed above (approximately
$0.3 million). The increase at existing facilities was due to higher utilization
(approximately 6%), partially
49
offset by nominal changes in reimbursement from third party payors. Patient
services revenues for the Eastern and Western Division represented approximately
33% and 66%, respectively, of patient services revenues for the three months
ended December 31, 2001.
Costs of Operations: Costs of operations increased approximately 1.2% from
approximately $40.3 million for the three months ended December 31, 2000, to
approximately $40.8 million for the three months ended December 31, 2001. This
increase was due primarily to costs related to the opened fixed-site centers
discussed above (approximately $0.2 million) and an increase in costs at
existing facilities (approximately $1.3 million), partially offset by the
elimination of goodwill amortization as a result of the adoption of SFAS 142
discussed below, net of goodwill amortization as a result of the acquisition and
related financing transactions (approximately $1.0 million).
Costs of operations, as a percentage of total revenues, decreased from
approximately 77.9% for the three months ended December 31, 2000, to
approximately 76.0% for the three months ended December 31, 2001. The percentage
decrease is due to the elimination of the goodwill amortization discussed below
and reduced costs in equipment leases, equipment maintenance and occupancy
costs, offset by higher salary and benefits.
Corporate Operating Expenses: Corporate operating expenses increased
approximately 2.7%, from approximately $2.58 million for the three months ended
December 31, 2000, to approximately $2.65 million for the three months ended
December 31, 2001. This increase was due primarily to occupancy and information
systems costs, partially offset by reduced travel and consulting costs.
Corporate operating expenses, as a percentage of total revenues, decreased from
approximately 5.0% for the three months ended December 31, 2000, to
approximately 4.9% for the three months ended December 31, 2001.
Acquisition Related Compensation Charge: For the three months ended
December 31, 2001, we recorded a charge of approximately $15.6 million related
to the exercise of our common stock options and warrants as a result of the
acquisition and related financing transactions.
Interest Expense, Net: Interest expense, net increased approximately 47.5%
from approximately $5.9 million for the three months ended December 31, 2000, to
approximately $8.7 million for the three months ended December 31, 2001. This
increase was due primarily to additional debt related to the acquisition and
related financing transactions.
Provision for Income Taxes: Provision for income taxes decreased from
approximately $0.3 million for the three months ended December 31, 2000, to a
benefit of approximately $4.5 million for the three months ended December 31,
2001. The decrease in provision is due to our recording a benefit of
approximately $2.1 million to recognize anticipated utilization of certain net
operating loss carrybacks.
EBITDA: Earnings before interest, taxes, depreciation, amortization and
the acquisition related compensation charge (EBITDA) decreased approximately
0.5% from approximately $19.8 million for the three months ended December 31,
2000, to approximately $19.7 million for the three months ended December 31,
2001. This decrease was primarily due to the reduction in contract services
revenues in the Eastern Division and higher costs of operations. EBITDA for the
Western Division increased approximately 20.3% from approximately $6.4 million
for the three months ended December 31, 2000 to approximately $7.7 million for
the three months ended December 31, 2001. EBITDA for the Eastern Division
decreased approximately 6.9% from approximately $16.0 million for the three
months ended December 31, 2000 to approximately $14.9 million for the three
months ended December 31, 2001. The reduction in EBITDA in the Eastern Division
is due primarily to the reduction in contract services revenues and to the
start-up costs relating to certain mobile PET facilities.
Extraordinary Item: We recorded an extraordinary loss of approximately
$7.4 million related to the write-off of associated debt issuance costs, as a
result of the acquisition and related financing transactions.
50
RESULTS OF OPERATIONS FOR YEARS ENDED JUNE 30, 2001 AND 2000
Revenues: Revenues increased approximately 12.1% from approximately $188.6
million for the fiscal year ended June 30, 2000, to approximately $211.5 million
for the fiscal year ended June 30, 2001. This increase was due primarily to the
acquisitions and opened fixed-site centers discussed above (approximately $10.9
million) and an increase in contract services, patient services and other
revenues (approximately $16.4 million) at existing facilities, resulting from
sales efforts and incentive initiatives implemented at existing facilities,
partially offset by the assignment in the fiscal year ended June 30, 2000 of
certain managed care contracts to an outside third party (approximately $4.4
million). Revenues for the Eastern and Western Divisions represented
approximately 61% and 35%, respectively, of total revenues for the fiscal year
ended June 30, 2001. However, the percentages will be affected by future
acquisitions and the establishment of fixed-site centers and mobile facilities.
Contract services revenues, primarily earned by our mobile facilities,
represented approximately 49% of total revenues for the fiscal year ended June
30, 2001. Contract services revenues increased approximately 3.3% from
approximately $100.1 million for the fiscal year ended June 30, 2000, to
approximately $103.4 million for the fiscal year ended June 30, 2001. The
increase was due to the addition of five mobile facilities and a combination of
higher utilization and more fixed monthly fee contracts at our existing mobile
customer base (approximately $7.7 million), partially offset by the assignment
in the fiscal year ended June 30, 2000 of certain managed care contracts to an
outside third party (approximately $4.4 million). Contract services revenues for
the Eastern and Western Divisions represented approximately 87% and 6%,
respectively, of contract services revenues for the fiscal year ended June 30,
2001. However, the percentages will be affected by future acquisitions and the
establishment of fixed-site centers, and mobile facilities.
Patient services revenues, primarily earned by our fixed-site centers,
represented approximately 51% of total revenues for the fiscal year ended June
30, 2001. Patient services revenues increased approximately 23.8% from
approximately $86.8 million for the fiscal year ended June 30, 2000, to
approximately $107.5 million for the fiscal year ended June 30, 2001. This
increase was due primarily to the acquisitions and opened fixed-site centers
discussed above (approximately $10.9 million) and an increase in revenues at
existing facilities (approximately $9.8 million). The increase at existing
facilities was due to higher utilization (approximately 9%), and a nominal
increase in reimbursement from third-party payors. Patient services revenues for
the Eastern and Western Divisions represented approximately 37% and 62%,
respectively, of patient services revenues for the fiscal year ended June 30,
2001. However, the percentages will be affected by future acquisitions and the
establishment of fixed-site centers and mobile facilities.
Costs of Operations: Costs of operations increased approximately 6.9% from
approximately $151.4 million for the fiscal year ended June 30, 2000, to
approximately $161.9 million for the fiscal year ended June 30, 2001. This
increase was due primarily to additional costs related to the acquisitions and
opened fixed-site centers discussed above (approximately $7.1 million) and at
existing facilities (approximately $8.0 million), primarily salary and benefits
and depreciation, partially offset by reduced equipment leases, supply costs,
consulting and marketing costs, and the elimination of costs resulting from the
assignment in the fiscal year ended June 30, 2000 of certain managed care
contracts to an outside third party (approximately $4.6 million). The decrease
in equipment lease costs and the increase in depreciation is primarily the
result of the buy-out of operating leases discussed above and purchases of new
diagnostic imaging equipment rather than entering into operating leases. The
adoption of SFAS 142 in the fiscal year ending June 30, 2002 discussed below
will result in a decrease of annual goodwill amortization of approximately $5.4
million.
Costs of operations, as a percentage of total revenues, decreased to
approximately 76.5% for the fiscal year ended June 30, 2001 from approximately
80.3% for the fiscal year ended June 30, 2000. The percentage decrease is
primarily due to reduced costs in equipment lease, equipment maintenance,
occupancy, consulting and communications costs, partially offset by higher
depreciation and salary and benefit costs.
51
Corporate Operating Expenses: Corporate operating expenses decreased
approximately 0.9% from approximately $10.9 million for the fiscal year ended
June 30, 2000, to approximately $10.8 million for the fiscal year ended June 30,
2001. The decrease was due primarily to reduced salary and benefits associated
with our acquisition and development activities, consulting and travel costs,
partially offset by additional information systems costs. Corporate operating
expenses, as a percentage of total revenues, decreased from approximately 5.8%
for the fiscal year ended June 30, 2000, to approximately 5.1% for the fiscal
year ended June 30, 2001.
Interest Expense, Net: Interest expense, net increased approximately 25.1%
from approximately $18.7 million for the fiscal year ended June 30, 2000, to
approximately $23.4 million for the fiscal year ended June 30, 2001. This
increase was due primarily to additional debt related to (1) the acquisitions
discussed above, (2) the buy-out of operating leases discussed above, (3)
upgrades to existing diagnostic imaging equipment, and (4) a charge of
approximately $0.7 million related to the interest rate swap discussed below,
partially offset by reduced interest as a result of principal payments of
long-term debt.
Provision for Income Taxes: For the fiscal year ended June 30, 2001, the
effective tax rate increased to approximately 16% from approximately 14% for the
fiscal year ended June 30, 2000, primarily as a result of recognizing in the
fiscal year ended June 30, 2000 the benefits from previously unused net
operating loss carryforwards.
EBITDA: EBITDA increased approximately 33.7% from approximately $60.6
million for the fiscal year ended June 30, 2000, to approximately $81.0 million
for the fiscal year ended June 30, 2001. This increase was primarily due to
higher revenues at existing facilities as a result of the revenue enhancing
efforts described above, lower costs of services as a result of the cost
reduction initiatives described above, and decreased equipment lease expense as
a result of the buy-out of operating leases discussed above.
Income per Common and Converted Preferred Share: On a diluted basis, net
income per common and converted preferred share was $1.42 for the fiscal year
ended June 30, 2001, compared to net income per common and converted preferred
share of $0.76 for the fiscal year ended June 30, 2000. The increase in net
income per common and converted preferred share is the result of (1) increased
income from company operations and (2) an increase in earnings from
unconsolidated partnerships, partially offset by (1) increased interest expense
and (2) an increase in provision for income taxes.
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
Revenues: Revenues increased approximately 16.4% from approximately $162.0
million for the fiscal year ended June 30, 1999, to approximately $188.6 million
for the fiscal year ended June 30, 2000. This increase was due primarily to the
acquisitions and opened fixed-site centers discussed above (approximately $15.2
million) and an increase in contract services and patient services revenues
(approximately $12.7 million) at existing facilities, partially offset by a
decrease in other revenues (approximately $1.3 million), primarily due to a
one-time settlement payment in connection with an earn-out from the sale of our
lithotripsy partnerships, which was recorded in the fiscal year ended June 30,
1999 (approximately $0.4 million).
Contract services revenues increased approximately 17.1% from approximately
$85.5 million for the fiscal year ended June 30, 1999, to approximately $100.1
million for the fiscal year ended June 30, 2000. This increase was due primarily
to the acquisitions discussed above (approximately $4.0 million) and an increase
in our existing mobile customer base (approximately $10.6 million). The increase
in our existing mobile customer base was due to (1) the addition of six mobile
facilities and (2) higher utilization (approximately 14%) at our existing mobile
facilities, partially offset by a decline in reimbursement from customers
(approximately 3%).
Patient services revenues increased approximately 17.9% from approximately
$73.6 million for the fiscal year ended June 30, 1999, to approximately $86.8
million for the fiscal year ended June 30, 2000. This increase was due primarily
to the acquisitions and opened fixed-site centers discussed above (approximately
$11.1 million) and an increase in revenues at existing facilities (approximately
52
$2.3 million), partially offset by reduced revenues from the closure of the Open
MRI fixed-site center discussed above (approximately $0.2 million). The increase
at existing facilities was due to higher utilization (approximately 9%),
partially offset by a decline in reimbursement from third-party payors
(approximately 3%).
Costs of Operations: Costs of operations increased approximately 15.3%
from approximately $131.3 million for the fiscal year ended June 30, 1999, to
approximately $151.4 million for the fiscal year ended June 30, 2000. This
increase was due primarily to additional costs related to the acquisitions and
opened fixed-site centers discussed above (approximately $14.5 million) and at
existing facilities (approximately $5.9 million), partially offset by reduced
expenses for the closed Open MRI fixed-site center discussed above
(approximately $0.3 million).
Costs of operations, as a percentage of total revenues, decreased to
approximately 80.3% for the fiscal year ended June 30, 2000 from approximately
81.1% for the fiscal year ended June 30, 1999. The percentage decrease is
primarily due to reduced costs in equipment lease, depreciation, equipment
maintenance and occupancy, partially offset by higher salary and benefit costs.
Corporate Operating Expenses: Corporate operating expenses increased
approximately 3.8% from approximately $10.5 million for the fiscal year ended
June 30, 1999, to approximately $10.9 million for the fiscal year ended June 30,
2000. This increase was due primarily to additional information systems costs,
partially offset by a decrease in travel, legal and consulting costs. Corporate
operating expenses, as a percentage of total revenues, decreased from
approximately 6.5% for the fiscal year ended June 30, 1999, to approximately
5.8% for the fiscal year ended June 30, 2000.
Interest Expense, Net: Interest expense, net increased approximately 29.0%
from approximately $14.5 million for the fiscal year ended June 30, 1999, to
approximately $18.7 million for the fiscal year ended June 30, 2000. This
increase was due primarily to additional debt related to (1) the acquisitions
discussed above, (2) the buy-out of operating leases discussed above, (3) higher
interest rates on our floating rate debt and (4) the upgrade of our existing
diagnostic imaging equipment, partially offset by reduced interest as a result
of principal payments of long-term debt.
EBITDA: EBITDA increased approximately 32.9% from approximately $45.6
million for the fiscal year ended June 30, 1999, to approximately $60.6 million
for the fiscal year ended June 30, 2000. EBITDA for the fiscal year ended June
30, 1999 excludes the provision for reorganization and other costs of
approximately $3.3 million. This increase was primarily due to higher revenues
at existing facilities as a result of the revenue enhancing efforts described
above, lower costs of services as a result of the cost reduction initiatives
described above, and decreased equipment lease expense as a result of the
buy-out of operating leases discussed above.
Provision for Income Taxes: Provision for income taxes increased from a
benefit of approximately $3.2 million for the fiscal year ended June 30, 1999,
to approximately $1.1 million for the fiscal year ended June 30, 2000. The
increase is due to our recording a reduction to the valuation allowance of
approximately $3.5 million to recognize anticipated benefits from the
utilization of certain net operating loss carryforwards in 1999. The effective
tax rate increased to approximately 14% in 2000 from approximately 11% in 1999
primarily as a result of the effects of benefits from our net operating loss
carryforwards.
Income per Common and Converted Preferred Share: On a diluted basis, net
income per common and converted preferred share was $0.76 for the fiscal year
ended June 30, 2000, compared to net income per common and converted preferred
share of $0.65 for the fiscal year ended June 30, 1999. Excluding the one-time
provision for reorganization and other costs and the benefit for income taxes,
net income per common and converted preferred share on a diluted basis for the
fiscal year ended June 30, 1999 would have been $0.63. The increase in net
income per common and converted preferred share is the result of (1) increased
income from company operations and (2) an increase in earnings from
unconsolidated partnerships, as a result of new diagnostic imaging equipment
installed in 1999, partially offset by (1) increased interest expense and (2) an
increase in provision for income taxes.
53
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services in the United States and receive payment for our
services exclusively in United States dollars. Accordingly, our business is
unlikely to be affected by factors such as changes in foreign market conditions
or foreign currency exchange rates.
Our market risk exposure relates primarily to interest rates, where we will
periodically use interest rate swaps to hedge variable interest rates on
long-term debt under our new senior credit facilities. We do not engage in
activities using complex or highly leveraged instruments.
In fiscal 1998, in the normal course of business, we entered into an
interest rate swap with a notional amount of $40.0 million, for the purpose of
fixing the interest rate of a corresponding amount of $40.0 million of floating
rate debt. This swap had a three year term and was extendable for an additional
three years at the option of the bank. Under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and
SFAS No. 138 (collectively SFAS 133), extendable swaps do not meet the criteria
for hedge accounting and changes in fair value are recognized currently in
earnings. During the year ended June 30, 2001, we recorded additional interest
expense of approximately $0.7 million due to changes in the fair value of the
swap. In March 2001, the swap was extended for an additional three years by the
bank and we expect the swap to qualify for hedge accounting through its
maturity.
At December 31, 2001, we had outstanding long-term debt of approximately
$149.6 million, which has floating rate terms. We had outstanding an interest
rate swap, converting $35.8 million of our floating rate debt to fixed rate
debt. Under the terms of the interest rate swap agreement, we are exposed to
credit loss in the event of nonperformance by the swap counterparty; however, we
do not anticipate nonperformance by the counterparty.
NEW PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 applies to all business combinations with a closing date after
June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. We adopted SFAS 141, effective July 1, 2001.
In accordance with SFAS 141, we engaged a valuation specialist to assist us
in identifying acquired intangible assets, their respective fair values and
amortization periods related to the acquisition and related financing
transactions. We have made a tentative allocation of values to these
identifiable intangible assets based on preliminary estimates. The final
allocation of goodwill and other intangible assets may differ significantly from
current estimates.
SFAS 142 eliminates the amortization of goodwill, permits indefinite-lived
intangible assets and initiates an annual review for impairment. Identifiable
intangible assets with a determinable useful life will continue to be amortized.
We adopted SFAS 142 effective July 1, 2001, which required us to cease
amortization of our remaining net goodwill balance and to perform a transitional
goodwill impairment test as of July 1, 2001, and thereafter an impairment test
at least annually. Impairment results when the fair value of our reporting
segments, including goodwill, is less than its carrying value. SFAS 142 permits
six months from the adoption date to complete a review of goodwill for
impairment and record necessary adjustments prior to the end of fiscal 2002. We
concluded that the book value of goodwill was not impaired as of July 1, 2001.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is
54
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 (with earlier application being
encouraged). We do not expect the adoption of SFAS 143 to have a material impact
on our financial condition and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 (with earlier application being encouraged)
and generally are to be applied prospectively. We do not expect the adoption of
SFAS 144 to have a material impact on our financial condition and results of
operations.
55
THE DIAGNOSTIC IMAGING INDUSTRY
OVERVIEW
Diagnostic imaging involves the use of non-invasive techniques to generate
representations of internal anatomy on film or video. Based on government and
industry sources, in calendar year 2000, the diagnostic imaging industry
generated revenues in excess of $70 billion in the United States, or
approximately 6% of total healthcare spending. MRI and CT services constituted
approximately $10 billion or approximately 13% of the diagnostic imaging
industry in 2000. MRI services have experienced substantial scan volume growth,
which increased at a compounded annual growth rate, or CAGR, of 10.7% from 9.8
million in 1996 to 13.3 million in 1999 and is projected to grow at a CAGR of
approximately 10.4% to 26.6 million in 2006. We believe that growth in the
diagnostic imaging industry as a whole, and MRI in particular, is attributable
to:
- STRONG DEMAND FOR HEALTHCARE SERVICES DUE TO AN AGING POPULATION. Based
on United States Census Bureau projections, one of the fastest growing
segments of the population is the group over 65 years of age, which is
expected to increase 14% by 2010. This aging population is expected to
drive imaging scan volume increases over the coming years primarily
because annual diagnostic imaging utilization increases substantially as
a person ages.
- WIDER PHYSICIAN AND PAYOR ACCEPTANCE OF IMAGING SYSTEMS AS A
COST-EFFECTIVE, NON-INVASIVE DIAGNOSTIC TOOL WITH SUPERIOR IMAGE
QUALITY. During approximately the last 30 years, there has been a major
effort undertaken by the medical and scientific communities to develop
cost-effective diagnostic imaging technologies and to minimize the risks
associated with the application of these technologies. Much of the thrust
of product development during the period has been to reduce the hazards
associated with conventional x-ray and nuclear medicine techniques and to
develop new, virtually harmless imaging technologies. Traditional x-rays
continue to be the primary diagnostic imaging modality based on the
number of procedures performed. However, the use of advanced diagnostic
imaging modalities, such as MRI, which provides superior image quality
compared to other diagnostic imaging technologies, CT and PET has
increased rapidly in recent years. These advanced modalities allow
physicians to diagnose a wide variety of diseases and injuries quickly
and accurately without exploratory surgery or other surgical or invasive
procedures, which are usually more expensive, involve greater risk to
patients and result in longer rehabilitation time. Because advanced
imaging systems are increasingly seen as a tool for reducing long-term
healthcare costs, they are gaining wider acceptance among payors.
- EXPANDING APPLICATIONS FOR MRI TECHNOLOGY. New technological
developments are expected to extend the clinical uses of MRI and increase
the number of scans performed. Recent technological advancements include:
(1) magnetic resonance spectroscopy, which can differentiate malignant
from benign lesions; (2) magnetic resonance angiography, which can
produce three-dimensional images of body parts and assess the status of
blood vessels; and (3) enhancements in teleradiology systems, which
permit the digital transmission of radiological images from one location
to another for interpretation. Additional improvements in imaging
technologies, contrast agents and scan capabilities are leading to new
non-invasive methods of diagnosing blockages in the heart's vital
coronary arteries, liver metastases, pelvic diseases and certain vascular
abnormalities without exploratory surgery. We believe that the use of
both the diagnostic and therapeutic capabilities of MRI and other imaging
services will continue to increase because of their cost-effective, time-
efficient and risk/benefit advantages over alternative procedures,
including surgery, and that newer technologies and future technological
advancements will continue the increased use of imaging services.
- A CURRENTLY RELATIVELY STABLE REIMBURSEMENT ENVIRONMENT WITH RESPECT TO
NON-GOVERNMENTAL PAYORS. The diagnostic imaging industry currently
benefits from relatively stable pricing from managed care payors.
Focusing more on product differentiation than price competition, managed
care payors have
56
witnessed approximately 10% premium growth in calendar year 2000. As a
result, the pricing pressure from this payor group has recently
stabilized.
- INCREASED ROLE OF PREVENTIVE MEDICINE. In addition, diagnostic imaging
is increasingly being used as a screening tool for preventive care. We
believe that future technological advances will continue to enhance the
ability of radiologists to diagnose and influence treatment. For example,
experimental MRI imaging techniques, such as magnetic resonance
spectroscopic imaging, are used to show the functions of the brain and to
investigate how epilepsy, AIDS, brain tumors, Alzheimer's and other
abnormalities affect the brain.
DIAGNOSTIC IMAGING TECHNOLOGY
The major categories of diagnostic imaging systems currently offered in the
medical marketplace are MRI systems, CT scanners, PET scanners, digital
ultrasound systems, computer-based nuclear gamma cameras, conventional x-ray and
radiography/fluoroscopy systems. Each of these types of imaging systems (other
than conventional x-ray) represents the marriage of computer technology and
various medical imaging modalities. The following highlights the key imaging
systems:
Magnetic Resonance Imaging or MRI
MRI is a technique that involves the use of high-strength magnetic fields
to produce computer-processed, three-dimensional, cross-sectional images of the
body. The resulting image reproduces soft tissue anatomy (as found in the brain,
spinal cord and interior ligaments of body joints such as the knee) with
superior clarity, not available by any other currently existing imaging
modality, and without exposing patients to ionizing radiation. A typical MRI
examination takes from 20 to 45 minutes.
MRI generally reduces the cost and amount of care needed and often
eliminates the need for invasive diagnostic procedures. MRI systems are
typically priced in the range of $0.9 million to $2 million each.
Computed Tomography or CT
In CT imaging, a computer analyzes the information received from an x-ray
beam to produce multiple cross-sectional images of a particular organ or area of
the body. CT imaging is used to detect tumors and other conditions affecting
bones and internal organs. A typical CT examination takes from 15 to 45 minutes.
The current selling prices of CT systems are typically in the range of $0.3
million to $0.8 million each.
Positron Emission Tomography or PET
PET is a nuclear medicine procedure that produces pictures of the body's
metabolic and biological functions. PET can provide earlier detection as well as
monitoring of certain cancers, coronary diseases or neurological problems than
other diagnostic imaging systems. The information provided by PET technology
often obviates the need to perform further highly invasive and/or diagnostic
surgical procedures. Interest in PET scanning has increased recently due to
several factors including, among others, a growing recognition by clinicians
that PET is a powerful diagnostic tool that can be used to evaluate and guide
management of a patient's disease, increased third-party payor coverage and
reimbursement and the availability of the isotopes without an in-house
cyclotron. PET systems are priced in the range of $1.0 million to $1.4 million
each.
OTHER IMAGING TECHNOLOGIES
- Ultrasound systems use, detect and process high frequency sound waves to
generate images of soft tissues and internal body organs.
- X-ray is the most common energy source used in imaging the body and is
now employed in conventional x-ray systems, CT scanners and digital x-ray
systems.
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- Bone densitometry uses an advanced technology called dual-energy x-ray
absorptiometry, or DEXA, which safely, accurately and painlessly measures
bone density and the mineral content of bone for the diagnosis of
osteoporosis and other bone diseases.
- Nuclear medicine gamma cameras, which are based upon the detection of
gamma radiation generated by radioactive pharmaceuticals injected or
inhaled into the body, are used to provide information about organ
function as opposed to anatomical structure.
- Radiation oncology generally uses external beam radiation from a linear
accelerator to treat cancer with ionizing radiation of the same type, but
at higher doses, as diagnostic x-rays.
- Lithotripsy is a non-invasive procedure for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the
need for lengthy hospital stays and extensive recovery periods associated
with surgery.
- Gamma Knife is a radiosurgical device used to treat intracranial
neoplasma and vascular anomalies, that are inaccessible or unsuitable for
conventional invasive surgery.
DIAGNOSTIC IMAGING SETTINGS
Diagnostic imaging services, such as MRI, CT and PET are typically provided
in one of the following settings:
Mobile Facilities
Mobile imaging facilities enable small to mid-size hospitals to gain access
to advanced diagnostic imaging technology. Using specially designed trailers,
imaging service providers transport imaging equipment and provide services to
hospitals and clinics on a shared-service or full-time basis. Generally,
hospitals and clinics contract with the imaging service provider to provide a
specified schedule of service to perform scans of their patients. Providers are
paid, on a fee-per-scan basis, directly by the hospitals or clinics, rather than
third-party payors, such as managed care organizations, insurance companies,
Medicare or Medicaid.
Fixed-site Centers
Fixed-site centers are diagnostic imaging facilities which range from
MRI-only to multi-modality centers. Fixed-site centers may be owned and operated
as:
Hospitals or clinics. Imaging systems are located in and owned and
operated by a hospital or clinic. These systems are primarily used by
patients of the hospital or clinic, and the hospital or clinic bills
third-party payors.
Freestanding imaging centers. Imaging systems are located in
permanent facilities not generally owned by hospitals or clinics. These
centers depend upon physician referrals for their patients and generally do
not maintain dedicated, contractual relationships with hospitals or
clinics. In fact, these centers may compete with hospitals or clinics that
have their own imaging systems to provide services to these patients. Like
hospitals and clinics, these centers bill third-party payors for their
services.
Co-source imaging centers. Imaging systems are housed in permanent or
semi-transportable facilities jointly owned by imaging service providers
and hospitals. Under these arrangements, the hospital outsources its
radiology function to the jointly owned facility, which is managed by the
imaging services provider and located on the hospital campus. Like the
other fixed-site centers, these joint venture entities bill third-party
payors for their services. We believe we are one of the few participants in
the diagnostic imaging industry to establish these kinds of co-sourcing
arrangements.
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BUSINESS
COMPANY OVERVIEW
We are a leading nationwide provider of outsourced diagnostic imaging
services, serving a diverse portfolio of customers, including healthcare
providers, such as hospitals and physicians, and payors, such as managed care
organizations and insurance companies. As the largest integrated network of
mobile facilities and fixed-site imaging centers in the United States, we
believe we are unique in our ability to offer healthcare providers a broad range
of comprehensive imaging solutions, from MRI services to MRI-only and
multi-modality fixed-site centers, many of which we jointly own with hospitals,
physician groups or other healthcare providers.
We deliver our services through regional networks of diagnostic imaging
facilities, comprised of:
- 95 mobile, including 84 MRI and seven PET, facilities. The revenues
generated primarily from our mobile facilities, which we refer to as our
contract services revenues, represent approximately 48% of our total
revenues; and
- 69 fixed-site centers operating 73 MRI systems. Approximately 38% of
these are multi-modality centers, which typically include MRI and one or
more of CT, x-ray, mammography, ultrasound, nuclear medicine and bone
densitometry services. The revenues generated primarily from our fixed-
site centers, which we refer to as our patient services revenues,
represent approximately 52% of our total revenues.
Healthcare providers contract with us for our outsourced imaging services
because they may lack:
- the financial resources to make the significant capital investments
associated with the purchase of an imaging system;
- the patient volume to utilize their own imaging system in a
cost-effective manner;
- the management and marketing expertise or the billing and collections
capabilities to operate an imaging facility or center efficiently and
profitably; or
- the ability to add capacity independently to meet local demand.
In addition, hospitals may use our outsourced imaging services to take
advantage of recent federal healthcare regulatory changes that favor the
outsourcing of radiology services to facilities managed by and jointly owned
with a third party.
We have contracts with approximately 240 hospitals and over 850 contracts
with managed care organizations across 28 states. In the six months ended
December 31, 2001, we completed over 371,000 procedures, and MRI services
accounted for approximately 77% of our total revenues. For the fiscal year ended
June 30, 2001, we had revenues of $211.5 million and EBITDA of $81.0 million.
For the six months ended December 31, 2001, we had revenues of $106.8 million
and EBITDA of $40.7 million.
MOBILE BUSINESS OVERVIEW
Hospitals can obtain access to advanced imaging technology through our
network of 95 mobile, including 84 MRI, facilities. We currently have contracts
with approximately 200 small to mid-size hospitals. We recruit, train, and
manage the technologists that operate the equipment and provide imaging
equipment services and upgrades that enable hospitals to benefit from upgraded
systems without spending their own capital directly. We do not provide
interpretation services for the diagnostic images produced. Interpretation
services are provided by the hospital's radiologists. During the six months
ended December 31, 2001, we performed over 95,000 procedures in our mobile
facilities.
Our mobile business operates using a wholesale model. We enter into
mid-to-long-term contracts (typically three to five years) with hospitals, under
which the hospitals assume responsibility for billing and collections. We are
paid directly by the hospitals on a pre-determined contracted amount for our
services,
59
regardless of the hospitals' reimbursement. Thus, we are able to collect our
mobile revenues independently of the hospital billing and collection process.
The wholesale rate is generally based upon one of three items: (1) a
fee-per-scan basis (approximately 69% of our mobile business); (2) a fixed daily
fee (approximately 22% of our mobile business); or (3) a monthly equipment
rental fee (approximately 9% of our mobile business). We have not experienced
any material write-offs with respect to our mobile business, which represents
approximately 48% of our total revenues.
After examining the needs of our customers, route patterns, travel times,
fuel costs and system utilization, our field managers implement planning and
route management to maximize the utilization of our mobile equipment while
controlling the costs to locate and relocate the mobile facilities. Our mobile
MRI facilities are scheduled for as little as one-half day and up to seven days
per week at any particular site.
Our mobile business provides a significant advantage for establishing
co-source arrangements with hospitals and expanding our fixed-site business. We
establish mobile routes in selected markets with the intent of growing with our
customers. Our mobile facilities give us the flexibility to (1) supplement
fixed-site centers operating at or near capacity until volume has grown
sufficiently to warrant additional fixed-site centers, and (2) test new markets
on a short-term basis prior to establishing new mobile routes or opening new
fixed-site centers. Our goal is to enter into long term co-source relationships
with our mobile route customers once the local market matures and sufficient
patient volume is attained to support a fixed-site center.
FIXED-SITE BUSINESS OVERVIEW
Our fixed-site centers provide easily accessible state-of-the-art
radiological services to patients, physicians, insurance payors and managed care
organizations. We provide a full spectrum of imaging services through our
network of 69 technologically-advanced, outpatient diagnostic imaging centers.
Forty of our fixed-site centers offer MRI services exclusively while our 26
multi-modality sites typically offer MRI and one or more of CT, x-ray,
mammography, ultrasound, nuclear medicine and bone densitometry services.
Our fixed-site business operates using a retail model. We provide the
equipment and technologists for the procedures, contract with radiologists to
interpret the scans, and bill payors directly. Revenue is recorded as patient
services revenues after the service has been provided, net of a contractual
allowance that varies in each market. We bill the payors and patients for the
technical fee associated with the use of the equipment and a professional fee
associated with the radiologists interpreting the scans. We do not recognize the
professional fees as revenues, and we exclude the associated receivables from
our balance sheet. During the six months ended December 31, 2001, we performed
over 275,000 procedures at our fixed-site centers.
We do not engage in the practice of medicine. We enter into agreements with
radiologists to provide professional services, which include supervision and
interpretation of radiological procedures and quality assurance.
We have approximately 40 exclusive contracts with hospitals for our
fixed-site services. Our contracts with hospitals for fixed-site services are
generally five to 15 years in length. We have over 850 contracts with managed
care organizations at our fixed-site centers. These contracts generally have
one-year terms which automatically renew for one-year periods and are primarily
on a discounted fee-for-service basis. We have more than doubled our number of
managed care contracts since the fiscal year ended June 30, 1997.
In addition to our independent facilities, we co-source operations with
hospitals through strategic partnerships, often in the form of joint ventures.
Under these arrangements, the hospital outsources its radiology function
(primarily MRI) to us and we then install the appropriate imaging equipment on
the hospital campus. The co-source product is attractive to hospitals who cannot
afford the significant capital investment associated with MRI systems or lack
patient volume to utilize these systems in a cost-effective manner but want to
maintain some control over the MRI operation as well as a residual equity
interest.
60
These co-source arrangements provide additional benefits in that they (1) permit
hospitals to take advantage of recent federal healthcare regulatory changes that
favor the outsourcing of radiology services to facilities that are jointly owned
with and managed by third parties and (2) obtain, for our company, a motivated
partner capable of generating significant scan volumes through the fixed-site
centers. A further benefit to us is that we charge the joint venture a
management and billing fee for supporting the day-to-day operations of the
jointly owned and managed facility.
COMPETITIVE STRENGTHS
We believe we are well-positioned to capitalize on the favorable trends in
the diagnostic imaging industry. We attribute our leading market position to the
following strengths:
COMPREHENSIVE OUTSOURCED IMAGING SOLUTIONS. Unlike most of our
competitors, we operate integrated, regional networks comprised of both mobile
facilities and fixed-site imaging centers. Through these networks, we believe we
have a unique ability to offer healthcare providers a broad range of outsourcing
solutions to meet their diverse and developing imaging needs, whether through
mobile MRI, MRI-only or multi-modality fixed-site centers or joint venture
facilities. In addition to providing these customers with imaging equipment and
technical expertise, we can tailor solutions, based on customers' needs, to
include day-to-day management, marketing support, billing and collection
assistance, as well as site design and development.
STRONG REGIONAL NETWORKS WITH SIGNIFICANT MARKET PRESENCE. We have
developed a substantial presence in our targeted markets by forming regional
networks of imaging facilities that emphasize quality of care, produce
cost-effective diagnostic information and provide superior service to our
customers. Clustering our facilities in regional networks enables us to:
- offer a broad range of imaging services;
- provide access to convenient locations and greater scheduling
flexibility;
- maximize our equipment utilization;
- leverage our marketing efforts; and
- benefit from economies of scale in purchasing, negotiating payor
contracts and reducing overhead through the centralization of certain
administrative functions.
WELL ESTABLISHED RELATIONSHIPS WITH HOSPITAL AND MANAGED CARE
CUSTOMERS. Our hospital and managed care customers accounted for approximately
50% and 33%, respectively, of total revenues for the fiscal year ended June 30,
2001. Our 60-member sales force focuses its marketing efforts on maintaining and
expanding our relationships with hospital and managed care customers.
Hospitals. We have approximately 240 exclusive contracts with hospitals,
including 200 for mobile facility services and 40 for fixed-site services.
- Our mobile facilities typically operate under contracts with average
terms of three to five years with an overall renewal rate of
approximately 85% since July 2000. Our mobile facilities operate under a
wholesale model in which we provide a specified schedule of services and
bill the hospital directly, typically on a fee-per-scan basis. Our mobile
facilities are rotated among multiple hospitals in a manner intended to
optimize equipment utilization.
- Our contracts with hospitals for fixed-site services generally have terms
of five to 15 years. We primarily operate our fixed-site centers under a
retail model in which we bill our payor customers and patients directly
on a fee-for-service basis.
As one of the largest networks of hospital outsourced radiology services,
we believe we are a preferred joint venture partner for hospitals and are
uniquely positioned to convert mobile customers into long-term fixed-site center
relationships as these customers' scan volumes increase and it becomes more
economical
61
for them to establish a fixed-site center. These conversions also decrease the
risk associated with mobile contract renewal. To date, we have completed 19
mobile to fixed-site conversions.
Managed Care Organizations. Through our regional networks, we offer
managed care organizations "one-stop shopping," which includes centralized
scheduling, single invoices, multiple locations and quality assurance. Since the
fiscal year ended June 30, 1997, we have more than doubled the number of our
managed care contracts, and we currently have over 850 contracts at our
fixed-site centers. Due to our extensive relationships with managed care payors,
we are able to provide services for a large base of referring physicians and as
a result, increase scan volumes at our centers.
TECHNOLOGICALLY ADVANCED MRI SYSTEMS. We operate our mobile facilities and
fixed-site centers with state-of-the-art equipment that allows us to perform the
variety, quality and volume of scans required by our customers. Of our 130
conventional MRI systems, 72% have a magnet field strength of 1.5 Tesla, which
is the industry's highest commercial standard, and 96% have a magnet field
strength of 1.0 Tesla or greater. We maintain our imaging systems with software
enhancements and upgrades to increase capacity and to perform new applications,
such as stroke and cardiac evaluation and cancer detection. The average age of
our MRI equipment is 3.1 years with an estimated useful life of 10 years.
EXPERIENCED MANAGEMENT TEAM. We have a highly experienced senior
management team with an average of 17 years of experience in the healthcare
services industry. Management has demonstrated its ability to generate
significant growth through a combination of same-store growth, developing new
mobile customers and routes, establishing fixed-site centers and successfully
integrating 12 acquisitions since the fiscal year ended June 30, 1996. From the
fiscal year ended June 30, 1997 to the fiscal year ended June 30, 2001, revenues
increased from $92.3 million to $211.5 million, reflecting a 23.0% CAGR, while
EBITDA increased from $15.5 million to $81.0 million, a 51.1% CAGR.
BUSINESS STRATEGY
Our objective is to be the leading provider of outsourced diagnostic
imaging services in our target markets by further developing and expanding our
regional networks. We plan to realize our objective by:
MAXIMIZING UTILIZATION OF OUR EXISTING FACILITIES. We intend to expand in
our regional markets by leveraging our existing facility network and customer
relationships, while reducing costs through economies of scale and ongoing cost
reduction measures. To this end, we intend to:
- broaden our physician referral base and generate new sources of revenues
through selective marketing activities, such as educating physicians on
new applications for diagnostic imaging equipment, providing technology
training for physicians and their staffs, and other customer service
programs;
- focus our marketing efforts on attracting additional managed care
customers;
- add new modalities such as CT, ultrasound and bone densitometry to
increase scan volume and economies of scale by leveraging our existing
fixed-site infrastructure;
- expand MRI applications to increase scan volume;
- continue to focus on our unique ability to convert developing mobile
operations into fixed-site centers; and
- maximize cost efficiencies through increased purchasing power and the
continual reduction of overhead expenses.
DEVELOPING DE NOVO OPPORTUNITIES. We will continue to pursue growth
opportunities within our existing regional networks by opening new fixed-site
centers and adding new mobile routes where attractive returns on investment can
be achieved and sustained. We will also selectively implement additional mobile
PET systems and routes. Mobile PET presents an attractive growth opportunity due
to increased physician acceptance of PET as a diagnostic tool, and recently
expanded Medicare coverage of PET procedures. In addition, we will continue to
pursue partnerships with hospitals because we believe they have the potential
62
to provide us with a steady source of scan volume. We believe this will be an
area for additional growth for us because we expect that hospitals may respond
to recent federal healthcare regulatory changes by outsourcing radiology
services to facilities that are jointly owned with and managed by third parties.
PURSUING STRATEGIC ACQUISITIONS. Acquisitions have been an integral part
of our strategy. We expect to selectively acquire imaging centers to augment our
penetration in existing regional markets and increase economies of scale. We may
also enter new markets where we believe we can establish a strong regional
network. Diagnostic imaging remains a highly fragmented industry as
multi-facility chains account for less than half of the total imaging centers.
We believe we are well positioned to capitalize on the ongoing consolidation of
the imaging industry. Our management team is experienced at successfully
identifying, negotiating, completing and integrating acquisitions. Since the
fiscal year ended June 30, 1996, we have completed 12 acquisitions comprising
over 45 imaging facilities.
CUSTOMERS AND CONTRACTS
Our revenues are primarily generated from contract services and patient
services. During the fiscal year ended June 30, 2001, approximately 49% of our
revenues were generated from contract services, which we generally refer to as
our mobile business, and approximately 51% were generated from patient services,
which we generally refer to as our fixed-site business.
The following illustrates our payor mix based on revenues for the fiscal
year ended June 30, 2001:
<Table>
<Caption>
PERCENT OF TOTAL
PAYOR REVENUES
- ----- ----------------
Hospital(1)................................................. 50%
Managed Care and Insurance.................................. 33%
Medicare/Medicaid........................................... 12%
Workers' Compensation....................................... 3%
Other....................................................... 2%
</Table>
- ---------------
(1) No single hospital accounts for more than 2% of our total revenues.
Contract services revenues are generally earned from services billed to a
hospital or other healthcare provider, which include fee-for-service
arrangements in which revenues are based upon a contractual rate per procedure;
equipment rental in which revenues are generally based upon a fixed monthly
rental; and management fees. Contract services revenues are primarily earned
through mobile facilities and are generally paid pursuant to hospital contracts
with a life span of up to five years. Each year approximately one-quarter to
one-third of the contract services agreements for mobile facilities are subject
to renewal. It is expected that some high volume customer accounts will elect
not to renew their agreements and instead will purchase or lease their own
diagnostic imaging equipment and some customers may choose an alternative
services provider.
Patient services revenues are earned from services billed directly to
patients or third-party payors (generally managed care organizations, Medicare,
Medicaid, commercial insurance carriers and workers' compensation funds) on a
fee-for-service basis and are primarily earned through fixed-site centers.
Our fixed-site center operations are principally dependent on our ability
(either directly or indirectly through our hospital customers) to attract
referrals from physicians and other healthcare providers representing a variety
of specialties. Our eligibility to provide service in response to a referral is
often dependent on the existence of a contractual arrangement with the referred
patient's insurance carrier (primarily if the insurance is provided by a managed
care organization). We currently have in excess of 850 contracts with managed
care organizations for diagnostic imaging services provided at our fixed-site
centers primarily on a discounted fee-for-service basis. Managed care
contracting has become very competitive and reimbursement schedules are at or
below Medicare reimbursement levels. A significant decline in referrals and/or
reimbursement rates would adversely affect our business, financial condition and
results of operations.
63
SALES AND MARKETING
We employ 60 sales representatives serving approximately 240 hospitals and
over 850 contracts with managed care organizations. We selectively invest in
marketing activities to obtain new sources of revenues, expand business
relationships, grow revenues at existing facilities, and maintain present
business alliances and contractual relationships. Marketing activities for the
fixed-site business include educating physicians on new applications, uses of
the technology and customer service programs. In addition, our sales force
leverages our regional market concentration to develop contractual relationships
with managed care payors to increase patient volume. Marketing activities for
our mobile business include direct marketing to hospitals and developing leads
through current customers, equipment manufacturers, and other vendors. In
addition, marketing activities for the mobile business include contacting
referring physicians associated with hospital customers and educating
physicians.
DIAGNOSTIC IMAGING AND OTHER EQUIPMENT
We own or lease 192 diagnostic imaging and treatment systems, of which 157
are MRI systems, 20 are CT systems, eight are PET systems, four are
lithotripters, two are radiation oncology systems and one is a Gamma Knife. We
own 148 of our imaging and treatment systems and have leases for the remaining
44 systems, of which 32 are operating and 12 are capital leases. Magnet
strengths are measured in Tesla, and MRI systems typically use magnets with
strengths ranging from 0.2 to 1.5 Tesla. The 1.0 and 1.5 Tesla strengths are
generally considered optimal because they are strong enough to produce
relatively fast scans but are not so strong as to create discomfort for most
patients. We are in the process of upgrading or replacing our remaining
conventional MRI systems from magnet strengths of less than 1.0 Tesla to magnet
strengths of at least 1.0 Tesla.
Our master lease agreement with GE Medical Systems (GEMS) includes a
variable lease arrangement for four of our 32 leased imaging systems, which can
significantly reduce our downside cash flow risk. Under our standard operating
lease agreement with GEMS, we pay approximately $29,000 per month to lease each
system. Under the variable rate election, we may choose to pay a monthly rental
fee averaging $18,000 per system, plus 40% of the operating profits generated by
such system, or to store idle systems at a fixed location for a monthly payment
to GEMS of $1,500 per system, representing approximately half of the monthly
maintenance costs for an idle system. Our variable lease arrangement with GEMS
covers most of our older systems, which we either have upgraded or expect to
replace within the next 18 to 24 months. As of March 1, 2002, we had elected the
variable lease option with respect to three of the four systems in the variable
rate pool. The option to elect the variable lease structure in the future with
respect to additional systems provides us with downside cash flow protection in
the event that any particular MRI system experiences low utilization.
We continue to evaluate the mix of our diagnostic imaging equipment in
response to changes in technology and to the surplus capacity in the
marketplace. The overall technological competitiveness of our equipment
continues to improve through upgrades, disposal and/or trade-in of older
equipment and the purchase or execution of leases for new equipment.
Several substantial companies are presently engaged in the manufacture of
MRI (including Open MRI), CT and other diagnostic imaging equipment, including
GEMS, Hitachi Medical Systems, Siemens Medical Systems and Phillips Medical
Systems. We maintain good working relationships with many of the major
manufacturers to better ensure an adequacy of supply as well as access to those
types of diagnostic imaging systems which appear most appropriate for the
specific imaging facility to be established.
COMPETITION
The healthcare industry in general, and the market for diagnostic imaging
services in particular, is highly competitive and fragmented, with only a few
national providers. We compete principally on the basis of our reputation for
productive and cost-effective quality services. Our operations must compete with
groups of radiologists, established hospitals and certain other independent
organizations, including equipment manufacturers and leasing companies that own
and operate imaging equipment. We will
64
continue to encounter substantial competition from hospitals and independent
organizations, including Alliance Imaging, Inc., Shared Medical Services,
Medical Resources, Inc., Radiologix, Inc., U.S. Diagnostic Inc. and Syncor
International Corporation. Some of our direct competitors that provide contract
diagnostic imaging services may have access to greater financial resources than
we do.
Certain hospitals, particularly the larger hospitals, may be expected to
directly acquire and operate imaging and treatment equipment on-site as part of
their overall inpatient servicing capability, assume the associated financial
risk, employ the necessary technologists and satisfy applicable certificate of
need (CON) and licensure requirements, if any. In addition, some physician
practices that refrained from establishing diagnostic imaging capability may
decide to do so, in light of the flexibility provided by the final physician
self-referral regulations adopted in January 2001 and the increased availability
of lower-cost specialty MRI scanners. Historically, smaller hospitals have been
reluctant to purchase imaging and treatment equipment.
PROPERTIES
We lease approximately 20,000 square feet of office space for our executive
offices in Newport Beach, California, under a lease expiring on December 14,
2002; approximately 13,000 square feet of office space for part of our Eastern
Division offices in Farmington, Connecticut, under a lease expiring on April 15,
2004; approximately 4,400 square feet of office space for a billing office in
Merrillville, Indiana, under a lease expiring on August 31, 2003; approximately
5,400 square feet of office space for a billing office in Santa Ana, California,
under a lease expiring on October 30, 2004, and approximately 3,000 square feet
of office space for a billing office in Scarborough, Maine, under a lease
expiring on June 30, 2006. As of June 30, 2001, we owned 14 and leased 38
properties used as office, imaging or treatment facilities. We do not own the
land underlying 11 of the 14 facilities that we own. In each case, the land is
leased under a long-term lease. In addition, we own 77,690 square feet of land
in Fort Worth, Texas, upon which we intended to build a multi-modality
fixed-site center to which certain existing operations in Fort Worth would be
relocated; however, we are currently evaluating our options. We believe our
existing facilities are adequate for our reasonably foreseeable needs. In
addition, the following table set forth the other principal properties used as
imaging or treatment facilities by us as of December 31, 2001:
<Table>
<Caption>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ---------------- ----------- --------
OWNED:
Western Division
Northern Indiana Oncology Center....................... 800 Valparaiso, Indiana
Granada Hills Open MRI Center(1)....................... 1,100 Granada Hills, California
Daniel Freeman Open MRI Center(1)...................... 1,400 Marina Del Rey, California
Berwyn Magnetic Resonance Center(1).................... 3,800 Berwyn, Illinois
Garfield Imaging Center(1)............................. 5,000 Monterey Park, California
LAC/USC Imaging Sciences Center(1)..................... 8,500 Los Angeles, California
Maxum Diagnostic Center -- Eighth Avenue............... 10,000 Ft. Worth, Texas
Harbor/UCLA Diagnostic Imaging Center(1)............... 15,000 Torrance, California
Diagnostic Outpatient Center(1)........................ 17,800 Hobart, Indiana
Eastern Division
Sun Coast Imaging Center(1)............................ 1,000 Largo, Florida
Thorn Run MRI(1)....................................... 1,300 Coraopolis, Pennsylvania
Greater Waterbury Imaging Center(1).................... 3,700 Waterbury, Connecticut
Wilkes-Barre Imaging Center(1)......................... 8,200 Wilkes-Barre, Pennsylvania
Chattanooga Outpatient Center.......................... 14,700 Chattanooga, Tennessee
</Table>
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<Table>
<Caption>
APPROXIMATE
NAME OF FACILITY SQUARE FEET LOCATION
- ---------------- ----------- --------
LEASED:
Western Division
InSight Diagnostic Imaging Center -- N. 18th Place..... 1,800 Phoenix, Arizona
Redwood City MRI....................................... 2,900 Redwood City, California
InSight Diagnostic Imaging Center...................... 3,100 Tempe, Arizona
Open MRI of Orange County.............................. 4,000 Santa Ana, California
Open MRI of Pleasanton................................. 4,400 Pleasanton, California
InSight Diagnostic Imaging Center -- 15th Avenue....... 4,600 Phoenix, Arizona
Washington Magnetic Resonance Center................... 5,000 Whittier, California
InSight Diagnostic Imaging Center...................... 5,800 Peoria, Arizona
Parkway Imaging Center................................. 5,800 Henderson, Nevada
Maxum Diagnostic Center -- Preston Road................ 5,800 Dallas/Plano, Texas
Open MRI of Hayward.................................... 6,500 Hayward, California
St. John's Regional Imaging Center..................... 10,000 Oxnard, California
InSight Diagnostic Imaging Center -- E. Thomas Road.... 10,600 Phoenix, Arizona
Maxum Diagnostic Center -- Forest Lane................. 18,500 Dallas, Texas
InSight Mountain Diagnostics........................... 20,000 Las Vegas, Nevada
Eastern Division
Lockport MRI -- Maple Road............................. 500 Williamsville, New York
Metabolic Imaging of Kentucky.......................... 1,800 Louisville, Kentucky
Open MRI of Indianapolis............................... 1,900 Indianapolis, Indiana
Lockport MRI -- River Road............................. 2,200 N. Tonawanda, New York
Lockport MRI........................................... 2,400 Lockport, New York
Open MRI of Southern Regional.......................... 2,400 Clarksville, Indiana
Whitney Imaging Center................................. 2,900 Hamden, Connecticut
Lockport MRI -- Sheridan Drive......................... 3,800 Tonawanda, New York
Dublin Imaging Center.................................. 3,900 Dublin, Ohio
Lockport MRI -- Youngs Road............................ 4,000 Williamsville, New York
Marshwood Imaging Center............................... 5,000 Scarborough, Maine
Lockport MRI -- Transit Road........................... 5,200 East Amherst, New York
Imaging Center at Murfreesboro......................... 6,000 Murfreesboro, Tennessee
Broad Street Imaging Center............................ 6,600 Columbus, Ohio
Ocean Medical Imaging Center........................... 8,500 Tom's River, New Jersey
Central Maine Imaging Center........................... 8,700 Lewiston, Maine
</Table>
- ---------------
(1) We own the building and hold the related land under a long-term lease.
INFORMATION SYSTEMS
Our internal information technology systems allow us to manage our
operations, accounting and finance, human resources, payroll, document imaging,
and data warehousing. Our primary operating system is InSight Radiological
Information System (IRIS), our proprietary information system. Developed between
1994 and 1999, IRIS provides front-office support for scheduling and
administration of imaging procedures and back
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office support for billing and collections. Additional functionality includes
workflow, transcription, and image management.
As a result of the acquisition of imaging centers that employed other
applications, we also utilize several third-party applications. At present,
approximately 85% of our revenues are derived from centers that use IRIS with
the remainder using third-party applications. We expect to convert the remainder
of these sites to IRIS over the next 18 months. We believe that our information
technology systems infrastructure has adequate capacity for our currently
projected growth.
In connection with the implementation of the electronic transaction,
security and privacy standards mandated by HIPAA, we project spending
approximately $1.5 million to make necessary software upgrades to IRIS to make
the system compliant with the HIPAA transaction standards by late 2002 and with
the privacy standards by 2003. See "Reimbursement of Health Care Costs -- Health
Insurance Portability and Accountability Act."
REIMBURSEMENT OF HEALTHCARE COSTS
Medicare: Beginning in late 1983, prospective payment regulations for
hospital inpatient services became effective under the federal Medicare program.
The Medicare program provides reimbursement for hospitalization, physician,
diagnostic and certain other services to eligible persons 65 years of age and
over and certain others. Providers of service are paid by the federal government
in accordance with regulations promulgated by the Department of Health and Human
Services (HHS) and generally accept said payment with nominal deductible and
co-insurance amounts required to be paid by the service recipient, as payment in
full. In general, these regulations provide for a specific prospective payment
to reimburse hospitals for inpatient treatment services based upon the diagnosis
of the patient.
On April 7, 2000, CMS published its final rules concerning the new hospital
outpatient prospective payment system for most outpatient services in
Medicare-participating hospitals. Effective August 1, 2000, Medicare pays
hospitals for outpatient services based on ambulatory payment classification
(APC) groups rather than on a hospital's costs. Each APC has been assigned a
payment weight by CMS. Under the new OPPS, the payment due a hospital for
performing an outpatient service will be an amount based on the APC weight, a
dollar based conversion factor, a geographic adjustment factor to account for
area labor cost differences and any other adjustments applicable to the hospital
or case.
Because the new OPPS appeared to have a severe adverse economic effect on
hospitals, Congress enacted additional legislation in the BBA to ease such
effect through 2003. Under the BBA, hospitals may receive additional payments
for new technologies, transitional pass-through for innovative medical devices,
drugs and biologics, outlier adjustments and transitional payment corridors. As
these transitional payments phase out or expire, some of our hospital customers
may decide to discontinue or restructure their arrangements with providers of
diagnostic imaging services, which may have a material adverse effect on our
operations. In addition, the BIPA included certain provisions requiring CMS to
revise the APCs to separate contrast-enhanced diagnostic imaging procedures from
those that are not contrast-enhanced. Accordingly, payment for unenhanced MRI
and other diagnostic procedures have been reduced as a result of implementation
of these provisions, effective January 1, 2002; however the APC rates for
certain contrast-enhanced diagnostic procedures have increased. The APC rates
that became effective on January 1, 2002, and revised effective April 1, 2002,
have also reduced Medicare payment for PET services provided to hospital
outpatients.
As a result of the implementation of the new OPPS, we believe that our
hospital customers may seek reductions in contractual rates to the extent the
hospital believes it will pay more to us than it will receive from Medicare and
other third-party payors. The reduction of contractual rates for a single
customer or loss of a single customer to a competitor prepared to reduce
contractual rates would not have a material adverse impact on our contract
services revenues; however, the reduction in contractual rates for several
customers or loss of several contracts could have a material impact on our
business, financial condition and results of operations.
On the other hand, we believe that the impact of the new OPPS on hospital
payments for diagnostic imaging services, especially for MRI services, may cause
hospitals to consider restructuring their MRI
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facilities as freestanding centers which are unaffected by the new OPPS. This
may provide us with additional opportunities for our radiology co-source product
which involves the joint ownership and management of MRI facilities with
hospitals. On the other hand, recent reductions in Medicare payment for MRI
services provided in freestanding centers will reduce the differential between
the amounts payable by Medicare for services provided in freestanding and
hospital-based centers. Given the infancy and complexity of the new OPPS and the
reduction in the differential between hospital and freestanding payment rates,
it is difficult to determine to what extent hospitals will attempt to
renegotiate existing contractual arrangements.
Multi-modality and certain fixed-site centers which are freestanding are
not directly affected by OPPS, which applies only to hospital-based facilities.
Congressional and regulatory actions reflect industry-wide cost-containment
pressures that we believe will affect all healthcare providers for the
foreseeable future. A recent initiative by CMS to impose a 24% reduction in
Medicare payment for the technical component (i.e. the facilities, equipment,
overhead and non-physician staff) of diagnostic imaging services provided in
non-hospital settings was indefinitely postponed due to flaws in CMS' cost study
methodology. CMS has indicated that it will continue to evaluate diagnostic
imaging technical component reimbursement. Effective January 1, 2002, payment
for these services has been reduced by approximately 5.4% as part of an
across-the-board reduction affecting all services reimbursed under the Medicare
Physician Fee Schedule. In addition, the Medicare allowances that became
effective on January 1, 2002 reflect an additional 2% to 3% reduction for the
technical component of all services, including the MRI and other diagnostic
imaging services provided by us. We cannot assure you that Medicare payment for
diagnostic imaging services will not be further reduced in the future, which
would have a material adverse effect on our financial condition and results of
operations.
In order for our hospital customers to receive payment from Medicare with
respect to our mobile services, our services must be furnished in a
"provider-based" department or be a covered service furnished "under
arrangements." On April 7, 2000, Medicare published new rules establishing
financial, technical and administrative criteria for being a "provider-based"
department, as well as new requirements for management contracts for
"provider-based" departments. Our services to hospitals possibly may not meet
Medicare's new standards for being a "provider-based" service, although that is
uncertain because at this time very little guidance exists regarding the proper
interpretation of this new Medicare regulation. If our services to hospital
customers are not furnished in a "provider-based" setting, the services would
not be covered by Medicare unless they are found to be a service furnished
"under arrangements" to a hospital. The extent to which "under arrangements"
services may be covered by Medicare when they do not meet the "provider-based"
standards is unclear. In the BIPA, Congress "grandfathered" until October 1,
2002 all sites that were paid as provider-based sites as of October 1, 2000. The
provision permits such sites to continue to be treated as "provider-based"
during the two-year grandfather period and not be subject to penalties for past
non-compliance as long as they either have a prior written determination of
"provider-based" status, or apply for "provider-based" status before October 1,
2001. As the Medicare rules are clarified, it may be necessary for us to modify
the contracts we have with hospital customers or to take other steps that may
affect our revenues, our cost for our mobile business or the manner in which we
furnish wholesale services to hospital customers.
Medicaid: The Medicaid program is a jointly-funded federal and state
program providing coverage for low-income persons. In addition to
federally-mandated basic services, the services offered and reimbursement
methods vary from state to state. In many states, Medicaid reimbursement is
patterned after the Medicare program; however, an increasing number of states
have established or are establishing payment methodologies intended to provide
healthcare services to Medicaid patients through managed care arrangements. In
addition, in a number of states, state Medicaid agencies have refused to
authorize entities organized as Independent Diagnostic Treatment Facilities
(IDTFs) (such as most of our fixed-site centers) to participate in the Medicaid
program. Because the volume of services that we provide to Medicaid patients is
limited, however, modifications of Medicaid reimbursement methodologies are not
expected to have a material adverse impact on our business, financial condition
and results of operations.
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Managed Care: Health Maintenance Organizations (HMOs) and Preferred
Provider Organizations (PPOs) and other managed care organizations attempt to
control the cost of healthcare services, including, imposing lower payment
rates, limiting services or mandating less costly treatment alternatives.
Managed care contracting has become very competitive and reimbursement schedules
are at or below Medicare reimbursement levels. The development and expansion of
HMOs, PPOs and other managed care organizations within our regional networks
could have a negative impact on utilization of our services in certain markets
and/or affect the revenue per procedure which we can collect, since such
organizations will exert greater control over patients' access to diagnostic
imaging services, the selection of the provider of such services and the
reimbursement thereof. The competition among healthcare providers for contracts
with all types of managed care organizations has resulted in an average length
of term of such contracts of between one and three years. See "-- Customers and
Contracts."
Some states have adopted expanded laws or regulations restricting the
assumption of financial risk by healthcare providers contracting with health
plans. While we are not presently subject to such regulation, we or our
customers may in the future be restricted in our ability to assume financial
risk, or may be subjected to reporting requirements if we do so. Any such
restrictions could negatively affect our contracting relationships with health
plans.
Private Insurance: Private health insurance programs generally have
authorized the payment for our services on satisfactory terms. However, if
Medicare reimbursement is reduced, we believe that private health insurance
programs will also reduce reimbursement in response to reductions in government
reimbursement, which could have an adverse impact on our business, financial
condition and results of operations.
GOVERNMENT REGULATION
The healthcare industry is highly regulated and changes in laws and
regulations can be significant. Changes in the law or new interpretation of
existing laws can have a material effect on our permissible activities, the
relative costs associated with doing business and the amount of reimbursement by
government and other third-party payors. The federal government and all states
in which we currently operate regulate various aspects of our business. Failure
to comply with these laws could adversely affect our ability to receive
reimbursement for our services and subject us and our officers and agents to
civil and criminal penalties.
Federal False Claims Act: There has been an increase in qui tam actions
brought under the federal False Claims Act and, in particular, under the False
Claims Act's "whistleblower" provisions. Those provisions allow a private
individual to bring actions in the name of the government alleging that the
defendant has made false claims for payment from federal funds. After the
individual has initiated the lawsuit, the government must decide whether to
intervene in the lawsuit and to become the primary prosecutor. Until then the
lawsuit is kept secret. If the government declines to join the lawsuit, the
individual may choose to pursue the case alone, in which case the individual's
counsel will have primary control over the prosecution, although the government
must be kept apprised of the progress of the lawsuit, and may intervene later.
Whether or not the federal government intervenes in the case, it will receive
the majority of any recovery. If the litigation is successful, the individual is
entitled to no less than 15%, but no more than 30%, of whatever amount the
government recovers. The percentage of the individual's recovery varies,
depending on whether the government intervened in the case and other factors.
Recently, the number of suits brought against healthcare providers by government
regulators and private individuals has increased dramatically. In addition,
various states are considering or have enacted laws modeled after the federal
False Claims Act, penalizing false claims against state funds. If a
whistleblower action is brought against us, even if it is dismissed with no
judgment or settlement, we may incur substantial legal fees and other costs
relating to an investigation. Actions brought under the False Claims Act may
result in significant fines and legal fees and distract our management's
attention, which would adversely affect our business, financial condition and
results of operations.
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When an entity is determined to have violated the federal False Claims Act,
it must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,500 to $11,000 for each separate false
claim, as well as the government's attorneys fees. Liability arises when an
entity knowingly submits, or causes someone else to submit, a false claim for
reimbursement to the federal government or submits a false claim with reckless
disregard for, or in deliberate ignorance of, its truth or falsity. Simple
negligence should not give rise to liability. Examples of the other actions
which may lead to liability under the Act:
- Failure to comply with the many technical billing requirements applicable
to our Medicare and Medicaid business.
- Failure to comply with Medicare requirements concerning the circumstances
in which a hospital, rather than we, must bill Medicare for diagnostic
imaging services we provide to outpatients treated by the hospital.
- Failure of our hospital customers to accurately identify and report our
reimbursable and allowable services to Medicare.
- Failure to comply with the prohibition against billing for services
ordered or supervised by a physician who is excluded from any federal
healthcare programs, or the prohibition against employing or contracting
with any person or entity excluded from any federal healthcare programs.
- Failure to comply with the Medicare physician supervision requirements
for the services we provide, or the Medicare documentation requirements
concerning physician supervision.
- The past conduct of the businesses we have acquired.
We strive to ensure that we meet applicable billing requirements. However,
the costs of defending claims under the False Claims Act, as well as sanctions
imposed under the Act, could significantly affect our business, financial
condition and results of operations.
Anti-kickback Statutes: We are subject to federal and state laws which
govern financial and other arrangements between healthcare providers. These
include the federal anti-kickback statute which, among other things, prohibits
the knowing and willful solicitation, offer, payment or receipt of any
remuneration, direct or indirect, in cash or in kind, in return for or to induce
the referral of patients for items or services covered by Medicare, Medicaid and
certain other governmental health programs. Violation of the anti-kickback
statute may result in civil or criminal penalties and exclusion from the
Medicare, Medicaid and other federal healthcare programs. In addition, it is
possible that private parties may file qui tam actions based on claims resulting
from relationships that violate this statute, seeking significant financial
rewards. Many states have enacted similar statutes, which are not limited to
items and services paid for under Medicare or a federally funded healthcare
program. In recent years, there has been increasing scrutiny by law enforcement
authorities, HHS, the courts and Congress of financial arrangements between
healthcare providers and potential sources of referrals to ensure that such
arrangements do not violate the anti-kickback provisions. HHS and the federal
courts interpret the anti-kickback statutes broadly to apply to a wide range of
financial incentives, including, under certain circumstances, distributions of
partnership and corporate profits to investors who refer federal healthcare
program patients to a corporation or partnership in which they have an ownership
interest and to payments for service contracts and equipment leases that are
designed, even if only in part, to provide direct or indirect remuneration for
patient referrals or similar opportunities to furnish reimbursable items or
services. HHS has issued "safe harbor" regulations that set forth certain
provisions which, if met, will assure that healthcare providers and other
parties who refer patients or other business opportunities, or who provide
reimbursable items or services, will be deemed not to violate the anti-kickback
statutes. The safe harbors are narrowly drawn and some of our relationships may
not qualify for any "safe harbor"; however, failure to comply with a "safe
harbor" does not create a presumption of liability. We believe that our
operations materially comply with the anti-kickback statutes; however, because
these provisions are interpreted broadly by law enforcement authorities, we
cannot assure you that law enforcement officials or others will not challenge
our operations under these statutes.
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Health Insurance Portability and Accountability Act: In 1996, Congress
passed HIPAA, designed to guarantee the availability and renewability of health
insurance coverage for certain employees and individuals, while also limiting
the use of pre-existing condition restrictions. HIPAA also made substantial
amendments to federal healthcare fraud and abuse laws, including:
- the establishment of fraud and abuse control programs to coordinate and
fund the investigation and prosecution of healthcare fraud and abuse;
- the establishment of a Medicare integrity program, including medical,
utilization and fraud review of Medicare providers;
- the extension of existing Medicare-Medicaid anti-fraud and abuse
provisions to all federal healthcare programs;
- the provision of enhanced civil penalties; and
- the creation of new federal crimes of healthcare fraud and making false
statements relating to healthcare matters.
The healthcare fraud statute prohibits knowingly and willfully executing a
scheme to defraud any healthcare benefit program, including private payors. A
violation of this statute is a felony and may result in fines, imprisonment or
exclusion from government sponsored programs such as the Medicare and Medicaid
programs. The false statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially
false, fictitious or fraudulent statement in connection with the delivery of or
payment for healthcare benefits, items or services, including those provided by
non-government payors. A violation of this statute is a felony and may result in
fines or imprisonment. HIPAA requires health care providers to maintain the
privacy and security of health information. It will also require us to follow
federal standards for electronic transactions with health plans and for
protecting the privacy of individually identifiable health information and the
security standards for all electronic health information. The government
recently published regulations to implement the privacy standards under the Act.
We are beginning to address compliance with the Act and applicable regulations.
We project spending approximately $1.5 million for necessary software upgrades
to make our proprietary computer operating system, IRIS, fully compliant with
the HIPPA transactions standards by late 2002 and with the privacy standards by
2003. A violation of the Act's health fraud, privacy or security provisions may
result in criminal and civil penalties, which may adversely affect our business,
financial condition and results of operations.
Stark II, State Physician Self-referral Laws: A federal law, commonly
known as the "Stark Law" or "Stark II," also imposes civil penalties and
exclusions from federal health programs for referrals for "designated health
services" by physicians or their family members to certain entities with which
they have a financial relationship (subject to certain exceptions), and for
claims for payments by entities receiving such referrals. A private party may
also bring a qui tam action in federal court on the basis of a Stark Law
violation. "Designated health services" include, among other things, radiology
services, including MRI, CT and ultrasound, radiation therapy, and hospital
inpatient and outpatient services. The Stark Law does not require any fraudulent
intent. Providers furnishing services pursuant to a prohibited referral may not
present a claim for the services and if payments are made they may be recouped.
The law applies directly to services reimbursable by Medicare and may apply to
services reimburseable under Medicaid, depending on state law. Final regulations
partially implementing the Stark Law were issued in January 2001 and will become
effective in April 2002. It is not clear when further regulations will be
published, but the CMS has taken the position that the Stark Law is
self-effectuating and does not require implementing regulations. In addition,
several states in which we operate have enacted or are considering legislation
that prohibits "self-referral" arrangements or requires physicians or other
healthcare providers to disclose to their patients any financial interest they
may have with a healthcare provider whom they recommend. Possible sanctions for
violating these provisions include loss of licensure and civil and criminal
sanctions. Such state laws vary from state to state and seldom have been
interpreted by the courts or regulatory agencies. Nonetheless, strict
enforcement of these requirements is likely. Although we believe
71
our operations materially comply with these federal and state physician
self-referral laws, we cannot assure you that Stark II or other physician
self-referral regulations will not be interpreted or applied in a manner that
would have a material adverse effect on our business, financial condition and
results of operations.
FDA: The U.S. Food and Drug Administration (FDA) has issued the requisite
premarket approval for all of our MRI, CT, PET, lithotripsy and Gamma Knife
systems. We do not believe that any further FDA approval is required in
connection with equipment currently in operation or proposed to be operated;
except under regulations issued by the FDA pursuant to MQSA, all mammography
facilities must have a certificate issued by the FDA. In order to obtain a
certificate, all mammography facilities are required to be accredited by an
approved non-profit organization or state agency or other agency designated by
the FDA. Pursuant to the accreditation process, each facility providing
mammography services must comply with certain standards including annual
inspection.
Compliance with these standards is required to obtain payment for Medicare
services and to avoid various sanctions, including monetary penalties, or
suspension of certification. Although all of our facilities which provide
mammography services are currently accredited by the Mammography Accreditation
Program of the American College of Radiology and we anticipate continuing to
meet the requirements for accreditation, the withdrawal of such accreditation
could result in the revocation of certification. Congress has extended Medicare
benefits to include coverage of screening mammography subject to the prescribed
quality standards described above. The regulations apply to diagnostic
mammography as well as screening mammography.
Radiologist and Facility Licensing: The radiologists with whom we may
enter into agreements to provide professional services are subject to licensing
and related regulations by the states, including registrations to use
radioactive materials. As a result, we require our radiologists to have and
maintain appropriate licensure and registrations. In addition, some states also
impose licensing or other requirements on us at our facilities and other states
may impose similar requirements in the future. Local authorities may also
require us to obtain various licenses, permits and approvals. We believe that we
have obtained all required licenses and permits; however, we cannot assure you
that additional laws and state licensure requirements governing our facilities'
operations will not be enacted.
Liability Insurance: The hospitals and physicians who use our diagnostic
imaging systems are involved in the delivery of healthcare services to the
public and, therefore, are exposed to the risk of liability claims. Our position
is that we do not engage in the practice of medicine. We provide only the
equipment and technical components of diagnostic imaging, including certain
limited nursing services, and we have not experienced any material losses due to
claims for malpractice. Nevertheless, claims for malpractice have been asserted
against us in the past and any future claims, if successful, could entail
significant defense costs and could result in substantial damage awards to the
claimants, which may exceed the limits of any applicable insurance coverage. We
maintain professional liability insurance in amounts we believe are adequate for
our business of providing diagnostic imaging, treatment and management services.
In addition, the radiologists or other healthcare professionals with whom we
contract are required by such contracts to carry adequate medical malpractice
insurance. Successful malpractice claims asserted against us, to the extent not
covered by our liability insurance, could have a material adverse effect on our
business, financial condition and results of operations.
Independent Diagnostic Treatment Facilities: Under prior Medicare policy,
imaging centers generally participated in the Medicare program as either medical
groups or, subject to the discretion of individual Medicare carriers,
Independent Physiological Laboratories (IPLs). The IPL was a loosely defined
Medicare provider category that was not specifically authorized to provide
imaging services. Accordingly, certain carriers permitted IPLs to provide
imaging services and others did not. In the past, we preferred, to the extent
possible, to operate imaging centers for Medicare purposes as IPLs. We believed
that the designation of our imaging centers as IPLs gave us greater operational
control than we would have had if our imaging centers were operated under the
medical group model, where we would function as a "manager."
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Under the IDTF regulations, imaging centers have the option to participate
in the Medicare program as either IDTFs or medical groups. The IDTF regulations
include more specific operational requirements than were previously required for
IPLs. We either have converted or have submitted applications to convert all of
our fixed-site imaging centers from IPLs to IDTFs, except in those states where
the medical group model is required. In addition, since the IDTF designation is
new, it is unclear to what extent and in what manner IDTFs will be monitored by
CMS, but it is probable that CMS will exercise increased oversight of IDTFs
compared to IPLs, which could have a material adverse effect on our business,
financial condition and results of operations.
Certificates of Need: Some states require hospitals and certain other
healthcare facilities and providers to obtain a CON or similar regulatory
approval prior to the commencement of certain healthcare operations or services,
the incurring of certain capital expenditures and/or the acquisition of major
medical equipment including MRI, PET and Gamma Knife systems. CON regulations
may limit or preclude us from providing diagnostic imaging services or systems
in certain states. We believe that we have complied or will comply with
applicable CON requirements in those states where we operate. Nevertheless, a
significant increase in the number of states regulating our business within the
CON or state licensure framework could adversely affect our business, financial
condition and results of operations. Conversely, repeal of existing CON
regulations in jurisdictions where we have obtained or operate under a CON could
also adversely affect our business, financial condition and results of
operations, since CON regulation effectively functions as a barrier to entry.
This is an area of continuing legislative activity, and we cannot assure you
that CON and licensing statutes will not be modified in the future in a manner
that may have a material adverse effect on our business and operations.
COMPLIANCE PROGRAM
We have voluntarily implemented a program to monitor compliance with
federal and state laws and regulations applicable to healthcare entities. We
have appointed a compliance officer who is charged with implementing and
supervising our compliance program, which includes a code of ethical conduct for
our employees and affiliates and a process for reporting regulatory or ethical
concerns to our compliance officer, including a toll-free telephone hotline. We
believe that our compliance program meets the relevant standards provided by the
Office of Inspector General of the HHS. An important part of our compliance
program consists of conducting periodic reviews of various aspects of our
operations. Our compliance program also contemplates mandatory education
programs designed to familiarize our employees with the regulatory requirements
and specific elements of our compliance program.
EMPLOYEES
As of February 28, 2002, we had approximately 1,200 full-time, 70 part-time
and 340 per diem employees. None of our employees are covered by a collective
bargaining agreement. Management believes its employee relations to be
satisfactory.
LEGAL PROCEEDINGS
We are engaged from time to time in the defense of lawsuits arising out of
the ordinary course and conduct of our business and have insurance policies
covering such potential insurable losses where such coverage is cost-effective.
We believe that the outcome of any such lawsuits will not have a material
adverse impact on our business, financial condition and results of operations.
COMPANY HISTORY
We were formed in June 1996 as a result of the merger of American Health
Services Corp. and Maxum Health Corp., two publicly held providers of diagnostic
imaging services. The merger was consummated in order to achieve cost savings,
enhance marketing capabilities, increase market presence and financial
resources, and to take advantage of positive consolidating trends in the
diagnostic imaging industry.
73
In October 1997, we consummated a recapitalization pursuant to which (a)
certain investors affiliated with TC Group, LLC and its affiliates (Carlyle), a
private merchant bank headquartered in Washington, D.C., made a cash investment
of $25 million in InSight and received convertible preferred stock and warrants
and (b) General Electric Company surrendered its rights previously granted in
connection with the merger and debt restructuring agreement to receive
supplemental service fee payments equal to 14% of pretax income, plus existing
preferred stock, in exchange for convertible preferred stock and warrants. These
securities gave Carlyle and General Electric beneficial ownership of more than a
majority of our common stock, all of which were purchased in the acquisition.
On October 17, 2001, as a result of the acquisition, InSight became a
wholly-owned subsidiary of InSight Holdings. See "The Acquisition and Related
Financing Transactions."
74
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
We are a wholly-owned subsidiary of InSight Holdings, a corporation owned
by J.W. Childs Equity Partners II, Halifax Capital Partners and certain of their
affiliates.
The following table sets forth the name, age and position of our directors
and executive officers as of February 28, 2002.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Steven T. Plochocki................... 50 President, Chief Executive Officer and Director
Patricia R. Blank..................... 51 Executive Vice President and Chief Information Officer
Michael A. Boylan..................... 45 Executive Vice President and Chief Development Officer
Thomas V. Croal....................... 42 Executive Vice President and Chief Financial Officer
Brian G. Drazba....................... 40 Senior Vice President, Finance and Corporate
Controller
Cecilia A. Guastaferro................ 41 Senior Vice President, Human Resources
Marilyn U. MacNiven-Young............. 50 Executive Vice President, General Counsel and
Secretary
Michael S. Madler..................... 43 Executive Vice President and Chief Operating Officer
Michael N. Cannizzaro................. 52 Director
Kenneth M. Doyle...................... 36 Director
David W. Dupree....................... 48 Director
Steven G. Segal....................... 41 Director
Mark J. Tricolli...................... 30 Director
Edward D. Yun......................... 34 Director
</Table>
Our directors are elected annually by, and serve at the discretion of, our
stockholder. Our executive officers are elected annually by, and serve at the
discretion of our board of directors.
Steven T. Plochocki has been our President, Chief Executive Officer and a
director since November 22, 1999. From January 1998 through November 19, 1999,
Mr. Plochocki was President and Chief Executive Officer of Centratex Support
Services, Inc., a support services company for the healthcare industry. Mr.
Plochocki was President and Chief Operating Officer of Apria Healthcare Group
Inc., a home healthcare company, from July 1995 through October 1997.
Patricia R. Blank has been our Executive Vice President and Chief
Information Officer since September 1, 1999. Prior to joining us, Ms. Blank was
the principal of Blank & Company, a consulting firm specializing in healthcare
consulting. From 1995 to 1998, Ms. Blank served as Executive Vice President and
Chief Operating Officer of HealthHelp, Inc., a Houston, Texas-based radiology
services organization managing radiology provider networks in multiple states.
From 1988 to 1995, she was Corporate Director of radiology of FHP, a California
insurance company.
Michael A. Boylan has been our Executive Vice President and Chief
Development Officer since February 7, 2002. He was the Executive Vice President,
Operations, Eastern Division from July 1, 2000 to February 7, 2002. From April
1998 to July 1, 2000, he was Executive Vice President and Chief Development
Officer. From February 1996 to April 1998, he was Senior Vice
President-Operations. Mr. Boylan has served as Executive Vice President of Maxum
Health Corp. (MHC) since March 1994. From 1992 to 1994, he served as a regional
vice president of MHC's principal operating subsidiary, Maxum Health Services
Corp. From 1991 to 1992, he served as an Executive Director of certain of MHC's
operations. From 1986 to 1991, Mr. Boylan served in various capacities as an
officer or employee, including President and Chief Operating Officer, with
American Medical Imaging Corporation.
75
Thomas V. Croal has been our Executive Vice President and Chief Financial
Officer since February 1996. From July 1998 to June 1999, Mr. Croal also served
as Chief Operating Officer. Mr. Croal served as a director of American Health
Services Corp. (AHS) from March 1991 until June 1996. He served as Vice
President and Chief Financial Officer of AHS from April 1991. He was Controller
of AHS from 1989 until April 1991. From 1981 to 1989, Mr. Croal was employed by
Arthur Andersen & Co., an independent public accounting firm.
Brian G. Drazba has been our Senior Vice President-Finance and Controller
since July 1997. From March 1996 to July 1997, he served as Vice
President-Finance. From June 1995, he served as Vice President-Finance of AHS.
Mr. Drazba served as corporate controller for AHS from 1992 to 1995. From 1985
to 1992, Mr. Drazba was employed by Arthur Andersen & Co.
Cecilia A. Guastaferro has been our Senior Vice President-Human Resources
since July 1, 2000. From July 1997 to June 30, 2000, she was Vice
President-Human Resources. Ms. Guastaferro served as Director of Human Resources
of AHS from May 1994 through June 1996, when she became Director of Human
Resources of InSight.
Marilyn U. MacNiven-Young has been our Executive Vice President, General
Counsel and Corporate Secretary since August 1998. From February 1996 through
July 1998, she was an independent consultant to us. From September 1994 through
June 1995, she was Senior Vice President and General Counsel of Abbey Healthcare
Group, Inc., a home healthcare company. From 1991 through 1994, Ms. MacNiven-
Young served as General Counsel of AHS.
Michael S. Madler has been our Executive Vice President and Chief Operating
Officer since February 7, 2002. He joined us as a Senior Vice President in
October 1998 and served as such until June 8, 1999 when he was appointed
Executive Vice President, Operations, Western Division. From 1993 through
October 1998, Mr. Madler was Chief Operating Officer of Prime Medical Services,
Inc. an Austin, Texas-based lithotripsy services management company.
Michael N. Cannizzaro became a member of our board of directors upon
consummation of the acquisition. He is an Operating Partner of J.W. Childs
Associates, L.P. Prior to that, he was President and Chief Executive Officer of
Beltone Electronics Corporation from 1998 to 2000. Prior to that, he was
President of Caremark International's Prescription Service Division from 1994 to
1997; Vice President, Business Development of Caremark's Nephrology Service
Division from April 1994 to September 1994; and President of Leica North America
from 1993 to 1994. Prior to that, he held numerous positions in general
management at Baxter Healthcare Corporation from 1976 to 1993, including the
position of President of four different divisions. He is also a director of
National Nephrology Associates, Inc. and Universal Hospital Services, Inc.
Kenneth M. Doyle is a director and Vice President of InSight Holdings and
became a member of our board of directors upon consummation of the acquisition.
Mr. Doyle is a principal of The Halifax Group. Mr. Doyle joined The Halifax
Group in January 2000. Prior to joining The Halifax Group, Mr. Doyle was an
Industry Leader and Vice President at GE Equity, the private equity subsidiary
of GE Capital. Prior to joining GE Equity, Mr. Doyle spent four years in
investment banking as a Senior Associate for the Telecommunications Corporate
Finance Group at Merrill Lynch and as an Associate with Chase Manhattan Bank in
the Media and Telecommunications Group. Mr. Doyle also spent three years with
Ernst & Young in the Entrepreneurial Services Group. Mr. Doyle currently serves
on the board of directors of National Packaging Solutions Group, Inc.
David W. Dupree is a director and Vice President of InSight Holdings and
became a member of our board of directors upon consummation of the acquisition.
Mr. Dupree is a Managing Director of The Halifax Group which he founded in
January 1999. Prior to joining Halifax, Mr. Dupree was a Managing Director and
Partner with The Carlyle Group, a global investment firm located in Washington,
D.C., where he was primarily responsible for investments in healthcare and
related sectors. Prior to joining The Carlyle Group in 1992, Mr. Dupree was a
Principal in Corporate Finance with Montgomery Securities and prior to that, he
was Co-Head of Equity Private Placements at Alex. Brown & Sons Incorporated.
76
Mr. Dupree currently serves on the board of directors of Whole Foods Markets,
Inc. and National Packaging Solutions Group, Inc. and previously served on our
board of directors, as a designee of The Carlyle Group, from October 1997 to
December 1999.
Steven G. Segal became a member of our board of directors upon consummation
of the acquisition. He is a Partner of J.W. Childs Associates, L.P. and has been
at Childs since 1995. Prior to that time, he was an executive at Thomas H. Lee
Company from 1987, most recently holding the position of Managing Director. He
is also a director of Quality Stores Inc., Jillian's Entertainment Corp.,
National Nephrology Associates, Inc., Big V Supermarkets, Inc., The NutraSweet
Company, Universal Hospital Services, Inc. and is Co-Chairman of the Board of
Empire Kosher Poultry, Inc.
Mark J. Tricolli is a director and Vice President of InSight Holdings and
became a member of our board of directors upon consummation of the acquisition.
Mr. Tricolli is a Senior Associate at J.W. Childs Associates, which he joined in
2000. Prior to that Mr. Tricolli was an Associate in the Merchant Banking
Division of Goldman Sachs from 1999 to 2000, an Analyst at William Blair Capital
Partners, a private equity firm based in Chicago, Illinois from 1995 to 1997 and
an Analyst at Chemical Securities, Inc. from 1993 to 1995.
Edward D. Yun is a director and Vice President of InSight Holdings and
became a member of our board of directors upon consummation of the acquisition.
He is a Partner of J.W. Childs Associates, L.P. and has been at Childs since
1996. From 1994 until 1996, he was an Associate at DLJ Merchant Banking, Inc. He
is also a director of Jillian's Entertainment Corp., Pan Am International Flight
Academy, Inc., National Nephrology Associates, Inc., Equinox Holdings, Inc.,
Chevys, Inc., Universal Hospital Services, Inc. and Hartz Mountain Corporation.
77
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual, long-term
and all other compensation for services rendered in all capacities to InSight
and its subsidiaries for the years ended June 30, 2001, 2000, and 1999 of (i)
InSight's chief executive officer during the year ended June 30, 2001, and (ii)
the four most highly compensated executive officers (other than the chief
executive officer) of InSight serving as executive officers at June 30, 2001
("Other Executive Officers"), and whose aggregate cash compensation exceeded
$100,000 for the year ended June 30, 2001 (collectively, "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG TERM
--------------------------------------- COMPENSATION
FISCAL AWARDS
YEAR STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS(1) OTHER(2) (SHARES) COMP(2)
- --------------------------- ------ -------- -------- -------- ------------- ---------
Steven T. Plochocki.............. 2001 $280,000 $238,000 $ 9,000 50,000 $ 3,324
President and Chief 2000 158,749 125,000 5,625 125,000 1,655
Executive Officer(3) 1999 -- -- -- -- --
Thomas V. Croal.................. 2001 236,000 140,420 9,000 5,000 1,409
Executive Vice President, and 2000 225,500 75,250 9,000 -- 8,319
Chief Financial Officer 1999 215,000 -- 9,000 -- 12,596
Marilyn U. MacNiven-Young........ 2001 243,300 103,403 9,000 10,000 3,850
Executive Vice President, 2000 236,250 59,063 9,000 -- 3,964
General Counsel and Secretary 1999 206,250 -- 8,250 50,000 4,195
Michael A. Boylan................ 2001 210,000 124,950 9,000 10,000 4,365
Executive Vice President and
Chief Development Officer(4) 195,000 68,250 14,000 -- 4,819
1999 195,000 -- 9,000 -- 7,277
Michael S. Madler................ 2001 200,000 119,000 9,000 50,000 6,618
Executive Vice President 175,000 61,250 16,341 -- 4,090
and Chief Operating Officer(5) 1999 106,450 25,000 4,000 30,000 3,437
</Table>
- ---------------
(1) Annual bonuses are earned and accrued during the fiscal years indicated, and
paid subsequent to the end of each fiscal year.
(2) Amounts of Other Compensation include perquisites (auto allowances and
commissions for contract awards and renewals) and amounts of All Other
Compensation include (i) amounts contributed to InSight's 401(k) profit
sharing plan, (ii) specified premiums on executive split-dollar insurance
arrangements and (iii) specified premiums on executive health insurance
arrangements, for the Named Executive Officers.
(3) On November 22, 1999, Mr. Plochocki joined InSight as president and chief
executive officer.
(4)On February 7, 2002, Mr. Boylan's title changed from Executive Vice
President -- Operations, Eastern Division to Executive Vice President and
Chief Development Officer.
(5)On February 7, 2002, Mr. Madler's title changed from Executive Vice
President -- Operations, Western Division to Executive Vice President and
Chief Operating Officer.
78
OPTION GRANTS
For the year ended June 30, 2001, stock options were granted under the 1999
Stock Option Plan to the Named Executive Officers, as follows:
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(1) PER SHARE DATE(3) 5% 10%
- ---- ---------- -------------- -------------- ---------- ---------- ----------
Steven T. Plochocki........... 50,000 14% $8.37 8/25/10 $263,192 $666,982
Thomas V. Croal............... 5,000 1% $8.37 8/25/10 26,319 66,698
Marilyn U. MacNiven-Young..... 10,000 3% $8.37 8/25/10 52,638 133,398
Michael A. Boylan............. 10,000 3% $8.37 8/25/10 52,638 133,398
Michael S. Madler............. 50,000 14% $8.37 8/25/10 263,192 666,982
</Table>
- ---------------
(1) The options were granted at an exercise price exceeding the fair market
value (the closing price reported on The Nasdaq SmallCap Market) for the
common stock on the date of grant.
(2) Potential realizable value is determined by taking the exercise price per
share and applying the stated annual appreciation rate compounded annually
for the remaining term of the option (ten years), subtracting the exercise
price per share at the end of the period and multiplying the remaining
number by the number of options granted. Actual gains, if any, on stock
option exercises and InSight's common stock holdings are dependent on the
future performance of the common stock and overall stock market conditions.
(3) Options were exercisable starting twelve months after the date of grant,
with 25% of the shares becoming exercisable at that time and with an
additional 25% of the shares becoming exercisable on each successive
anniversary date with full vesting occurring on the fourth anniversary date.
The options were granted for a term of ten years, subject to earlier
termination in certain events related to termination of employment.
OPTION EXERCISES AND FISCAL YEAR-END VALUES.
During the year ended June 30, 2001, none of the Named Executive Officers
of InSight exercised any stock options. The following table sets forth
information with respect to the unexercised options to purchase common stock
granted under (i) MHC's and AHS's stock option plans and assumed by InSight
pursuant to the merger of American Health Services Corp. and Maxum Health Corp.,
(ii) InSight's 1996 Employee Stock Option Plan, (iii) InSight's 1997 Management
Stock Option Plan, (iv) InSight's 1998 Employee Stock Option Plan, and (v)
InSight's 1999 Stock Option Plan, for the Named Executive Officers as of June
30, 2001:
<Table>
<Caption>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS HELD IN-THE-MONEY OPTIONS
OF SHARES AT JUNE 30, 2001 AT JUNE 30, 2001(1)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Steven T. Plochocki........... -- -- 20,833 154,167 $ 194,372 $1,438,378
Thomas V. Croal............... -- -- 113,750 81,250 1,185,725 781,875
Marilyn U. MacNiven-Young..... -- -- 25,000 35,000 208,000 301,300
Michael A. Boylan............. -- -- 81,370 37,500 1,113,362 359,400
Michael S. Madler............. -- -- 15,000 65,000 139,950 606,450
</Table>
- ---------------
(1) Based on the closing price reported on The Nasdaq SmallCap Market for the
InSight common stock on that date of $17.70 per share.
(2) At the consummation of the acquisition, the Named Executive Officers became
entitled to receive in cash the difference between $18.00 and the exercise
price for each share of common stock which each
79
could acquire pursuant to the terms of their stock option agreements; except
that Messrs. Plochocki, Croal, Boylan and Madler rolled over certain of
their stock options (totaling an aggregate of approximately $1.7 million)
into fully vested options to purchase the common stock of InSight Holdings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Upon the consummation of the acquisition, the committees of our board of
directors ceased to exist and new committees have since been established. The
current compensation arrangements for our chief executive officer and each of
our executive officers were established pursuant to the terms of the respective
employment agreements between us and each executive officer. The terms of the
employment agreements were established pursuant to arms-length negotiations
between the equity sponsors and each executive officer.
During fiscal year ended June 30, 2001, our former board of directors
established a Compensation, Audit, Executive and Nominating Committee. None of
our current directors served on any of these committees.
Since the acquisition, our board of directors has established the following
committees:
A Compensation Committee consisting of Michael Cannizzaro, David Dupree,
Steven Plochocki and Steven Segal. The Compensation Committee is responsible for
determining the specific forms and levels of compensation of our executive
officers.
An Audit Committee consisting of Kenneth Doyle, Mark Tricolli and Edward
Yun. The committee's principal function is to review the results of our annual
audit with our independent auditors and review the performance of our
independent auditors.
An Executive Committee consisting of Michael Cannizzaro, David Dupree,
Steven Plochocki and Steven Segal. The committee is authorized to exercise all
the power and authority of the board of directors in the management of our
business, however, its authority does not extend to certain fundamental
corporate transactions.
A Regulatory Compliance Committee consisting of Kenneth Doyle, Mark
Tricolli and Edward Yun. The committee is responsible for monitoring regulatory
compliance of our business.
COMPENSATION OF DIRECTORS
All members of our board of directors will be reimbursed for their usual
and customary expenses incurred in connection with attending all board meetings
but will not otherwise be compensated for serving in such capacity.
MANAGEMENT PARTICIPATION
As described elsewhere in this prospectus, upon consummation of the
acquisition, certain members of our senior management rolled over a portion of
their options in InSight into options of InSight Holdings and exchanged their
common stock and remaining options in InSight for cash. The individuals, the
value of their InSight common stock and options, the value of their option
rollover into InSight Holdings and cash proceeds as a result of the acquisition
are indicated in the chart below.
<Table>
<Caption>
TOTAL COMMON STOCK TOTAL CASH
NAME AND OPTION VALUE OPTION ROLLOVER VALUE PROCEEDS
- ---- ------------------ --------------------- ----------
Steven T. Plochocki......................... $1,685,250 $ 505,575 $1,179,675
Thomas V. Croal............................. 2,026,100 505,575 1,520,525
Michael A. Boylan........................... 1,508,370 452,514 1,055,856
Michael S. Madler........................... 770,400 231,120 539,280
---------- ---------- ----------
TOTAL.................................. $5,990,120 $1,694,784 $4,295,336
========== ========== ==========
</Table>
80
INDEMNIFICATION AGREEMENTS
InSight has entered into separate indemnification agreements with Mr.
Plochocki, its executive officers and each of our former directors that could
require InSight, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
executive officers and to advance expenses incurred by them as a result of any
proceedings against them as to which they could be indemnified.
EMPLOYMENT AGREEMENTS
The employment agreement with Steven T. Plochocki is for a term of three
years, subject to certain termination rights. Under the employment agreement,
Mr. Plochocki receives an annual base salary as well as a discretionary bonus of
up to 75% of his annual base salary if we achieve our budgetary goals and a
discretionary bonus of an additional 25% of his annual base salary upon the
achievement of other goals mutually agreed upon by Mr. Plochocki and our board
of directors. Mr. Plochocki is currently being paid an annual base salary of
$300,000. Mr. Plochocki's employment agreement also provides for a life
insurance policy of three times the amount of his annual base salary and
entitles him to participate during the term of his employment in our life
insurance, medical, health and accident and disability plan or program, pension
plan or other similar benefit plan. Mr. Plochocki is subject to a noncompetition
covenant and nonsolicitation provisions (relating to our employees and
customers) during the term of his employment agreement and continuing for a
period of 24 months after the termination of his employment. Mr. Plochocki's
employment agreement will terminate and he will be entitled to all accrued and
unpaid compensation, as well as 24 months of compensation at the annual salary
rate then in effect (1) upon his permanent and total disability (as defined in
his employment agreement); (2) upon our 30 days' written notice to him of the
termination of his employment without cause (as defined in his employment
agreement); (3) if he terminates his employment with us for good reason (as
defined in the employment agreement); and (4) if his employment is terminated by
us without cause or he terminates his employment for good reason within 12
months of a change in control (as defined in his employment agreement) which
occurs after the acquisition contemplated by the merger agreement. In addition,
we will maintain at our expense until the earlier of 24 months after the date of
termination or commencement of Mr. Plochocki's benefits pursuant to full time
employment with a new employer under such employer's standard benefits program,
all life insurance, medical, health and accident and disability plans or
programs in which Mr. Plochocki was entitled to participate immediately prior to
the date of termination. Mr. Plochocki's employment will immediately terminate
upon his death and the executors or administrators of his estate or his heirs or
legatees (as the case may be) will be entitled to all accrued and unpaid
compensation up to the date of his death. Mr. Plochocki's employment will
terminate and he will not be entitled to receive any monetary compensation or
benefit upon (1) the termination of his employment by us for cause or (2) his
voluntary termination of his employment with us without good reason.
The employment agreement with each of Michael A. Boylan, Thomas V. Croal,
Marilyn U. MacNiven-Young and Michael S. Madler provides for a term of 12 months
on a continuing basis, subject to certain termination rights. The executives'
respective employment agreement provides for an annual salary as well as a
discretionary bonus of up to 75% of the executive's annual base salary if we
achieve our budgetary goals and a discretionary bonus of an additional 25% of
the executive's annual base salary upon the achievement of other goals mutually
agreed upon by each executive and our President and Chief Executive Officer and
approved by our board of directors. Mr. Boylan, Mr. Croal, Ms. MacNiven-Young
and Mr. Madler are currently being paid an annual base salary of $225,000,
$252,500, $260,300 and $214,000, respectively. Each executive is provided with a
life insurance policy of three times the amount of his or her annual base salary
and is entitled to participate in our life insurance, medical, health and
accident and disability plan or program, pension plan or other similar benefit
plan. Each executive is subject to a noncompetition covenant and nonsolicitation
provisions (relating to our employees and customers) during the term of his or
her respective employment agreement and continuing for a period of 12 months
after the termination of his or her respective employment. Each executive's
employment agreement will terminate and each of them will be entitled to all
accrued and unpaid compensation, as
81
well as 12 months of compensation at the annual salary rate then in effect (1)
upon the executive's permanent and total disability (as defined in the
respective employment agreement); (2) upon our 30 days' written notice to the
executive of the termination of the executive's employment without cause (as
defined in the respective employment agreement); (3) if the executive terminates
his or her respective employment with us for good reason (as defined in the
respective employment agreement); and (4) if the executive's employment is
terminated by us without cause or he or she terminates his or her employment for
good reason within 12 months of a change in control (as defined in the
respective employment agreement) which occurs after the acquisition contemplated
in the merger agreement. In addition, we will maintain at our expense until the
earlier of 12 months after the date of termination or commencement of the
executive's benefits pursuant to full time employment with a new employer under
such employer's standard benefits program, all life insurance, medical, health
and accident and disability plans or programs in which the executive was
entitled to participate immediately prior to the date of termination. Each
executive's employment will immediately terminate upon his or her death and the
executors or administrators of his or her estate or his or her heirs or legatees
(as the case may be) will be entitled to all accrued and unpaid compensation up
to the date of his or her death. The executive's employment will terminate and
the executive will not be entitled to receive any monetary compensation or
benefit upon (1) the termination of his or her respective employment by us for
cause; or (2) his or her voluntary termination of his or her respective
employment with us without good reason.
The employment agreement with each of Patricia R. Blank, Brian G. Drazba
and Cecilia A. Guastaferro provides for a term of 12 months on a continuing
basis, subject to certain termination rights. The executives' respective
employment agreements provide for an annual salary and should make them eligible
for discretionary bonuses, if any, as awarded by our President and Chief
Executive Officer and approved by our board of directors. Ms. Blank, Mr. Drazba
and Ms. Guastaferro are currently being paid an annual base salary of $198,000,
$146,000 and $145,000, respectively. Each executive is provided with a life
insurance policy of three times the amount of the executive's annual base salary
and is entitled to participate in our health, hospitalization or disability
insurance plan, pension plan or other similar benefit plan. Each executive is
subject to a noncompetition covenant and nonsolicitation provisions (relating to
our employees and customers) during the term of the executive's respective
employment agreement and continuing for a period of 12 months after the
termination of the executive's respective employment. Each executive's
employment agreement will terminate and each of them will be entitled to all
accrued and unpaid compensation, as well as 12 months of compensation at the
annual salary rate then in effect (1) upon the executive's permanent and total
disability (as defined in the respective employment agreement); (2) upon our 30
days' written notice to the executive of the termination of the executive's
employment without cause (as defined in the respective employment agreements);
and (3) if the executive's employment is terminated by us within 12 months of a
change in control (as defined in the respective employment agreement) which
occurs after the acquisition contemplated in the merger agreement. In addition,
we will maintain at our expense until the earlier of 12 months after the date of
termination or commencement of the executive's benefits pursuant to full time
employment with a new employer under such employer's standard benefits program,
all life insurance, medical, health and accident and disability plans or
programs in which the executive was entitled to participate immediately prior to
the date of termination. Each executive's employment will immediately terminate
upon his or her death and the executors or administrators of his or her estate
or his or her heirs or legatees (as the case may be) will be entitled to all
accrued and unpaid compensation up to the date of his or her death. Each of the
executive's employment will terminate and each executive will not be entitled to
receive any monetary compensation or benefit upon (1) the termination of his or
her employment by us for cause; or (2) voluntary termination of his or her
employment with us.
2001 STOCK OPTION PLAN
In connection with the acquisition, Mr. Plochocki, Mr. Croal, Mr. Boylan
and Mr. Madler rolled over a certain number of the stock options in our company
that they held prior to the acquisition into stock options under the 2001 Stock
Option Plan of InSight Holdings. Under the Stock Option Plan, the board of
directors of InSight Holdings has been authorized to issue stock options to
purchase the common stock of
82
InSight Holdings, not to exceed 175,990 shares, at an option price of $8.37 per
share. Pursuant to stock option agreements entered into by each of Mr.
Plochocki, Mr. Croal, Mr. Boylan and Mr. Madler and InSight Holdings, Mr.
Plochocki and Mr. Croal both were granted options to purchase up to 52,500
shares of common stock, Mr. Boylan was granted options to purchase up to 46,990
shares of common stock, and Mr. Madler was granted options to purchase up to
24,000 shares of common stock under the Stock Option Plan. The Stock Option Plan
provides for a term of ten years and any options outstanding under the Stock
Option Plan upon the termination date of the Plan will continue to be
exercisable pursuant to their terms.
Upon consummation of the acquisition, each option granted under the Stock
Option Plan vested fully and became exercisable, in whole or in part, at any
time. The minimum number of shares of InSight Holdings common stock that may be
purchased is the lesser of 100 shares or the maximum number of shares available
for purchase under the option at the time of exercise. The exercise price will
be payable (1) in cash or in cash equivalents, (2) with the consent of the board
of directors of InSight Holdings through a cashless exercise, or (3) by any
other method or methods as the board of directors of InSight Holdings may
authorize.
Upon the termination of employment of an optionee for any reason, the
option granted will terminate on the earlier to occur of (1) the expiration of
the term of the Stock Option Plan and (2) a change in control (as defined in the
Stock Option Plan).
STOCK OPTION AGREEMENTS
Certain of our employees are eligible to receive a number of options to
purchase the common stock of InSight Holdings. The exercise price of the options
is the price per share that subscribing stockholders paid to InSight Holdings at
the time the acquisition was consummated in connection with their subscription
for the common stock of InSight Holdings. The options will be administered by
the board of directors of InSight Holdings. Options may be exercised when fully
vested by giving written notice stating the number of shares (not less than 100,
unless the total shares which are vested and exercisable at such time is less
than 100) to be purchased and accompanied by payment in full of the exercise
price. Twenty percent of the options will vest annually on the following
schedule: (1) 25% of the number of available options shall vest and become
exercisable upon the anniversary of the consummation of the acquisition in each
of the fiscal years ending on June 30 in the years 2003-2007 and (2) 75% of the
number of available options shall vest and become exercisable for each fiscal
year ending on June 30 in the years 2002-2006 upon the attainment of a set of
predetermined performance-based targets.
The options expire on the tenth anniversary of the consummation of the
acquisition, unless: (1) the employee is terminated for cause (as defined in the
employee's stock option agreement) or voluntarily terminates his or her
employment without good reason (as defined in the employee's stock option
agreement), in which case the options shall terminate on the date of such
termination of employment, whether or not then fully vested or exercisable; or
(2) the employee is terminated without cause, resigns for good reason, dies or
becomes disabled (as defined in the employee's stock option agreement) at any
time during the term of his or her employment, in which case any portion of the
option not fully vested and exercisable shall terminate immediately, and any
option that is vested and exercisable shall terminate on the 120th day following
such termination of employment. However, the board of directors of InSight
Holdings has discretion to vest any portion of options not already vested at the
time of such termination.
All options subject solely to time vesting will become fully vested
immediately prior to a change of control (as defined in the employee's stock
option agreement). In addition, in the case of a change in control, the board of
directors of InSight Holdings may, in its sole discretion, accelerate the
vesting of all or any portion of the options that would remain unvested. All
options subject to performance-based vesting will become fully vested on the
eighth anniversary of the grant date to the extent they have not previously
vested.
83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Upon consummation of the acquisition, we became a wholly-owned subsidiary
of InSight Holdings, a corporation owned by J.W. Childs Equity Partners II,
Halifax Capital Partners and certain of their affiliates.
The following table sets forth certain information regarding beneficial
ownership of the common stock of InSight Holdings, as of February 28, 2002, by:
(1) each person or entity known to us owning beneficially 5% or more of InSight
Holdings' common stock; (2) each director of InSight and InSight Holdings; (3)
each of InSight's named executive officers; and (4) all directors of InSight and
InSight Holdings and executive officers of InSight, as a group. Upon
consummation of the acquisition, InSight Holdings' outstanding securities
consisted of approximately 5,461,401 shares of common stock and options to
purchase 175,990 shares of common stock which are immediately exercisable.
Beneficial ownership of the securities listed in the table has been determined
in accordance with the applicable rules and regulations promulgated under the
Exchange Act.
<Table>
<Caption>
SHARES
BENEFICIALLY
NAME AND ADDRESS OWNED(1) PERCENT
- ---------------- ------------ -------
J.W. Childs Equity Partners II, L.P.(2)
111 Huntington Avenue, Suite 2900
Boston, Massachusetts 02199............................... 4,350,290 80%
JWC-InSight Co-invest LLC(3)
111 Huntington Avenue, Suite 2900
Boston, Massachusetts 02199............................... 338,532 6.0%
Halifax Capital Partners, L.P.(4)
1133 Connecticut Avenue, N.W.
Washington, D.C. 20036.................................... 1,111,112 20%
Steven G. Segal(5)
111 Huntington Avenue, Suite 2900
Boston, Massachusetts 02199............................... -- --
Edward D. Yun(6)
111 Huntington Avenue, Suite 2900
Boston, Massachusetts 02199............................... -- --
Michael N. Cannizzaro(7)
111 Huntington Avenue, Suite 2900
Boston, Massachusetts 02199............................... -- --
Mark J. Tricolli(8)
111 Huntington Avenue, Suite 2900
Boston, Massachusetts 02199............................... -- --
David W. Dupree(9)
1133 Connecticut Avenue, N.W.
Washington, D.C. 20036.................................... 4,092 *
Kenneth M. Doyle(10)
1133 Connecticut Avenue, N.W.
Washington, D.C. 20036.................................... -- --
Steven T. Plochocki(11)
4400 MacArthur Blvd., Suite 800
Newport Beach, California 92660........................... 52,500 *
Michael A. Boylan(12)
110 Gibraltar Road
Horsham, Pennsylvania 18901............................... 46,990 *
Thomas V. Croal(13)
4400 MacArthur Blvd., Suite 800
Newport Beach, California 92660........................... 52,500 *
</Table>
84
<Table>
<Caption>
SHARES
BENEFICIALLY
NAME AND ADDRESS OWNED(1) PERCENT
- ---------------- ------------ -------
Michael S. Madler(14)
4400 MacArthur Blvd., Suite 800
Newport Beach, California 92660........................... 24,000 *
Marilyn U. MacNiven-Young
4400 MacArthur Blvd., Suite 800
Newport Beach, California 92660........................... -- --
All directors and executive officers, as a group (14
persons).................................................. 243,709 4.3%
</Table>
- ---------------
* Less than 1%
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any security that such person has the right to acquire within
60 days after the date of this prospectus.
(2) Includes 4,011,758 shares of InSight Holdings common stock owned directly
by J.W. Childs Equity Partners II and 338,532 shares of InSight Holdings
common stock owned directly by JWC-InSight Co-invest LLC, an affiliate of
J.W. Childs Equity Partners II. The general partner of J.W. Childs Equity
Partners II, L.P. is J.W. Childs Advisors II, L.P., a Delaware limited
partnership. The general partner of J.W. Childs Advisors II, L.P. is J.W.
Childs Associates, L.P., a Delaware limited partnership. The general
partner of J.W. Childs Associates, L.P. is J.W. Childs Associates, Inc., a
Delaware corporation. J.W. Childs Advisors II, L.P., J.W. Childs
Associates, L.P. and J.W. Childs Associates, Inc. may be deemed to
beneficially own the 4,350,290 shares of InSight Holdings common stock held
by J.W. Childs Equity Partners II and JWC-InSight Co-invest LLC.
(3) JWC-InSight Co-invest LLC is a Delaware limited liability company and
affiliate of J.W. Childs Equity Partners II. J.W. Childs Associates Inc. is
the managing member of JWC-InSight Co-invest LLC. As the managing member,
J.W. Childs Associates Inc. owns the 338,532 shares of InSight Holdings to
be held directly by JWC-InSight Co-invest LLC. Steven G. Segal, Edward D.
Yun, Michael N. Cannizzaro and Mark J. Tricolli are each members of
JWC-InSight Co-invest LLC.
(4) Includes 1,107,020 shares of InSight Holdings common stock owned directly
by Halifax Capital Partners and 4,092 shares of InSight Holdings common
stock owned directly by David W. Dupree, a Managing Director of The Halifax
Group, L.L.C. The general partner of Halifax Capital Partners, L.P. is
Halifax Genpar, L.P., a Delaware limited partnership. The general partner
of Halifax Genpar, L.P. is The Halifax Group, L.L.C., a Delaware limited
liability company. Halifax Genpar, L.P. and The Halifax Group, L.L.C. may
be deemed to beneficially own the 1,111,112 shares of InSight Holdings
common stock held by Halifax Capital Partners, L.P. and its affiliate, Mr.
Dupree. Halifax Capital Partners, Halifax Genpar, L.P. and The Halifax
Group, L.L.C. disclaim beneficial ownership of the 4,092 shares of InSight
Holdings common stock owned directly by Mr. Dupree.
(5) As a Senior Managing Director of J.W. Childs Associates, L.P., which
manages J.W. Childs Equity Partners II, and a member of JWC-InSight
Co-invest LLC, Mr. Segal may be deemed to beneficially own the 4,011,758
shares of InSight Holdings common stock owned by J.W. Childs Equity
Partners II and the 338,532 shares of InSight Holdings common stock held
directly by JWC-InSight Co-invest LLC. Mr. Segal disclaims beneficial
ownership of such shares of InSight Holdings.
(6) As a Managing Director of J.W. Childs Associates, L.P., which manages J.W.
Childs Equity Partners II, L.P. and a member of JWC-InSight Co-invest LLC,
Mr. Yun may be deemed to beneficially own the 4,011,758 shares of InSight
Holdings common stock owned by J.W. Childs Equity Partners II, and the
338,532 shares of InSight Holdings common stock held directly by
JWC-InSight Co-invest LLC. Mr. Yun disclaims beneficial ownership of such
shares of InSight Holdings.
85
(7) As a Managing Director of J.W. Childs Associates, L.P., which manages J.W.
Childs Equity Partners II, L.P. and a member of JWC-InSight Co-invest LLC,
Mr. Cannizzaro may be deemed to beneficially own the 4,011,758 shares of
InSight Holdings common stock owned by J.W. Childs Equity Partners II and
the 338,532 shares of InSight Holdings common stock held directly by JWC-
InSight Co-invest LLC. Mr. Cannizzaro disclaims beneficial ownership of
such shares of InSight Holdings.
(8) As a Senior Associate at J.W. Childs Associates, L.P., which manages J.W.
Childs Equity Partners II and a member of JWC-InSight Co-invest LLC, Mr.
Tricolli may be deemed to beneficially own the 4,011,758 shares of InSight
Holdings common stock owned by J.W. Childs Equity Partners II and the
338,532 shares of InSight Holdings common stock held directly by JWC-
InSight Co-invest LLC. Mr. Tricolli disclaims beneficial ownership of such
shares of InSight Holdings.
(9) As a Managing Director of The Halifax Group, L.L.C., which manages Halifax
Capital Partners, L.P., Mr. Dupree may also be deemed to beneficially own
the 1,107,020 shares of InSight Holdings common stock owned by Halifax
Capital Partners, L.P. Mr. Dupree disclaims beneficial ownership of such
shares of InSight Holdings.
(10) As a Principal of The Halifax Group, L.L.C., which manages Halifax Capital
Partners, L.P., Mr. Doyle may be deemed to beneficially own the 1,111,112
shares of InSight Holdings common stock owned by Halifax Capital Partners,
L.P. and its affiliates. Mr. Doyle disclaims beneficial ownership of the
shares of InSight Holdings owned by Halifax Capital Partners and its
affiliates.
(11) Consists of options to purchase 52,500 shares of InSight Holdings common
stock at an exercise price of $8.37 per share which options were granted
upon the consummation of the acquisition and are fully vested and
immediately exercisable.
(12) Consists of options to purchase 46,990 shares of InSight Holdings common
stock at an exercise price of $8.37 per share which options were granted
upon the consummation of the acquisition and are fully vested and
immediately exercisable.
(13) Consists of options to purchase 52,500 shares of InSight Holdings common
stock at an exercise price of $8.37 per share which options were granted
upon the consummation of the acquisition and are fully vested and
immediately exercisable.
(14) Consists of options to purchase 24,000 shares of InSight Holdings common
stock at an exercise price of $8.37 per share which options were granted
upon the consummation of the acquisition and are fully vested and
immediately exercisable.
Except as otherwise noted, InSight Holdings believes that each of the
stockholders listed in the table above has sole voting and dispositive power
over all shares beneficially owned. Each of the stockholders of InSight Holdings
in the table above is party to a stockholders agreement which governs the
transferability and voting of shares of InSight Holdings common stock held by
them. See "Certain Relationships and Related Transactions -- Stockholders
Agreement."
86
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement. Upon the completion of the acquisition, InSight and
InSight Holdings entered into a management agreement with J.W. Childs Advisors
II, L.P., the general partner of J.W. Childs Equity Partners II, and Halifax
Genpar, L.P., the general partner of Halifax Capital Partners. Under the
agreement, InSight paid J.W. Childs Advisors II and Halifax Genpar a transaction
fee of $4,500,000 and $1,125,000, respectively, for services rendered in
connection with the acquisition. Additionally, J.W. Childs Advisors II and
Halifax Genpar will provide business, management and financial advisory services
to InSight and InSight Holdings in consideration of (1) an annual fee of
$240,000 to be paid to J.W. Childs Advisors II and (2) an annual fee of $60,000
to be paid to Halifax Genpar. InSight and InSight Holdings will also reimburse
such entities for all travel and other out-of-pocket expenses incurred by such
entities in connection with their performance of the advisory services under the
agreement. The management agreement has an initial term of five years, which
term will automatically renew for one year periods thereafter and is subject to
earlier termination by the board of directors of InSight and InSight Holdings.
Furthermore, InSight Holdings and InSight have agreed to indemnify and hold
harmless J.W. Childs Advisors II and Halifax Genpar and their affiliates, from
and against any and all claims, losses, damages and expenses arising out of the
acquisition or the performance by J.W. Childs Advisors II and Halifax Genpar of
their obligations under the management agreement.
Stockholders Agreement. InSight Holdings, J.W. Childs Equity Partners II,
JWC-InSight Co-invest LLC, Halifax Capital Partners, Mr. Dupree, management of
InSight and all other holders of capital stock or stock options of InSight
Holdings have entered into a stockholders agreement. Under the stockholders
agreement, InSight Holdings and each stockholder have a right of first refusal
to purchase any stock proposed to be sold by all other stockholders, except J.W.
Childs Equity Partners II and JWC-InSight Co-invest LLC. Additionally, the
stockholders agreement affords (1) stockholders, other than J.W. Childs Equity
Partners II and JWC-InSight Co-invest LLC, so-called "tag-along" rights on
proposed sales of capital stock of InSight Holdings by J.W. Childs Equity
Partners II and JWC-InSight Co-invest LLC; (2) J.W. Childs Equity Partners II
and JWC-InSight Co-invest LLC so-called "drag-along" rights with respect to
proposed sales of a majority of the capital stock of InSight Holdings and (3)
all stockholders certain registration rights with respect to the capital stock
of InSight Holdings. Furthermore, the stockholders agreement contains put and
call features on capital stock and stock options held by InSight management
which are triggered upon termination of such individual's employment with
InSight and InSight Holdings. The stockholders agreement also obligates InSight
Holdings and the stockholders to take all necessary action to appoint, as
directors of InSight Holdings, up to eight nominees designated by J.W. Childs
Equity Partners II (as would constitute a majority of InSight Holdings' entire
board of directors) and two nominees designated by Halifax Capital Partners.
87
DESCRIPTION OF NEW SENIOR CREDIT FACILITIES
Concurrently with the closing of the acquisition, we entered into new
senior credit facilities for up to $275 million of senior loans, arranged by
Banc of America Securities LLC, with Bank of America, N.A. and a syndicate of
other financial institutions. The new senior credit facilities consist of:
- a $50 million six-year revolving credit facility;
- a $75 million seven-year delayed-draw term loan facility (which is
available for draw for two years following the closing of the
acquisition); and
- a $150 million seven-year term loan B facility.
REVOLVING CREDIT FACILITY
The new senior credit facilities include a $50 million six-year revolving
credit facility, none of which was drawn on the consummation of the acquisition.
DELAYED-DRAW TERM LOAN FACILITY
The new senior credit facilities include a $75 million seven-year
delayed-draw term loan facility available from time to time until October 17,
2003. The delayed-draw term facility will be amortized with 1% of the initial
aggregate delayed-draw term loan facility advances outstanding as of October 17,
2003 to be payable in each of years three through six following the initial
borrowing under the new senior credit facilities and 96% of the initial
aggregate acquisition term loan facility advances outstanding as of October 17,
2003 to be payable in year seven.
TERM LOAN B
The new senior credit facilities include a seven-year $150 million term
loan B facility. The term loan B was drawn in full on the consummation of the
acquisition. The term loan B facility will be amortized with 1% of the term loan
B to be payable in each of the first six years and 94% of the initial aggregate
term loan B to be payable in year seven.
INTEREST RATES AND FEES
The interest rates per annum applicable to the new senior credit facilities
are LIBOR plus the applicable margin (as defined below) or, at the option of the
borrower, the alternate base rate which will be the higher of (x) the Bank of
America, N.A. prime rate and (y) the federal funds rate plus 0.50%, plus the
applicable margin. The applicable margin (1) until March 31, 2002 will be (A)
with respect to the revolving credit facility, 3.00% per annum in the case of
LIBOR rate advances and 2.00% per annum with respect to alternate base rate
advances and (B) with respect to the term loan facilities, 3.50% per annum in
the case of LIBOR rate advances and from 2.50% of alternate rate advances and
(2) thereafter will be determined in accordance with a performance grid based on
our senior leverage ratio agreed to with Bank of America, N.A. The default rate
on the new senior credit facilities will be 2% above the otherwise applicable
interest rate. In addition, we will pay a commitment fee on the unused portion
of the revolving credit facility of (1) until March 31, 2002, 0.50%, and (2)
thereafter, a percentage per annum determined in accordance with a performance
pricing grid based on our senior leverage ratio to be agreed upon with Bank of
America, N.A. We will also be obligated to pay a commitment fee of 2% on the
unused portion of the delayed-draw term loan facility. The commitment fees are
payable quarterly in arrears and on the date of termination or expiration of the
respective commitments.
88
PREPAYMENTS
Subject to certain exceptions, loans under the new senior credit facilities
are required to be prepaid with:
- 100% of the net cash proceeds (1) from certain asset dispositions by us,
InSight Holdings or our subsidiaries, (2) of extraordinary receipts which
include tax refunds, indemnity payments, pension reversions and certain
insurance proceeds and (3) from the issuance or incurrence after the date
of the initial borrowing under the new senior credit facilities of debt
or equity by us, InSight Holdings or any of our subsidiaries; and
- 75% (if the senior leverage ratio is equal to or greater than 2.0 to 1.0)
or 50% (if the senior leverage ratio is less than 2.0 to 1.0) of excess
cash flow, as defined in the new senior credit facilities.
We may prepay the new senior credit facilities at any time in whole or in
part without premium or penalty, except that any prepayment of LIBOR rate
advances other than at the end of the applicable interest periods therefor shall
be made with reimbursement for any funding losses and redeployment costs of the
lenders resulting therefrom.
COVENANTS AND BORROWING LIMIT
The new senior credit facilities contain customary affirmative and negative
covenants, including limitations on liens, limitations on sales, transfers and
other dispositions of assets, limitations on incurrence of debt, limitations on
dividends, stock redemptions and the redemption and/or prepayment of other debt,
limitations on investments and acquisitions, limitations on capital
expenditures, limitations on granting negative pledges, limitations on amending
organizational documents and material agreements and limitations on changing
accounting policies and reporting practices. In addition, the credit agreement
contains the following financial covenants: (1) a maximum senior leverage ratio,
(2) a maximum total leverage ratio, (3) a minimum fixed charge coverage ratio,
and (4) a minimum interest coverage ratio.
EVENTS OF DEFAULT
Events of default under the new senior credit facilities include, among
others, nonpayment of principal or interest, covenant defaults, a material
inaccuracy in any of the representations and warranties, bankruptcy and
insolvency events, cross-defaults and a change of control.
SECURITY AND GUARANTEES
Our obligations under the new senior credit facilities and any interest
rate protection and other hedging agreements with any lender or its affiliates
are guaranteed by InSight Holdings and all of its existing and future direct and
indirect subsidiaries formed under the laws of the United States, any state
thereof or the District of Columbia, except for specified excluded subsidiaries.
All obligations under the new senior credit facilities, the guarantees and
any interest rate protection and other hedging agreements with any lender or its
affiliates are secured by a first priority perfected security interest in (1)
all our capital stock and other ownership or profit interests and our existing
and future direct and indirect subsidiaries, excluding certain specified
excluded subsidiaries and limited, in the case of each foreign subsidiary, to
65% of the voting stock of such entity and (2) all our and the guarantors' other
existing and future assets and properties.
89
DESCRIPTION OF NOTES
The outstanding notes were, and the exchange notes will be, issued under an
indenture, dated as of October 30, 2001, by and among the Guarantors, State
Street Bank and Trust Company, as trustee, and us, a copy of which is filed as
an exhibit to the registration statement of which this prospectus forms a part.
The terms of the notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act of 1939, as amended, as
in effect on the date of the indenture. The exchange notes are substantially
identical to the terms and provisions of the outstanding notes, except for
certain transfer restrictions and registration rights relating to the
outstanding notes. The exchange notes represent the same indebtedness as
represented by the outstanding notes and are subject to the same terms. We refer
you to the indenture and the Trust Indenture Act for a statement of them. The
following is a summary of the material terms of the notes. It does not restate
the indenture in its entirety. Because this is a summary, we urge you to read
the indenture and the relevant portions of the Trust Indenture Act because they,
and not this description, define your rights as holders of the notes. You can
find definitions to certain capitalized terms under "-- Certain Definitions." In
this description, the words the "Company" and "InSight" refer only to InSight
Health Services Corp. and not any of its subsidiaries.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The Notes
The notes:
- are general unsecured obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are ranked equally in right of payment with any future senior
subordinated Indebtedness of the Company; and
- are guaranteed by the Guarantors.
The Guarantees
The notes are guaranteed by the Parent and by all of the Wholly Owned
Restricted Subsidiaries of InSight.
Each guarantee of the notes are:
- a general unsecured obligation of the Guarantor;
- subordinated in right of payment to all existing and future Senior
Indebtedness of the Guarantor; and
- ranked equally in right of payment with any future senior subordinated
Indebtedness of the Guarantor.
Assuming we had completed the acquisition and the related financing
transactions, including this offering, as of September 30, 2001, the Company
would have had total Senior Indebtedness of approximately $150 million and $125
million available to be borrowed under the Credit Agreement (all of which would
be Senior Indebtedness), and the Guarantors would have had total Senior
Indebtedness of approximately $154.1 million. As indicated above and as
discussed in more detail below under the caption "-- Subordination," payments on
the notes and under the guarantees of the notes are subordinated to the prior
payment in full of all Senior Indebtedness. The Indenture permits the Company
and the Guarantors to incur additional Senior Indebtedness.
90
PRINCIPAL, MATURITY AND INTEREST
The notes will mature on November 1, 2011, will be limited in aggregate
principal amount to $225 million and will be senior subordinated unsecured
obligations of the Company. The indenture provides for the issuance of up to
$100 million aggregate principal amount of additional notes having identical
terms and conditions to the notes offered hereby (the "Additional Notes"),
subject to compliance with the covenants contained in the indenture. For
purposes of this "Description of the Notes," reference to the notes includes
Additional Notes unless otherwise indicated; however, no offering of any such
Additional Notes is being or shall in any manner be deemed to be made by this
prospectus. In addition, there can be no assurance as to when or whether the
Company will issue any such Additional Notes or as to the aggregate principal
amount of such Additional Notes. Interest on the notes will accrue at the rate
of 9 7/8% per annum and will be payable semiannually on each May 1 and November
1, commencing May 1, 2002, to the Holders of record on the immediately preceding
April 15 and October 15. Interest on the notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
original date of issuance (the "Issue Date"). Interest will be computed on the
basis of a 360-day year comprising twelve 30-day months.
The principal of and premium, if any, and interest on the notes will be
payable and the notes will be exchangeable and transferable, at the office or
agency of the Company in the City of New York maintained for such purposes
(which initially will be the office of the Trustee located at 61 Broadway, 15th
Floor, New York, New York 10006) or, at the option of the Company, payment of
interest may be paid by check mailed to the address of the person entitled
thereto as such address appears in the security register. The notes will be
issued only in registered form without coupons and only in denominations of
$1,000 and any integral multiple thereof. No service charge will be made for any
registration of transfer or exchange or redemption of notes, but the Company may
require payment in certain circumstances of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith.
The notes and any Additional Notes will be treated as a single class of
securities under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase.
The notes will not be entitled to the benefit of any sinking fund.
GUARANTEES
Each of the Company's Wholly Owned Restricted Subsidiaries is a Subsidiary
Guarantor and payment of the principal of, premium, if any and interest on the
notes, when and as the same become due and payable, will be guaranteed, jointly
and severally, on a senior subordinated and unsecured basis (the "Guarantees")
by the Subsidiary Guarantors and by the Parent. In addition, if the Company or
any of its Wholly Owned Restricted Subsidiaries acquires or creates another
Wholly Owned Subsidiary (other than any Foreign Subsidiary), then such
Subsidiary shall be required to execute a Guarantee, in accordance with the
terms of the indenture. Each Guarantee is subordinated in right of payment, as
set forth in the indenture, to the prior payment in full of Senior Indebtedness
of the relevant Guarantor. See "Certain Covenants -- Guarantees of Indebtedness
by Restricted Subsidiaries." The obligations of the Guarantors under the
Guarantees is limited so as not to constitute a fraudulent conveyance under
applicable statutes. See "Risk Factors -- Risks Relating to the Notes -- Federal
and state statutes allow courts, under specific circumstances, to void
guarantees and require noteholders to return payments received from guarantors."
The indenture provides that upon a sale or other disposition to a Person
not an Affiliate of the Company of all or substantially all of the assets of any
Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or
other disposition to a Person not an Affiliate of the Company of all of the
Capital Stock of any Subsidiary Guarantor, by way of merger, consolidation or
otherwise, which transaction is carried out in accordance with the covenants
described below under the captions "-- Repurchase at the Option of
Holders -- Asset Sales," such Subsidiary Guarantor will be deemed automatically
and unconditionally released and discharged from all of its obligations under
its Guarantee without any further action on the part of the Trustee or any
holder of the notes; provided that any such termination shall occur only to the
extent that all obligations of such Subsidiary Guarantor under all of its
91
guarantees of, and under all of its pledges of assets or other security
interests which secure any, Indebtedness of the Company shall also terminate
upon such sale, disposition or release.
SUBORDINATION
The notes are unsecured senior subordinated obligations of the Company. The
payment of principal of, premium, if any, and interest on the notes is
subordinated in right of payment, as set forth in the indenture, to the prior
payment in full of Senior Indebtedness.
The holders of Senior Indebtedness are entitled to receive payment in full
of all Obligations due in respect of such Senior Indebtedness (including
interest after the commencement of any bankruptcy, reorganization, insolvency,
receivership or similar proceeding at the rate specified in the applicable
Senior Indebtedness) before the Holders are entitled to receive any payment in
respect of any Obligations with respect to the notes (except that Holders may
receive securities that are subordinated at least to the same extent as the
notes to Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness and Holders may recover payments made from the trust described
under the caption "Legal Defeasance and Covenant Defeasance"), in the event of
any distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the Company's assets and liabilities.
The Company also may not make any payment upon or in respect of the notes
(except in such subordinated securities or from the trust described under the
caption "Legal Defeasance and Covenant Defeasance") if:
(1) a default in the payment of principal of, premium, if any, or
interest on Designated Senior Indebtedness occurs and is continuing beyond
any applicable period of grace; or
(2) any other default occurs and is continuing with respect to
Designated Senior Indebtedness which permits holders of the Designated
Senior Indebtedness as to which such default relates to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from (A) with respect to the Designated Senior
Indebtedness arising under the Credit Agreement, the Agent Bank or (B) with
respect to any other Designated Senior Indebtedness, the holders or the
representative of the holders of any such Designated Senior Indebtedness.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such
default is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received unless the
maturity of any Designated Senior Indebtedness has been accelerated.
No new period of payment blockage may be commenced by a Payment Blockage
Notice unless and until:
(1) 360 days have elapsed since the first day of the effectiveness of
the immediately prior Payment Blockage Notice; and
(2) all scheduled payments of principal of, premium, if any, and
interest on the notes that have come due have been paid in full in cash.
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No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice, unless such default has been
cured or waived for a period of not less than 90 days.
If the Trustee or any Holder of the notes receives a payment in respect of
the notes (except (i) for securities that are subordinated at least to the same
extent as the notes to Senior Indebtedness and any securities issued in exchange
for Senior Indebtedness or (ii) from the trust described under "-- Legal
Defeasance and Covenant Defeasance") when:
(1) the payment is prohibited by these subordination provisions; and
(2) the Trustee or the Holder has actual knowledge that the payment is
prohibited;
the Trustee or the Holder, as the case may be, shall hold the payment in trust
for the benefit of the holders of Senior Indebtedness of the Company. Upon the
proper written request of the holders of Senior Indebtedness of the Company, the
Trustee or the Holder, as the case may be, shall deliver the amounts in trust to
the holders of Senior Indebtedness of the Company or their proper
representative.
The indenture requires that the Company promptly notify holders of Senior
Indebtedness if payment of the notes is accelerated because of any Event of
Default.
As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of the Company,
creditors of the Company who are holders of Senior Indebtedness and holders of
trade payables may recover more, ratably, than the holders of the notes, and
assets which would otherwise be available to pay obligations in respect of the
notes will be available only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the notes. See "Risk Factors -- Risks Relating to the Notes -- Your
right to receive payments on these notes is junior to the issuer's existing
senior indebtedness and possibly all its future borrowings. Further, the
guarantees of these notes are junior to all of the guarantors' existing senior
indebtedness and possibly to all of their future borrowings."
Payments under the Guarantee of each Guarantor is subordinated to the prior
payment in full of all Senior Indebtedness of such Guarantor, including Senior
Indebtedness of such Guarantor incurred after the date of the indenture, on the
same basis as provided above with respect to the subordination of payments on
the notes by the Company to the prior payment in full of Senior Indebtedness of
the Company. See "Risk Factors -- Risks Relating to the Notes -- Your right to
receive payments on these notes is junior to the issuer's existing senior
indebtedness and possibly all its future borrowings. Further, the guarantees of
these notes are junior to all of the guarantors' existing senior indebtedness
and possibly to all of their future borrowings."
The terms of the indenture permit the Company and its Restricted
Subsidiaries to incur additional Senior Indebtedness, subject to certain
limitations, including Indebtedness that may be secured by Liens on property of
the Company and its Restricted Subsidiaries. See the discussion below under the
captions "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Disqualified Stock" and "Certain Covenants -- Liens." See "Risk Factors -- Risks
Relating to the Notes -- Your right to receive payments on these notes is junior
to the issuer's existing senior indebtedness and possibly all its future
borrowings. Further, the guarantees of these notes are junior to all of the
guarantors' existing senior indebtedness and possibly to all of their future
borrowings."
OPTIONAL REDEMPTION
The notes are not redeemable at the Company's option prior to November 1,
2006. Thereafter, the notes are redeemable, at the option of the Company, as a
whole or from time to time in part, on not less than 30 nor more than 60 days'
prior notice to the Holders at the following redemption prices (expressed as
percentages of principal amount), together with accrued interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on an interest payment date), if redeemed
during the 12-month period beginning on November 1 of the years indicated below.
93
<Table>
<Caption>
YEAR REDEMPTION PRICE
- ---- ----------------
2006........................................................ 104.938%
2007........................................................ 103.292%
2008........................................................ 101.646%
2009 and thereafter......................................... 100.000%
</Table>
Notwithstanding the foregoing, at any time or from time to time prior to
November 1, 2004, the Company may redeem, on one or more occasions, up to 35% of
the aggregate principal amount of the notes issued under the indenture with the
net proceeds of the initial Public Equity Offering at a redemption price equal
to 109.875% of the principal amount thereof, plus accrued interest, if any, to
the redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on an interest payment date); provided that,
immediately after giving effect to such redemption, at least 65% of the
aggregate principal amount of the notes issued under the indenture remains
outstanding; provided further that such redemptions shall occur within 60 days
of the date of closing of each such initial Public Equity Offering.
If less than all the notes are to be redeemed, the particular notes to be
redeemed will be selected not more than 60 days prior to the redemption date by
the Trustee by such method as the Trustee deems fair and appropriate, provided
that no Note of $1,000 in principal amount at maturity or less shall be redeemed
in part.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs at any time, then each Holder will have the
right to require that the Company purchase such Holder's notes in whole or in
part in integral multiples of $1,000, at a purchase price in cash equal to 101%
of the principal amount of such notes, plus accrued and unpaid interest, if any,
to the date of purchase, pursuant to the offer described below (the "Change of
Control Offer") and the other procedures set forth in the indenture.
Within 30 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of notes by first-class mail, postage prepaid, at its address appearing in the
security register, stating, among other things:
(1) the purchase price and the purchase date, which will be a Business
Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed or such later date as is necessary to comply with the
requirements under the Exchange Act;
(2) that any note not tendered will continue to accrue interest;
(3) that, unless the Company defaults in the payment of the purchase
price, any notes accepted for payment pursuant to the Change of Control
Offer will cease to accrue interest after the Change of Control purchase
date; and
(4) certain other procedures that a Holder must follow to accept a
Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the notes that might be tendered by Holders seeking to accept the Change of
Control Offer. The failure of the Company to make or consummate the
94
Change of Control Offer or pay the applicable Change of Control purchase price
when due would result in an Event of Default and would give the Trustee and the
Holders the rights described under "Events of Default and Remedies."
The Credit Agreement provides that certain change of control events with
respect to the Company and the Parent would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Indebtedness to
which the Company becomes a party may contain similar restrictions and
provisions. If a Change of Control occurs at a time when the Company is
prohibited from purchasing notes, the Company could seek the consent of its
lenders to the purchase of notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
refinance such borrowings, the Company will remain prohibited from purchasing
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the indenture, which would, in turn,
constitute a default under the Credit Agreement. In such circumstances, the
subordination provisions in the indenture would likely restrict payments to the
Holders.
One of the events that constitutes a Change of Control under the indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the indenture) to represent a specific quantitative test. As a consequence, if
Holders elect to require the Company to purchase the Notes and the Company
elects to contest such election, there can be no assurance as to how a court
interpreting New York law would interpret the phrase in many circumstances.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by the Company and
purchases all the Notes validly tendered and not withdrawn under such Change of
Control Offer.
The existence of a Holder's right to require the Company to purchase such
Holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the indenture is limited in scope.
The provisions of the indenture may not afford Holders the right to require the
Company to repurchase such Notes in the event of a highly leveraged transaction
or certain transactions with the Company's management or its Affiliates,
including a reorganization, restructuring, merger or similar transaction
involving the Parent or the Company (including, in certain circumstances, an
acquisition of the Parent or the Company by management or its Affiliates) that
may adversely affect Holders, if such transaction is not a transaction defined
as a Change of Control. See "Certain Definitions" below for the definition of
"Change of Control." A transaction involving the Company's management or its
Affiliates, or a transaction involving a recapitalization of the Parent or the
Company, would result in a Change of Control if it is the type of transaction
specified in such definition.
The Company will comply with the applicable tender offer rules including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Change of
Control" provisions of the indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
indenture by virtue thereof.
Restrictions in the indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on its or their property, to make Restricted Payments and to make
Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Notes, and there can be no assurance that the
Company or the acquiring party will have sufficient financial resources to
effect such redemption or repurchase. In certain circumstances, such
restrictions and the restrictions on transactions
95
with Affiliates may make more difficult or discourage any leveraged buyout of
the Company or any of its Restricted Subsidiaries. While such restrictions cover
a variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the indenture may not afford the Holders protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any Asset Sale unless:
(1) the consideration received by the Company or such Restricted
Subsidiary for such Asset Sale is not less than the fair market value of
the assets sold as evidenced by a resolution of the board of directors of
such entity set forth in an officers' certificate delivered to the Trustee;
and
(2) the consideration received by the Company or the relevant
Restricted Subsidiary in respect of such Asset Sale consists of at least
75% cash or cash equivalents. For purposes of this provision, cash and cash
equivalents includes:
(a) any liabilities (as reflected in the Company's consolidated
balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms
subordinated to the Notes or any Note Guarantee) that are assumed by any
transferee of any such assets or other property in such Asset Sale, and
where the Company or the relevant Restricted Subsidiary is released from
any further liability in connection therewith with respect to such
liabilities;
(b) any securities, notes or other similar obligations received by
the Company or any such Restricted Subsidiary from such transferee that
are converted within 180 days of the related Asset Sale by the Company
or such Restricted Subsidiary into cash or cash equivalents (to the
extent of the net cash proceeds or the cash equivalents (net of related
costs) received upon such conversion); and
(c) any Designated Noncash Consideration received by the Company or
any such Restricted Subsidiary in the Asset Sale having an aggregate
fair market value, as determined by the Board of the Company, taken
together with all other Designated Noncash Consideration received
pursuant to this clause that is at that time outstanding, not to exceed
the greater of:
(A) $10 million; and
(B) 15% of Consolidated Tangible Assets at the time of the
receipt of such Designated Noncash Consideration (with the fair
market value of each item of such Designated Noncash Consideration
being measured at the time received and without giving effect to
subsequent changes in value).
If the Company or any Restricted Subsidiary engages in an Asset Sale, the
Company may, at its option, within 12 months after such Asset Sale (i) apply all
or a portion of the Net Cash Proceeds to the permanent reduction of amounts
outstanding under the Credit Agreement (and to correspondingly reduce the
commitments, if any, with respect thereto) or to the repayment of other Senior
Indebtedness of the Company or a Restricted Subsidiary, provided that the
repayment of any Indebtedness incurred under the Credit Agreement in connection
with the acquisition of any Facility with the proceeds of any subsequent Sale
and Leaseback Transaction relating to such Facility shall not be required to
result in the permanent reduction of the amounts outstanding under the Credit
Agreement or correspondingly permanently reduce the commitments thereunder, or
(ii) invest (or enter into a legally binding agreement to invest) all or a
portion of such Net Cash Proceeds in properties and assets to replace the
properties and assets that were the subject of the Asset Sale or in properties
and assets that will be used in businesses of the Company or its Restricted
Subsidiaries, as the case may be, existing on the Reference Date or in
businesses the same, similar or reasonably related thereto. If any such legally
binding agreement to invest such Net Cash
96
Proceeds is terminated, the Company may, within 90 days of such termination or
within 12 months of such Asset Sale, whichever is later, invest such Net Cash
Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical
contained in such clause (ii)) above. Pending the final application of any such
Net Cash Proceeds, the Company may temporarily reduce revolving credit
borrowings or otherwise invest such Net Cash Proceeds in a manner that is not
prohibited by the indenture. The amount of such Net Cash Proceeds not so used as
set forth above in this paragraph constitutes "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10 million, the
Company will, within 30 days thereafter, make an offer to purchase (an "Excess
Proceeds Offer") from all Holders on a pro rata basis, in accordance with the
procedures set forth in the indenture, the maximum principal amount (expressed
as a multiple of $1,000) of Notes that may be purchased with the Excess
Proceeds, at a purchase price in cash equal to 100% of the principal amount
thereof, plus accrued interest, if any, to the date such offer to purchase is
consummated. To the extent that the aggregate principal amount of Notes tendered
pursuant to such offer to purchase is less than the Excess Proceeds, the Company
may use such deficiency for general corporate purposes. If the aggregate
principal amount of Notes validly tendered and not withdrawn by holders thereof
exceeds the Excess Proceeds, the Notes to be purchased will be selected on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
CERTAIN COVENANTS
Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, take any of the following actions:
(a) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Company or any
Restricted Subsidiary, other than (i) dividends or distributions payable
solely in Qualified Equity Interests or (ii) dividends or distributions by
a Restricted Subsidiary payable to the Company or a Wholly Owned Restricted
Subsidiary or to all holders of Capital Stock of such Restricted Subsidiary
on a pro rata basis;
(b) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock, or any options,
warrants or other rights to acquire such shares of Capital Stock, of the
Company, any direct or indirect parent of the Company or any Subsidiary of
the Company (other than a Wholly Owned Restricted Subsidiary);
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
and
(d) make any Investment (other than a Permitted Investment) in any
Person (such payments or other actions described in (but not excluded
from) clauses (a) through (d) being referred to as "Restricted
Payments"), unless at the time of, and immediately after giving effect
to, the proposed Restricted Payment:
(i) no Default or Event of Default has occurred and is
continuing,
(ii) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under the
caption "-- Incurrence of Indebtedness and Issuance of Disqualified
Stock," and
97
(iii) the aggregate amount of all Restricted Payments made after
the Reference Date does not exceed the sum of:
(A) 50% of the aggregate Consolidated Net Income of the
Company during the period (taken as one accounting period) from
the first day of the Company's first fiscal quarter commencing
after the Closing Date to the last day of the Company's most
recently ended fiscal quarter for which internal financial
statements are available at the time of such proposed Restricted
Payment (or, if such aggregate cumulative Consolidated Net Income
is a loss, minus 100% of such amount); plus
(B) 100% of the aggregate net cash proceeds received by the
Company after the Reference Date as a capital contribution or
from the issuance or sale (other than to a Subsidiary) of either
(1) Qualified Equity Interests of the Company or (2) debt
securities or Disqualified Stock that have been converted into or
exchanged for Qualified Stock of the Company, together with the
aggregate net cash proceeds received by the Company at the time
of such conversion or exchange.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions, so long as no Default or Event of Default has
occurred and is continuing or would occur:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at the declaration date such payment would not have
been prohibited by the foregoing provisions;
(b) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary) of, Qualified Equity Interests of the
Company or of the Parent, the proceeds of which are contributed to the
Company as a capital contribution on a substantially concurrent basis;
(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary) of, shares of Qualified Equity Interests
of the Company or of the Parent, the proceeds of which are contributed to
the Company as a capital contribution on a substantially concurrent basis;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance or sale
(other than to a Subsidiary) of, Subordinated Indebtedness, so long as the
Company or a Restricted Subsidiary would be permitted to refinance such
original Subordinated Indebtedness with such new Subordinated Indebtedness
pursuant to clause (4) of the definition of Permitted Indebtedness set
forth in the covenant entitled "Incurrence of Indebtedness and Issuance of
Disqualified Stock;"
(e) the repurchase of any Subordinated Indebtedness at a purchase
price not greater than 101% of the principal amount of such Subordinated
Indebtedness in the event of a Change of Control in accordance with
provisions similar to the "Change of Control" covenant; provided that,
prior to or simultaneously with such repurchase, the Company has made the
Change of Control Offer as provided in such covenant with respect to the
Notes and has repurchased all Notes validly tendered for payment in
connection with such Change of Control Offer;
(f) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company, options on
any such shares or related stock appreciation rights or similar securities,
or any dividend, distribution or advance to the Parent for the purchase,
redemption, acquisition, cancellation or other retirement for value of
shares of Capital Stock of the Parent, options on any such shares or
related stock appreciation rights or similar securities, in each case held
by officers, directors or employees or former officers, directors or
employees (or their estates or beneficiaries under their estates) of the
Company, the Parent or any Subsidiary of the Company, as
98
applicable, or by any employee benefit plan of the Company, the Parent or
any Subsidiary of the Company, as applicable, upon death, disability,
retirement or termination of employment or pursuant to the terms of any
employee benefit plan or any other agreement under which such shares of
stock or related rights were issued; provided that the aggregate amount of
cash applied by the Company for such purchase, redemption, acquisition,
cancellation or other retirement of such shares of Capital Stock of the
Company or the Parent after the Reference Date does not exceed $7.5 million
in the aggregate (excluding for purposes of calculating such amount the
aggregate amount received by any Person in connection with such purchase,
redemption, acquisition, cancellation or other retirement of such shares
that is concurrently used to repay loans made to such Person by the Company
pursuant to clause (f) of the definition of "Permitted Investment");
(g) the payment of dividends or other distributions or the making of
loans or advances to the Parent in amounts required for the Parent to pay
franchise taxes and other fees required to maintain its existence and
provide for all other customary operating costs of the Parent to the extent
attributable to the ownership and operation of the Company and its
Restricted Subsidiaries, including, without limitation, in respect of
director fees and expenses, administrative, legal and accounting services
provided by third parties and other customary costs and expenses including
all costs and expenses with respect to filings with the Commission;
(h) the payment of dividends or other distributions by the Company to
the Parent in amounts required to pay the tax obligations of the Parent
attributable to the Company and its Subsidiaries, determined as if the
Company and its Subsidiaries had filed a separate consolidated, combined or
unitary return for the relevant taxing jurisdiction; provided that (x) the
amount of dividends paid pursuant to this clause (h) to enable the Parent
to pay Federal and state income taxes (and franchise taxes based on income)
at any time shall not exceed the amount of such Federal and state income
taxes (and franchise taxes based on income) actually owing by the Parent at
such time to the respective tax authorities for the respective period and
(y) any refunds received by the Parent attributable to the Company or any
of its Subsidiaries shall promptly be returned by the Parent to the Company
through a contribution or purchase of common stock (other than Disqualified
Stock) of the Company;
(i) the payment of dividends or other distributions or the making of
loans or advances to the Parent in amounts required for the Parent to pay
to the Equity Sponsors an annual amount not to exceed $500,000 for payment
of management consulting or financial advisory services provided to the
Company or any of the Subsidiaries; and
(j) other Restricted Payments not to exceed $10 million at any one
time outstanding.
The actions described in clauses (e), (f), (g), (h), (i) and (j) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph but will reduce the amount that would otherwise
be available for Restricted Payments under clause (iii) of the first paragraph
of this covenant and the actions described in clauses (a), (b), (c) and (d) of
the preceding paragraph will be Restricted Payments that will be permitted to be
taken in accordance with this paragraph and will not reduce the amount that
would otherwise be available for Restricted Payments under clause (iii) of the
first paragraph of this covenant.
For the purpose of making any calculations under the indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will
be deemed to have made an Investment in an amount equal to the greater of the
fair market value or net book value of the net assets of such Restricted
Subsidiary at the time of such designation as determined by the Board of the
Company, and (ii) any property transferred to or from an Unrestricted Subsidiary
will be valued at fair market value at the time of such transfer, as determined
by the Board of the Company. The amount of all Restricted Payments (other than
cash) shall be the fair market value on the date of the Restricted Payment of
the asset(s) or securities proposed to be transferred or issued by the Company
or such Restricted Subsidiary, as the case may be, pursuant to the Restricted
Payment. The fair market value of any non-cash Restricted Payment shall be
determined by the Board of the Company whose resolution with respect thereto
shall be delivered
99
to the Trustee, such determination to be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if such fair market value exceeds $10 million. Not later than the date
of making any Restricted Payment, the Company shall deliver to the Trustee an
officer's certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required under "Certain
Covenants -- Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other Person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision will
be reduced by the lesser of (x) the net asset value of such Subsidiary at the
time it becomes a Restricted Subsidiary and (y) the initial amount of such
Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such Investment
(resulting from the payment of interest or dividends, loan repayment, transfer
of assets or otherwise, other than the redesignation of an Unrestricted
Subsidiary or other Person as a Restricted Subsidiary), to the extent such net
reduction is not included in the Company's Consolidated Net Income; provided
that the total amount by which the aggregate amount of all Restricted Payments
may be reduced may not exceed the lesser of (x) the cash proceeds received by
the Company and its Restricted Subsidiaries in connection with such net
reduction and (y) the initial amount of such Investment.
In computing the Consolidated Net Income of the Company for purposes of the
foregoing clause (iii)(A) of the first paragraph of this covenant, (i) the
Company may use audited financial statements for the portions of the relevant
period for which audited financial statements are available on the date of
determination and unaudited financial statements and other current financial
data based on the books and records of the Company for the remaining portion of
such period and (ii) the Company will be permitted to rely in good faith on the
financial statements and other financial data derived from its books and records
that are available on the date of determination. If the Company makes a
Restricted Payment that, at the time of the making of such Restricted Payment,
would in the good faith determination of the Company be permitted under the
requirements of the indenture, such Restricted Payment will be deemed to have
been made in compliance with the indenture notwithstanding any subsequent
adjustments made in good faith to the Company's financial statements affecting
Consolidated Net Income of the Company for any period.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Company will not, and will not permit any Restricted Subsidiary to,
create, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of, or otherwise incur (collectively, "incur"), any
Indebtedness (including Acquired Indebtedness and the issuance of Disqualified
Stock), except that the Company and any Subsidiary Guarantors may incur
Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for
the immediately preceding four full fiscal quarters for which internal financial
statements are available, taken as one accounting period, would have been equal
to at least 2.0 to 1.0.
In making the foregoing calculation for any four-quarter period that
includes the Reference Date, pro forma effect will be given to the acquisition
and related financing transactions, as if such transactions had occurred at the
beginning of such four-quarter period. In addition (but without duplication), in
making the foregoing calculation, pro forma effect will be given to: (i) the
incurrence of such Indebtedness and (if applicable) the application of the net
proceeds therefrom, including to refinance other Indebtedness, as if such
Indebtedness was incurred and the application of such proceeds occurred at the
beginning of such four-quarter period; (ii) the incurrence, repayment or
retirement of any other Indebtedness by the Company or its Restricted
Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such
four-quarter period; and (iii) the
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acquisition (whether by purchase, merger or otherwise) or disposition (whether
by sale, merger or otherwise) of any company, entity or business acquired or
disposed of by the Company or its Restricted Subsidiaries, as the case may be,
since the first day of such four-quarter period, as if such acquisition or
disposition occurred at the beginning of such four-quarter period. In making a
computation under the foregoing clause (i) or (ii), (A) the amount of
Indebtedness under a revolving credit facility will be computed based on the
average daily balance of such Indebtedness during such four-quarter period, (B)
if such Indebtedness bears, at the option of the Company, a fixed or floating
rate of interest, interest thereon will be computed by applying, at the option
of the Company, either the fixed or floating rate, and (C) the amount of any
Indebtedness that bears interest at a floating rate will be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Hedging Obligations applicable to such
Indebtedness if such Hedging Obligations have a remaining term at the date of
determination in excess of 12 months).
Notwithstanding the foregoing, the Company may, and may permit its
Restricted Subsidiaries to, incur the following Indebtedness ("Permitted
Indebtedness"):
(1) Indebtedness of the Company or any Subsidiary Guarantor under the
Credit Agreement (and the incurrence by any Guarantor of guarantees
thereof) in an aggregate principal amount at any one time outstanding not
to exceed $375 million, less any amounts applied to the permanent reduction
of such credit facilities pursuant to the provisions of the covenant
described under the caption "-- Repurchase at the Option of
Holders -- Asset Sales;"
(2) Indebtedness represented by the notes (other than the Additional
Notes) and the Guarantees;
(3) Existing Indebtedness;
(4) the incurrence by the Company of Permitted Refinancing
Indebtedness in exchange for, or the net cash proceeds of which are used to
refund, refinance or replace, any Indebtedness that is permitted to be
incurred under clause (2) or (3) above;
(5) Indebtedness owed by the Company to any Restricted Subsidiary or
owed by any Restricted Subsidiary to the Company or a Restricted Subsidiary
(provided that such Indebtedness is held by the Company or such Restricted
Subsidiary); provided, however, that:
(a) any Indebtedness of the Company or any Subsidiary Guarantor
owing to any such Restricted Subsidiary is unsecured and subordinated in
right of payment from and after such time as the notes shall become due
and payable (whether at Stated Maturity, acceleration, or otherwise) to
the payment and performance of the Company's obligations under the notes
or the Subsidiary Guarantor's obligations under its Guarantee, as the
case may be; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
the Company or a Restricted Subsidiary thereof and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either
the Company or a Restricted Subsidiary thereof, shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or
such Restricted Subsidiary, as the case may be, that was not permitted
by this clause (5);
(6) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Obligations incurred in the ordinary course of business;
(7) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets, including, without limitation, shares of Capital Stock;
(8) either (A) Capitalized Lease Obligations of the Company or any
Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or
secured by purchase money security interests so long as (x) such
Indebtedness is not secured by any property or assets of the Company or any
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Restricted Subsidiary other than the property and assets so acquired and
(y) such Indebtedness is created within 90 days of the acquisition of the
related property; provided that the aggregate amount of Indebtedness under
clauses (A) and (B) does not exceed 15% of Consolidated Tangible Assets at
any one time outstanding;
(9) Guarantees by any Restricted Subsidiary made in accordance with
the provisions of the covenant described under the caption "-- Guarantees
of Indebtedness by Restricted Subsidiaries;"
(10) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(11) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(12) the incurrence of Non-Recourse Indebtedness by Permitted Joint
Ventures that are Restricted Subsidiaries;
(13) Indebtedness incurred by a Receivables Subsidiary pursuant to a
Receivables Program; provided that, after giving effect to any such
incurrence of Indebtedness, the aggregate principal amount of all
Indebtedness incurred under this clause (13) and then outstanding does not
exceed $30 million; and
(14) Indebtedness of the Company, any Restricted Subsidiary or any
Permitted Joint Venture not permitted by any other clause of this
definition, in an aggregate principal amount not to exceed $30 million at
any one time outstanding.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Disqualified Stock" covenant, in the event that any
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (1) through (14) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will be permitted to classify such item of Indebtedness on the date of
its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant. Indebtedness under
the Credit Agreement incurred on the Reference Date shall be deemed to have been
incurred on the Reference Date in reliance on the exception provided by clause
(1) above.
Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien
securing Pari Passu Indebtedness or Subordinated Indebtedness of the Company on
or with respect to any of its property or assets, including any shares of stock
or Indebtedness of any Restricted Subsidiary, whether owned at the Closing Date
or thereafter acquired, or any income, profits or proceeds therefrom, or assign
or otherwise convey any right to receive income thereon, unless (i) in the case
of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien
on such property, assets or proceeds that is senior in priority to such Lien and
(ii) in the case of any Lien securing Pari Passu Indebtedness, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to or ranks equally with such Lien.
The Company will not permit any Subsidiary Guarantor to, directly or
indirectly, create, incur, assume or suffer to exist any Lien securing Pari
Passu Indebtedness or Subordinated Indebtedness of such Subsidiary Guarantor on
or with respect to such Subsidiary Guarantor's properties or assets, including
any shares of stock or Indebtedness of any other Restricted Subsidiary, whether
owned at the date of the indenture or thereafter acquired, or any income,
profits or proceeds therefrom, or assign or otherwise convey any right to
receive income thereon, unless (i) in the case of any Lien securing Pari Passu
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Indebtedness of such Subsidiary Guarantor, each Guarantee of such Subsidiary
Guarantor is secured by a Lien on such property, assets or proceeds that is
senior in priority to or ranks equally with such Lien and (ii) in the case of
any Lien securing Subordinated Indebtedness of such Subsidiary Guarantor, each
Guarantee of such Subsidiary Guarantor is secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien.
Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any Restricted Subsidiary to:
(1) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock;
(2) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary;
(3) make loans or advances to the Company or any other Restricted
Subsidiary; or
(4) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) any agreement (including the Credit Agreement) in effect on the
Reference Date;
(2) customary non-assignment provisions of any lease, license or other
contract entered into in the ordinary course of business by the Company or
any Restricted Subsidiary;
(3) the refinancing or successive refinancing of Indebtedness incurred
under the agreements in effect on the Reference Date (including the Credit
Agreement), so long as such encumbrances or restrictions are no more
restrictive, taken as a whole, than those contained in such original
agreement;
(4) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person, or the property or assets of the
Person, so acquired;
(5) purchase money obligations for acquired property permitted under
the covenant entitled "-- Incurrence of Indebtedness and Issuance of
Disqualified Stock" that impose restrictions of the nature described in
clause (4) of the preceding paragraph on the property so acquired;
(6) any agreement for the sale of a Restricted Subsidiary or an asset
that restricts distributions by that Restricted Subsidiary or transfers of
such asset pending its sale;
(7) secured Indebtedness otherwise permitted to be incurred pursuant
to the provisions of the covenant described above under the caption
"-- Liens" that limits the right of the debtor to dispose of the assets
securing such Indebtedness;
(8) restrictions on cash or other deposits or net worth imposed by
leases entered into in the ordinary course of business;
(9) Non-Recourse Indebtedness of any Permitted Joint Venture permitted
to be incurred under the indenture;
(10) applicable law or regulation;
(11) a Receivables Program with respect to a Receivables Subsidiary;
and
(12) customary provisions in joint venture, limited liability company
operating, partnership, shareholder and other similar agreements entered
into in the ordinary course of business reasonably consistent with past
practice by the Company or any Restricted Subsidiary.
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Limitation on Layering Debt
Neither the Company nor any Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness or guarantee, as
applicable, that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in any respect in right of payment to the notes or such
Guarantor's Guarantee, respectively.
Merger, Consolidation or Sale of Assets
Neither the Company nor the Parent will, in a single transaction or series
of related transactions, consolidate or merge with or into (whether or not the
Company or the Parent, as the case may be, is the surviving corporation), or
directly and/or indirectly through its Subsidiaries, sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets (determined on a consolidated basis for the Company or the Parent, as
the case may be, and its Subsidiaries, taken as a whole) in one or more related
transactions to, another corporation, Person or entity unless:
(a) either (i) the Company or the Parent, as the case may be, is the
surviving corporation or (ii) the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (the "Surviving Entity") is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia and assumes all the obligations of the
Company or the Parent, as the case may be, under the Notes and the
indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee;
(b) immediately after giving effect to such transaction and treating
any obligation of the Company in connection with or as a result of such
transaction as having been incurred as of the time of such transaction, no
Default or Event of Default has occurred and is continuing;
(c) if such transaction involves the Company, the Company (or the
Surviving Entity if the Company is not the continuing obligor under the
indenture) could, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the first
paragraph of "-- Incurrence of Indebtedness and Issuance of Disqualified
Stock;"
(d) each Guarantor, unless it is the other party to the transaction
described above, has by supplemental indenture confirmed that its Guarantee
applies to the Surviving Entity's obligations under the indenture and the
Notes;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the covenant described above under the caption "--Liens" are
complied with; and
(f) the Company or the Parent, as the case may be, delivers, or causes
to be delivered, to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an officers' certificate and an opinion of
counsel, each stating that such transaction complies with the requirements
of the indenture.
The indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into any other Person or convey, sell, assign, transfer,
lease or otherwise dispose of its properties and assets substantially as an
entirety to any other Person (other than the Company or another Subsidiary
Guarantor) unless: (a) subject to the provisions of the following paragraph, the
Person formed by or surviving such consolidation or merger (if other than such
Subsidiary Guarantor) or to which such properties and assets are transferred
assumes all of the obligations of such Subsidiary Guarantor under the indenture
and its Guarantee, pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, (b) immediately after giving effect to
such transaction, no Default or Event of Default has occurred and is continuing
and (c) the Subsidiary Guarantor delivers, or causes to be
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delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an officers' certificate and an opinion of counsel, each stating that
such transaction complies with the requirements of the indenture.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the indenture, and thereafter the Company will, except in the
case of a lease, be discharged from all of its obligations and covenants under
the indenture and Notes.
Transactions with Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or suffer to exist any transaction with, or
for the benefit of, any Affiliate of the Company ("Interested Persons"), unless
(a) such transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's-length transaction with third parties who are not
Interested Persons and (b) the Company delivers to the Trustee (i) with respect
to any transaction or series of related transactions entered into after the
Reference Date involving aggregate payments in excess of $5 million, a
resolution of the Company's Board set forth in an officers' certificate
certifying that such transaction or transactions complies with clause (a) above
and that such transaction or transactions have been approved by the Board
(including a majority of the Disinterested Directors) of the Company and (ii)
with respect to a transaction or series of related transactions involving
aggregate payments equal to or greater than $10 million, a written opinion as to
the fairness to the Company or such Restricted Subsidiary of such transaction or
series of transactions from a financial point of view issued by an accounting,
appraisal or investment banking firm, in each case of national standing.
The foregoing covenant will not restrict:
(A) transactions among the Company and/or its Restricted Subsidiaries;
(B) the Company from paying reasonable and customary regular
compensation, indemnification, reimbursement and fees to officers of the
Company or any Restricted Subsidiary and to directors of the Company or any
Restricted Subsidiary who are not employees of the Company or any
Restricted Subsidiary;
(C) transactions permitted by the provisions of the covenant described
under the caption "Certain Covenants--Restricted Payments;"
(D) advances to employees for moving, entertainment and travel
expenses and similar expenditures in the ordinary course of business and
consistent with past practice;
(E) any Receivables Program of the Company or a Restricted Subsidiary;
(F) the agreements described herein under the caption "Certain
Relationships And Related Transactions" and certain other agreements listed
on a schedule to the indenture, in each case as in effect as of the
Reference Date or any amendment thereto (so long as the amended agreement
is not more disadvantageous to the Holders in any material respect than
such agreement immediately prior to such amendment) or any transaction
contemplated thereby; and
(G) sales of Equity Interests to Affiliates.
105
Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
The Company (a) will not permit any Restricted Subsidiary to issue any
Capital Stock unless after giving effect thereto the Company's percentage
interest (direct and indirect) in the Capital Stock of such Restricted
Subsidiary is at least equal to its percentage interest prior thereto, and (b)
will not, and will not permit any Restricted Subsidiary to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than the Company or a Wholly Owned Restricted
Subsidiary); provided, however, that this covenant will not prohibit (i) the
sale or other disposition of all, but not less than all, of the issued and
outstanding Capital Stock of a Restricted Subsidiary owned by the Company and
its Restricted Subsidiaries in compliance with the other provisions of the
indenture, (ii) the sale or other disposition of a portion of the issued and
outstanding Capital Stock of a Restricted Subsidiary (other than a Subsidiary
Guarantor), whether or not as a result of such sale or disposition such
Restricted Subsidiary continues or ceases to be a Restricted Subsidiary, if (A)
at the time of such sale or disposition, the Company could make an Investment in
the remaining Capital Stock held by it or one of its Restricted Subsidiaries in
an amount equal to the amount of its remaining Investment in such Person
pursuant to the covenant entitled "Restricted Payments" and (B) such sale or
disposition is permitted under, and the Company or such Restricted Subsidiary
applies the Net Cash Proceeds of any such sale in accordance with, the "Asset
Sales" covenant, or (iii) the ownership by directors of director's qualifying
shares or the ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law.
The Company will not permit any Restricted Subsidiary to issue any
Preferred Stock other than to the Company or any Subsidiary Guarantor.
Payments for Consent
The indenture will provide that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of the indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Guarantees of Indebtedness by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary that is not a
Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any
other manner become liable for the payment of any Indebtedness of the Company or
any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture
providing for a guarantee of payment of the Notes by such Restricted Subsidiary
on a senior subordinated basis on the same terms as set forth in the indenture
and (b) with respect to any guarantee of Subordinated Indebtedness by a
Restricted Subsidiary, any such guarantee is subordinated to such Restricted
Subsidiary's guarantee with respect to the Notes at least to the same extent as
such Subordinated Indebtedness is subordinated to the Notes, provided that the
foregoing provision will not be applicable to any guarantee by any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary.
Any guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph may provide by its terms that it will be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer
to any Person not an Affiliate of the Company of all of the Company's and the
Restricted Subsidiaries' Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the indenture) or (ii) the release or discharge of the guarantee
that resulted in the creation of such guarantee of the Notes, except a discharge
or release by or as a result of payment under such guarantee.
106
Issuances of Guarantees by New Restricted Subsidiaries
The Company will provide to the Trustee, on the date that any Person (other
than a Foreign Subsidiary) becomes a Wholly Owned Restricted Subsidiary, a
supplemental indenture to the indenture, executed by such new Wholly Owned
Restricted Subsidiary, providing for a full and unconditional guarantee on a
senior subordinated basis by such new Wholly Owned Restricted Subsidiary of the
Company's obligations under the Notes and the indenture to the same extent as
that set forth in the indenture.
Unrestricted Subsidiaries
The Board of the Company may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as
(i) such Subsidiary has no Indebtedness other than Non-Recourse Indebtedness,
(ii) no default with respect to any Indebtedness of such Subsidiary would permit
(upon notice, lapse of time or otherwise) any holder of any other Indebtedness
of the Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the covenant described under the caption "-- Restricted Payments,"
(iv) neither the Company nor any Restricted Subsidiary has a contract,
agreement, arrangement, understanding or obligation of any kind, whether written
or oral, with such Subsidiary other than those that might be obtained at the
time from Persons who are not Affiliates of the Company, (v) neither the Company
nor any Restricted Subsidiary has any obligation to subscribe for additional
shares of Capital Stock or other equity interests in such Subsidiary, or to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results, and (vi) such
Unrestricted Subsidiary has at least one director on its board of directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries.
Notwithstanding the foregoing, the Company may not designate any Subsidiary
Guarantor (whether or not existing as of the Closing Date) as an Unrestricted
Subsidiary.
The Board of the Company may designate any Unrestricted Subsidiary as a
Restricted Subsidiary; provided that (i) no Default or Event of Default has
occurred and is continuing following such designation and (ii) the Company
would, at the time of making such designation and giving such pro forma effect
as if such designation had been made at the beginning of the applicable four
quarter period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described under the caption "Incurrence of
Indebtedness and Issuance of Disqualified Stock" (treating any Indebtedness of
such Unrestricted Subsidiary as the incurrence of Indebtedness by a Restricted
Subsidiary).
Reports
Whether or not the Company is required to file reports with the Commission,
the Company will file with the Commission all such annual reports, quarterly
reports and other documents that the Company would be required to file if it
were subject to Section 13(a) or 15(d) under the Exchange Act. The Company will
also be required (a) to supply to the Trustee and each Holder, or supply to the
Trustee for forwarding to each such Holder, without cost to such Holder, copies
of such reports and other documents within 15 days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the Exchange
Act, to supply at the Company's cost copies of such reports and documents to any
prospective Holder promptly upon written request.
Notwithstanding the foregoing, so long as the Parent guarantees the Notes,
the reports, information and other documents required to be filed and provided
as described above may be those of the Parent,
107
rather than the Company, so long as such filings (i) would satisfy the
requirements of the Exchange Act and regulations promulgated thereunder and (ii)
disclose the Company's results of operations and financial condition in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section in at least such detail as would be required if the Company
were filing such report.
EVENTS OF DEFAULT AND REMEDIES
The following will be "Events of Default" under the indenture:
(a) default in the payment of any interest on any note when it becomes
due and payable, and continuance of such default for a period of 30 days
(whether or not prohibited by the subordination provisions of the
indenture);
(b) default in the payment of the principal of (or premium, if any,
on) any note when due (whether or not prohibited by the subordination
provisions of the indenture);
(c) failure to perform or comply with the indenture provisions
described under the captions "-- Repurchase at the Option of
Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales," "-- Certain Covenants -- Restricted Payments,"
"Incurrence of Indebtedness and Issuance of Disqualified Stock" or
"-- Merger, Consolidation or Sale of Assets;"
(d) default in the performance, or breach, of any covenant or
agreement of the Company or any Guarantor contained in the indenture or in
any Guarantee (other than a default in the performance, or breach, of a
covenant or agreement that is specifically dealt with elsewhere herein),
and continuance of such default or breach for a period of 60 days after
written notice has been given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of
Indebtedness of the Company, the Parent or any Restricted Subsidiary, which
issue individually or in the aggregate has an aggregate outstanding
principal amount of not less than $10 million, and such default has
resulted in such Indebtedness becoming, whether by declaration or
otherwise, due and payable prior to the date on which it would otherwise
become due and payable or (ii) a default in any payment when due at final
maturity of any such Indebtedness;
(f) failure by the Company, the Parent or any of its Restricted
Subsidiaries to pay one or more final judgments the uninsured portion of
which exceeds in the aggregate $10 million, which judgment or judgments are
not paid, discharged or stayed for a period of 60 days;
(g) any Guarantee ceases to be in full force and effect or is declared
null and void or any such Guarantor denies that it has any further
liability under any Guarantee, or gives notice to such effect (other than
by reason of the termination of the indenture or the release of any such
Guarantee in accordance with the indenture); or
(h) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company, the Parent or any Significant
Subsidiary.
If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the notes then outstanding may, and the Trustee at the
request of such Holders will, declare the principal of, and accrued interest on,
all of the notes then outstanding immediately due and payable and, upon any such
declaration, such principal and such interest will become due and payable
immediately.
If an Event of Default specified in clause (h) above occurs and is
continuing, then the principal of and accrued interest on all of the outstanding
notes will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration under the indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate
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principal amount of the outstanding notes, by written notice to the Company and
the Trustee, may rescind such declaration and its consequences if: (i) the
Company has paid or deposited with the Trustee a sum sufficient to pay (A) all
overdue interest on all notes, (B) all unpaid principal of (and premium, if any,
on) any outstanding notes that has become due otherwise than by such declaration
of acceleration and interest thereon at the rate borne by the notes, (C) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the notes and (D) all sums paid or
advanced by the Trustee under the indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(ii) all Events of Default, other than the non-payment of amounts of principal
of (or premium, if any, on) or interest on the notes that have become due solely
by such declaration of acceleration, have been cured or waived. No such
rescission will affect any subsequent default or impair any right consequent
thereon.
No Holder has any right to institute any proceeding with respect to the
indenture or any remedy thereunder, unless the Holders of at least 25% in
aggregate principal amount of the outstanding notes have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding,
the Trustee has failed to institute any such proceeding within 60 days after
receipt of such notice, request and offer of indemnity and the Trustee, within
such 60-day period, has not received directions inconsistent with such written
request by Holders of a majority in aggregate principal amount of the
outstanding notes. Such limitations do not apply, however, to a suit instituted
by a Holder for the enforcement of the payment of the principal of, premium, if
any, or interest on such note on or after the respective due dates expressed in
such Note.
The Holders of not less than a majority in aggregate principal amount of
the notes then outstanding may, on behalf of the Holders of all of the notes
waive any past defaults under the indenture, except a default in the payment of
the principal of (and premium, if any) or interest on any note, or in respect of
a covenant or provision that under the indenture cannot be modified or amended
without the consent of the holder of each note outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each Holder notice of the Default or
Event of Default within 90 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of (and premium, if
any, on) or interest on any notes, the Trustee may withhold the notice to the
Holders if a committee of its trust officers in good faith determines that
withholding such notice is in the interests of the Holders.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Guarantors of their obligations under the
indenture and as to any default in such performance. The Company is also
required to notify the Trustee within five days of any Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Guarantor, as such, shall have any liability
for any obligations of the Company or the Guarantors under the notes, the
indenture or the Guarantees, as applicable, or any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Guarantors with respect to the outstanding notes ("legal
defeasance"). Such legal defeasance means that the Company will be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
notes, except for (i) the rights of Holders of outstanding notes to receive
payments in respect of the principal of (and premium, if any, on) and interest
on such notes when such payments are due, (ii) the Company's obligations to
issue temporary notes, register the transfer or exchange of any notes,
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replace mutilated, destroyed, lost or stolen notes, maintain an office or agency
for payments in respect of the notes and segregate and hold such payments in
trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee
and (iv) the legal defeasance provisions of the indenture. In addition, the
Company may, at its option and at any time, elect to terminate the obligations
of the Company and any Guarantor with respect to certain covenants set forth in
the indenture and described under "Certain Covenants" above, and any omission to
comply with such obligations would not constitute a Default or an Event of
Default with respect to the notes ("covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance: (a)
the Company must irrevocably deposit or cause to be deposited with the Trustee,
as trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the Holders, money in an amount, or U.S. Government
Obligations (as defined in the indenture) that through the scheduled payment of
principal and interest thereon will provide money in an amount, or a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of (and
premium, if any, on) and interest on the outstanding notes at maturity (or upon
redemption, if applicable) of such principal or installment of interest; (b) no
Default or Event of Default has occurred and is continuing on the date of such
deposit or, insofar as an event of bankruptcy under clause (h) of "Events of
Default" above is concerned, at any time during the period ending on the 91st
day after the date of such deposit; (c) such legal defeasance or covenant
defeasance may not result in a breach or violation of, or constitute a default
under, the indenture, the Credit Agreement or any other material agreement or
instrument to which the Company or any Guarantor is a party or by which it is
bound; (d) in the case of legal defeasance, the Company must deliver to the
Trustee an opinion of counsel stating that the Company has received from, or
there has been published by, the Internal Revenue Service a ruling, or since the
date hereof, there has been a change in applicable federal income tax law, to
the effect, and based thereon such opinion must confirm that, the Holders of the
notes will not recognize income, gain or loss for federal income tax purposes as
a result of such legal defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such legal defeasance had not occurred; (e) in the case of covenant
defeasance, the Company must have delivered to the Trustee an opinion of counsel
to the effect that the Holders of the notes will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such covenant defeasance
had not occurred; and (f) the Company must have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to either the legal defeasance or the
covenant defeasance, as the case may be, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer document and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
indenture. The Company is not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
The registered Holder of a note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Modifications and amendments of the indenture and any Guarantee may be made
by the Company, any affected Guarantor and the Trustee with the consent of the
Holders of a majority in aggregate outstanding principal amount of the notes;
provided, however, that no such modification or amendment may, without the
consent of the Holder of each outstanding notes affected thereby:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any notes, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon
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the redemption thereof, or change the coin or currency in which any notes
or any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof (or, in the case of redemption, on or after the redemption
date);
(b) amend, change or modify the obligation of the Company to make and
consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the covenant described under the covenant entitled
"Repurchase at the Option of Holders -- Asset Sales" or the obligation of
the Company to make and consummate a Change of Control Offer in the event
of a Change of Control in accordance with the covenant entitled "Repurchase
at the Option of Holders -- Change of Control," including, in each case,
amending, changing or modifying any definition relating thereto;
(c) reduce the percentage in principal amount of notes outstanding,
the consent of whose Holders is required for any waiver of compliance with
certain provisions of, or certain defaults and their consequences provided
for under, the indenture;
(d) waive a default in the payment of principal of, or premium, if
any, or interest on the notes or reduce the percentage or aggregate
principal amount of notes outstanding the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the indenture
or for waiver of certain defaults;
(e) modify the ranking or priority of the notes or the Guarantee of
any Guarantor; or
(f) release any Guarantor from any of its obligations under its
Guarantee or the indenture other than in accordance with the terms of the
indenture.
The Holders of a majority in aggregate principal amount of the notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the indenture.
Without the consent of any Holders, the Company and the Trustee, at any
time and from time to time, may enter into one or more indentures supplemental
to the indenture for any of the following purposes: (1) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the indenture and in the notes; or
(2) to add to the covenants of the Company for the benefit of the Holders, or to
surrender any right or power herein conferred upon the Company; or (3) to add
additional Events of Default; or (4) to provide for uncertificated notes in
addition to or in place of the certificated notes; or (5) to evidence and
provide for the acceptance of appointment under the indenture by a successor
Trustee; or (6) to secure the notes; or (7) to cure any ambiguity, to correct or
supplement any provision in the indenture that may be defective or inconsistent
with any other provision in the indenture, or to make any other provisions with
respect to matters or questions arising under the indenture, provided that such
actions pursuant to this clause do not adversely affect the interests of the
Holders in any material respect; or (8) to comply with any requirements of the
Commission in order to effect and maintain the qualification of the indenture
under the Trust indenture Act; or (9) to provide for the issuance of Additional
notes in accordance with the limitations set forth in the indenture; or (10) to
allow any Guarantor to execute a supplemental indenture and a Guarantee with
respect to the notes.
Notwithstanding the foregoing, neither the Company nor the Trustee may
amend any provisions of the indenture or the notes concerning (i) the
subordination of the notes and the Guarantees or (ii) legal defeasance or
covenant defeasance without, in either case, the prior written consent of the
Agent Bank, acting on behalf of the Banks under the Credit Agreement.
CONCERNING THE TRUSTEE
State Street Bank and Trust Company, N.A., the Trustee under the indenture,
is the initial paying agent and registrar for the Notes.
The indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the indenture. Under the indenture, the Holders of
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a majority in outstanding principal amount of the notes will have the right to
direct the time, method and place of conducting any proceeding for exercising
any remedy available to the Trustee, subject to certain exceptions. If an Event
of Default has occurred and is continuing, the Trustee will exercise such rights
and powers vested in it under the indenture and use the same degree of care and
skill in its exercise as a prudent person would exercise under the circumstances
in the conduct of such person's own affairs.
The indenture and provisions of the Trust indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that, if it acquires any conflicting
interest (as defined in the Trust indenture Act), it must eliminate such
conflict upon the occurrence of an Event of Default or else resign.
BOOK-ENTRY, DELIVERY AND FORM
The exchange notes will be represented by one or more notes in registered,
global form without interest coupons (collectively, the "Global Notes"). The
Global Notes will be deposited upon issuance with the Trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of Cede & Co., as nominee of DTC, for credit to an account of a direct
or indirect participant in DTC, including the Euroclear System ("Euroclear") and
Clearstream Banking, S.A. ("Clearstream").
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of Notes in certificated
form.
Transfers of beneficial interests in the Global Notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and Clearstream),
which may change from time to time.
Depositary Procedures
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to changes by them. We take no
responsibility for these operations and procedures and urges investors to
contact the system or its participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company that was
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks and
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through the Participants
or the Indirect Participants. The ownership interests in, and transfers of
ownership interests in, each security held by or on behalf of DTC are recorded
on the records of the Participants or Indirect Participants.
DTC has also advised us that pursuant to procedures established by it:
(i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes; and
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(ii) ownership of the Global Notes will be shown on, and the transfer
of ownership thereof will be effected only through, records
maintained by DTC, with respect to the Participants, or by the
Participants and the Indirect Participants with respect to other
owners of beneficial interests in the Global Notes.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the exchange notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of exchange
notes will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Trustee or us. Neither we nor the Trustee
will be liable for any delay by DTC or any of its Participants in identifying
the beneficial owners of the exchange notes, and we may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee for all
purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures and will be settled in same day funds.
DTC has advised us that it will take any action permitted to be taken by a
Holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
Global Notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among participants in DTC, it is under no
obligation to perform or to continue to perform these procedures, and may
discontinue them at any time. Neither the Company nor the Trustee nor any of
their respective agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies the Company that it is unwilling or unable to
continue as depositary for the Global Notes and the Company fails
to appoint a successor depositary within 90 days or (b) has ceased
to be a clearing agency registered under the Exchange Act;
(2) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear an applicable restrictive legend, unless that legend
is not required by applicable law.
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Exchange of Certificated Notes for Global Notes
Certificated Notes may be exchanged for beneficial interests in the Global
Note.
Same-Day Settlement and Payment
The indenture requires that payments in respect of the notes represented by
the Global Notes (including principal, premium, if any, and interest, if any) be
made by wire transfer of immediately available funds to the accounts specified
by the Global Note Holder. With respect to Certificated Notes, we will make all
payments of principal, premium, if any, and interest, if any, by wire transfer
of immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address. The notes represented by the Global Notes are expected to be
eligible to trade in the PORTAL market and to trade in DTC's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
notes will, therefore, be required by DTC to be settled in immediately available
funds. We expect that secondary trading in any Certificated Notes will also be
settled in immediately available funds.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to InSight Health Services Corp., 4400 MacArthur
Boulevard, Suite 800, Newport Beach, California 92660, Attention: General
Counsel.
GOVERNING LAW
The Indenture and the notes will be governed by, and in accordance with,
the laws of the State of New York.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person is merged with or into the Company or a Subsidiary or becomes a
Subsidiary or (b) assumed in connection with the acquisition of assets from such
Person.
"Affiliate" means, with respect to any specified person, (a) any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person or (b) any other person that
owns, directly or indirectly, 10% or more of such specified person's Capital
Stock or any executive officer or director of any such specified person or other
person. For the purposes of this definition, "control," when used with respect
to any specified person, means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agent Bank" means Bank of America, N.A. and its successors under the
Credit Agreement, in its capacity as administrative agent.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of merger, consolidation or
similar arrangement) (collectively, a "transfer") by the Company or any
Restricted Subsidiary other than in the ordinary course of business and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Shares of
Capital Stock of any of the Company's Restricted Subsidiaries (which shall be
deemed to include the sale, grant or conveyance of any interest in the income,
profits or proceeds therefrom), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (x) that
have a fair market value in excess of $2 million or (y) for Net Cash Proceeds in
excess of $2 million. For the purposes of this definition, the term "Asset Sale"
does not include (a) any transfer of properties or assets (i) that is governed
by the provisions of the indenture described under the captions "-- Certain
Covenants--Merger, Consolidation or Sale of Assets," "-- Limitation on Issuances
and sales of Capital Stock of Restricted Subsidiaries" (to the
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extent of clause (a) thereof) or "-- Restricted Payments," (ii) between or among
the Company and its Restricted Subsidiaries pursuant to transactions that do not
violate any other provision of the indenture or (iii) representing obsolete or
permanently retired equipment and facilities or (b) the sale or exchange of
equipment in connection with the purchase or other acquisition of other
equipment, in each case used in the business of the Company or its Restricted
Subsidiaries as it was in existence on the Reference Date or any business
determined by the Board of the Company in its good faith judgment to be
reasonably related thereto. Notwithstanding anything to the contrary set forth
above, a disposition of Receivables and Related Assets other than pursuant to a
Receivables Program contemplated under the provisions described under the
caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Disqualified Stock" shall be deemed to be an Asset Sale.
"Banks" means the banks and other financial institutions that from time to
time are lenders under the Credit Agreement.
"Board" means the Company's Board of Directors or the Parent's Board of
Directors, as applicable.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"Capital Stock" of any Person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such Person's equity interest (however designated), whether now
outstanding or issued after the Closing Date.
"Capitalized Lease Obligation" means, with respect to any Person, any lease
of any property (whether real, personal or mixed) by that Person as lessee
which, in accordance with GAAP, is required to be accounted for as a capital
lease on the balance sheet of that Person.
"Change of Control" means the occurrence of any of the following:
(a) the consummation of any transaction (including, without
limitation, any merger or consolidation) (a) prior to a Public Equity
Offering by the Company or the Parent, the result of which is that the
Principals and their Related Parties become the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act) of
less than 50% of the Voting Stock of the Company or the Parent, as the case
may be (measured by voting power rather than the number of shares), or (b)
after a Public Equity Offering of the Company or the Parent, any "person"
or "group" (as such terms are used in Section 13(d) and 14(d) of the
Exchange Act), other than the Principals and their Related Parties, become
the beneficial owner (as defined above), directly or indirectly, of 35% or
more of the Voting Stock of the Company or the Parent, as the case may be,
and such person is or becomes, directly or indirectly, the beneficial owner
of a greater percentage of the voting power of the Voting Stock of the
Company or the Parent, as the case may be, calculated on a fully diluted
basis, than the percentage beneficially owned by the Principals and their
Related Parties;
(b) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of the Company and its Subsidiaries or the Parent and
its Subsidiaries, in each case, taken as a whole, to any "person" (as the
term is defined in Section 13(d)(3) of the Exchange Act) other than the
Principals or Related Parties of the Principals;
(c) the first day on which a majority of the members of the Board of
the Company or the Parent are not Continuing Directors; or
(d) the Company or the Parent is liquidated or dissolved or adopts a
plan of liquidation or dissolution, other than in a transaction that
complies with the provisions described under "Certain
Covenants -- Consolidation, Merger or Sale of Assets."
"Closing Date" means the date on which the notes are originally issued
under the indenture.
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"Consolidated EBITDA" means, for any period, the sum of, without
duplication, Consolidated Net Income for such period, plus (or, in the case of
clause (d) below, plus or minus) the following items to the extent included in
computing Consolidated Net Income for such period (a) Fixed Charges for such
period, plus (b) the provision for federal, state, local and foreign income
taxes of the Company and its Restricted Subsidiaries for such period, plus (c)
the aggregate depreciation and amortization expense of the Company and its
Restricted Subsidiaries for such period, plus (d) any other non-cash charges for
such period, and minus non-cash items increasing Consolidated Net Income for
such period, other than non-cash charges or items increasing Consolidated Net
Income resulting from changes in prepaid assets or accrued liabilities in the
ordinary course of business, plus (e) Minority Interest; provided that fixed
charges, income tax expense, depreciation and amortization expense and non-cash
charges of a Restricted Subsidiary will be included in Consolidated EBITDA only
to the extent (and in the same proportion) that the net income of such
Subsidiary was included in calculating Consolidated Net Income for such period.
"Consolidated Net Income" means, for any period, the net income (or net
loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary or nonrecurring gains or losses (less all fees and
expenses relating thereto), (b) any net after-tax gains or losses (less all fees
and expenses relating thereto) attributable to Asset Sales or discontinued
operations, (c) the portion of net income (or loss) of any Person (other than
the Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in
which the Company or any Restricted Subsidiary has an ownership interest, except
to the extent of the amount of dividends or other distributions actually paid to
the Company or any Restricted Subsidiary in cash during such period, (d) the net
income (or loss) of any Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination, (e) the net income (but not the net loss) of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary is at the date of
determination restricted, directly or indirectly, except to the extent that such
net income is actually paid to the Company or a Restricted Subsidiary thereof by
loans, advances, intercompany transfers, principal repayments or otherwise and
(f) the cumulative effect of a change in accounting principles.
"Consolidated Tangible Assets" means, as of the date of determination, the
total assets, less goodwill and other intangibles, shown on the balance sheet of
the Company and its Restricted Subsidiaries as of the most recent date for which
such a balance sheet is available, determined on a consolidated basis in
accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of the Company or the Parent, as the case may be, who:
(1) was a member of such Board on the Reference Date;
(2) was nominated for election or elected to such Board with the
approval of the majority of the Continuing Directors who were members of
such Board at the time of such nomination or election; or
(3) was nominated by one or more of the Principals and the Related
Parties.
"Credit Agreement" means the credit agreement, to be dated as of the date
of the Acquisition, among the Company, the Parent, the Subsidiary Guarantors,
the lenders named therein and Bank of America, N.A., as administrative agent,
First Union National Bank, as syndication agent, and The CIT Group/ Business
Credit, Inc., as documentation agent, providing for up to $225 million in term
loan borrowings and $50 million of revolving credit borrowings, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, as such credit agreement (and related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith) may be amended, restated, supplemented, refinanced,
extended or otherwise modified from time to time.
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"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an officer's certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or cash equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the indenture the principal amount of which is $25
million or more and that has been specifically designated by the Company, in the
instrument creating or evidencing such Senior Indebtedness or in an officers'
certificate delivered to the Trustee, as "Designated Senior Indebtedness."
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board is required to deliver a
resolution of the Board, to make a finding or otherwise take action under the
indenture, a member of the Board who does not have any material direct or
indirect financial interest in or with respect to such transaction or series of
transactions.
"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise (i) is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the Holder
thereof, at any time prior to such final Stated Maturity or (iii) at the option
of the Holder thereof is convertible into or exchangeable for debt securities at
any time prior to such final Stated Maturity; provided that any Capital Stock
that would constitute Disqualified Stock solely as a result of the provisions
therein giving holders thereof the right to cause the issuer thereof to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the Stated Maturity of the Notes will
not constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in the covenants described
under the captions "Repurchase at the Option of Holders -- Change of Control"
and "-- Asset Sales" described herein and such Capital Stock specifically
provides that the issuer will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to the provisions contained in the covenants
described under the captions "Repurchase at the Option of Holders--Change of
Control" and "-- Asset Sales."
"Equity Interests" means Capital Stock and all warrants, options and other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means a public or private offering of Capital Stock
(other than Disqualified Stock) of the Parent or the Company.
"Equity Sponsors" means J.W. Childs Associates, L.P., J.W. Childs Equity
Partners II, L.P., The Halifax Group, L.L.C. and Halifax Capital Partners L.P.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Credit Agreement)
outstanding on the Reference Date and listed on a schedule to the indenture,
until such amounts are repaid.
"Existing Notes" means the 9 5/8% Senior Subordinated Notes due 2008 of the
Company.
"Facility" means any premises, together with the diagnostic imaging and
treatment equipment installed therein, used by the Company in the conduct of the
business of providing diagnostic imaging and information, treatment and related
management services.
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"Fixed Charge Coverage Ratio" means, for any period, the ratio of
Consolidated EBITDA for such period to Fixed Charges for such period.
"Fixed Charges" means, for any period, without duplication, the sum of (a)
the amount that, in conformity with GAAP, would be set forth opposite the
caption "interest expense" (or any like caption) on a consolidated statement of
operations of the Company and its Restricted Subsidiaries for such period,
including, without limitation, (i) amortization of original issue discount, (ii)
the net cost of interest rate contracts (including, amortization of discounts),
(iii) the interest portion of any deferred payment obligation, (iv) amortization
of debt issuance costs, and (v) the interest component of Capitalized Lease
Obligations, plus (b) all dividends and distributions paid (whether or not in
cash) on Preferred Stock and Disqualified Stock by the Company or any Restricted
Subsidiary (to any Person other than the Company or any of its Restricted
Subsidiaries), other than dividends on Equity Interests payable solely in
Qualified Equity Interests of the Company, computed on a tax effected basis,
plus (c) all interest on any Indebtedness of any Person guaranteed by the
Company or any of its Restricted Subsidiaries or secured by a lien on the assets
of the Company or any of its Restricted Subsidiaries; provided, however, that
Fixed Charges will not include (i) any gain or loss from extinguishment of debt,
including the write-off of debt issuance costs, and (ii) the fixed charges of a
Restricted Subsidiary to the extent (and in the same proportion) that the net
income of such Subsidiary was excluded in calculating Consolidated Net Income
pursuant to clause (e) of the definition thereof for such period.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a state thereof or the District
of Columbia and that has no material operations or assets in the United States.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person entered into in the ordinary course of business under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and other similar financial agreements or arrangements designed to
protect such Person against, or manage the exposure of such Person to,
fluctuations in interest rates, and (ii) forward exchange agreements, currency
swap, currency option and other similar financial agreements or arrangements
designed to protect such Person against, or manage the exposure of such Person
to, fluctuations in foreign currency exchange rates.
"Holder" means the Person in whose name a Note is, at the time of
determination, registered on the Registrar's books.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed, (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (d) every obligation of such Person issued or
assumed as the deferred purchase price of property or services, (e) the
attributable value of every Capitalized Lease Obligation of such Person, (f) all
Disqualified Stock of such Person valued at its maximum fixed repurchase price,
plus accrued and unpaid dividends thereon, (g) all obligations of such Person
under or in respect of Hedging Obligations, and (h) every obligation of the type
referred to in clauses (a) through (g) of another Person and all dividends of
another Person the payment of which, in either case, such Person has guaranteed.
For purposes of this definition, the "maximum fixed repurchase price" of any
Disqualified Stock that does not have a fixed repurchase price will be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness is required
to be determined pursuant to the indenture, and if such price
118
is based upon, or measured by, the fair market value of such Disqualified Stock,
such fair market value will be determined in good faith by the board of
directors of the issuer of such Disqualified Stock. Notwithstanding the
foregoing, trade accounts payable and accrued liabilities arising in the
ordinary course of business and any liability for federal, state or local taxes
or other taxes owed by such Person will not be considered Indebtedness for
purposes of this definition.
"Investment" in any Person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to such Person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities issued by such Person, the acquisition (by purchase or otherwise) of
all or substantially all of the business or assets of such Person, or the making
of any investment in such Person, (ii) the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the
Capital Stock (or any other Investment), held by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary. Investments exclude endorsements for deposit or
collection in the ordinary course of business and extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon, or with respect to, any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A Person will be deemed to own subject to a Lien any
property that such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Minority Interest" means, with respect to any Person, interests in income
of such Person's Subsidiaries held by Persons other than such Person or another
Subsidiary of such Person, as reflected on such Person's consolidated financial
statements.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or cash equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (a) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (b) provisions for all taxes payable as a result of
such Asset Sale, (c) payments made to retire Indebtedness where such
Indebtedness is secured by the assets that are the subject of such Asset Sale,
(d) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with such Asset Sale
and retained by the seller after such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Non-Recourse Indebtedness" means Indebtedness of a Person (i) as to which
neither the Company nor any of its Restricted Subsidiaries (other than such
Person), (a) provides any guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would constitute
Indebtedness) or (b) is directly or indirectly liable (as a guarantor or
otherwise), and (ii) the obligees of which will have recourse for repayment of
the principal of and interest on such Indebtedness and any fees, indemnities,
expense reimbursements or other amount of whatsoever nature accrued or payable
in connection with such Indebtedness solely against the assets of such Person
and not against any of the assets of the Company or its Restricted Subsidiaries
(other than such Person).
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent" means InSight Health Services Holdings Corp.
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"Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness
that ranks pari passu in right of payment to the Notes and (b) with respect to
any Guarantee, Indebtedness that ranks pari passu in right of payment to such
Guarantee.
"Permitted Business" means the business conducted by the Company, its
Restricted Subsidiaries and Permitted Joint Ventures as of the Reference Date
and any and all diagnostic imaging and information businesses that in the good
faith judgment of the Board of the Company are reasonably related thereto.
"Permitted Investments" means any of the following:
(a) Investments in (i) United States dollars (including such dollars
as are held as overnight bank deposits and demand deposits with banks),
(ii) securities with a maturity of one year or less issued or directly and
fully guaranteed or insured by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof); (iii) certificates of
deposit, Euro-dollar time deposits or acceptances with a maturity of one
year or less of any financial institution that is a member of the Federal
Reserve System having combined capital and surplus of not less than
$500,000,000; (iv) any shares of money market mutual or similar funds
having assets in excess of $500,000,000; (v) repurchase obligations with a
term not exceeding seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above; and
(vi) commercial paper with a maturity of one year or less issued by a
corporation that is not an Affiliate of the Company and is organized under
the laws of any state of the United States or the District of Columbia and
having a rating (A) from Moody's Investors Service, Inc. of at least P-1 or
(B) from Standard & Poor's Ratings Group of at least A-1;
(b) Investments by the Company or any Restricted Subsidiary in
another Person, if as a result of such Investment (i) such other Person
becomes a Restricted Subsidiary or (ii) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its assets to, the Company or a Restricted Subsidiary;
(c) Investments by the Company or a Restricted Subsidiary in the
Company or a Restricted Subsidiary;
(d) Investments in existence on the Reference Date;
(e) promissory notes or other evidence of Indebtedness received as a
result of Asset Sales permitted under the covenant entitled "Repurchase at
the Option of Holders -- Asset Sales;"
(f) loans or advances to officers, directors and employees of the
Company or any of its Restricted Subsidiaries made (i) in the ordinary
course of business in an amount not to exceed $5 million in the aggregate
at any one time outstanding or (ii) in connection with the purchase by such
Persons of Equity Interests of the Parent so long as the cash proceeds of
such purchase received by the Parent are contemporaneously remitted by the
Parent to the Company as a capital contribution;
(g) any Investment by the Company or any Restricted Subsidiary of the
Company in Permitted Joint Ventures made after the Reference Date having an
aggregate fair market value, when taken together with all other Investments
made pursuant to this clause (g) that are at the time outstanding, not
exceeding the greater of (i) $30 million and (ii) 10% of the Consolidated
Tangible Assets of the Company as of the last day of the most recent full
fiscal quarter ending immediately prior to the date of such Investment
(with the fair market value of each Investment being measured at the time
made and without giving effect to subsequent changes in value);
(h) any Investment by the Company or any Restricted Subsidiary in a
trust, limited liability company, special purpose entity or other similar
entity in connection with a Receivables Program; provided that (A) such
Investment is made by a Receivables Subsidiary and (B) the only assets
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transferred to such trust, limited liability company, special purpose
entity or other similar entity consists of Receivables and Related Assets
of such Receivables Subsidiary; and
(i) other Investments that do not exceed $20 million in the aggregate
at any one time outstanding.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of the Company, (i) at least 20% of whose Capital
Stock with voting power under ordinary circumstances to elect directors (or
Persons having similar or corresponding powers and responsibilities) is at the
time owned (beneficially or directly) by the Company and/or by one or more
Restricted Subsidiaries of the Company and if the Company owns more than 50% of
the Capital Stock of the Permitted Joint Venture, such Permitted Joint Venture
is either a Restricted Subsidiary of the Company or has been designated as an
Unrestricted Subsidiary of the Company in accordance with the provisions
described under the caption "-- Unrestricted Subsidiaries," (ii) (x) if it is an
Unrestricted Subsidiary, all Indebtedness of such Person is Non-Recourse
Indebtedness or (y) if it is a Person other than an Unrestricted Subsidiary,
either all Indebtedness of such Person is Non-Recourse Indebtedness or the only
Indebtedness of such Person that is not Non-Recourse Indebtedness is
Indebtedness as to which any guarantee provided by the Company or a Restricted
Subsidiary complies with the covenants described under the captions "Certain
Covenants -- Restricted Payments" and "-- Incurrence of Indebtedness and
Issuance of Disqualified Stock" and (iii) which is engaged in a Permitted
Business; provided that each of Berwyn Magnetic Resonance Center, LLC, Garfield
Imaging Center, Ltd., Tom's River Imaging Associates, L.P., St. John's Regional
Imaging Center, LLC, Dublin Diagnostic Imaging, LLC, Connecticut Lithotripsy,
LLC, Northern Indiana Oncology Center of Porter Memorial Hospital, LLC, Lockport
MRI, LLC, Wilkes-Barre Imaging, LLC, Sun Coast Imaging Center, LLC, Granada
Hills Open MRI, LLC, Daniel Freeman MRI, LLC, InSight-Premier Health, LLC,
Southern Connecticut Imaging Centers, LLC, Parkway Imaging Center, LLC,
Metabolic Imaging of Kentucky, LLC, Maine Molecular Imaging, LLC, Greater
Waterbury Imaging Center, L.P. and Central Maine Magnetic Imaging Associates
shall be deemed to be a Permitted Joint Venture. Any such designation (other
than with respect to the Persons identified in the preceding sentence) shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution giving effect to such designation and an officer's certificate
certifying that such designation complied with the foregoing provisions.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded plus accrued
interest plus the lesser of the amount of any premium required to be paid in
connection with such refinancings pursuant to the terms of such indebtedness or
the amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing (in each case plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated in
right of payment to the Notes, such Permitted Refinancing Indebtedness has a
final maturity date not earlier than the final maturity date of, and is
subordinated in right of payment to, the Notes on terms at least as favorable to
the Holders as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (iv)
such Permitted Refinancing Indebtedness shall not include Indebtedness of a
Restricted Subsidiary that refinances Indebtedness of the Company or
Indebtedness of a Restricted Subsidiary that is not a Subsidiary Guarantor that
refinances Indebtedness of a Subsidiary Guarantor.
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"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's preferred or preference stock, whether now
outstanding or issued after the Closing Date, and including, without limitation,
all classes and series of preferred or preference stock of such Person.
"Principals" means the Equity Sponsors and their respective Affiliates.
"Public Equity Offering" means an offer and sale of Capital Stock (other
than Disqualified Stock) of the Company or the Parent pursuant to a registration
statement that has been declared effective by the Commission pursuant to the
Securities Act (other than a registration statement on Form S-8 or otherwise
relating to equity securities issuable under any employee benefit plan of the
Company).
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any Person means any and all Capital Stock of such
Person, other than Disqualified Stock.
"Receivables and Related Assets" means accounts receivable, instruments,
chattel paper, health care insurance receivables, obligations, general
intangibles and other similar assets, including interest in merchandise or
goods, the sale or lease of which give rise to the foregoing, related
contractual rights, guarantees, insurance proceeds, collections, other related
assets and proceeds of all the foregoing.
"Receivables Program" means with respect to any Person, any securitization
program pursuant to which such Person pledges, sells or otherwise transfers or
encumbers its Receivables and Related Assets, including a trust, limited
liability company, special purpose entity or other similar entity.
"Receivables Subsidiary" means a Wholly Owned Subsidiary (i) created for
the purpose of financing Receivables and Related Assets created in the ordinary
course of business of the Company and its Subsidiaries and (ii) the sole assets
of which consist of Receivables and Related Assets of the Company and its
Subsidiaries and Permitted Investments.
"Reference Date" means October 17, 2001, the date of the consummation of
the acquisition.
"Related Party" means:
(1) any controlling stockholder, partner, member, 80% (or more) owned
Subsidiary, or immediate family member (in the case of an individual) of
any Principal; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of any one or
more Principals and/or such other Persons referred to in the immediately
preceding clause.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary. Notwithstanding anything to the contrary herein or in the Notes,
Toms River Imaging Associates, L.P. will be deemed a Restricted Subsidiary of
the Company so long as the Company, directly or indirectly, owns at least 50% of
the Voting Stock thereof.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Restricted Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
"Senior Bank Debt" means the Obligations outstanding under the Credit
Agreement.
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"Senior Indebtedness" means (i) the Senior Bank Debt and any Hedging
Obligations owing by the Company or any Guarantor to any lender which is a party
to the Credit Agreement (or to any Affiliate of any such lender), (ii) any other
Indebtedness permitted to be incurred by the Company or any Restricted
Subsidiary under the terms of the indenture and (iii) any Indebtedness of the
Parent, unless, in the case of clauses (ii) and (iii), the instrument under
which such Indebtedness is incurred expressly provides that it is subordinated
in right of payment to any Indebtedness for money borrowed. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not include
(i) Indebtedness evidenced by the Notes or the Guarantees, (ii) Indebtedness of
the Company or any Guarantor that is expressly subordinated in right of payment
to any Senior Indebtedness of the Company or such Guarantor or the Notes or such
Guarantor's Guarantee, (iii) Indebtedness of the Company that by operation of
law is subordinate to any general unsecured obligations of the Company, (iv)
Indebtedness of the Company or any Guarantor to the extent incurred in violation
of the indenture, (v) any liability for federal, state or local taxes or other
taxes, owed or owing by the Company or the Parent, (vi) trade account payables
owed or owing by the Company or any Guarantor, (vii) amounts owed by the Company
or any Guarantor for compensation to employees or for services rendered to the
Company or such Guarantor, (viii) Indebtedness of the Company to any Restricted
Subsidiary or any other Affiliate of the Company, (ix) Disqualified Stock of the
Company or any Guarantor, and (x) Indebtedness which when incurred and without
respect to any election under Section 1111(b) of Title 11 of the United States
Code is without recourse to the Company or any Restricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that, together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net revenues of the
Company and its Subsidiaries, (b) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the
most recently available consolidated financial statements of the Company for
such fiscal year or (c) was organized or acquired after the beginning of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such entire fiscal year.
"Stated Maturity" means, when used with respect to any note or any
installment of interest thereon, the date specified in such note as the fixed
date on which the principal of such note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness or any installment of interest
thereon is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is subordinated in right of payment to the Notes or the Guarantee
issued by such Guarantor, as the case may be.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company. Notwithstanding anything
to the contrary herein or in the Notes, Toms River Imaging Associates, L.P. will
be deemed a Subsidiary of the Company so long as the Company, directly or
indirectly, owns at least 50% of the Voting Stock thereof.
"Subsidiary Guarantors" means, collectively, all Wholly Owned Restricted
Subsidiaries that are incorporated in the United States or a state thereof or
the District of Columbia.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of the Company as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes has, or might have, voting power by reason of the
happening of any contingency).
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"Weighted Average Life" means, as of the date of determination with respect
to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a)
the sum of the products of (i) the number of years from the date of
determination to the date or dates of each successive scheduled principal or
liquidation value payment of such Indebtedness or Disqualified Stock,
respectively, multiplied by (ii) the amount of each such principal or
liquidation value payment by (b) the sum of all such principal or liquidation
value payments.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all
of the outstanding Voting Stock (other than directors' qualifying shares or
shares of foreign Restricted Subsidiaries required to be owned by foreign
nationals pursuant to applicable law) of which is owned, directly or indirectly,
by the Company.
"Wholly Owned Subsidiary" means any Subsidiary, all of the outstanding
Voting Stock (other than directors' qualifying shares or shares of foreign
Subsidiaries required to be owned by foreign nationals pursuant to applicable
law) of which is owned, directly or indirectly, by the Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes certain material U.S. federal income
tax considerations generally applicable to holders of the notes. The U.S.
federal income tax considerations set forth below are based upon currently
existing provisions of the Internal Revenue Code (Code), applicable permanent,
temporary and proposed Treasury regulations, judicial authority, and current
administrative rulings and pronouncements of the IRS. There can be no assurance
that the IRS will not take a contrary view, and no ruling from the IRS has been,
or will be, sought on the issues discussed herein. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences discussed below.
The summary is not a complete analysis or description of all potential U.S.
federal income tax considerations that may be relevant to, or of the actual tax
effect that any of the matters described herein will have on, particular
holders, and does not address foreign, state, local or other tax consequences.
This summary does not purport to address special classes of taxpayers (such as S
corporations, mutual funds, insurance companies, financial institutions, small
business investment companies, regulated investment companies, broker-dealers
and tax-exempt organizations) who are subject to special treatment under the
U.S. federal income tax laws, or persons that hold notes that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency within
the meaning of section 985 of the Code is not the U.S. dollar. Furthermore,
estate and gift tax consequences are not discussed herein. The following
discussion assumes that the exchange notes are held as capital assets within the
meaning of section 1221 of the Code.
As used herein, the term "U.S. Holder" means a beneficial owner of the
notes that is (1) a citizen or resident of the United States for U.S. federal
income tax purposes, (2) a corporation or a partnership (or entity treated as a
corporation or partnership for U.S. tax purposes) created or organized in or
under the laws of the United States or any political subdivision thereof
(including the District of Columbia), (3) an estate, the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or (4) a trust if (a) a U.S. court can exercise primary supervision
over the administration of such trust and (b) one or more U.S. fiduciaries has
the authority to control all of the substantial decisions of such trust. As used
herein the term "Non-U.S. Holder" means a beneficial holder of notes that is not
a U.S. Holder.
Because individual circumstances may differ, each holder of the notes is
strongly urged to consult his or her own tax advisor with respect to his or her
particular tax situation and as to any U.S. federal, foreign, state, local or
other tax considerations (including any possible changes in tax law) affecting
the exchange, holding and disposition of the notes.
EXCHANGE OFFER
We have obtained an opinion from Kaye Scholer LLP to the effect that, if
the exchange offer is consummated in accordance with this prospectus, a U.S.
Holder will not recognize taxable gain or loss on the exchange of outstanding
notes for exchange notes pursuant to the exchange offer. A U.S. Holder's tax
basis and holding period for such exchange notes will be the same as for the
outstanding notes immediately before the exchange.
FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
This section describes certain U.S. federal income tax considerations
applicable to U.S. Holders. Non-U.S. Holders should see the discussion below
under the heading "Federal Income Tax Consequences to Non-U.S. Holders" for a
discussion of certain tax considerations applicable to them.
Interest and OID. Interest on the exchange notes generally will be taxable
to a U.S. Holder as ordinary interest income at the time such amounts are
accrued or received, in accordance with the U.S. Holder's method of accounting
for U.S. federal income tax purposes.
125
In the event that the issue price of the notes is less than the "stated
redemption price at maturity" of the notes by more than a de minimis amount, the
notes will be considered to have original issue discount (OID). The "stated
redemption price at maturity" of a debt instrument is equal to the sum of all
payments to be received other than payments of stated interest. The "issue
price" of a debt instrument issued for cash is equal to the first price at which
a substantial amount of such debt instruments are sold. If the notes are treated
as having OID, a U.S. Holder (including a cash basis holder) generally would be
required to include the OID on the notes in income for U.S. federal income tax
purposes under the accrual method on a constant yield basis resulting in the
inclusion of interest in income in advance of the receipt of cash attributable
to that income.
Amortizable Bond Premium. A U.S. Holder that purchases a note for an
amount in excess of the stated redemption price at maturity will be considered
to have purchased the note with "amortizable bond premium". Such holder may
elect to amortize such premium (as an offset to interest income), using a
constant-yield method, over the remaining term of the note. Such election, once
made, generally applies to all debt instruments held or subsequently acquired by
the U.S. Holder on or after the first day of the first taxable year to which the
election applies and may be revoked only with the consent of the IRS. A U.S.
Holder that elects to amortize such premium must reduce its tax basis in the
note by the amount of the premium amortized during its holding period. With
respect to a U.S. Holder that does not elect to amortize bond premium, the
amount of such premium will be included in the U.S. Holder's tax basis for
purposes of computing gain or loss in connection with taxable disposition of the
note.
Market Discount on Resale of the Notes. If a U.S. Holder acquires a note
(generally other than in an original issue) at a market discount that exceeds a
statutorily defined de minimis amount and thereafter recognizes gain upon a
disposition (or makes a gift) of the note, the lesser of (1) such gain (or
appreciation, in the case of a gift) or (2) the portion of the market discount
that accrued while the note was held by such U.S. Holder will be treated as
ordinary income at the time of the disposition. For these purposes, market
discount equals the excess of the stated redemption price at maturity (or, if
the note is issued with OID, its "revised issued price" as defined in the Code)
over the basis of the note in the hands of such U.S. Holder immediately after
its acquisition. A U.S. Holder of a note may elect to include any market
discount in income currently as it accrues, either ratably or on a constant
yield basis, rather than upon disposition of the note. This election is
revocable only with the consent of the IRS and applies to all market discount
bonds acquired by the U.S. Holder on or after the first day of the taxable year
in which the holder makes the election. A U.S. Holder of a note who acquired it
at a market discount may be required to defer the deduction of all or a portion
of any interest paid or accrued on any indebtedness incurred or continued to
purchase or carry the note until the market discount is recognizable upon a
subsequent disposition of the note. Such a deferral is not required, however, if
the U.S. Holder elects to include accrued market discount in income currently.
Disposition of the Notes. Unless a nonrecognition provision applies, the
sale, exchange, redemption (including pursuant to an offer by InSight) or other
disposition of a note will be a taxable event for U.S. federal income tax
purposes. In such event, in general, a U.S. Holder of notes will recognize gain
or loss equal to the difference between (1) the amount of cash plus the fair
market value of property received (except to the extent attributable to any
accrued interest on the notes which will be taxable as such) and (2) the U.S.
Holder's tax basis in the notes (as increased by any OID and market discount
previously included in income by the U.S. Holder and decreased by any
amortizable bond premium deducted over the term of the notes). Subject to the
market discount rules discussed above, any such gain or loss generally will be
long-term capital gain or loss, provided the notes have been held for more than
one year. The deductibility of capital losses is subject to limitations.
Backup Withholding. Under section 3406 of the Code and applicable Treasury
regulations, a noncorporate U.S. Holder of the notes may be subject to backup
withholding at the rate of 30% (subject to change in future years) with respect
to "reportable payments," which include interest paid on, or, in certain cases,
the proceeds of a sale, exchange or redemption of, the notes. The payor will be
required to deduct and withhold the prescribed amounts if (1) the payee fails to
furnish a taxpayer identification number (TIN) to the payor in the manner
required, (2) the IRS notifies the payor that the TIN
126
furnished by the payee is incorrect, (3) there has been a "notified payee
underreporting" described in section 3406(c) of the Code or (4) there has been a
failure of the payee to certify under penalty of perjury that the payee is not
subject to withholding under section 3406(a)(1)(C) of the Code. Amounts paid as
backup withholding do not constitute an additional tax and may be refunded (or
credited against the holder's U.S. federal income tax liability, if any) so long
as the required information is provided to the IRS. The Company will report to
the holders of the notes and to the IRS the amount of any "reportable payments"
for each calendar year and the amount of tax withheld, if any, with respect to
payment on those securities.
FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following information describes the U.S. federal income tax treatment
of "Non-U.S. Holders."
Interest on the Notes. If the income or gain on the notes is "effectively
connected with the conduct of a trade or business within the United States" by a
Non-U.S. Holder, and, if a tax treaty applies, the income or gain generally is
attributable to a U.S. permanent establishment maintained by the Non-U.S.
Holder, such income or gain will be subject to U.S. federal income tax
essentially in the same manner as if the notes were held by a U.S. Holder, as
described above, and in the case of a Non-U.S. Holder that is a corporation, may
also be subject to U.S. branch profits tax. Such Non-U.S. Holder will not be
subject to withholding taxes, however, if it provides a properly executed IRS
Form W-8ECI.
Interest on the notes held by other Non-U.S. Holders may be subject to
withholding of up to 30% of each payment made to the holders or other payee
unless the "portfolio interest exemption" applies or an applicable income tax
treaty reduces the withholding rate. The interest paid on the notes generally
will qualify for the portfolio interest exemption. Accordingly, interest paid on
the notes to a Non-U.S. Holder will not be subject to withholding if (1) the
U.S. person who would otherwise be required to deduct and withhold the tax
receives from the Non-U.S. Holder who is the beneficial owner of the notes a
statement signed by such person under penalties of perjury, certifying that such
owner is not a U.S. person on IRS Form W-8BEN (or successor form); (2) such
Non-U.S. Holder does not actually or constructively own 10 percent or more of
the total combined voting power of all classes of stock in the Company; (3) such
Non-U.S. Holder is not a "controlled foreign corporation" (within the meaning of
section 957 of the Code) related to the Company; and (4) the Non-U.S. Holder is
not a foreign "bank" receiving the interest on an extension of credit pursuant
to a loan agreement entered into in the ordinary course of its trade or
business.
If you do not claim, or do not qualify for, the benefit of the portfolio
interest exemption, you may be subject to a 30% withholding tax on interest
payments on the notes. However, you may be able to claim the benefit of a
reduced withholding tax rate under an applicable income tax treaty. The required
information for claiming treaty benefits is generally submitted, under current
regulations, on IRS Form W-8BEN.
Sale or Other Disposition of the Notes. A Non-U.S. Holder will generally
not be subject to U.S. federal income tax or withholding tax on gain recognized
on a sale, exchange, redemption, retirement, or other disposition of the notes.
A Non-U.S. Holder may, however, be subject to tax on such gain if: (1) it is an
individual who was present in the United States for 183 days or more in the
taxable year of the disposition and certain other conditions are met; (2) it is
an individual who is a former citizen or long-term resident of the United States
subject to certain U.S. tax rules relevant to such status; or (3) the gain is
effectively connected with the conduct of a U.S. trade or business, as provided
in applicable U.S. tax rules.
Backup Withholding and Information Reporting. Payments of interest or
principal may be subject to both backup withholding at a rate of 30% (subject to
change in future years) and information reporting. Backup withholding and
information reporting generally will not apply to payments on the notes if the
Non-U.S. Holder certifies, on a Form W-8BEN, or successor form, that it is not a
U.S. person, provided that the payor does not have actual knowledge that the
Non-U.S. Holder is, in fact, a U.S. person. Any
127
amounts withheld under the backup withholding rules may be refunded or credited
against the Non-U.S. Holder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
The foregoing summary is included herein for general information only and
does not discuss all aspects of U.S. federal income taxation that may be
relevant to a particular holder of the notes in light of his or her particular
circumstances and income tax situation. Holders are urged to consult their own
tax advisors as to any tax consequences to them from the exchange, ownership,
and disposition of the notes, including the application and effect of state,
local, foreign, and other tax laws.
128
PLAN OF DISTRIBUTION
Each participating broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a participating broker-dealer in connection with resales of exchange notes
received in exchange for outstanding notes where such outstanding notes were
acquired as a result of market-making activities or other trading activities. We
have agreed that for a period of 180 days after the expiration of the exchange
offer, we will make this prospectus, as amended or supplemented, available to
any participating broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sales of the exchange notes by
participating broker-dealers. Exchange notes received by participating
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such participating broker-dealer and/or the purchasers of
any such exchange notes. Any participating broker-dealer that resells the
exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
such exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a participating broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the exchange offer we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any participating broker-dealer that requests
such documents in the letter of transmittal.
Prior to the exchange offer, there has not been any public market for the
outstanding notes. The outstanding notes have not been registered under the
Securities Act and will be subject to restrictions on transferability to the
extent that they are not exchanged for exchange notes by holders who are
entitled to participate in this exchange offer. The holders of outstanding notes
who timely notify us under the registration rights agreement, and are not
eligible to participate in the exchange offer, are not permitted to resell the
exchange notes using this prospectus or is a broker-dealer and holds outstanding
notes acquired directly from us or any of our affiliates are entitled to certain
registration rights, and we are required to file a shelf registration statement
with respect to their outstanding notes. The exchange notes will constitute a
new issue of securities with no established trading market. We do not intend to
list the exchange notes on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act and may
be limited during the exchange offer and the pendency of the shelf registration
statements. Accordingly, no assurance can be given that an active public or
other market will develop for the exchange notes or as to the liquidity of the
trading market for the exchange notes. If a trading market does not develop or
is not maintained, holders of the exchange notes may experience difficulty in
reselling the exchange notes or may be unable to sell them at all. If a market
for the exchange notes develops, any such market may be discontinued at any
time.
LEGAL MATTERS
The validity of the notes offered hereby and certain other legal matters
will be passed upon on behalf of InSight by Kaye Scholer LLP, New York, New
York. Certain legal matters will be passed upon on behalf of InSight by Hunton &
Williams, McLean, Virginia.
129
EXPERTS
The consolidated financial statements of InSight as of June 30, 2001 and
2000 and for the three years in the period ended June 30, 2001 and the
consolidated financial statements of InSight Holdings as of June 30, 2001 and
for the period from inception (June 13, 2001) to June 30, 2001, included in this
prospectus and elsewhere in the registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
Since the consummation of the acquisition, InSight is no longer subject to
the informational requirements of the Securities Exchange Act of 1934. As a
result, and until the registration statement filed in connection with the
exchange offer described herein for the exchange notes has been declared
effective, InSight will not be required to file periodic reports with the SEC.
InSight has agreed that, whether or not it is required to do so by the rules and
regulations of the SEC, for so long as any of the notes remain outstanding, it
will furnish to the holders of the notes and file with the SEC, unless the SEC
will not accept such a filing, following the consummation of the exchange offer:
(1) all quarterly and annual reports that would be required to be filed with the
SEC on Forms 10-Q and 10-K if InSight was required to file such reports and (2)
all reports that would be required to be filed with the SEC on Form 8-K if
InSight was required to file such reports. So long as InSight Holdings
guarantees the notes, InSight's reporting obligations will be satisfied by
InSight Holdings. All reports, exhibits to such reports and other information
that InSight files with the SEC will be available on the SEC's web site at
www.sec.gov.
130
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE NUMBER
-----------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of June 30, 2001 and 2000.... F-3
Consolidated Statements of Income for the years ended June
30, 2001, 2000 and 1999................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2001, 2000 and 1999.................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000 and 1999.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31,
2001 and June 30, 2001 (unaudited)........................ F-33
Condensed Consolidated Statements of Operations for the six
months ended December 31, 2001, the period from July 1,
2001 through October 17, 2001, and the six months ended
December 31, 2000 (unaudited)............................. F-34
Condensed Consolidated Statements of Operations for the
three months ended December 31, 2001, the period from
October 1, 2001 through October 17, 2001, and the three
months ended December 31, 2000 (unaudited)................ F-35
Condensed Consolidated Statements of Stockholders' Equity
for the period from July 1, 2001 through October 17, 2001,
and the six months ended December 31, 2001 (unaudited).... F-36
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 2001, the period from July 1,
2001 through October 17, 2001, and the six months ended
December 31, 2000 (unaudited)............................. F-37
Notes to Condensed Consolidated Financial Statements........ F-38
Report of Independent Public Accountants ................... F-56
Consolidated Balance Sheet as of June 30, 2001.............. F-57
Consolidated Statement of Stockholders' Equity from
Inception (June 13, 2001) to June 30, 2001................ F-58
Notes to Consolidated Financial Statements.................. F-59
</Table>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of InSight Health Services Corp.:
We have audited the accompanying consolidated balance sheets of InSight
Health Services Corp. (a Delaware corporation) and subsidiaries as of June 30,
2001 and 2000, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InSight
Health Services Corp. and subsidiaries as of June 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
August 29, 2001
F-2
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 23,254 $ 27,133
Trade accounts receivables, net........................... 43,355 40,598
Other current assets...................................... 5,029 5,811
Deferred income taxes..................................... 3,350 3,350
-------- --------
Total current assets................................... 74,988 76,892
-------- --------
PROPERTY AND EQUIPMENT, net................................. 148,255 148,469
INVESTMENTS IN PARTNERSHIPS................................. 1,783 1,782
OTHER ASSETS................................................ 6,828 7,799
INTANGIBLE ASSETS, net...................................... 89,202 93,930
-------- --------
$321,056 $328,872
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment and other notes.............. $ 21,259 $ 18,813
Current portion of capital lease obligations.............. 12,603 10,652
Accounts payable and other accrued expenses............... 24,335 26,613
-------- --------
Total current liabilities.............................. 58,197 56,078
-------- --------
LONG-TERM LIABILITIES:
Equipment and other notes, less current portion........... 150,696 172,379
Capital lease obligations, less current portion........... 43,695 46,388
Other long-term liabilities............................... 2,997 2,540
-------- --------
Total long-term liabilities............................ 197,388 221,307
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares
authorized:
Convertible Series B preferred stock, 25,000 shares
outstanding at June 30, 2001 and 2000, with a
liquidation preference of $25,000 as of June 30,
2001.................................................. 23,923 23,923
Convertible Series C preferred stock, 27,953 shares
outstanding at June 30, 2001 and 2000, with a
liquidation preference of $27,953 as of June 30,
2001.................................................. 13,173 13,173
Common stock, $.001 par value, 25,000,000 shares
authorized, 3,011,656 and 2,979,293 shares outstanding
at June 30, 2001 and 2000, respectively............... 3 3
Additional paid-in capital................................ 23,926 23,743
Retained earnings (deficit)............................... 4,446 (9,355)
-------- --------
Total stockholders' equity............................. 65,471 51,487
-------- --------
$321,056 $328,872
======== ========
</Table>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
2001 2000 1999
-------- -------- -------
REVENUES:
Contract services......................................... $103,421 $100,135 $85,491
Patient services.......................................... 107,468 86,838 73,565
Other..................................................... 614 1,601 2,936
-------- -------- -------
Total revenues......................................... 211,503 188,574 161,992
-------- -------- -------
COSTS OF OPERATIONS:
Costs of services......................................... 109,216 101,323 85,317
Provision for doubtful accounts........................... 3,594 2,907 2,618
Equipment leases.......................................... 7,928 13,569 18,522
Depreciation and amortization............................. 41,134 33,630 24,886
-------- -------- -------
Total costs of operations.............................. 161,872 151,429 131,343
-------- -------- -------
Gross profit........................................... 49,631 37,145 30,649
CORPORATE OPERATING EXPENSES................................ 10,783 10,946 10,475
PROVISION FOR REORGANIZATION AND OTHER COSTS................ -- -- 3,300
-------- -------- -------
Income from company operations............................ 38,848 26,199 16,874
EQUITY IN EARNINGS OF UNCONSOLIDATED
PARTNERSHIPS.............................................. 971 817 548
-------- -------- -------
Operating income.......................................... 39,819 27,016 17,422
INTEREST EXPENSE, net....................................... 23,394 18,696 14,500
-------- -------- -------
Income before income taxes................................ 16,425 8,320 2,922
PROVISION (BENEFIT) FOR INCOME TAXES........................ 2,624 1,131 (3,190)
-------- -------- -------
Net income................................................ $ 13,801 $ 7,189 $ 6,112
======== ======== =======
INCOME PER COMMON AND PREFERRED SHARE:
Basic..................................................... $ 1.48 $ 0.78 $ 0.67
======== ======== =======
Diluted................................................... $ 1.42 $ 0.76 $ 0.65
======== ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON AND
PREFERRED SHARES OUTSTANDING:
Basic..................................................... 9,321 9,258 9,158
======== ======== =======
Diluted................................................... 9,719 9,398 9,376
======== ======== =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
PREFERRED STOCK
-----------------------------------
SERIES B SERIES C COMMON STOCK ADDITIONAL RETAINED
---------------- ---------------- ------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------- ------ ------- --------- ------ ---------- --------- -------
BALANCE AT JUNE 30,
1998.................... 25,000 $23,923 27,953 $13,173 2,824,090 $3 $23,415 $(22,656) $37,858
Stock options exercised... -- -- -- -- 52,596 -- 115 -- 115
Common stock issued....... -- -- -- -- 2,385 -- 21 -- 21
Net income................ -- -- -- -- -- -- -- 6,112 6,112
------ ------- ------ ------- --------- -- ------- -------- -------
BALANCE AT JUNE 30,
1999.................... 25,000 23,923 27,953 13,173 2,879,071 3 23,551 (16,544) 44,106
Stock options and warrants
exercised............... -- -- -- -- 100,222 -- 192 -- 192
Net income................ -- -- -- -- -- -- -- 7,189 7,189
------ ------- ------ ------- --------- -- ------- -------- -------
BALANCE AT JUNE 30,
2000.................... 25,000 23,923 27,953 13,173 2,979,293 3 23,743 (9,355) 51,487
Stock options and warrants
exercised............... -- -- -- -- 32,375 -- 183 -- 183
Adjustment for fractional
shares on MHC and IHC
exchange................ -- -- -- -- (12) -- -- -- --
Net income................ -- -- -- -- -- -- -- 13,801 13,801
------ ------- ------ ------- --------- -- ------- -------- -------
BALANCE AT JUNE 30,
2001.................... 25,000 $23,923 27,953 $13,173 3,011,656 $3 $23,926 $ 4,446 $65,471
====== ======= ====== ======= ========= == ======= ======== =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
2001 2000 1999
------- -------- --------
OPERATING ACTIVITIES:
Net income................................................ $13,801 $ 7,189 $ 6,112
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 41,134 33,630 24,886
Amortization of deferred gain on debt restructure...... -- -- (75)
Cash provided by (used in) changes in operating assets and
liabilities:
Trade accounts receivables, net........................ (2,757) (4,611) (8,324)
Other current assets................................... 782 (1,803) (4,106)
Accounts payable and other accrued expenses............ (2,278) 6,119 (7,601)
------- -------- --------
Net cash provided by operating activities............ 50,682 40,524 10,892
------- -------- --------
INVESTING ACTIVITIES:
Cash acquired in acquisitions............................. -- -- 850
Acquisition of Centers and Fixed Facilities............... -- (25,346) (28,046)
Additions to property and equipment....................... (22,911) (23,170) (18,440)
Other..................................................... (531) (554) (1,565)
------- -------- --------
Net cash used in investing activities................ (23,442) (49,070) (47,201)
------- -------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and warrants exercised........ 183 192 115
Proceeds from issuance of common stock.................... -- -- 21
Principal payments of debt and capital lease
obligations............................................ (31,759) (25,468) (17,495)
Proceeds from issuance of debt............................ -- 45,200 23,820
Other..................................................... 457 1,461 (598)
------- -------- --------
Net cash provided by (used in) financing
activities........................................ (31,119) 21,385 5,863
------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:........... (3,879) 12,839 (30,446)
Cash, beginning of year................................... 27,133 14,294 44,740
------- -------- --------
Cash, end of year......................................... $23,254 $ 27,133 $ 14,294
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $22,947 $ 18,086 $ 14,923
Income taxes paid......................................... 2,582 452 71
Equipment additions under capital leases.................. 11,780 55,290 1,507
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Nature of Business
InSight Health Services Corp. (Company) was incorporated in Delaware in
February 1996. The Company's predecessors, InSight Health Corp. (formerly
American Health Services Corp.) (IHC), and Maxum Health Corp. (MHC), became
wholly owned subsidiaries of the Company on June 26, 1996, pursuant to an
Agreement and Plan of Merger among the Company, IHC and MHC (the Merger).
The Company provides diagnostic imaging, treatment and related management
services in 28 states throughout the United States. The Company has two
reportable segments: Eastern Division and Western Division. The Company's
services are provided through a network of 82 mobile magnetic resonance imaging
(MRI) facilities, four mobile lithotripsy facilities, four mobile positron
emission tomography (PET) facilities (collectively Mobile Facilities), 35
fixed-site MRI facilities (Fixed Facilities), 27 multi-modality imaging centers
(Centers), one Leksell Stereotactic Gamma Knife treatment center, one PET Fixed
Facility, and one radiation oncology center. An additional radiation oncology
center is operated by the Company as part of one of its Centers. The Company has
a substantial presence in California, Texas, New England, the Carolinas, Florida
and the Midwest (Indiana and Ohio).
At its Centers, the Company typically offers other services in addition to
MRI, including computed tomography (CT), diagnostic and fluoroscopic x-ray,
mammography, diagnostic ultrasound, nuclear medicine, bone densitometry, nuclear
cardiology, and cardiovascular services.
b. Consolidated Financial Statements
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The Company's investment interests in
partnerships or limited liability companies (Partnerships) are accounted for
under the equity method of accounting for ownership of 50 percent or less when
the Company does not exercise significant control over the operations of the
Partnership and does not have primary responsibility for the Partnership's
long-term debt. The Company's investment interests in Partnerships are
consolidated for ownership of 50 percent or greater owned entities when the
Company exercises significant control over the operations and is primarily
responsible for the associated long-term debt (Note 12).
Significant intercompany balances have been eliminated in consolidation.
c. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
d. Revenue Recognition
Revenues from contract services (primarily Mobile Facilities) and from
patient services (primarily Fixed Facilities and Centers) are recognized when
services are provided. Patient services revenues are presented net of related
contractual adjustments. Equipment rental revenues, management fees and other
revenues are recognized over the applicable contract period. Revenues collected
in advance are recorded as unearned revenue.
F-7
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
e. Cash Equivalents
Cash equivalents are generally composed of liquid investments with original
maturities of three months or less, such as certificates of deposit and
commercial paper.
f. Property and Equipment
Property and equipment are depreciated and amortized on the straight-line
method using the following estimated useful lives:
<Table>
Vehicles................................. 3 to 8 years
Buildings................................ 7 to 20 years
Leasehold improvements................... Lesser of the useful life or term of
lease
Computer and office equipment............ 3 to 5 years
Diagnostic and related equipment......... 5 to 8 years
Equipment and vehicles under capital Lesser of the useful life or term of
leases................................. lease
</Table>
The Company capitalizes expenditures for improvements and major renewals.
Maintenance, repairs and minor replacements are charged to operations as
incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations.
g. Intangible Assets
The Company has classified as goodwill the cost in excess of fair value of
the net assets acquired in purchase transactions. Intangible assets are
amortized on the straight-line basis over the following periods:
<Table>
Goodwill.................................................... 5 to 20 years
Other....................................................... 3 to 7 years
</Table>
The Company assesses the ongoing recoverability of its intangible assets
(including goodwill) by determining whether the intangible asset balance can be
recovered over the remaining amortization period through projected undiscounted
future cash flows. If projected future cash flows indicate that the unamortized
intangible asset balances will not be recovered, an adjustment is made to reduce
the net intangible asset to an amount consistent with projected future cash
flows discounted at the Company's incremental borrowing rate. Cash flow
projections, although subject to a degree of uncertainty, are based on trends of
historical performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
h. Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
F-8
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
i. Income Per Common and Preferred Share
The Company reports basic and diluted earnings per share (EPS) for common
and preferred stock (Note 13). Basic EPS is computed by dividing reported
earnings by weighted average common and preferred shares outstanding. Diluted
EPS is computed by adding to the weighted average common and preferred shares
the dilutive effect of stock options and warrants.
j. Fair Value of Financial Instruments
The fair value of financial instruments is estimated using available market
information and other valuation methodologies. The fair value of the Company's
financial instruments is estimated to approximate the related book value, unless
otherwise indicated.
k. New Pronouncements
In the first quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138
(collectively, SFAS 133). SFAS 133 requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under SFAS 133 an entity may designate a
derivative as a hedge of exposure to either changes in: (i) fair value of a
recognized asset or liability or firm commitment, (ii) cash flows of a
recognized or forecasted transaction, or (iii) foreign currencies of a net
investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of the
hedge and/or the transaction being hedged, any change in the fair value of the
derivative instrument is either recognized in earnings in the current year,
deferred to future periods, or recognized in other comprehensive income. Changes
in the fair value of all derivative instruments not recognized as hedge
accounting are recognized in current year earnings. The adoption of SFAS 133 on
July 1, 2000 did not have a material impact on the Company's financial condition
and results of operations.
In fiscal 1998, the Company entered into an interest rate swap with a
notional amount of $40 million for the purpose of fixing the interest rate of a
corresponding amount of $40 million of floating rate debt. This swap had a three
year term and was extendable for an additional three years at the option of the
bank. Under SFAS 133, extendable swaps do not meet the criteria for hedge
accounting and changes in fair value are recognized currently in earnings.
During the year ended June 30, 2001, the Company recorded additional interest
expense of approximately $0.7 million due to changes in the fair value of the
swap. In March 2001, the swap was extended for an additional three years by the
bank and the Company expects the swap to qualify for hedge accounting through
its maturity.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition," to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101 explains
the SEC staff's general framework for revenue recognition, stating that certain
criteria need to be met in order to recognize revenue. The adoption of SAB 101
did not have a material impact on the Company's financial condition and results
of operations.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modifications to outstanding awards and changes in grantee status that occur on
or after July 1, 2001, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
The requirements of FIN 44 did not have a material impact on the Company's
financial condition and results of operations.
F-9
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
141 addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No.
38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of SFAS 141 are to be accounted for using the
purchase method of accounting. The Company will adopt SFAS 141 for all business
combinations initiated after June 30, 2001.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." SFAS 142 addresses, among other things, how goodwill and
other intangible assets should be accounted for after they have been initially
recognized in the financial statements. Goodwill would no longer be amortized
but would be assessed at least annually for impairment using a fair value
methodology. The Company will adopt SFAS 142 for all goodwill and other
intangible assets acquired after June 30, 2001 and for all existing goodwill and
other intangible assets beginning July 1, 2001. The Company expects that upon
adoption of SFAS 142 on July 1, 2001 it will cease recording annual goodwill
amortization of approximately $5.4 million. For the year ending June 30, 2002,
SFAS 142 also changes the methodology and potential timing of impairment
charges; however, the effect of these charges (if any) cannot be determined at
this time. Under the transition arrangements of SFAS 142, the Company is
required to complete a preliminary evaluation of impairment charges by December
31, 2001 and recognize the effects of any impairment charges prior to June 30,
2002. Such amounts would be recorded as a cumulative effect of a change in
accounting principle, effective in the first quarter of fiscal 2002.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 (with
earlier application being encouraged). The Company does not expect the adoption
of SFAS 143 to have a material impact on the Company's financial condition and
results of operations.
l. Reclassifications
Reclassifications have been made to certain 2000 and 1999 amounts to
conform to the 2001 presentation.
2. TRADE ACCOUNTS RECEIVABLES
Trade accounts receivables, net are comprised of the following (amounts in
thousands):
<Table>
<Caption>
JUNE 30,
-----------------
2001 2000
------- -------
Trade accounts receivables.................................. $79,607 $70,907
Less: Allowances for doubtful accounts and contractual
adjustments............................................... 26,611 22,291
Allowances for professional fees.......................... 9,641 8,018
------- -------
Trade accounts receivables, net............................. $43,355 $40,598
======= =======
</Table>
F-10
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allowance for doubtful accounts and contractual adjustments includes
management's estimate of the amounts expected to be written off on specific
accounts and for write-offs on other unidentified accounts included in accounts
receivables. In estimating the write-offs and adjustments on specific accounts,
management relies on a combination of in-house analysis and a review of
contractual payment rates from private health insurance programs or under the
federal Medicare program. In estimating the allowance for unidentified
write-offs and adjustments, management relies on historical experience. The
amounts the Company will ultimately realize could differ materially in the near
term from the amounts assumed in arriving at the allowance for doubtful accounts
and contractual adjustments in the financial statements at June 30, 2001.
The Company reserves a contractually agreed upon percentage at several of
its Centers and Fixed Facilities, averaging 20 percent of the accounts
receivables balance from patients, for payments to radiologists for interpreting
the results of the diagnostic imaging procedures. Payments to radiologists are
only due when amounts are received. At that time, the balance is transferred
from the allowance account to a professional fees payable account.
3. PROPERTY AND EQUIPMENT
Property and equipment, net are stated at cost and are comprised of the
following (amounts in thousands):
<Table>
<Caption>
JUNE 30,
-------------------
2001 2000
-------- --------
Vehicles.................................................... $ 2,964 $ 2,426
Land, building and leasehold improvements................... 26,409 24,265
Computer and office equipment............................... 20,161 19,192
Diagnostic and related equipment............................ 118,112 107,639
Equipment and vehicles under capital leases................. 68,573 57,752
-------- --------
236,219 211,274
Less: Accumulated depreciation and amortization............. 87,964 62,805
-------- --------
Property and equipment, net................................. $148,255 $148,469
======== ========
</Table>
4. INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
<Table>
<Caption>
JUNE 30,
-------------------
2001 2000
-------- --------
Intangible assets........................................... $107,208 $108,014
Less: Accumulated amortization.............................. 18,006 14,084
-------- --------
Intangible assets, net...................................... $ 89,202 $ 93,930
======== ========
Net intangible assets:
Goodwill.................................................... $ 87,933 $ 92,980
Other....................................................... 1,269 950
-------- --------
$ 89,202 $ 93,930
======== ========
</Table>
Amortization of intangible assets was approximately $6.2 million, $5.3
million, and $4.7 million for the years ended June 30, 2001, 2000 and 1999,
respectively.
F-11
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, the Company completed two acquisitions as follows: a 70% interest
in a partnership which owns four Centers and two Fixed Facilities in Buffalo,
New York; and a 100% interest in three Centers and two Fixed Facilities in
Phoenix, Arizona. The aggregate purchase price for these two acquisitions was
approximately $17.4 million.
In 2000, the Company completed two acquisitions as follows: two Fixed
Facilities in Indianapolis and Clarksville, Indiana, respectively; and a 90%
interest in a partnership which owns a Center in Wilkes-Barre, Pennsylvania. The
aggregate purchase price for these two acquisitions was approximately $24.5
million.
5. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses are comprised of the following
(amounts in thousands):
<Table>
<Caption>
JUNE 30,
-----------------
2001 2000
------- -------
Accounts payable............................................ $ 2,202 $ 133
Accrued equipment related costs............................. 3,030 8,526
Accrued payroll and related costs........................... 7,351 4,519
Other accrued expenses...................................... 11,752 13,435
------- -------
$24,335 $26,613
======= =======
</Table>
6. EQUIPMENT AND OTHER NOTES PAYABLE
Equipment and other notes payable are comprised of the following (amounts
in thousands):
<Table>
<Caption>
JUNE 30,
-------------------
2001 2000
-------- --------
Notes payable to bank (Bank Financing), bearing interest at
LIBOR plus 1.75 percent (5.46 and 6.78 percent at June 30,
2001 and 2000), principal and interest payable quarterly,
maturing in June 2004. The notes are secured by
substantially all of the Company's assets................. $ 70,663 $ 89,055
Notes payable to General Electric Company (GE), bearing
interest at rates which range from 8.60 percent to 8.75
percent, maturing at various dates through May 2005. The
notes are primarily secured by certain buildings and
diagnostic equipment...................................... 1,234 1,587
Unsecured senior subordinated notes payable (Existing
Notes), bearing interest at 9.625 percent, interest
payable semi-annually, principal due in June 2008. At June
30, 2001, the fair value of the Existing Notes was
approximately $99.5 million............................... 100,000 100,000
Other notes payable......................................... 58 550
-------- --------
Total equipment and other notes payable..................... 171,955 191,192
Less: Current portion....................................... 21,259 18,813
-------- --------
Long-term equipment and other notes payable................. $150,696 $172,379
======== ========
</Table>
F-12
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of equipment and other notes payable at June 30, 2001,
are as follows (amounts in thousands):
<Table>
2002........................................................ $ 21,259
2003........................................................ 24,132
2004........................................................ 26,379
2005........................................................ 185
2006........................................................ --
Thereafter.................................................. 100,000
--------
$171,955
========
</Table>
As part of the Bank Financing, the Company has a $25 million revolving
working capital facility, which expires in June 2003. There were no borrowings
under the working capital facility as of June 30, 2001. The Company is also
required to pay an unused facility fee of 0.375% on unborrowed amounts under the
working capital facility.
The credit agreement related to the Bank Financing and the indenture
related to the Existing Notes contain limitations on additional borrowings,
capital expenditures, dividend payments and certain financial covenants. As of
June 30, 2001, the Company was in compliance with these covenants.
During 1998, the Company entered into an interest rate swap agreement with
a bank to hedge against the effects of increases in the interest rates
associated with the Company's floating rate debt. The swap agreement initially
had a notional amount of $40.0 million and was extended in 2001 for an
additional three years and expires in 2004. At June 30, 2001, the estimated fair
market value of the interest rate swap, and the effective fixed interest rate
due on the remaining notional amount is as follows (amounts in thousands):
<Table>
<Caption>
NOTIONAL EFFECTIVE MAXIMUM FAIR MARKET
AMOUNT INTEREST RATE VALUE
- -------- ----------------- -----------
$36,250.................................................. 7.47% $(669)
</Table>
F-13
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The Company leases diagnostic equipment, certain other equipment and its
office, imaging and treatment facilities under various capital and operating
leases. Future minimum scheduled rental payments required under these
noncancelable leases at June 30, 2001 are as follows (amounts in thousands):
<Table>
<Caption>
CAPITAL OPERATING
------- ---------
2002........................................................ $17,182 $12,342
2003........................................................ 16,892 10,857
2004........................................................ 15,294 8,220
2005........................................................ 11,756 6,806
2006........................................................ 6,532 5,629
Thereafter.................................................. 229 9,929
------- -------
Total minimum lease payments................................ 67,885 $53,783
======= =======
Less: Amounts representing interest......................... 11,587
-------
Present value of capital lease obligations.................. 56,298
Less: Current portion....................................... 12,603
-------
Long-term capital lease obligations......................... $43,695
=======
</Table>
As of June 30, 2001, certain equipment leased by the Company is subject to
contingent rental adjustments dependent on certain operational factors. No
contingent rental expense was paid for the years ended June 30, 2001, 2000 and
1999. Rental expense for diagnostic equipment and other equipment for the years
ended June 30, 2001, 2000 and 1999 was $7.9 million, $13.6 million and $18.5
million, respectively.
The Company occupies facilities under lease agreements expiring through
June 2007. Rental expense for these facilities for the years ended June 30,
2001, 2000 and 1999 was $5.4 million, $5.1 million, and $3.7 million,
respectively.
The Company is engaged from time to time in the defense of lawsuits arising
out of the ordinary course and conduct of its business and has insurance
policies covering such potential insurable losses where such coverage is
cost-effective. Management believes that the outcome of any such lawsuits will
not have a material adverse impact on the Company's business, financial
condition and results of operations.
8. CAPITAL STOCK
Preferred Stock: In 1998, the Company consummated a recapitalization
(Recapitalization) pursuant to which (a) certain investors affiliated with TC
Group, LLC and its affiliates (collectively, Carlyle), a private merchant bank
headquartered in Washington, D.C., made a cash investment of $25 million in the
Company and received therefor (i) 25,000 shares of newly issued convertible
preferred stock, Series B of the Company, par value $0.001 per share (Series B
Preferred Stock), initially convertible, at the option of the holders thereof,
in the aggregate into 2,985,075 shares of common stock, and (ii) warrants
(Carlyle Warrants) to purchase up to 250,000 shares of common stock at an
exercise price of $10.00 per share; and (b) GE (i) surrendered its rights
previously granted in connection with the Merger and debt restructuring
arrangement to receive supplemental service fee payments equal to 14% of pretax
income in exchange for (A) the issuance of 7,000 shares of newly issued
convertible preferred stock, Series C of the Company, par value $0.001 per share
(Series C Preferred Stock), initially convertible, at the option of GE, in the
aggregate into 835,821 shares of common stock, and (B) warrants (GE Warrants) to
purchase up to 250,000 shares of common stock at an exercise price of $10.00 per
share and (ii) exchanged all of its
F-14
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
convertible preferred stock, Series A of the Company, for an additional 20,953
shares of Series C Preferred Stock, initially convertible, at the option of GE,
in the aggregate into 2,501,760 shares of common stock.
The terms of the Series B Preferred Stock and the Series C Preferred Stock
(collectively, Preferred Stock) are substantially the same. The Preferred Stock
has a liquidation preference of $1,000 per share. It will participate in any
dividends paid with respect to the common stock. There is no mandatory or
optional redemption provision for the Preferred Stock. The Preferred Stock is
convertible into an aggregate of 6,322,656 shares of common stock. For so long
as Carlyle and its affiliates own at least 33% of the Series B Preferred Stock
or GE and its affiliates own at least 33% of the Series C Preferred Stock,
respectively, the approval of at least 67% of the holders of such series of
Preferred Stock is required before the Company may take certain actions
including, but not limited to, amending its certificate of incorporation or
bylaws, changing the number of directors or the manner in which directors are
selected, incurring indebtedness in excess of $15 million in any fiscal year,
issuing certain equity securities below the then current market price or the
then applicable conversion price, acquiring equity interests or assets of
entities for consideration equal to or greater than $15 million, and engaging in
mergers for consideration equal to or greater than $15 million. The Preferred
Stock will vote with the common stock on an as-if-converted basis on all matters
except the election of directors, subject to an aggregate maximum Preferred
Stock percentage of 37% of all votes entitled to be cast on such matters.
Assuming the conversion of all of the Series B Preferred Stock into common stock
and the exercise of all of the Carlyle Warrants, Carlyle would own approximately
33% of the then outstanding common stock of the Company. Assuming the conversion
of all of the Series C Preferred Stock and the exercise of the GE Warrants, GE
would own approximately 37% of the then outstanding common stock of the Company
(Note 17).
All of the Series B Preferred Stock and the Series C Preferred Stock may be
converted into a newly created convertible preferred stock, Series D of the
Company, par value $0.001 per share (Series D Preferred Stock). The Series D
Preferred Stock allows the number of directors to be automatically increased to
a number which would permit each of Carlyle and GE, by filling the newly created
vacancies, to achieve representation on the Company's board of directors (Board)
proportionate to their respective common stock ownership percentages on an
as-if-converted basis but would limit such representation to less than two
thirds of the Board for a certain period of time. The Series D Preferred Stock
has a liquidation preference of $0.001 per share but no mandatory or optional
redemption provision. It will participate in any dividends paid with respect to
the common stock and is convertible into 6,323,660 shares of common stock.
Holders of the Preferred Stock also have a right of first offer with
respect to future sales of common stock in certain transactions or proposed
transactions not involving a public offering by the Company of its common stock
or securities convertible into common stock. Holders of the Preferred Stock are
also entitled to certain demand and "piggyback" registration rights.
Warrants: The Company does not have a formal warrant plan. The Board
authorizes the issuance of warrants at its discretion. The Board has generally
granted warrants in connection with financing transactions. The number of
warrants issued and related terms are determined by the Board. All warrants have
been issued with an exercise price of at least the fair market value of its
common stock on the issuance date. There were no warrants granted or exercised
for the year ended June 30, 1999. A summary
F-15
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the status of the Company's warrants at June 30, 2001, 2000 and 1999 and
changes during the years is presented below:
<Table>
<Caption>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
Outstanding, June 30, 1999.................................. 662,183 $9.00
Granted................................................... 15,000 6.00
Exercised................................................. (35,000) 5.50
------- -----
Outstanding, June 30, 2000.................................. 642,183 9.12
Granted................................................... 15,000 7.96
Exercised................................................. (15,000) 5.50
------- -----
Outstanding, June 30, 2001.................................. 642,183 $9.17
======= =====
</Table>
Of the 642,183 warrants outstanding at June 30, 2001, the characteristics
are as follows:
<Table>
<Caption>
EXERCISE PRICE WEIGHTED AVERAGE WARRANTS TOTAL WARRANTS REMAINING
RANGE EXERCISE PRICE EXERCISABLE OUTSTANDING CONTRACTUAL LIFE
- -------------- ---------------- ----------- -------------- ----------------
$4.56 - $ 6.00 $4.92 82,183 82,183 3.68 years
$7.25 - $10.00 $9.80 554,584 560,000 5.69 years
------- -------
636,767 642,183
======= =======
</Table>
Stock Options: The Company has five stock option plans, which provide for
the granting of incentive and nonstatutory stock options to key employees and
non-employee directors. Incentive stock options must have an exercise price of
at least the fair market value of its common stock on the grant date. Options
become vested cumulatively over various periods up to seven years from the grant
date, are exercisable in whole or in installments, and expire ten years from the
grant date. In addition, two wholly owned subsidiaries of the Company have two
stock option plans, which provided for the granting of incentive or nonstatutory
stock options to key employees and non-employee directors. No shares are
available for future grants under these plans.
F-16
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 2001, the Company has 287,308 shares available for issuance
under its plans. A summary of the status of the Company's stock option plans at
June 30, 2001, 2000 and 1999 and changes during the years is presented below:
<Table>
<Caption>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Outstanding, June 30, 1998.................................. 1,483,378 $ 7.15
Granted................................................... 265,000 8.46
Exercised................................................. (59,800) 1.92
Forfeited................................................. (136,500) 7.28
--------- ------
Outstanding, June 30, 1999.................................. 1,552,078 7.56
Granted................................................... 190,000 8.15
Exercised................................................. (92,970) 2.07
Forfeited................................................. (340,368) 8.08
--------- ------
Outstanding, June 30, 2000.................................. 1,308,740 7.90
Granted................................................... 370,000 8.71
Exercised................................................. (17,375) 5.79
Forfeited................................................. (105,667) 11.33
--------- ------
Outstanding, June 30, 2001.................................. 1,555,698 $ 7.88
========= ======
Exercisable at:
June 30, 1999............................................. 558,838 $ 6.12
June 30, 2000............................................. 751,887 $ 7.61
June 30, 2001............................................. 867,239 $ 7.41
</Table>
All unvested options and warrants will become fully vested upon
consummation of the proposed acquisition (Note 17). Of the 1,555,698 options
outstanding at June 30, 2001, the characteristics are as follows:
<Table>
<Caption>
EXERCISE PRICE WEIGHTED AVERAGE OPTIONS TOTAL OPTIONS REMAINING
RANGE EXERCISE PRICE EXERCISABLE OUTSTANDING CONTRACTUAL LIFE
- --------------- ---------------- ----------- ------------- ----------------
$ 0.10 - $ 1.25 $ 0.59 98,670 98,670 2.98 years
$ 4.56 - $ 7.00 $ 5.58 320,708 343,000 6.49 years
$ 8.37 - $12.57 $ 8.98 423,173 1,074,340 8.21 years
$15.64 - $17.25 $16.33 24,688 39,688 3.49 years
------- ---------
867,239 1,555,698
======= =========
</Table>
As permitted under SFAS No. 123, "Accounting for Stock Based Compensation",
the Company accounts for the options and warrants issued to employees and
non-employee directors in accordance with APB Opinion No. 25, and no
compensation cost has been recognized in the financial statements. SFAS 123
requires that the Company present pro forma disclosures of net income as if the
Company had recognized compensation expense equal to the fair value of options
granted, as determined at the date of
F-17
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant. The Company's net income and earnings per share would have reflected the
following pro forma amounts (amounts in thousands, except per share data):
<Table>
<Caption>
YEARS ENDED JUNE 30,
-------------------------
2001 2000 1999
------- ------ ------
Net income: As Reported.................................. $13,801 $7,189 $6,112
Pro Forma.................................... 12,458 5,469 4,446
Diluted EPS: As Reported.................................. 1.42 0.76 0.65
Pro Forma.................................... 1.28 0.58 0.47
</Table>
The fair value of each option grant and warrant issued is estimated on the
date of grant or issuance using the Black-Scholes pricing model with the
following assumptions used for the grants and issuances in the fiscal years
ended June 30, 2001, 2000 and 1999, respectively:
<Table>
<Caption>
YEARS ENDED JUNE 30,
------------------------------------
ASSUMPTION 2001 2000 1999
- ---------- ---------- ---------- ----------
Risk-free interest rate........................... 5.87% 6.22% 5.08%
Volatility........................................ 71.27% 71.23% 64.90%
Expected dividend yield........................... 0.00% 0.00% 0.00%
Estimated contractual life........................ 9.19 years 9.38 years 9.35 years
</Table>
9. PROVISION FOR REORGANIZATION AND OTHER COSTS
In 1999, the Company recorded a one-time provision for reorganization and
other costs of $3.3 million, consisting of the following: The Company realigned
its corporate and regional organization to improve financial performance and
operating efficiencies and recorded a provision with respect to the related
employee severances and office closing costs of approximately $1.8 million.
Additionally, in connection with its business strategy, the Company evaluated a
number of potential acquisitions in the last six months of fiscal 1999 which it
did not complete. The Company recorded a provision of approximately $0.7 million
for legal, accounting and consulting costs associated with certain potential
acquisitions that the Company determined were no longer consistent with its
strategic objectives. Finally, the Company reevaluated its information systems
in light of organizational changes and developed a new strategic plan to modify
and reimplement its proprietary radiology information system. Accordingly, the
Company recorded a provision with respect to related software and other
capitalized costs of approximately $0.8 million.
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended June 30, 2001,
2000 and 1999 was computed using effective tax rates calculated as follows:
<Table>
<Caption>
YEARS ENDED JUNE 30,
----------------------
2001 2000 1999
----- ----- ------
Federal statutory tax rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit.................. 6.0 6.0 6.0
Permanent items, including goodwill and non-deductible
merger costs.............................................. 5.0 3.7 12.3
Changes in valuation allowance.............................. (29.1) (30.1) (161.5)
----- ----- ------
Net effective tax rate...................................... 15.9% 13.6% (109.2)%
===== ===== ======
</Table>
The provision (benefit) for income taxes includes income taxes currently
payable and those deferred because of temporary differences between the
financial statements and tax bases of assets and liabilities.
F-18
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes for the years ended June 30, 2001, 2000
and 1999 consisted of the following (amounts in thousands):
<Table>
<Caption>
YEARS ENDED JUNE 30,
--------------------------
2001 2000 1999
------ ------- -------
Current provision:
Federal................................................ $2,931 $ 548 $ 60
State.................................................. 1,173 283 100
------ ------- -------
4,104 831 160
------ ------- -------
Deferred taxes arising from temporary differences:
State income taxes..................................... (480) (186) (144)
Accrued expenses (not currently deductible)............ (198) 769 (706)
Reserves............................................... (1,790) (1,110) (958)
Depreciation and amortization.......................... 7,920 1,004 1,383
Utilization of net operating losses.................... 836 75 346
Net operating losses reduced due to prior ownership
changes............................................. -- 5,111 --
Changes in valuation allowance reducing goodwill....... -- 400 1,300
Changes in valuation allowance......................... (4,044) (5,795) (4,691)
Alternative minimum tax credit carryforwards........... (3,038) -- --
Other.................................................. (686) 32 120
------ ------- -------
(1,480) 300 (3,350)
------ ------- -------
Total provision (benefit) for income taxes............... $2,624 $ 1,131 $(3,190)
====== ======= =======
</Table>
The components of the Company's net deferred tax asset (including current
and noncurrent portions) as of June 30, 2001 and 2000, respectively, which arise
due to timing differences between financial and tax reporting and net operating
loss (NOL) carryforwards are as follows (amounts in thousands):
<Table>
<Caption>
JUNE 30,
-----------------
2001 2000
-------- ------
Reserves.................................................... $ 5,754 $3,964
Accrued expenses (not currently deductible)................. 1,214 1,016
Depreciation and amortization............................... (11,248) (3,328)
NOL carryforwards........................................... 9,784 10,620
Valuation allowance......................................... (3,683) (7,727)
Alternative minimum tax credit carryforwards................ 3,038 --
Other....................................................... 141 (545)
-------- ------
$ 5,000 $4,000
======== ======
</Table>
As of June 30, 2001, the Company had NOL carryforwards of approximately
$29.0 million, expiring on various dates through 2019. The NOLs and related
deferred tax components have been reduced to reflect limitations from prior
changes in ownership. A valuation allowance is provided against the net deferred
tax asset when it is more likely than not that the net deferred tax asset will
not be realized. In addition, the Company has alternative minimum tax credit
carryforwards of approximately $3.0 million which do not expire.
F-19
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RETIREMENT SAVINGS PLANS
The Company has a 401(k) profit sharing plan (Plan), which is available to
all eligible employees, pursuant to which the Company may match a percentage of
employee contributions to the Plan. Company contributions of approximately $0.7
million, $0.7 million and $0.6 million were made for the years ended June 30,
2001, 2000 and 1999, respectively.
12. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The Company has direct ownership in four Partnerships at June 30, 2001, two
of which operate Fixed Facilities and two of which operate Centers. The Company
owns between 25 percent and 44 percent of these Partnerships, serves as the
managing general partner and provides certain management services under
agreements expiring in 2010. These Partnerships are accounted for under the
equity method since the Company does not exercise significant control over the
operations of these Partnerships or does not have primary responsibility for the
Partnerships' long-term debt.
Set forth below is certain financial data of these Partnerships (amounts in
thousands):
<Table>
<Caption>
JUNE 30,
-----------------
2001 2000
------- -------
Combined Financial Position:
Current assets:
Cash...................................................... $ 1,281 $ 1,098
Trade accounts receivables, net........................... 3,250 1,840
Other..................................................... 19 107
Property and equipment, net................................. 7,134 6,957
Intangible assets, net...................................... 543 613
------- -------
Total assets................................................ 12,227 10,615
Current liabilities......................................... (2,077) (1,455)
Due to the Company.......................................... (1,830) (1,194)
Long-term liabilities....................................... (4,278) (3,877)
------- -------
Net assets.................................................. $ 4,042 $ 4,089
======= =======
</Table>
Set forth below are the combined operating results of the Partnerships and
the Company's equity in earnings of the Partnerships (amounts in thousands):
<Table>
<Caption>
YEARS ENDED JUNE 30,
-------------------------
2001 2000 1999
------- ------ ------
Operating Results:
Net revenues.............................................. $11,344 $7,493 $5,673
Expenses.................................................. 9,211 5,717 4,334
------- ------ ------
Net income................................................ $ 2,133 $1,776 $1,339
======= ====== ======
Equity in earnings of partnerships........................ $ 971 $ 817 $ 548
======= ====== ======
</Table>
The Company has direct ownership in 50 percent of an additional
Partnership, which operates a Center. Since the Company controls the operations
and is primarily responsible for the associated long-term debt, the Partnership
has been included in the Company's consolidated financial statements. Set forth
F-20
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
below is the summarized financial data of the Company's 50 percent controlled
entity which is consolidated (amounts in thousands):
<Table>
<Caption>
JUNE 30,
---------------
2001 2000
------ ------
Condensed Combined Balance Sheet Data:
Current assets............................................ $1,622 $1,490
Total assets.............................................. 1,844 1,706
Current liabilities....................................... 426 623
Minority interest equity.................................. 608 441
</Table>
<Table>
<Caption>
YEARS ENDED JUNE 30,
------------------------
2001 2000 1999
------ ------ ------
Condensed Combined Statement of Income Data:
Net revenues............................................. $5,844 $5,484 $5,551
Expenses................................................. 3,740 3,702 3,973
Provision for center profit distribution................. 1,052 891 789
------ ------ ------
Net income............................................... $1,052 $ 891 $ 789
====== ====== ======
</Table>
13. INCOME PER COMMON AND PREFERRED SHARE
The number of shares used in computing EPS is equal to the weighted average
number of common and preferred shares outstanding during the respective period.
The preferred stock has certain rights, including conversion into common stock
on a one-to-one basis, voting rights, no stated dividend rate and participates
in any dividends paid with respect to the common stock. Accordingly, the
preferred stock is included in the computation of basic EPS only if the effect
on EPS is dilutive as required by SFAS No. 128, "Earnings per Share" and
Emerging Issues Task Force Topic D-95. The Company uses the as-if converted
method in computing EPS. There were no adjustments to net income (the numerator)
for purposes of computing EPS.
A reconciliation of basic and diluted share computations is as follows
(amounts in thousands):
<Table>
<Caption>
YEARS ENDED JUNE 30,
---------------------
2001 2000 1999
----- ----- -----
Average common stock outstanding............................ 2,998 2,935 2,835
Effect of preferred stock................................... 6,323 6,323 6,323
----- ----- -----
Denominator for basic EPS................................... 9,321 9,258 9,158
Dilutive effect of stock options and warrants............... 398 140 218
----- ----- -----
9,719 9,398 9,376
===== ===== =====
</Table>
14. RELATED PARTY TRANSACTIONS
The Company has purchased a majority of its diagnostic imaging equipment
from GE. At June 30, 2001, the Company had outstanding notes payable and capital
lease obligations to GE totaling approximately $1.2 million and $56.3 million,
respectively. In addition, at June 30, 2001 the Company's future operating lease
obligations to GE were approximately $28.3 million. GE also provides maintenance
services with respect to the Company's diagnostic imaging equipment, totaling
approximately $9.9 million for the year ended June 30, 2001.
F-21
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid $120,000 to Shattuck Hammond Partners, an investment
banking firm in which a director of the Company is a managing director, for
general strategic advisory and investment banking services during the year ended
June 30, 2001. Additionally, the Company paid $85,000 to the chairman of the
board for acquisition and financing activities during the year ended June 30,
2001.
15. SEGMENT INFORMATION
The Company has two reportable segments: Western Division and Eastern
Division. The Company's reportable segments are geographical business units
defined by management's division of responsibility between two executive vice
presidents -- operations, who are responsible for the Western and Eastern
Divisions and who report directly to the Company's chief operating decision
maker. Each segment owns and operates Centers, Fixed and Mobile Facilities
within their respective geographic areas. The accounting policies of the
segments are the same as those described in the "Summary of Significant
Accounting Policies" except that the Company does not allocate income taxes to
the two Divisions. The Company manages cash flows and assets on a consolidated
basis, and not by segment, and does not allocate or report assets and capital
expenditures by segment. Information for the fiscal year ended June 30, 2000 and
1999 has been recast, as required by SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information."
The following tables summarize the operating results by segment for fiscal
2001, 2000 and 1999 (amounts in thousands):
<Table>
<Caption>
EASTERN WESTERN OTHER CONSOLIDATED
-------- ------- -------- ------------
YEAR ENDED JUNE 30, 2001:
Contract services revenues................ $ 89,615 $ 6,266 $ 7,540 $103,421
Patient services revenues................. 39,390 66,776 1,302 107,468
Other revenues............................ 321 70 223 614
-------- ------- -------- --------
Total revenues.......................... 129,326 73,112 9,065 211,503
Depreciation and amortization............. 25,021 9,234 6,879 41,134
Total costs of operations................. 93,896 54,299 13,677 161,872
Equity in earnings of unconsolidated
partnerships............................ 973 (2) -- 971
Operating income.......................... 36,403 18,811 (15,395) 39,819
Interest expense, net..................... 14,206 3,774 5,414 23,394
Income before income taxes................ 22,197 15,037 (20,809) 16,425
</Table>
<Table>
<Caption>
EASTERN WESTERN OTHER CONSOLIDATED
-------- ------- -------- ------------
YEAR ENDED JUNE 30, 2000:
Contract services revenues................ $ 80,847 $ 7,063 $ 12,225 $100,135
Patient services revenues................. 26,953 58,660 1,225 86,838
Other revenues............................ 562 652 387 1,601
-------- ------- -------- --------
Total revenues.......................... 108,362 66,375 13,837 188,574
Depreciation and amortization............. 20,668 8,191 4,771 33,630
Total costs of operations................. 80,980 52,420 18,029 151,429
Equity in earnings of unconsolidated
partnerships............................ 813 4 -- 817
Operating income.......................... 28,195 13,959 (15,138) 27,016
Interest expense, net..................... 11,261 3,533 3,902 18,696
Income before income taxes................ 16,934 10,426 (19,040) 8,320
</Table>
F-22
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
EASTERN WESTERN OTHER CONSOLIDATED
-------- ------- -------- ------------
YEAR ENDED JUNE 30, 1999:
Contract services revenues................ $ 66,205 $ 6,713 $ 12,573 $ 85,491
Patient services revenues................. 24,323 47,995 1,247 73,565
Other revenues............................ 726 1,588 622 2,936
-------- ------- -------- --------
Total revenues.......................... 91,254 56,296 14,442 161,992
Depreciation and amortization............. 15,504 6,503 2,879 24,886
Total costs of operations................. 71,885 43,618 15,840 131,343
Equity in earnings of unconsolidated
partnerships............................ 528 20 -- 548
Operating income.......................... 19,897 12,698 (15,173) 17,422
Interest expense, net..................... 8,904 2,488 3,108 14,500
Income before income taxes................ 10,993 10,210 (18,281) 2,922
</Table>
16. RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL(1)
------- ------- ------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2001:
Revenues.................................... $52,220 $51,794 $53,815 $53,674 $211,503
Gross profit................................ 11,671 11,452 12,694 13,814 49,631
Net income.................................. 2,757 2,971 3,768 4,305 13,801
Diluted income per common and preferred
share..................................... $ 0.29 $ 0.31 $ 0.38 $ 0.43 $ 1.42
======= ======= ======= ======= ========
2000:
Revenues.................................... $46,166 $46,121 $47,690 $48,597 $188,574
Gross profit................................ 8,070 8,627 9,955 10,493 37,145
Net income.................................. 1,320 1,322 1,990 2,557 7,189
Diluted income per common and preferred
share..................................... $ 0.14 $ 0.14 $ 0.21 $ 0.27 $ 0.76
======= ======= ======= ======= ========
</Table>
- ---------------
(1) Some amounts do not add across due to differences generated from the
quarterly and annual weighted average shares calculations.
17. PROPOSED ACQUISITION AND RELATED FINANCING TRANSACTIONS
On June 29, 2001, the Company entered into an agreement and plan of merger
(Merger Agreement) with InSight Health Services Holdings Corp. (InSight
Holdings) and its wholly owned subsidiary InSight Health Services Acquisition
Corp. (formerly JWCH Merger Corp.) (Acquisition Corp.). Pursuant to the Merger
Agreement, Acquisition Corp. will merge with and into the Company and the
Company will become a wholly owned subsidiary of InSight Holdings (Acquisition).
At the consummation of the Acquisition, J.W. Childs Equity Partners II and
certain of its affiliates and co-investors will own approximately 80% of the
outstanding common stock of InSight Holdings and Halifax Capital Partners and
certain of its affiliates will own approximately 20% of the outstanding common
stock of InSight Holdings. J.W. Childs Equity Partners II and Halifax Capital
Partners are collectively known as Equity Sponsors. Certain members of the
Company's senior management have agreed to rollover a portion of their existing
stock options into InSight Holdings' stock options at the consummation of the
Acquisition. Pursuant to the Merger Agreement, the Company's stockholders will
be entitled to receive $18.00 in cash for each share of the Company's common
stock they own. In addition, holders of stock options and warrants which are
exercisable for the Company's common stock
F-23
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will receive the difference between $18.00 and the exercise price for each share
of common stock the holder could have acquired pursuant to the terms of the
options or warrants. The options and warrants will be terminated pursuant to the
Merger Agreement. The Merger Agreement contains customary provisions, including
representations and warranties, covenants with respect to the conduct of the
business and various closing conditions, including the continued accuracy of
representations and warranties, and the completion of the related financing
transactions described below. The Company's stockholders, option holders and
warrant holders immediately prior to the Acquisition will receive cash
consideration of approximately $187.7 million as a result of the Acquisition.
The transactions and related fees and expenses will be financed through (i)
the sale of $200 million in aggregate principal amount of new senior
subordinated notes due 2011; (ii) borrowings of approximately $145 million under
the proposed $275 million new senior secured credit facilities; (iii) the
investment by the Equity Sponsors of up to $101.5 million less the net value of
the management options rollover totaling approximately $1.7 million; and (iv) a
portion of the Company's cash on hand of approximately $6.6 million.
The Company's Board and the boards of Acquisition Corp. and InSight
Holdings have approved the Acquisition. A special meeting of the Company's
stockholders to consider and vote upon the Acquisition will be scheduled
shortly. Approval of the Acquisition requires the affirmative vote of a majority
of the Company's capital stock.
Pursuant to voting agreements entered into by InSight Holdings and
Acquisition Corp. with each of GE, GE Fund and certain affiliates of The Carlyle
Group, the holders of more than a majority of the Company's capital stock have
agreed to convert the Preferred Stock which they currently hold into Series D
Preferred Stock which they will vote in favor of the Acquisition.
Contemporaneously with the Acquisition, Acquisition Corp. will repurchase
by tender offer the Existing Notes up to their aggregate principal amount of
$100 million. On August 15, 2001, Acquisition Corp. commenced a tender offer to
repurchase all of the Existing Notes. 100% of the Existing Notes have been
tendered. In connection with the tender offer, Acquisition Corp. has also
successfully solicited the requisite consents from the holders of the Existing
Notes to eliminate certain restrictive covenants and certain events of default
in the indenture relating to the Existing Notes.
If InSight Holdings, Acquisition Corp. or the Company elect to terminate
the Merger Agreement due to the failure of the Company's stockholders to approve
the Merger Agreement at the special meeting or any adjournment or postponement
of that meeting, then the Company is obligated to reimburse InSight Holdings for
its fees and expenses incurred in connection with the Acquisition and the
related financing transactions up to a maximum of $1 million.
In addition, if the Company terminates the Merger Agreement and enters into
a superior proposal with a third party, the Company is obligated to pay InSight
Holdings a termination fee of $7 million, of which $5 million is payable
immediately prior to the termination of the Merger Agreement and $2 million is
payable upon the earlier of (i) six months from the date of termination of the
Merger Agreement and (ii) consummation of a superior proposal with a third
party.
18. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Company's payment obligations under the Existing Notes (Note 6) are
guaranteed by certain of the Company's wholly owned subsidiaries (the Guarantor
Subsidiaries). Such guarantees are full, unconditional and joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheets, statements of income, and statements of
cash flows information for the Company (Parent Company Only), for the Guarantor
Subsidiaries and for the Company's other subsidiaries (the Non-Guarantor
Subsidiaries). The supplemental financial information reflects the investments
of the Company and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting.
F-24
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....... $ -- $ 19,921 $ 3,333 $ -- $ 23,254
Trade accounts receivables,
net.......................... -- 32,758 10,597 -- 43,355
Other current assets............ -- 8,273 106 -- 8,379
Intercompany accounts
receivable................... 241,016 27,590 -- (268,606) --
-------- -------- ------- --------- --------
Total current assets......... 241,016 88,542 14,036 (268,606) 74,988
Property and equipment, net....... -- 123,579 24,676 -- 148,255
Investments in partnerships....... -- 1,783 -- -- 1,783
Investments in consolidated
subsidiaries.................... (4,882) 9,328 -- (4,446) --
Other assets...................... -- 6,828 -- -- 6,828
Intangible assets, net............ -- 84,358 4,844 -- 89,202
-------- -------- ------- --------- --------
$236,134 $314,418 $43,556 $(273,052) $321,056
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of equipment,
capital leases and other
notes........................ $ 20,810 $ 12,275 $ 777 $ -- $ 33,862
Accounts payable and other
accrued expenses............. -- 23,033 1,302 -- 24,335
Intercompany accounts payable... -- 241,016 27,590 (268,606) --
-------- -------- ------- --------- --------
Total current liabilities.... 20,810 276,324 29,669 (268,606) 58,197
Equipment, capital leases and
other notes, less current
portion......................... 149,853 42,409 2,129 -- 194,391
Other long-term liabilities....... -- 567 2,430 -- 2,997
Stockholders' equity (deficit).... 65,471 (4,882) 9,328 (4,446) 65,471
-------- -------- ------- --------- --------
$236,134 $314,418 $43,556 $(273,052) $321,056
======== ======== ======= ========= ========
</Table>
F-25
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....... $ -- $ 25,375 $ 1,758 $ -- $ 27,133
Trade accounts receivables,
net.......................... -- 32,841 7,757 -- 40,598
Other current assets............ -- 8,954 207 -- 9,161
Intercompany accounts
receivable................... 253,181 24,776 -- (277,957) --
-------- -------- ------- --------- --------
Total current assets......... 253,181 91,946 9,722 (277,957) 76,892
Property and equipment, net....... -- 129,499 18,970 -- 148,469
Investments in partnerships....... -- 1,782 -- -- 1,782
Investments in consolidated
subsidiaries.................... (12,639) 3,284 -- 9,355 --
Other assets...................... -- 7,799 -- -- 7,799
Intangible assets, net............ -- 92,478 1,452 -- 93,930
-------- -------- ------- --------- --------
$240,542 $326,788 $30,144 $(268,602) $328,872
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of equipment,
capital leases and other
notes........................ $ 18,393 $ 10,809 $ 263 $ -- $ 29,465
Accounts payable and other
accrued expenses............. -- 25,712 901 -- 26,613
Intercompany accounts payable... -- 253,181 24,776 (277,957) --
-------- -------- ------- --------- --------
Total current liabilities.... 18,393 289,702 25,940 (277,957) 56,078
Equipment, capital leases and
other notes, less current
portion......................... 170,662 47,257 848 -- 218,767
Other long-term liabilities....... -- 2,468 72 -- 2,540
Stockholders' equity (deficit).... 51,487 (12,639) 3,284 9,355 51,487
-------- -------- ------- --------- --------
$240,542 $326,788 $30,144 $(268,602) $328,872
======== ======== ======= ========= ========
</Table>
F-26
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
Revenues........................... $ -- $166,433 $45,070 $ -- $211,503
Costs of operations................ -- 127,329 34,543 -- 161,872
------- -------- ------- -------- --------
Gross profit....................... -- 39,104 10,527 -- 49,631
Corporate operating expenses....... -- 10,783 -- -- 10,783
------- -------- ------- -------- --------
Income from company operations..... -- 28,321 10,527 -- 38,848
Equity in earnings of
unconsolidated partnerships...... -- 971 -- -- 971
------- -------- ------- -------- --------
Operating income................... -- 29,292 10,527 -- 39,819
Interest expense, net.............. -- 20,727 2,667 -- 23,394
------- -------- ------- -------- --------
Income before income taxes......... -- 8,565 7,860 -- 16,425
Provision for income taxes......... -- 2,624 -- -- 2,624
------- -------- ------- -------- --------
Income before equity in income of
consolidated subsidiaries........ -- 5,941 7,860 -- 13,801
Equity in income of consolidated
subsidiaries..................... 13,801 7,860 -- (21,661) --
------- -------- ------- -------- --------
Net income......................... $13,801 $ 13,801 $ 7,860 $(21,661) $ 13,801
======= ======== ======= ======== ========
</Table>
F-27
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 2000
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
Revenues........................... $ -- $168,884 $19,690 $ -- $188,574
Costs of operations................ -- 134,784 16,645 -- 151,429
------ -------- ------- ------- --------
Gross profit....................... -- 34,100 3,045 -- 37,145
Corporate operating expenses....... -- 10,946 -- -- 10,946
------ -------- ------- ------- --------
Income from company operations..... -- 23,154 3,045 -- 26,199
Equity in earnings of
unconsolidated partnerships...... -- 817 -- -- 817
------ -------- ------- ------- --------
Operating income................... -- 23,971 3,045 -- 27,016
Interest expense, net.............. -- 17,730 966 -- 18,696
------ -------- ------- ------- --------
Income before income taxes......... -- 6,241 2,079 -- 8,320
Provision for income taxes......... -- 1,131 -- -- 1,131
------ -------- ------- ------- --------
Income before equity in income of
consolidated subsidiaries........ -- 5,110 2,079 -- 7,189
Equity in income of consolidated
subsidiaries..................... 7,189 2,079 -- (9,268) --
------ -------- ------- ------- --------
Net income......................... $7,189 $ 7,189 $ 2,079 $(9,268) $ 7,189
====== ======== ======= ======= ========
</Table>
F-28
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
Revenues........................... $ -- $143,205 $18,787 $ -- $161,992
Costs of operations................ -- 115,230 16,113 -- 131,343
------ -------- ------- ------- --------
Gross profit....................... -- 27,975 2,674 -- 30,649
Provision for reorganization and
other costs...................... -- 3,300 -- -- 3,300
Corporate operating expenses....... -- 10,475 -- -- 10,475
------ -------- ------- ------- --------
Income from company operations..... -- 14,200 2,674 -- 16,874
Equity in earnings of
unconsolidated partnerships...... -- 548 -- -- 548
------ -------- ------- ------- --------
Operating income................... -- 14,748 2,674 -- 17,422
Interest expense, net.............. -- 13,453 1,047 -- 14,500
------ -------- ------- ------- --------
Income before income taxes......... -- 1,295 1,627 -- 2,922
Provision (benefit) for income
taxes............................ -- (3,190) -- -- (3,190)
------ -------- ------- ------- --------
Income before equity in income of
consolidated subsidiaries........ -- 4,485 1,627 -- 6,112
Equity in income of consolidated
subsidiaries..................... 6,112 1,627 -- (7,739) --
------ -------- ------- ------- --------
Net income......................... $6,112 $ 6,112 $ 1,627 $(7,739) $ 6,112
====== ======== ======= ======= ========
</Table>
F-29
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES:
Net income....................... $13,801 $13,801 $ 7,860 $(21,661) $13,801
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization.... -- 34,882 6,252 -- 41,134
Equity in income of consolidated
subsidiaries.................. (13,801) (7,860) -- 21,661 --
Cash provided by (used in) changes
in operating assets and
liabilities:
Trade accounts receivables....... -- 83 (2,840) -- (2,757)
Intercompany receivables, net.... 18,209 (19,207) 998 -- --
Other current assets............. -- 681 101 -- 782
Accounts payable and other
accrued expenses.............. -- (2,679) 401 -- (2,278)
------- ------- -------- -------- -------
Net cash provided by operating
activities.................. 18,209 19,701 12,772 -- 50,682
------- ------- -------- -------- -------
INVESTING ACTIVITIES:
Additions to property and
equipment..................... -- (13,281) (9,630) -- (22,911)
Other............................ -- 3,459 (3,990) -- (531)
------- ------- -------- -------- -------
Net cash used in investing
activities.................. -- (9,822) (13,620) -- (23,442)
------- ------- -------- -------- -------
FINANCING ACTIVITIES:
Proceeds from stock options and
warrants exercised............ 183 -- -- -- 183
Principal payments of debt and
capital lease obligations..... (18,392) (13,432) 65 -- (31,759)
Other............................ -- (1,901) 2,358 -- 457
------- ------- -------- -------- -------
Net cash provided by (used in)
financing activities........ (18,209) (15,333) 2,423 -- (31,119)
------- ------- -------- -------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. -- (5,454) 1,575 -- (3,879)
CASH AND CASH EQUIVALENTS:
Cash, beginning of year.......... -- 25,375 1,758 -- 27,133
------- ------- -------- -------- -------
Cash, end of year................ $ -- $19,921 $ 3,333 $ -- $23,254
======= ======= ======== ======== =======
</Table>
F-30
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES:
Net income...................... $ 7,189 $ 7,189 $2,079 $(9,268) $ 7,189
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and
amortization............... -- 31,343 2,287 -- 33,630
Equity in income of
consolidated
subsidiaries............... (7,189) (2,079) -- 9,268 --
Cash provided by (used in)
changes in operating assets
and liabilities:
Trade accounts receivables...... -- (3,907) (704) -- (4,611)
Intercompany receivables, net... (27,447) 30,180 (2,733) -- --
Other current assets............ -- (1,849) 46 -- (1,803)
Accounts payable and other
accrued expenses............. -- 5,853 266 -- 6,119
-------- -------- ------ ------- --------
Net cash provided by (used in)
operating activities......... (27,447) 66,730 1,241 -- 40,524
-------- -------- ------ ------- --------
INVESTING ACTIVITIES:
Acquisitions of Centers and
Fixed Facilities............. -- (25,346) -- -- (25,346)
Additions to property and
equipment.................... -- (22,635) (535) -- (23,170)
Other........................... -- (554) -- -- (554)
-------- -------- ------ ------- --------
Net cash used in investing
activities................... -- (48,535) (535) -- (49,070)
-------- -------- ------ ------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and
warrants exercised........... 192 -- -- -- 192
Principal payments of debt and
capital lease obligations.... (17,945) (7,326) (197) -- (25,468)
Proceeds from issuance of
debt......................... 45,200 -- -- -- 45,200
Other........................... -- 1,797 (336) -- 1,461
-------- -------- ------ ------- --------
Net cash provided by (used
in) financing activities... 27,447 (5,529) (533) -- 21,385
-------- -------- ------ ------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS..................... -- 12,666 173 -- 12,839
CASH AND CASH EQUIVALENTS:
Cash, beginning of year......... -- 12,709 1,585 -- 14,294
-------- -------- ------ ------- --------
Cash, end of year............... $ -- $ 25,375 $1,758 $ -- $ 27,133
======== ======== ====== ======= ========
</Table>
F-31
INSIGHT HEALTH SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES:
Net income........................... $ 6,112 $ 6,112 $1,627 $(7,739) $ 6,112
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization........ -- 21,976 2,910 -- 24,886
Amortization of deferred gain on debt
restructure....................... -- (75) -- -- (75)
Equity in income of consolidated
subsidiaries...................... (6,112) (1,627) -- 7,739 --
Cash provided by (used in) changes in
operating assets and liabilities:
Trade accounts receivables........... -- (7,255) (1,069) -- (8,324)
Intercompany receivables, net........ (11,936) 6,230 5,706 -- --
Other current assets................. -- (4,291) 185 -- (4,106)
Accounts payable and other accrued
expenses.......................... -- (7,293) (308) -- (7,601)
-------- -------- ------ ------- --------
Net cash provided by (used in)
operating activities.............. (11,936) 13,777 9,051 -- 10,892
-------- -------- ------ ------- --------
INVESTING ACTIVITIES:
Cash acquired in acquisitions........ -- 850 -- -- 850
Acquisitions of Centers and Fixed
Facilities........................ -- (28,046) -- -- (28,046)
Additions to property and
equipment......................... -- (11,112) (7,328) -- (18,440)
Other................................ -- (706) (859) -- (1,565)
-------- -------- ------ ------- --------
Net cash used in investing
activities...................... -- (39,014) (8,187) -- (47,201)
-------- -------- ------ ------- --------
FINANCING ACTIVITIES:
Proceeds from stock options and
warrants exercised................ 115 -- -- -- 115
Proceeds from issuance of common
stock............................. 21 -- -- -- 21
Principal payments of debt and
capital lease obligations......... (11,200) (6,124) (171) -- (17,495)
Proceeds from issuance of debt....... 23,000 820 -- -- 23,820
Other................................ -- -- (598) -- (598)
-------- -------- ------ ------- --------
Net cash provided by (used in)
financing activities............ 11,936 (5,304) (769) -- 5,863
-------- -------- ------ ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................... -- (30,541) 95 -- (30,446)
CASH AND CASH EQUIVALENTS:
Cash, beginning of year.............. -- 43,250 1,490 -- 44,740
-------- -------- ------ ------- --------
Cash, end of year.................... $ -- $ 12,709 $1,585 $ -- $ 14,294
======== ======== ====== ======= ========
</Table>
F-32
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<Table>
<Caption>
COMPANY PREDECESSOR
------------ -----------
DECEMBER 31, JUNE 30,
2001 2001
------------ -----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 22,891 $ 23,254
Trade accounts receivables, net........................... 41,687 43,355
Other current assets...................................... 9,748 8,379
-------- --------
Total current assets................................... 74,326 74,988
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $7,335 and $87,964, respectively.......... 158,161 148,255
INVESTMENTS IN PARTNERSHIPS................................. 1,924 1,783
OTHER ASSETS................................................ 21,393 6,828
OTHER INTANGIBLE ASSETS, net................................ 19,460 --
GOODWILL, net............................................... 215,299 89,202
-------- --------
$490,563 $321,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of equipment, capital leases and other
notes.................................................. $ 3,196 $ 33,862
Accounts payable and other accrued expenses............... 27,228 24,335
-------- --------
Total current liabilities.............................. 30,424 58,197
-------- --------
LONG-TERM LIABILITIES:
Equipment, capital leases and other notes, less current
portion................................................ 376,547 194,391
Other long-term liabilities............................... 3,073 2,997
-------- --------
Total long-term liabilities............................ 379,620 197,388
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 3,500,000 shares
authorized:
Convertible Series B preferred stock, 25,000 shares
outstanding at June 30, 2001.......................... -- 23,923
Convertible Series C preferred stock, 27,953 shares
outstanding at June 30, 2001.......................... -- 13,173
Common stock, $.001 par value, 10,000,000 shares
authorized, 5,461,402 shares issued and outstanding at
December 31, 2001...................................... 5 --
Common stock, $.001 par value, 25,000,000 shares
authorized, 3,011,656 shares issued and outstanding at
June 30, 2001.......................................... -- 3
Additional paid-in capital................................ 87,566 23,926
Accumulated other comprehensive income.................... 127 --
Retained earnings (accumulated deficit)................... (7,179) 4,446
-------- --------
Total stockholders' equity............................. 80,519 65,471
-------- --------
$490,563 $321,056
======== ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-33
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
COMPANY PREDECESSOR PREDECESSOR
------------ ----------- ------------
SIX MONTHS PERIOD FROM SIX MONTHS
ENDED JULY 1 TO ENDED
DECEMBER 31, OCTOBER 17, DECEMBER 31,
2001 2001 2000
------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
REVENUES:
Contract services...................................... $21,060 $ 29,767 $ 52,168
Patient services....................................... 21,946 33,693 51,503
Other.................................................. 105 218 343
------- -------- --------
Total revenues...................................... 43,111 63,678 104,014
------- -------- --------
COSTS OF OPERATIONS:
Costs of services...................................... 23,149 32,197 53,646
Provision for doubtful accounts........................ 730 1,110 1,672
Equipment leases....................................... 1,501 2,557 4,637
Depreciation and amortization.......................... 7,823 9,823 20,936
------- -------- --------
Total costs of operations........................... 33,203 45,687 80,891
------- -------- --------
Gross profit........................................ 9,908 17,991 23,123
CORPORATE OPERATING EXPENSES............................. 2,129 3,184 5,277
------- -------- --------
Income from company operations...................... 7,779 14,807 17,846
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS........ 110 382 425
ACQUISITION RELATED COMPENSATION CHARGE.................. -- (15,616) --
------- -------- --------
Operating income (loss)............................. 7,889 (427) 18,271
INTEREST EXPENSE, net.................................... 7,690 6,321 11,907
------- -------- --------
Income (loss) before income taxes................... 199 (6,748) 6,364
PROVISION (BENEFIT) FOR INCOME TAXES..................... -- (2,100) 636
------- -------- --------
Income (loss) before extraordinary item............. 199 (4,648) 5,728
EXTRAORDINARY ITEM -- Loss on debt extinguishment........ (7,378) -- --
------- -------- --------
Net income (loss)................................... $(7,179) $ (4,648) $ 5,728
======= ======== ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-34
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
COMPANY PREDECESSOR PREDECESSOR
------------ ------------ ------------
THREE MONTHS PERIOD FROM THREE MONTHS
ENDED OCTOBER 1 TO ENDED
DECEMBER 31, OCTOBER 17, DECEMBER 31,
2001 2001 2000
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
REVENUES:
Contract services.................................... $21,060 $ 4,981 $25,889
Patient services..................................... 21,946 5,528 25,792
Other................................................ 105 52 113
------- -------- -------
Total revenues.................................... 43,111 10,561 51,794
------- -------- -------
COSTS OF OPERATIONS:
Costs of services.................................... 23,149 5,488 26,562
Provision for doubtful accounts...................... 730 179 839
Equipment leases..................................... 1,501 408 2,345
Depreciation and amortization........................ 7,823 1,541 10,596
------- -------- -------
Total costs of operations......................... 33,203 7,616 40,342
------- -------- -------
Gross profit...................................... 9,908 2,945 11,452
CORPORATE OPERATING EXPENSES........................... 2,129 524 2,575
------- -------- -------
Income from company operations.................... 7,779 2,421 8,877
EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS...... 110 48 299
ACQUISITION RELATED COMPENSATION CHARGE................ -- (15,616) --
------- -------- -------
Operating income (loss)........................... 7,889 (13,147) 9,176
INTEREST EXPENSE, net.................................. 7,690 985 5,875
------- -------- -------
Income (loss) before income taxes................. 199 (14,132) 3,301
PROVISION (BENEFIT) FOR INCOME TAXES................... -- (4,517) 330
------- -------- -------
Income (loss) before extraordinary item........... 199 (9,615) 2,971
EXTRAORDINARY ITEM -- Loss on debt extinguishment...... (7,378) -- --
------- -------- -------
Net income (loss)................................. $(7,179) $ (9,615) $ 2,971
======= ======== =======
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-35
INSIGHT HEALTH SERVICES HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<Table>
<Caption>
PREFERRED STOCK
-------------------------------------------------------------
SERIES B SERIES C SERIES D COMMON STOCK
------------------ ------------------ ------------------- -------------------
PREDECESSOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ----------- ------- -------- ------- -------- -------- -------- --------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT JUNE 30, 2001............. 25,000 $ 23,923 27,953 $ 13,173 -- $ -- 3,011,656 $ 3
Stock options and warrants
exercised.......................... -- -- -- -- -- -- 13,911 --
Conversion of Series B and Series C
to Series D Preferred Stock........ (25,000) (23,923) (27,953) (13,173) 632,266 37,096 -- --
Conversion of Series D Preferred
Stock to common stock.............. -- -- -- -- (632,266) (37,096) 6,323,660 62
Acquisition related compensation
charge............................. -- -- -- -- -- -- -- --
Other comprehensive loss............. -- -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- -- --
------- -------- ------- -------- -------- -------- --------- -------
BALANCE AT OCTOBER 17, 2001.......... -- $ -- -- $ -- -- $ -- 9,349,227 $ 65
======= ======== ======= ======== ======== ======== ========= =======
<Caption>
ADDITIONAL OTHER RETAINED
PAID-IN COMPREHENSIVE EARNINGS
PREDECESSOR CAPITAL LOSS (DEFICIT) TOTAL
- ----------- ---------- ------------- ----------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT JUNE 30, 2001............. $23,926 $ -- $ 4,446 $65,471
Stock options and warrants
exercised.......................... 145 -- -- 145
Conversion of Series B and Series C
to Series D Preferred Stock........ -- -- -- --
Conversion of Series D Preferred
Stock to common stock.............. 37,034 -- -- --
Acquisition related compensation
charge............................. 15,616 -- -- 15,616
Other comprehensive loss............. -- (682) -- (682)
Net loss............................. -- -- (4,648) (4,648)
------- ----- ------- -------
BALANCE AT OCTOBER 17, 2001.......... $76,721 $(682) $ (202) $75,902
======= ===== ======= =======
</Table>
<Table>
<Caption>
COMMON STOCK
-------------------
COMPANY SHARES AMOUNT
- ------- --------- -------
BALANCE AT JUNE 30, 2001............... -- $ --
Sale of common stock, net of equity
issuance costs....................... 5,461,402 5
Issuance of stock options.............. -- --
Other comprehensive income............. -- --
Net loss............................... -- --
--------- -------
BALANCE AT DECEMBER 31, 2001........... 5,461,402 $ 5
========= =======
<Caption>
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
COMPANY CAPITAL INCOME DEFICIT TOTAL
- ------- ---------- ------------- ----------- -------
BALANCE AT JUNE 30, 2001............... $ -- $ -- $ -- $ --
Sale of common stock, net of equity
issuance costs....................... 85,871 -- -- 85,876
Issuance of stock options.............. 1,695 -- -- 1,695
Other comprehensive income............. -- 127 -- 127
Net loss............................... -- -- (7,179) (7,179)
------- ----- ------- -------
BALANCE AT DECEMBER 31, 2001........... $87,566 $ 127 $(7,179) $80,519
======= ===== ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
COMPANY PREDECESSOR PREDECESSOR
------------ ----------- ------------
SIX MONTHS PERIOD FROM SIX MONTHS
ENDED JULY 1 TO ENDED
DECEMBER 31, OCTOBER 17, DECEMBER 31,
2001 2001 2000
------------ ----------- ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)...................................... $ (7,179) $ (4,648) $ 5,728
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on debt extinguishment........... 7,378 -- --
Acquisition related compensation charge............. -- 15,616 --
Depreciation and amortization....................... 7,823 9,823 20,936
Cash provided by (used in) changes in operating assets
and liabilities:
Trade accounts receivables, net..................... 4,046 (2,378) (4,096)
Other current assets................................ (1,102) (3,616) (741)
Accounts payable and other accrued expenses......... 351 23 (2,834)
--------- -------- --------
Net cash provided by operating activities......... 11,317 14,820 18,993
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of InSight common stock....................... (187,722) -- --
Cash acquired in the Acquisition....................... 8,429 -- --
Additions to property and equipment.................... (11,436) (20,852) (18,642)
Other.................................................. (634) (740) (273)
--------- -------- --------
Net cash used in investing activities............. (191,363) (21,592) (18,915)
--------- -------- --------
FINANCING ACTIVITIES:
Proceeds from stock options exercised.................. -- 145 89
Proceeds from sale of common stock, net of equity
issuance costs...................................... 85,876 -- --
Payment of deferred loan fees.......................... (27,594) -- --
Principal payments of debt and capital lease
obligations......................................... (430,040) (8,579) (15,074)
Proceeds from issuance of debt......................... 575,000 -- 2,500
Other.................................................. (305) 381 421
--------- -------- --------
Net cash provided by (used in) financing
activities..................................... 202,937 (8,053) (12,064)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 22,891 (14,825) (11,986)
Cash, beginning of period.............................. -- 23,254 27,133
--------- -------- --------
Cash, end of period.................................... $ 22,891 $ 8,429 $ 15,147
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 3,553 $ 6,799 $ 11,000
========= ======== ========
Income taxes paid...................................... $ 14 $ 943 $ 199
========= ======== ========
Equipment additions under capital leases............... $ -- $ -- $ 7,404
========= ======== ========
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-37
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND ACQUISITION
InSight Health Services Holdings Corp. (Company), a Delaware corporation,
was incorporated on June 13, 2001 under the name JWC/Halifax Holdings Corp. The
Company was funded through an equity contribution from J.W. Childs Equity
Partners II, Halifax Capital Partners and certain of their affiliates. On June
29, 2001, the Company's name was changed to InSight Health Services Holdings
Corp. The Company and its former wholly owned subsidiary, InSight Health
Services Acquisition Corp. (Acquisition Corp.) were created to acquire all the
outstanding shares of InSight Health Services Corp. (InSight).
On October 17, 2001, the Company acquired InSight pursuant to an agreement
and plan of merger dated June 29, 2001, as amended, among the Company,
Acquisition Corp. and InSight (the Acquisition). Acquisition Corp. was merged
with and into InSight, with InSight being the surviving corporation. The
operations of the Company after the Acquisition are substantially the same as
the operations of InSight prior to the Acquisition. In addition, the Company has
no operations other than its investment in InSight. As such, InSight is
considered the predecessor to the Company in accordance with Regulation S-X.
At the effective time of the Acquisition, InSight became a wholly owned
subsidiary of the Company. Pursuant to the terms of the merger agreement, each
of InSight's stockholders received $18.00 in cash for each share of common stock
they owned prior to the Acquisition. Holders of options and warrants, which
prior to the Acquisition were exercisable for InSight common stock, received the
difference between $18.00 and the exercise price of each share of common stock
the holder could have acquired pursuant to the terms of the options and
warrants, and the options and warrants were terminated. This resulted in a
charge of approximately $15.6 million, which is reflected in the accompanying
statement of operations of InSight. In addition, certain members of senior
management rolled a portion of their InSight common stock options into stock
options of the Company. InSight's stockholders, option holders and warrant
holders received aggregate cash consideration of approximately $187.7 million as
a result of the Acquisition.
Concurrently with the Acquisition, InSight (i) repurchased by tender offer
all of its 9 5/8% senior subordinated notes due 2008 in an aggregate principal
amount of $100 million, (ii) repaid its then outstanding senior credit
facilities and certain other indebtedness and (iii) paid fees and expenses
relating to the Acquisition and related financing transactions.
These transactions were financed through:
- Borrowings of $150 million under $275 million of new senior credit
facilities;
- A $200 million senior subordinated bridge financing; and
- The investment by the Company, before equity issuance costs, of
approximately $98.1 million; management options and common stock rollover
with a total net value of approximately $1.9 million.
2. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated balance sheet as of
December 31, 2001, the unaudited condensed consolidated statements of operations
and cash flows for the six and three months ended December 31, 2001, reflect the
consolidated financial position, results of operations and cash flows of the
Company and also include the consolidated financial position, statements of
operations and cash flows of InSight from the date of the Acquisition and
include all material adjustments required under purchase accounting. InSight is
considered the predecessor to the Company in accordance with Regulation S-X. As
such, the historical financial statements of InSight prior to the Acquisition
are included in the accompanying unaudited condensed consolidated financial
statements, including the condensed consolidated balance sheet as of June 30,
2001, the condensed consolidated statements of
F-38
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
operations for the periods from July 1, 2001 to October 17, 2001, and from
October 1, 2001 to October 17, 2001, and for the six and three months ended
December 31, 2000, and the condensed consolidated statements of cash flows for
the period from July 1, 2001 to October 17, 2001 and for the six months ended
December 31, 2000 (collectively Predecessor financial statements). The
Predecessor financial statements have not been adjusted to reflect the
acquisition of InSight by the Company. As such, the condensed consolidated
financial statements of the Company after the Acquisition are not directly
comparable to the Predecessor financial statements prior to the Acquisition.
Unaudited combined results of the Company assuming the Acquisition had
occurred as of July 1, 2001 are presented below. These combined results have
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been, and may not be indicative of future
operating results (in thousands):
<Table>
<Caption>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Revenues............................................. $106,789 $104,014 $53,672 $51,794
Costs of operations.................................. 78,890 80,891 40,819 40,342
-------- -------- ------- -------
Gross profit......................................... 27,899 23,123 12,853 11,452
Corporate operating expenses......................... 5,313 5,277 2,653 2,575
-------- -------- ------- -------
Income from company operations....................... 22,586 17,846 10,200 8,877
Equity in earnings of unconsolidated partnerships.... 492 425 158 299
Acquisition related compensation charge.............. (15,616) -- (15,616) --
-------- -------- ------- -------
Operating income (loss).............................. 7,462 18,271 (5,258) 9,176
Interest expense..................................... 14,011 11,907 8,675 5,875
-------- -------- ------- -------
Income (loss) before income taxes.................... (6,549) 6,364 (13,933) 3,301
Provision (benefit) for income taxes................. (2,100) 636 (4,517) 330
-------- -------- ------- -------
Income (loss) before extraordinary item.............. $ (4,449) $ 5,728 $(9,416) $ 2,971
======== ======== ======= =======
</Table>
3. PURCHASE ACCOUNTING
The Acquisition was accounted for as a purchase by the Company. The
preliminary purchase accounting adjustments of the Company have been recorded in
the accompanying unaudited condensed consolidated financial statements as of and
for any periods subsequent to October 17, 2001. The excess purchase price paid
by the Company over its preliminary estimates of the fair market value of the
tangible assets and liabilities of InSight as of the date of the Acquisition was
approximately $233.5 million and is reflected as Goodwill, net and Other
Intangible Assets, net in the accompanying unaudited condensed consolidated
balance sheet as of December 31, 2001. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," the
new intangible asset balance has been allocated between identifiable intangible
assets and remaining goodwill. Goodwill will not be amortized but is subject to
an ongoing assessment for impairment. The determination of the fair value of
assets and liabilities at the Acquisition date as well as the identification of
other intangible assets is
F-39
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
continuing, and the final allocation may be significantly different. A summary
of the assets acquired and liabilities assumed in the Acquisition follows
(amounts in thousands):
<Table>
Cash purchase price......................................... $ 187,722
Estimated fair values
Assets acquired:
Tangible............................................... 393,487
Other intangible assets................................ 19,860
Liabilities assumed....................................... (385,770)
---------
Goodwill.................................................... $ 215,299
=========
</Table>
The net book value of other intangible assets and their estimated useful
lives are as follows (amounts in thousands):
<Table>
Trademark................................................... $ 8,680 Indefinite Life
Contracts................................................... 11,180 5 Years
</Table>
4. NATURE OF BUSINESS
The Company, through InSight and its consolidated subsidiaries, provides
diagnostic imaging, treatment and related management services in 28 states
throughout the United States. The Company has two reportable segments: Eastern
Division and Western Division. The Company's services are provided through a
network of 83 mobile magnetic resonance imaging (MRI) facilities, six mobile
positron emission tomography (PET) facilities, four mobile lithotripsy
facilities (collectively, Mobile Facilities), 40 fixed-site MRI facilities
(Fixed Facilities), 27 multi-modality imaging centers (Centers), one Leksell
Stereotactic Gamma Knife treatment center, one PET Fixed Facility, and one
radiation oncology center. An additional radiation oncology center is operated
by the Company as part of one of its Centers. The Company has a substantial
presence in California, Texas, New England, the Carolinas, Florida and the
Midwest (Indiana and Ohio).
At its Centers, the Company typically offers other services in addition to
MRI including computed tomography (CT), diagnostic and fluoroscopic x-ray,
mammography, diagnostic ultrasound, nuclear medicine, bone densitometry, nuclear
cardiology, and cardiovascular services.
5. INTERIM FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Company
and Predecessor included herein have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
statements and do not include all of the information and disclosures required by
accounting principles generally accepted in the United States for annual
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and related footnotes included as
part of the Predecessor's Annual Report on Form 10-K for the period ended June
30, 2001 filed with the Securities and Exchange Commission (SEC) on October 14,
2001. In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for fair presentation of results for the period
have been included. The results of operations for the periods ended December 31,
2001 are not necessarily indicative of the results to be achieved for the full
fiscal year.
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
F-40
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
6. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The Company's
investment interests in partnerships or limited liability companies
(Partnerships) are accounted for under the equity method of accounting for
ownership of 50 percent or less when the Company does not exercise significant
control over the operations of the Partnerships and does not have primary
responsibility for the Partnerships' long-term debt. The Company's investment
interests in Partnerships are consolidated for ownership of 50 percent owned
entities when the Company exercises significant control over the operations and
is primarily responsible for the associated long-term debt. Total assets and
revenues as of and for the six months ended December 31, 2001 for the Company's
50 percent controlled entity which is consolidated were approximately $2.0
million and $2.8 million, respectively.
7. SEGMENT INFORMATION
The Company has two reportable segments: Western Division and Eastern
Division. Through December 31, 2001, the Company's reportable segments are
geographical business units defined by management's division of responsibility
between two executive vice presidents -- operations, who are responsible for the
Western and Eastern Divisions and who report directly to the Company's chief
operating decision maker. Each segment owns and operates Centers, Fixed and
Mobile Facilities within their respective geographic areas. The Company does not
allocate income taxes to the two Divisions. The Company manages cash flows and
assets on a consolidated basis, and not by segment, and does not allocate or
report assets and capital expenditures by segment.
The following tables summarize the operating results by segment (amounts in
thousands)(unaudited):
Company
Six and three months ended December 31, 2001:
<Table>
<Caption>
EASTERN WESTERN OTHER CONSOLIDATED
------- ------- -------- ------------
Contract services revenues....................... $18,793 $ 954 $ 1,313 $ 21,060
Patient services revenues........................ 7,247 14,475 224 21,946
Other revenues................................... 64 10 31 105
------- ------- -------- --------
Total revenues................................ 26,104 15,439 1,568 43,111
Depreciation and amortization.................... 4,365 2,034 1,424 7,823
Total costs of operations........................ 18,716 11,389 3,098 33,203
Equity in earnings of unconsolidated
partnerships.................................. 141 (31) -- 110
Operating income (loss).......................... 7,529 4,019 (3,659) 7,889
Interest expense, net............................ 2,811 771 4,108 7,690
Income (loss) before income taxes................ 4,718 3,248 (7,767) 199
</Table>
F-41
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Predecessor
Period from July 1, 2001 through October 17, 2001:
<Table>
<Caption>
EASTERN WESTERN OTHER CONSOLIDATED
------- ------- -------- ------------
Contract services revenues....................... $26,354 $ 1,448 $ 1,965 $ 29,767
Patient services revenues........................ 11,735 21,657 301 33,693
Other revenues................................... 167 14 37 218
------- ------- -------- --------
Total revenues................................ 38,256 23,119 2,303 63,678
Depreciation and amortization.................... 5,839 2,584 1,400 9,823
Total costs of operations........................ 25,985 15,788 3,914 45,687
Equity in earnings of unconsolidated
partnerships.................................. 354 28 -- 382
Acquisition related compensation charge.......... -- -- (15,616) (15,616)
Operating income (loss).......................... 12,630 7,354 (20,411) (427)
Interest expense, net............................ 3,864 1,039 1,418 6,321
Income (loss) before income taxes................ 8,766 6,315 (21,829) (6,748)
Predecessor
Six months ended December 31, 2000:
Contract services revenues....................... $45,521 $ 2,839 $ 3,808 $ 52,168
Patient services revenues........................ 19,533 31,386 584 51,503
Other revenues................................... 147 37 159 343
------- ------- -------- --------
Total revenues................................ 65,201 34,262 4,551 104,014
Depreciation and amortization.................... 12,824 4,666 3,446 20,936
Total costs of operations........................ 45,829 26,322 8,740 80,891
Equity in earnings of unconsolidated
partnerships.................................. 463 (38) -- 425
Operating income (loss).......................... 19,835 7,902 (9,466) 18,271
Interest expense, net............................ 7,191 1,831 2,885 11,907
Income (loss) before income taxes................ 12,644 6,071 (12,351) 6,364
</Table>
F-42
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Predecessor
Period from October 1, 2001 through October 17, 2001:
<Table>
<Caption>
EASTERN WESTERN OTHER CONSOLIDATED
------- ------- -------- ------------
Contract services revenues....................... $ 4,453 $ 231 $ 297 $ 4,981
Patient services revenues........................ 1,895 3,578 55 5,528
Other revenues................................... 47 1 4 52
------- ------- -------- --------
Total revenues................................ 6,395 3,810 356 10,561
Depreciation and amortization.................... 893 414 234 1,541
Total costs of operations........................ 4,281 2,627 708 7,616
Equity in earnings of unconsolidated
partnerships.................................. 42 6 -- 48
Acquisition related compensation charge.......... -- -- (15,616) (15,616)
Operating income (loss).......................... 2,156 1,189 (16,492) (13,147)
Interest expense, net............................ 581 159 245 985
Income (loss) before income taxes................ 1,575 1,030 (16,737) (14,132)
Predecessor
Three months ended December 31, 2000:
Contract services revenues....................... $22,583 $ 1,361 $ 1,945 $ 25,889
Patient services revenues........................ 9,743 15,796 253 25,792
Other revenues................................... 66 24 23 113
------- ------- -------- --------
Total revenues................................ 32,392 17,181 2,221 51,794
Depreciation and amortization.................... 6,492 2,323 1,781 10,596
Total costs of operations........................ 23,185 13,150 4,007 40,342
Equity in earnings of unconsolidated
partnerships.................................. 301 (2) -- 299
Operating income (loss).......................... 9,508 4,029 (4,361) 9,176
Interest expense, net............................ 3,573 926 1,376 5,875
Income (loss) before income taxes................ 5,935 3,103 (5,737) 3,301
</Table>
8. HEDGING ACTIVITIES
In the first quarter of fiscal 2001, InSight adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
SFAS No. 137 and SFAS No. 138 (collectively SFAS 133). SFAS 133 requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Under SFAS 133 an entity may designate a derivative as a hedge of exposure to
either changes in: (a) the fair value of a recognized asset or liability or firm
commitment, (b) cash flows of a recognized or forecasted transaction, or (c)
foreign currencies of a net investment in foreign operations, firm commitments,
available-for-sale securities or a forecasted transaction. Additionally, any
ineffective portion of the hedging transaction is recorded currently in net
income with the remainder deferred in accumulated other comprehensive income
(loss).
The Company has established policies and procedures to permit limited types
and amounts of off-balance sheet hedges to help manage interest rate risk.
InSight had entered into an interest rate swap to pay a fixed rate of interest
to the counterparty and received a floating rate of interest and has designated
F-43
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
the interest rate swap as a cash flow hedge of its floating rate debt. Such
swaps have the effect of converting variable rate borrowings into fixed rate
borrowings.
Subsequent to the Acquisition, the Company re-designated the acquired swap
as a cash flow hedge and established a new hedging relationship with the new
senior credit facilities. At December 31, 2001 the notional amount of this swap
was $35.8 million with a fair value loss of approximately $1.5 million. The fair
value of the swap at the time of the Acquisition represents hedge
ineffectiveness that will be recognized in net income over the remaining life of
the swap. $217,000 of hedge ineffectiveness was recognized as a reduction to
interest expense for the period ended December 31, 2001.
9. COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income are changes in equity other than those
resulting from investments by owners and distributions to owners. Net income
(loss) is the primary component of comprehensive income. For the Company, the
only component of comprehensive income other than net income (loss) is the
change in unrealized gain or loss on derivatives qualifying for hedge
accounting, net of tax. The aggregate amount of such changes to equity that have
not yet been recognized in net income are reported in the equity portion of the
condensed consolidated balance sheets as accumulated other comprehensive income
(loss).
10. DEBT
On October 17, 2001, in connection with the Acquisition, InSight
repurchased by tender offer all of its 9 5/8% senior subordinated notes due 2008
in an aggregate principal amount of $100 million and repaid its then outstanding
credit facilities and certain other indebtedness.
On October 30, 2001, the Company, through InSight, its wholly owned
subsidiary, issued new 9 7/8% senior subordinated notes due 2011 (Notes) in the
aggregate principal amount of $225 million. The net proceeds from the issuance
of the Notes was approximately $211.5 million, $200 million of which was used to
retire in full the senior subordinated bridge financing and the balance of which
is being used for general corporate purposes. As a result, an extraordinary loss
of approximately $7.4 million was recorded related to the write-off of
associated debt issuance costs.
On December 27, 2001, the Company filed a Form S-4 registration statement
with the SEC to register an offer to exchange all of the outstanding Notes for
new notes registered under the Securities Act of 1933, as amended. The terms of
the exchange notes to be issued in the exchange offer are substantially
identical to the Notes; however the exchange notes will be freely tradeable,
except in limited circumstances.
11. NEW PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 applies to all business combinations with a closing date after
June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. InSight adopted SFAS 141, effective July 1, 2001.
In accordance with SFAS 141 the Company engaged a valuation specialist to
assist the Company in identifying acquired intangible assets, their respective
fair values and amortization period related to the Acquisition. The Company has
made a tentative allocation of values to these identifiable intangible assets
based on preliminary estimates. The final allocation of goodwill and other
intangible assets may differ significantly from current estimates.
F-44
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SFAS 142 eliminates the amortization of goodwill, permits indefinite-lived
intangible assets and initiates an annual review for impairment. Identifiable
intangible assets with a determinable useful life will continue to be amortized.
InSight adopted SFAS 142 effective July 1, 2001, which required InSight to cease
amortization of its remaining net goodwill balance and to perform a transitional
goodwill impairment test of July 1, 2001, and thereafter an impairment test at
least annually. Impairment results when the fair value of InSight's reporting
segments, including goodwill, is less than its carrying value. SFAS 142 permits
six months from the adoption date to complete a review of goodwill for
impairment and record necessary adjustments prior to the end of fiscal 2002.
InSight concluded that the book value of goodwill was not impaired as of July 1,
2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 (with earlier application being encouraged)
and generally are to be applied prospectively. The Company does not expect the
adoption of SFAS 144 to have a material impact on the Company's financial
condition and results of operations.
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Notes issued on October 30, 2001 by InSight, the Company's wholly owned
subsidiary, and the exchange notes to be issued in the exchange offer, are or
will be guaranteed by the Company (Parent Company) and all of InSight's wholly
owned subsidiaries (Guarantor Subsidiaries). These guarantees are full,
unconditional, joint and several. The following condensed consolidating
financial information has been prepared and presented pursuant to SEC Regulation
S-X Rule 3-10 "Financial statements of guarantors and issuers of guaranteed
securities registered or being registered." This information is not intended to
present the financial position, results of operations and cash flows of the
individual companies or groups of companies in accordance with accounting
principles generally accepted in the United States.
F-45
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2001
(COMPANY)
<Table>
<Caption>
PARENT NON-
COMPANY GUARANTOR GUARANTOR
ONLY INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- -------- ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents......... $ -- $ -- $ 19,785 $ 3,106 $ -- $ 22,891
Trade accounts receivables, net... -- -- 31,341 10,346 -- 41,687
Other current assets.............. -- -- 9,595 153 -- 9,748
Intercompany accounts
receivables.................... 87,698 374,625 30,476 -- (492,799) --
------- -------- -------- ------- --------- --------
Total current assets........... 87,698 374,625 91,197 13,605 (492,799) 74,326
Property and equipment, net......... -- -- 131,732 26,429 -- 158,161
Investments in partnerships......... -- -- 1,924 -- -- 1,924
Investments in consolidated
subsidiaries...................... (7,179) (7,179) 9,311 -- 5,047 --
Other assets........................ -- -- 21,393 -- -- 21,393
Goodwill and other intangible
assets, net....................... -- -- 229,957 4,802 -- 234,759
------- -------- -------- ------- --------- --------
$80,519 $367,446 $485,514 $44,836 $(487,752) $490,563
======= ======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment,
capital leases and other
notes.......................... $ -- $ 1,500 $ 1,442 $ 254 $ -- $ 3,196
Accounts payable and other accrued
expenses....................... -- -- 26,199 1,029 -- 27,228
Intercompany accounts payable..... -- -- 462,323 30,476 (492,799) --
------- -------- -------- ------- --------- --------
Total current liabilities...... -- 1,500 489,964 31,759 (492,799) 30,424
Equipment, capital leases and other
notes, less current portion....... -- 373,125 2,278 1,144 -- 376,547
Other long-term liabilities......... -- -- 451 2,622 -- 3,073
Stockholders' equity (deficit)...... 80,519 (7,179) (7,179) 9,311 5,047 80,519
------- -------- -------- ------- --------- --------
$80,519 $367,446 $485,514 $44,836 $(487,752) $490,563
======= ======== ======== ======= ========= ========
</Table>
F-46
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 2001
(PREDECESSOR)
<Table>
<Caption>
NON-
GUARANTOR GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ -- $ 19,921 $ 3,333 $ -- $ 23,254
Trade accounts receivables,
net.......................... -- 32,758 10,597 -- 43,355
Other current assets............ -- 8,273 106 -- 8,379
Intercompany accounts
receivable................... 241,016 27,590 -- (268,606) --
-------- -------- ------- --------- --------
Total current assets......... 241,016 88,542 14,036 (268,606) 74,988
Property and equipment, net....... -- 123,579 24,676 -- 148,255
Investments in partnerships....... -- 1,783 -- -- 1,783
Investments in consolidated
subsidiaries.................... (4,882) 9,328 -- (4,446) --
Other assets...................... -- 6,828 -- -- 6,828
Goodwill, net..................... -- 84,358 4,844 -- 89,202
-------- -------- ------- --------- --------
$236,134 $314,418 $43,556 $(273,052) $321,056
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of equipment,
capital leases and other
notes........................ $ 20,810 $ 12,275 $ 777 $ -- $ 33,862
Accounts payable and other
accrued expenses............. -- 23,033 1,302 -- 24,335
Intercompany accounts payable... -- 241,016 27,590 (268,606) --
-------- -------- ------- --------- --------
Total current liabilities.... 20,810 276,324 29,669 (268,606) 58,197
Equipment, capital leases and
other notes, less current
portion......................... 149,853 42,409 2,129 -- 194,391
Other long-term liabilities....... -- 567 2,430 -- 2,997
Stockholders' equity (deficit).... 65,471 (4,882) 9,328 (4,446) 65,471
-------- -------- ------- --------- --------
$236,134 $314,418 $43,556 $(273,052) $321,056
======== ======== ======= ========= ========
</Table>
F-47
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2001
(COMPANY)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
-------- ------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Revenues................. $ -- $ -- $36,033 $7,078 $ -- $43,111
Costs of operations...... -- -- 27,424 5,779 -- 33,203
------- ------- ------- ------ ------- -------
Gross profit........ -- -- 8,609 1,299 -- 9,908
Corporate operating
expenses............... -- -- 2,129 -- -- 2,129
------- ------- ------- ------ ------- -------
Income from company
operations........ -- -- 6,480 1,299 -- 7,779
Equity in earnings of
unconsolidated
partnerships........... -- -- 110 -- -- 110
------- ------- ------- ------ ------- -------
Operating income.... -- -- 6,590 1,299 -- 7,889
Interest expense, net.... -- -- 7,265 425 -- 7,690
------- ------- ------- ------ ------- -------
Income (loss) before
income taxes...... -- -- (675) 874 -- 199
Provision for income
taxes.................. -- -- -- -- -- --
------- ------- ------- ------ ------- -------
Income (loss) before
equity in income
of consolidated
subsidiaries...... -- -- (675) 874 -- 199
Equity in income of
consolidated
subsidiaries........... (7,179) (7,179) 874 -- 13,484 --
------- ------- ------- ------ ------- -------
Income (loss) before
extraordinary
item.............. (7,179) (7,179) 199 874 13,484 199
Extraordinary
item -- loss on debt
extinguishment......... -- -- (7,378) -- -- (7,378)
------- ------- ------- ------ ------- -------
Net income (loss)... $(7,179) $(7,179) $(7,179) $ 874 $13,484 $(7,179)
======= ======= ======= ====== ======= =======
</Table>
F-48
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE PERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001
(PREDECESSOR)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Revenues........................... $ -- $ 48,002 $15,676 $ -- $ 63,678
Costs of operations................ -- 33,654 12,033 -- 45,687
------- -------- ------- ------ --------
Gross profit.................. -- 14,348 3,643 -- 17,991
Corporate operating expenses....... -- 3,184 -- -- 3,184
------- -------- ------- ------ --------
Income from company
operations.................. -- 11,164 3,643 -- 14,807
Equity in earnings of
unconsolidated partnerships...... -- 382 -- -- 382
Acquisition related compensation
charge........................... -- (15,616) -- -- (15,616)
------- -------- ------- ------ --------
Operating income (loss)....... -- (4,070) 3,643 -- (427)
Interest expense, net.............. -- 5,489 832 -- 6,321
------- -------- ------- ------ --------
Income (loss) before income
taxes....................... -- (9,559) 2,811 -- (6,748)
Provision (benefit) for income
taxes............................ -- (2,100) -- -- (2,100)
------- -------- ------- ------ --------
Income (loss) before equity in
income of consolidated
subsidiaries................ -- (7,459) 2,811 -- (4,648)
Equity in income (loss) of
consolidated subsidiaries........ (4,648) 2,811 -- 1,837 --
------- -------- ------- ------ --------
Net income (loss)............. $(4,648) $ (4,648) $ 2,811 $1,837 $ (4,648)
======= ======== ======= ====== ========
</Table>
F-49
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(PREDECESSOR)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Revenues............................ $ -- $84,709 $19,305 $ -- $104,014
Costs of operations................. -- 65,865 15,026 -- 80,891
------ ------- ------- ------- --------
Gross profit................... 18,844 4,279 -- 23,123
Corporate operating expenses........ -- 5,277 -- -- 5,277
------ ------- ------- ------- --------
Income from company
operations................... -- 13,567 4,279 -- 17,846
Equity in earnings of unconsolidated
partnerships...................... -- 425 -- -- 425
------ ------- ------- ------- --------
Operating income............... -- 13,992 4,279 -- 18,271
Interest expense, net............... -- 10,758 1,149 -- 11,907
------ ------- ------- ------- --------
Income before income taxes..... -- 3,234 3,130 -- 6,364
Provision for income taxes.......... -- 636 -- -- 636
------ ------- ------- ------- --------
Income before equity in income
of consolidated
subsidiaries................. -- 2,598 3,130 -- 5,728
Equity in income of consolidated
subsidiaries...................... 5,728 3,130 -- (8,858) --
------ ------- ------- ------- --------
Net income..................... $5,728 $ 5,728 $ 3,130 $(8,858) $ 5,728
====== ======= ======= ======= ========
</Table>
F-50
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE PERIOD FROM OCTOBER 1, 2001 THROUGH OCTOBER 17, 2001
(PREDECESSOR)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Revenues........................... $ -- $ 6,437 $4,124 $ -- $ 10,561
Costs of operations................ -- 4,527 3,089 -- 7,616
------- -------- ------ ------ --------
Gross profit.................. -- 1,910 1,035 -- 2,945
Corporate operating expenses....... -- 524 -- -- 524
------- -------- ------ ------ --------
Income from company
operations.................. -- 1,386 1,035 -- 2,421
Equity in earnings of
unconsolidated partnerships...... -- 48 -- -- 48
Acquisition related compensation
charge........................... -- (15,616) -- -- (15,616)
------- -------- ------ ------ --------
Operating income (loss)....... -- (14,182) 1,035 -- (13,147)
Interest expense, net.............. -- 778 207 -- 985
------- -------- ------ ------ --------
Income (loss) before income
taxes....................... -- (14,960) 828 -- (14,132)
Provision (benefit) for income
taxes............................ -- (4,517) -- -- (4,517)
------- -------- ------ ------ --------
Income (loss) before equity in
income of consolidated
subsidiaries................ -- (10,443) 828 -- (9,615)
Equity in income (loss) of
consolidated subsidiaries........ (9,615) 828 -- 8,787 --
------- -------- ------ ------ --------
Net income (loss)............. $(9,615) $ (9,615) $ 828 $8,787 $ (9,615)
======= ======== ====== ====== ========
</Table>
F-51
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
(PREDECESSOR)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Revenues............................ $ -- $42,271 $9,523 $ -- $51,794
Costs of operations................. -- 32,837 7,505 -- 40,342
------ ------- ------ ------- -------
Gross profit................... -- 9,434 2,018 -- 11,452
Corporate operating expenses........ -- 2,575 -- -- 2,575
------ ------- ------ ------- -------
Income from company
operations................... -- 6,859 2,018 -- 8,877
Equity in earnings of unconsolidated
partnerships...................... -- 299 -- -- 299
------ ------- ------ ------- -------
Operating income............... -- 7,158 2,018 -- 9,176
Interest expense, net............... -- 5,291 584 -- 5,875
------ ------- ------ ------- -------
Income before income taxes..... -- 1,867 1,434 -- 3,301
Provision for income taxes.......... -- 330 -- -- 330
------ ------- ------ ------- -------
Income before equity in income
of consolidated
subsidiaries................. -- 1,537 1,434 -- 2,971
Equity in income of consolidated
subsidiaries...................... 2,971 1,434 -- (4,405) --
------ ------- ------ ------- -------
Net income..................... $2,971 $ 2,971 $1,434 $(4,405) $ 2,971
====== ======= ====== ======= =======
</Table>
F-52
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001
(COMPANY)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR NON-GUARANTOR
ONLY INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)............. $ (7,179) $ (7,179) $(7,179) $ 874 $13,484 $ (7,179)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Extraordinary loss on debt
extinguishment............ -- -- 7,378 -- -- 7,378
Depreciation and
amortization.............. -- -- 6,833 990 -- 7,823
Equity in income (loss) of
consolidated
subsidiaries.............. 7,179 7,179 (874) -- (13,484) --
Cash provided by (used in)
changes in operating assets
and liabilities:
Trade accounts receivables,
net....................... -- -- 3,758 288 -- 4,046
Intercompany receivables,
net....................... 101,846 (204,337) 102,615 (124) -- --
Other current assets........ -- -- (1,154) 52 -- (1,102)
Accounts payable and other
accrued expenses.......... -- -- 546 (195) -- 351
--------- --------- ------- ------- ------- ---------
Net cash provided by (used
in) operating
activities............. 101,846 (204,337) 111,923 1,885 -- 11,317
--------- --------- ------- ------- ------- ---------
INVESTING ACTIVITIES:
Purchase of InSight common
stock....................... (187,722) -- -- -- -- (187,722)
Cash acquired in the
Acquisition................. -- -- 4,682 3,747 -- 8,429
Additions to property and
equipment................... -- -- (9,109) (2,327) -- (11,436)
Other......................... -- -- (634) -- -- (634)
--------- --------- ------- ------- ------- ---------
Net cash provided by (used
in) investing
activities............. (187,722) -- (5,061) 1,420 -- (191,363)
--------- --------- ------- ------- ------- ---------
FINANCING ACTIVITIES:
Proceeds from sale of common
stock, net of equity
issuance costs.............. 85,876 -- -- -- -- 85,876
Payment of deferred loan
fees........................ -- -- (27,594) -- -- (27,594)
Principal payments of debt and
capital lease obligations... -- (370,663) (59,338) (39) -- (430,040)
Proceeds from issuance of
debt........................ -- 575,000 -- -- -- 575,000
Other......................... -- -- (145) (160) -- (305)
--------- --------- ------- ------- ------- ---------
Net cash provided by (used
in) financing
activities............. 85,876 204,337 (87,077) (199) -- 202,937
--------- --------- ------- ------- ------- ---------
INCREASE IN CASH AND CASH
EQUIVALENTS................... -- -- 19,785 3,106 -- 22,891
Cash, beginning of period..... -- -- -- -- -- --
--------- --------- ------- ------- ------- ---------
Cash, end of period........... $ -- $ -- $19,785 $ 3,106 $ -- $ 22,891
========= ========= ======= ======= ======= =========
</Table>
F-53
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001
(PREDECESSOR)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).................... $(4,648) $ (4,648) $ 2,811 $ 1,837 $ (4,648)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Acquisition related compensation
charge.......................... -- 15,616 -- -- 15,616
Depreciation and amortization..... -- 7,920 1,903 -- 9,823
Equity in income (loss) of
consolidated subsidiaries....... 4,648 (2,811) -- (1,837) --
Cash provided by (used in) changes in
operating assets and liabilities:
Trade accounts receivables, net... -- (2,341) (37) -- (2,378)
Intercompany receivables, net..... (145) 837 (692) -- --
Other current assets.............. -- (3,517) (99) -- (3,616)
Accounts payable and other accrued
expenses........................ -- 101 (78) -- 23
------- -------- ------- ------- --------
Net cash provided by (used in)
operating activities......... (145) 11,157 3,808 -- 14,820
------- -------- ------- ------- --------
INVESTING ACTIVITIES:
Additions to property and
equipment......................... -- (18,575) (2,277) -- (20,852)
Other................................ -- (740) -- -- (740)
------- -------- ------- ------- --------
Net cash used in investing
activities................... -- (19,315) (2,277) -- (21,592)
------- -------- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from stock options
exercised......................... 145 -- -- -- 145
Principal payments of debt and
capital lease obligations......... -- (7,110) (1,469) -- (8,579)
Other................................ -- 29 352 -- 381
------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities......... 145 (7,081) (1,117) -- (8,053)
------- -------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................... -- (15,239) 414 -- (14,825)
Cash, beginning of period............ -- 19,921 3,333 -- 23,254
------- -------- ------- ------- --------
Cash, end of period.................. $ -- $ 4,682 $ 3,747 $ -- $ 8,429
======= ======== ======= ======= ========
</Table>
F-54
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(PREDECESSOR)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
INSIGHT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income........................... $ 5,728 $ 5,728 $ 3,130 $(8,858) $ 5,728
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... -- 18,362 2,574 -- 20,936
Equity in income of consolidated
subsidiaries.................... (5,728) (3,130) -- 8,858 --
Cash provided by (used in) changes in
operating assets and liabilities:
Trade accounts receivables........ -- (1,956) (2,140) -- (4,096)
Intercompany receivables, net..... 6,607 (5,090) (1,517) -- --
Other current assets.............. -- (695) (46) -- (741)
Accounts payable and other accrued
expenses........................ -- (2,856) 22 -- (2,834)
------- -------- ------- ------- --------
Net cash provided by operating
activities................... 6,607 10,363 2,023 -- 18,993
------- -------- ------- ------- --------
INVESTING ACTIVITIES:
Additions to property and
equipment......................... -- (16,703) (1,939) -- (18,642)
Other................................ -- (149) (124) -- (273)
------- -------- ------- ------- --------
Net cash used in investing
activities................... -- (16,852) (2,063) -- (18,915)
------- -------- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from stock options
exercised......................... 89 -- -- -- 89
Principal payments of debt and
capital lease obligations......... (9,196) (5,638) (240) -- (15,074)
Proceeds from issuance of debt....... 2,500 -- -- -- 2,500
Other................................ -- 291 130 -- 421
------- -------- ------- ------- --------
Net cash used in financing
activities................... (6,607) (5,347) (110) -- (12,064)
------- -------- ------- ------- --------
DECREASE IN CASH AND CASH
EQUIVALENTS.......................... -- (11,836) (150) -- (11,986)
Cash, beginning of period............ -- 25,375 1,758 -- 27,133
------- -------- ------- ------- --------
Cash, end of period.................. $ -- $ 13,539 $ 1,608 $ -- $ 15,147
======= ======== ======= ======= ========
</Table>
F-55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of InSight Health Services Holdings Corp.:
We have audited the accompanying consolidated balance sheet of InSight
Health Services Holdings Corp. (a Delaware corporation) and subsidiary as of
June 30, 2001 and the related statement of stockholders' equity for the period
from inception (June 13, 2001) to June 30, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InSight Health Services
Holdings Corp. and subsidiary as of June 30, 2001 and for the period from
inception (June 13, 2001) to June 30, 2001 in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
September 10, 2001
F-56
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
JUNE 30, 2001
-------------
ASSETS
ASSETS...................................................... $ --
====
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES................................................. $ --
STOCKHOLDERS' EQUITY:....................................... --
Preferred stock, $.001 par value; 1,000,000 shares
authorized, no shares issued or outstanding............... --
Common stock subscription receivable........................ (90)
Common stock, $.001 par value; 10,000,000 shares authorized,
5 shares issued and outstanding........................... --
Additional paid-in capital.................................. 90
----
Total stockholders' equity............................. --
----
Total liabilities and stockholders' equity................ $ --
====
</Table>
The accompanying notes are an integral part of this consolidated balance sheet.
F-57
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION (JUNE 13, 2001) TO JUNE 30, 2001
<Table>
<Caption>
COMMON
COMMON STOCK STOCK ADDITIONAL
--------------- SUBSCRIPTION PAID-IN
SHARES AMOUNT RECEIVABLE CAPITAL TOTAL
------ ------ ------------ ---------- -----
Balance at Inception (June 13, 2001)............ -- $-- $ -- $-- $--
Issuance of common stock........................ 5 -- (90) 90 --
-- --- ---- --- ---
Balance at June 30, 2001........................ 5 $-- $(90) $90 $--
== === ==== === ===
</Table>
The accompanying notes are an integral part of this consolidated financial
statement.
F-58
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND BUSINESS
InSight Health Services Holdings Corp. (Company), a Delaware corporation,
was originally incorporated on June 13, 2001 under the name of JWC/Halifax
Holdings Corp. On June 29, 2001, the Company's name was changed to InSight
Health Services Holdings Corp.
The Company was formed for the purpose of consummating an acquisition of
InSight Health Services Corp. (InSight), a Delaware corporation, through a
merger of the Company's wholly owned subsidiary, InSight Health Services
Acquisition Corp. (formerly JWCH Merger Corp.) (Acquisition Corp) with and into
InSight whereby InSight would become the wholly-owned subsidiary of the Company.
The acquisition was consummated on October 17, 2001.
The Company has no prior or current operations or cash activity.
Acquisition Corp. was merged out of existence of October 17, 2001 and had no
prior operations or cash activity.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany amounts have been
eliminated in consolidation.
2. ACQUISITION AND RELATED FINANCING TRANSACTIONS (SUBSEQUENT
EVENT -- UNAUDITED)
On October 17, 2001, Acquisition Corp. merged with InSight. InSight was the
surviving corporation and became a wholly-owned subsidiary of the Company.
InSight is deemed to be the predecessor for future SEC reporting purposes. J.W.
Childs Equity Partners II (Childs) and an affiliate own approximately 80% of the
outstanding common stock of the Company and Halifax Capital Partners (Halifax)
and an affiliate own approximately 20% of the outstanding common stock of the
Company. In addition, certain members of senior management rolled over portion
of their InSight stock options into stock options of the Company at the
consummation of the acquisition. In connection with the Company's acquisition of
InSight, the Company's stockholders purchased additional shares of the Company's
common stock, resulting in net proceeds as follows (in millions):
<Table>
J.W. Childs Equity Partners II and affiliate................ $ 79.8
Halifax Capital Partners and affiliate...................... 20.0
Net value of rolled management options...................... 1.7
------
$101.5
======
</Table>
Upon consummation of the acquisition, each of InSight's stockholders became
entitled to receive $18.00 in cash for each share of InSight common stock that
they owned prior to the acquisition. Holders of options and warrants, which
prior to the acquisition were exercisable for InSight common stock, received the
difference between $18.00 and the exercise price for each share of common stock
the holder could have acquired pursuant to the terms of the options or warrants,
and the options and warrants were terminated. This resulted in a charge of
approximately $19.7 million, which will be reflected in InSight's pre-merger
financial statements in the second quarter of fiscal 2002. InSight's
stockholders, option holders and warrant holders immediately prior to the
acquisition became entitled to receive aggregate cash consideration of
approximately $187.7 million as a result of the acquisition.
Concurrently with the acquisition, (i) Acquisition Corp. repurchased by
tender offer all of InSight's 9 5/8% senior subordinated notes due 2008 (Prior
Notes) in an aggregate principal amount of $100 million, (ii) InSight repaid its
then outstanding senior credit facilities and certain other indebtedness and
(iii) InSight paid fees and expenses relating to the acquisition and related
financing transactions. InSight will record a pre-merger extraordinary loss on
extinguishment of existing indebtedness of approximately $20.0 million in the
second quarter of fiscal 2002.
F-59
INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These transactions were financed through:
- Borrowings of $150 million under $275 million of new senior credit
facilities;
- A $200 million senior subordinated bridge financing; and
- The investment by Childs, Halifax and certain of their affiliates of
$98.1 million; management options and common stock rollover with a total
net value of approximately $1.9 million as discussed above.
The acquisition will be accounted for as a purchase of InSight by the
Company. As such, the recorded amounts of InSight's assets and liabilities will
change significantly as a result of the application of purchase accounting.
Management is currently in the process of evaluating the appropriate purchase
accounting adjustments.
On October 30, 2001, InSight issued new 9 7/8% senior subordinated notes
due 2011 (Outstanding Notes) in the aggregate principal amount of $225 million.
The net proceeds from the issuance of the Outstanding Notes was approximately
$211.5 million, $200 million of which was used to retire in full the senior
subordinated bridge financing and the balance is being used for general
corporate purposes. InSight will record a post-merger extraordinary loss on
extinguishment of the senior subordinated bridge financing of approximately $7.8
million in the second quarter of fiscal 2002.
Upon the completion of the acquisition, InSight and the Company entered
into a management agreement with J.W. Childs Advisors II, L.P., the general
partner of J.W. Childs Equity Partners II, and Halifax Genpar L.P., the general
partner of Halifax Capital Partners. Under the agreement, InSight paid J.W.
Childs Advisors II and Halifax Genpar a transaction fee of $4,500,000 and
$1,125,000, respectively, for services rendered in connection with the
acquisition. Additionally, J.W. Childs Advisors II and Halifax Genpar will
provide business, management and financial advisory services to InSight and the
Company in consideration of (1) an annual fee of $240,000 to be paid to J.W.
Childs Advisors II and (2) an annual fee of $60,000 to be paid to Halifax
Genpar. InSight and the Company will also reimburse such entities for all travel
and other out-of-pocket expenses incurred by such entities in connection with
their performance of the advisory services under the agreement. The management
agreement has an initial term of five years, which term will automatically renew
for one year periods thereafter and is subject to earlier termination by the
board of directors of InSight and the Company. Furthermore, the Company and
InSight have agreed to indemnify and hold harmless J.W. Childs Advisors II and
Halifax Genpar and their affiliates, from and against any and all claims,
losses, damages and expenses arising out of the acquisition or the performance
by J.W. Childs Advisors II and Halifax Genpar of their obligations under the
management agreement.
F-60
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$225,000,000
INSIGHT HEALTH SERVICES CORP.
OFFER TO EXCHANGE $225,000,000
9 7/8% SENIOR SUBORDINATED NOTES DUE 2011
FOR REGISTERED 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2011
-------------------------
PROSPECTUS
-------------------------
, 2002
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained in
this prospectus. You must not rely on unauthorized information or
representations.
This prospectus does not offer to sell or ask for offers to buy any of the
securities in any jurisdiction where it is unlawful, where the person making the
offer is not qualified to do so, or to any person who cannot legally be offered
the securities. The information in this prospectus is current only as of the
date on its cover, and may change after that date. For any time after the cover
date of this prospectus, we do not represent that our business is the same as
described or that the information in this prospectus is correct -- nor do we
imply those things by delivering this prospectus or selling securities to you.
Until , 2002 (90 days after the date of this prospectus), all
dealers effecting transactions in the exchange notes, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
selling exchange notes received in exchange for outstanding notes held for their
own account.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF DELAWARE CORPORATE REGISTRANTS
The following is a summary of the statues, charter and bylaw provisions,
contracts or other arrangements under which each of the Registrants' directors
and officers are insured or indemnified against liability in their capacities as
such. All of the directors and officers of the Registrants are covered by
insurance policies maintained and held in effect by InSight against certain
liabilities for actions taken in their capacities as such, including liabilities
under the Securities Act.
REGISTRANTS INCORPORATED UNDER DELAWARE LAW
InSight, InSight Holdings, InSight Health Corp., Signal Medical Services,
Inc., Open MRI, Inc., Maxum Health Corp., Radiosurgery Centers, Inc., Maxum
Health Services Corp., and Diagnostic Solutions Corp. are incorporated under the
laws of the State of Delaware. Section 145 of the Delaware General Corporation
Law ("DGCL") provides that a corporation may indemnify any person who was or is
a party, or is threatened to be made a party, to any threatened, pending or
complete action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Section 145 further provides that a corporation similarly
may indemnify any such person serving in any such capacity who was or is a
party, or is threatened to be made a party, to any threatened, pending or
completed action or suit by or the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court or Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
InSight's certificate of incorporation limits the liability of its
directors and officers to the fullest extent permitted under the DGCL. The
certificate of incorporation specifies that the directors and officers will not
be personally liable for monetary damages for breach of fiduciary duty as a
director or officer, as applicable. This limitation does not apply to actions by
a director or officer that do not meet the standards of conduct which make it
permissible under the DGCL for InSight Holdings to indemnify such director or
officer. InSight has entered into separate indemnification agreements with its
executive officers and each of its former directors that could require InSight,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors and executive officers and to
advance expenses incurred by them as a result of any proceedings against them as
to which they could be indemnified.
InSight Holdings's certificate of incorporation limits the liability of its
directors and officers to the fullest extent permitted under the DGCL. The
certificate of incorporation specifies that the directors and officers will not
be personally liable for monetary damages for breach of fiduciary duty as a
director or
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officer. This limitation does not apply to actions by a director or officer that
do not meet the standards of conduct which make it permissible under the DGCL
for us to indemnify such director or officer.
InSight Health Corp.'s certificate of incorporation limits the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director except for liability for any breach of the director's duty of loyalty
to the corporation or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, under
Section 174 of the DGCL, or for any transaction from which the director derived
any improper personal benefit. It also indemnifies its officers, directors, and
employees and agents to the extent permitted by the DGCL. The right to
indemnification shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition, provided however, that, if the DGCL requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer shall be made only upon delivery to the corporation of an undertaking to
repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal that such
indemnitee is not entitled to be indemnified for such expenses. Its bylaws
provide for indemnification of any person made or threatened to be made a party
to any threatened, pending or completed action, suit or proceeding by reason of
the fact that such person is or was a director, officer, employee or agent of
the corporation or any constituent corporation absorbed in a consolidation or
merger, or serves or served with another corporation, partnership, joint
venture, trust or other enterprise at the request of the corporation or any such
constituent corporation and provide such expenses incurred in defending such
actions upon receipt of an undertaking by or on behalf of such persons to repay
such advances unless it shall be ultimately determined that such person is
entitled to indemnification by the corporation.
Signal Medical Services, Inc.'s certificate of incorporation limits the
personal liability of its directors for monetary damages for breach of fiduciary
duty as a director except for liability for any breach of the director's duty of
loyalty to the corporation or its stockholders, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, under Section 174 of the DGCL, or for any transaction from which the
director derived any improper personal benefit. The corporation also indemnifies
its officers, directors, and employees and agents to the extent permitted by the
DGCL. Article VII of its bylaws indemnifies to the fullest extent provided by
the DGCL each person who was or is made a party or is threatened to be a party
to or is involved in any action, suit or proceeding by reason of the fact that
he or she, as a person of whom he or she is the legal representative, is or was
a director or officer of the corporation or is or was serving at the request of
the corporation as a director, officer, employee, fiduciary, or agent of another
corporation or of a partnership, joint venture, trust or other enterprise. The
corporation may provide indemnification to employees and agents of the
corporation with the same scope and effect as the indemnification for directors
and officers.
Open MRI, Inc.'s certificate of incorporation limits the liability of its
directors to the fullest extent permitted by the DGCL for monetary damages for a
breach of fiduciary duty as a director. Article VII of its bylaws indemnifies to
the fullest extent provided by the DGCL each person who was or is made a party
or is threatened to be a party to or is involved in any action, suit or
proceeding by reason of the fact that he or she, as a person of whom he or she
is the legal representative, is or was a director or officer of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee, fiduciary, or agent of another corporation or of a partnership, joint
venture, trust or other enterprise. The corporation may provide indemnification
to employees and agents of the corporation with the same scope and effect as the
indemnification for directors and officers.
Maxum Health Corp.'s certificate of incorporation limits a directors
liability to the fullest extent permitted by the DGCL for monetary damages for a
breach of fiduciary duty as a director. Article V of its bylaws indemnifies to
the fullest extent provided by the DGCL each person who was or is made a party
or is threatened to be a party to or is involved in any action, suit or
proceeding by reason of the fact that he or she, as a person of whom he or she
is the legal representative, is or was a director or officer of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee, fiduciary, or agent of another corporation or of a partnership, joint
venture, trust or other enterprise. The corporation
II-2
may provide indemnification to employees and agents of the corporation with the
same scope and effect as the indemnification for directors and officers.
Radiosurgery Centers, Inc.'s certificate of incorporation limits the
personal liability of its directors for monetary damages for breach of fiduciary
duty as a director except for liability for any breach of the director's duty of
loyalty to the corporation or its stockholders, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, under Section 174 of the DGCL, or for any transaction from which the
director derived any improper personal benefit. Article VII of its bylaws also
indemnifies its officers, directors, and employees and agents to the extent
permitted by the DGCL. The right to indemnification shall include the right to
be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition, provided however, that, if the
DGCL requires, an advancement of expenses incurred by an indemnitee in his or
her capacity as a director or officer shall be made only upon delivery to the
corporation of undertaking, by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such indemnitee is
not entitled to be indemnified for such expenses.
Maxum Health Services Corp.'s bylaws limit the personal liability of its
directors for monetary damages for breach of fiduciary duty as a director except
for liability for any breach of the director's duty of loyalty to the
corporation or its stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, under
Section 174 of the DGCL, or for any transaction from which the director derived
any improper personal benefit. The liability of a director shall be further
eliminated or limited to the fullest extent provided by an amendment to the DGCL
or any other applicable law authorizing such corporate action. Each person who
was or is made a party or is threatened to be made a party to or is involved in
any action, suit or proceeding by reason of the fact that he or she or a person
of whom he or she is a legal representative or was a director or officer of the
corporation or is or was serving at the request of the corporation as a
director, officer or employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified by the corporation to the fullest extent authorized
by the DGCL. Such right to indemnification includes the right to be paid by the
corporation the expenses incurred in defending any such proceeding in advance of
its final disposition, provided that if the DGCL or any other applicable law
requires the payment of such expenses in advance of the final disposition of a
proceeding, payment shall be made only upon delivery to the corporation of an
undertaking by or on behalf of such director or officer, to repay all amounts so
advanced if it shall ultimately be determined that such director or officer is
not entitled to be indemnified.
REGISTRANTS INCORPORATED UNDER INDIANA LIMITED PARTNERSHIP LAW
MRI Associates, L.P. is a limited partnership formed under the laws of the
State of Indiana. Under Section 2(9) of Indiana's Limited Liability Partnership
Act, a limited partnership may indemnify a person made a party to an action
because the person is or was a partner, employee, officer, or agent of the
partnership against liability incurred in the action if (1) the person's conduct
was in good faith; and (2) the person reasonably believed (a) in the case of
conduct in the person's capacity as a partner, that the person's conduct was in
the best interests of the partnership; and (b) in all other cases that the
person's conduct was at least not opposed to the best interests of the
partnership; and (3) in the case of any criminal action, the person either had
reasonable cause to believe the person's conduct was lawful or had no reasonable
cause to believe the person's conduct was unlawful. These indemnification
provisions do not exclude any other rights to indemnification that a partner,
employee, officer or agent of the limited partnership may have under the
partnership agreement or with the written consent of all partners. MRI
Associates, L.P.'s Agreement of Limited Partnership provides for indemnification
of the general partner, its agents and employees so long as the acts or
omissions were taken in good faith and in a manner reasonably believed by the
general partner to be, or not opposed to, the best interests of the partnership.
However, no indemnity is made if the conduct
II-3
was found by a court of competent jurisdiction to be the result of gross
negligence or reckless or intentional misconduct or breach of fiduciary duty,
unless and only to the extent that the court determines that in view of all
circumstances the general partner, agent or employee is entitled to indemnity
for such expense as the court deems proper. If the partnership is made a party
to a claim as a result of or in connection with any partner's obligations or
liabilities unrelated to the partnership business, such partners cumulatively,
jointly and severally shall indemnify and reimburse the partnership for all loss
and expense incurred, including reasonable attorney's fees. If the partnership,
general partner, or any limited partner is sued as a result of the medical
activities of any other limited partner, then the limited partner whose activity
resulted in a claim being made shall, jointly and severally, indemnify the
partnership, general partner, the other limited partners and all of their
officers, directors, agents and employees arising from or related to that claim
of medical malpractice. In addition, the partnership agreement also provides
that if the Partnership, the General Partner or any Limited Partner is sued as a
result of the medical activities of any other Limited Partner, then the Limited
Partner whose activity resulted in the claim being made shall, jointly and
severally, indemnify the Partnership, the General Partner, the other Limited
Partners and all of their officers, directors, agents and employees, if any,
from and against any loss, liability, damage, cost or expense arising from or
related to that claim of medical malpractice.
REGISTRANTS INCORPORATED UNDER PENNSYLVANIA LIMITED LIABILITY COMPANY LAW
Wilkes-Barre Imaging, L.L.C. is a limited liability company formed under
the laws of the State of Pennsylvania. Under Section 8945 of the Pennsylvania
Limited Liability Company Law of 1994 ("PLLCL"), a limited liability company may
and shall have the power to indemnify and hold harmless any member or manager or
other person from and against any and all claims and demands whatsoever, subject
to such standards and restrictions, if any, as are set forth in the operating
agreement. Indemnification is not permitted under the PLLCL in any case where
the act giving rise to the claim for indemnification is determined by a court to
have constituted willful misconduct or recklessness. Wilkes-Barre Imaging,
L.L.C.'s Operating Agreement provides that Wilkes-Barre Imaging, L.L.C. will
indemnify and hold harmless, to the fullest extent permitted by law, each member
from and against any and all losses, claims, damages, liabilities and expenses
of whatever nature, as incurred, arising out of or relating to the fact that
such person was or is a member and/or a manager of Wilkes-Barre Imaging, L.L.C.
The Operating Agreement limits indemnification for any member or manager if a
final judgment or other final adjudication adverse to the member or manager
establishes (i) that the member or manager's acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or (ii) that the member or manager personally
gained financial profit or other advantage to which the member or manager was
not legally entitled.
REGISTRANTS INCORPORATED UNDER TEXAS LAW
Maxum Health Services of North Texas, Inc., Maxum Health Services of
Dallas, Inc., and NDDC, Inc. are incorporated under the laws of the State of
Texas. Article 2.02-1 of the Texas Business Corporation Act ("TBCA") provides
that a corporation may indemnify any director or officer who was, is or is
threatened to be made a named defendant or respondent in a proceeding because he
or she is or was a director or officer, provided that the director or officer
(1) conducted himself in good faith, (2) reasonably believed (a) in the case of
conduct in his or her official capacity, that his or her conduct was in the
corporation's best interests, and/or (b) in other cases, that his or her conduct
was at least not opposed to the corporation's best interest, and (3) in the case
of any criminal proceeding, has no reasonable cause to believe his or her
conduct was unlawful. Subject to certain exceptions, a director or officer may
not be indemnified if he or she is found liable to the corporation or if he or
she is found liable on the basis that he or she improperly received a personal
benefit. Under Texas law reasonable expenses incurred by a director or officer
may be paid or reimbursed by the corporation in advance of a final disposition
of the proceeding after the corporation receives a written affirmation by the
director or officer of his or her good faith belief that he or she has met the
standards of conduct necessary for indemnification and a written undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined that the director or officer is not entitled to indemnification by
the corporation.
II-4
Texas law requires a corporation to indemnify a director or officer against
reasonable expenses incurred in connection with the proceeding to which such
director or officer is named defendant or respondent because he or she is or was
a director or officer if he or she is wholly successful in defense of the
proceeding. Texas law also permits a corporation to purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
director or officer against any liability asserted against him and incurred by
him in such a capacity or arising out of his or her status as such a director or
officer, whether or not the corporation would have the power to indemnify him
against liability under Article 2.02-1 of the TBCA.
Maxum Health Services of North Texas, Inc.'s certificate of incorporation
eliminates the liability of directors to the fullest extent permitted by the
provisions of the TBCA and indemnifies any and all persons whom it shall have
power to indemnify from and against any and all of the expenses, liabilities or
other matters. Article V of the bylaws of Maxum Health Services of North Texas
states that the corporation indemnifies, to the fullest extent provided by the
TBCA, each person who was or is made a party or is threatened to be a party to
or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she, as a
person of whom he or she is the legal representative, is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, fiduciary, or agent of another
corporation or of a partnership, joint venture, trust or other enterprise. The
bylaws provide that the corporation may indemnify employees and agents of the
corporation with the same scope and effect as the indemnification for directors
and officers.
Maxum Health Services of Dallas, Inc.'s certificate of incorporation
eliminates the liability of directors to the fullest extent permitted by the
provisions of the TBCA and indemnifies any and all persons whom it shall have
power to indemnify from and against any and all of the expenses, liabilities or
other matters.
NDDC, Inc.'s certificate of incorporation eliminates the liability of
directors to the fullest extent permitted by the provisions of the TBCA and
indemnifies any and all persons whom it shall have power to indemnify from and
against any and all of the expenses, liabilities or other matters.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<Table>
2.1 -- Agreement and Plan of Merger dated as of June 29, 2001, by
and among InSight Health Services Holdings Corp., JWCH
Merger Corp. and InSight, previously filed and incorporated
herein by reference from InSight's Current Report on Form
8-K, filed July 2, 2001.
2.2 -- Amendment No. 1 to Agreement and Plan of Merger dated as of
June 29, 2001, by and among InSight Health Services Holdings
Corp., JWCH Merger Corp. and InSight, previously filed and
incorporated by reference from InSight's Annual Report on
Form 10-K, filed September 14, 2001.
2.3 -- Amendment No. 2 to Agreement and Plan of Merger, dated as of
October 9, 2001, by and among InSight Health Services
Holdings Corp., InSight Health Services Acquisition Corp.
and InSight Health Corp., previously filed and incorporated
herein by reference from InSight's Current Report on Form
8-K, filed October 9, 2001.
2.4 -- Second Amended and Restated Stockholders Agreement, dated as
of February 8, 2002, among InSight Health Services Holdings
Corp., the JWC Holders (as defined therein), the Halifax
Holders (as defined therein), the Management Holders (as
defined therein) and the Additional Holders (as defined
therein), filed herewith.
*2.5 -- Management Agreement, dated as of October 17, 2001, by and
among J.W. Childs Advisors II., L.P, Halifax Genpar, L.P.,
InSight Health Services Holdings Corp. and InSight Health
Services Corp.
*3.1 -- Certificate of Incorporation of InSight, as amended.
*3.2 -- Bylaws of InSight, as amended.
*3.3 -- Certificate of Incorporation of InSight Health Services
Holdings Corp., as amended.
*3.4 -- Bylaws of InSight Health Services Holdings Corp.
</Table>
II-5
<Table>
*3.5 -- Certificate of Incorporation of InSight Health Corp., as amended.
*3.6 -- Bylaws of InSight Health Corp., as amended.
*3.7 -- Certificate of Incorporation of Signal Medical Services, Inc., as amended.
*3.8 -- Bylaws of Signal Medical Services, Inc., as amended.
*3.9 -- Certificate of Incorporation of Open MRI, Inc., as amended.
*3.10 -- Bylaws of Open MRI, Inc.
*3.11 -- Certificate of Incorporation of Maxum Health Corp., as amended.
*3.12 -- Bylaws of Maxum Health Corp., as amended.
*3.13 -- Certificate of Incorporation of Radiosurgery Centers, Inc.
*3.14 -- Bylaws of Radiosurgery Centers, Inc.
*3.15 -- Certificate of Incorporation of Maxum Health Services Corp., as amended.
*3.16 -- Bylaws of Maxum Health Services Corp.
*3.17 -- Certificate of Limited Partnership of MRI Associates, L.P.
*3.18 -- Agreement of Limited Partnership of MRI Associates, L.P.
*3.19 -- Certificate of Incorporation of Maxum Health Services of North Texas, Inc.
*3.20 -- Bylaws of Maxum Health Services of North Texas, Inc.
*3.21 -- Certificate of Incorporation of Maxum Health Services of Dallas, Inc.
*3.22 -- Bylaws of Maxum Health Services of Dallas, Inc.
*3.23 -- Certificate of Incorporation of NDDC, Inc.
*3.24 -- Bylaws of NDDC, Inc.
*3.25 -- Certificate of Incorporation of Diagnostic Solutions Corp., as amended.
*3.26 -- Bylaws of Diagnostic Solutions Corp.
3.27 -- Certificate of Organization of Wilkes-Barre Imaging, L.L.C., filed herewith.
3.28 -- Operating Agreement of Wilkes-Barre Imaging, L.L.C., filed herewith.
*4.1 -- Indenture with respect to 9 7/8% Senior Subordinated Notes due 2011 with State Street Bank and Trust
Company, N.A., as Trustee, dated October 30, 2001.
4.2 -- Supplemental Indenture with respect to Wilkes-Barre Imaging, L.L.C. with State Street Bank and Trust
Company, N.A., dated February 25, 2002, filed herewith.
*4.3 -- Purchase Agreement, dated October 25, 2001 by and among InSight, Banc of America Securities LLC and
First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011.
*4.4 -- Registration Rights Agreement, dated October 30, 2001, by and among InSight, Banc of America Securities
LLC and First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011.
5.1 -- Opinion of Kaye Scholer LLP, filed herewith.
5.2 -- Opinion of Hunton & Williams, filed herewith.
8.1 -- Tax Opinion of Kaye Scholer LLP, filed herewith.
10.1 -- Voting Agreement dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger
Corp., Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle International Partners II, L.P.,
Carlyle International Partners III, L.P., C/S International Partners, State Board of Administration of
Florida, Carlyle Investment Group, L.P., Carlyle-InSight International Partners, L.P., Carlyle-InSight
Partners L.P. and T.C. Group, LLC, previously filed and incorporated herein by reference from InSight's
Current Report on Form 8-K, filed July 2, 2001.
10.2 -- Voting Agreement dated as of July 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger
Corp. and General Electric Company, previously filed and incorporated herein by reference from InSight's
Current Report on Form 8-K, filed July 2, 2001.
</Table>
II-6
<Table>
10.3 -- Voting Agreement, dated as of June 29, 2001, among InSight
Health Services Holdings Corp., JWCH Merger Corp. and GE
Fund, previously filed and incorporated herein by reference
from InSight's Current Report on Form 8-K, filed July 2,
2001.
*10.4 -- Credit Agreement, dated October 17, 2001, by and among
InSight, Banc of America Securities LLC and First Union
Securities, LLC.
*10.5 -- Note Purchase Agreement, dated as of October 17, 2001, by
and among InSight Health Services Acquisition Corp., InSight
Health Services Corp., InSight Health Services Holdings
Corp., the Subsidiary Guarantors (as defined therein), Banc
of America Bridge LLC, and Banc of America Securities LLC.
*10.6 -- InSight Health Services Holdings Corp. 2001 Stock Option
Plan.
*10.7 -- InSight Health Services Holdings Corp. 2001 Stock Option
Plan Stock Option Agreement, dated June 29, 2001, by and
between InSight Health Services Holdings Corp. and Steven T.
Plochocki.
*10.8 -- InSight Health Services Holdings Corp. 2001 Stock Option
Plan Stock Option Agreement, dated June 29, 2001, by and
between InSight Health Services Holdings Corp. and Michael
A. Boylan.
*10.9 -- InSight Health Services Holdings Corp. 2001 Stock Option
Plan Stock Option Agreement, dated June 29, 2001, by and
between InSight Health Services Holdings Corp. and Thomas V.
Croal.
*10.10 -- InSight Health Services Holdings Corp. 2001 Stock Option
Plan Stock Option Agreement, dated June 29, 2001, by and
between InSight Health Services Holdings Corp. and Michael
S. Madler.
*10.11 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Steven T. Plochocki.
*10.12 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Patricia R. Blank.
*10.13 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Michael A. Boylan.
*10.14 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Thomas V. Croal.
*10.15 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Brian G. Drazba.
*10.16 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Michael S. Madler.
*10.17 -- Executive Employment Agreement, dated December 7, 2001,
between InSight Health Services Corp. and Marilyn U.
MacNiven-Young.
10.18 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Cecilia A. Guastaferro,
filed herewith.
*10.19 -- Form of InSight Health Services Holdings Corp. Performance
Based Option Agreement.
*12.1 -- Computation of ratio of earnings to fixed charges.
*21 -- Subsidiaries of InSight.
23.1 -- Consent of Independent Public Accountants, filed herewith.
23.2 -- Consent of Kaye Scholer LLP, included in Exhibit 5.1 hereto.
23.3 -- Consent of Hunton & Williams, included in Exhibit 5.2
hereto.
25.1 -- Form T-1 Statement regarding eligibility of State Street
Bank and Trust Company, N.A., as Trustee, filed herewith.
99.1 -- Form of Letter of Transmittal, filed herewith.
99.2 -- Form of Notice of Guaranteed Delivery, filed herewith.
99.3 -- Broker Letter, filed herewith.
99.4 -- Client Letter, filed herewith.
</Table>
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* Previously filed.
II-7
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the provisions described under Item 20 or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of a registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrants hereby undertake:
(1) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(2) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(B) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(3) That, for the purpose of determining liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the exchange offer.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form S-4, within one business day of the receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
INSIGHT HEALTH SERVICES CORP.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
/s/ STEVEN G. SEGAL Director
- -----------------------------------------------------
Steven G. Segal
/s/ EDWARD D. YUN Director
- -----------------------------------------------------
Edward D. Yun
/s/ MICHAEL N. CANNIZZARO Director
- -----------------------------------------------------
Michael N. Cannizzaro
/s/ MARK J. TRICOLLI Director
- -----------------------------------------------------
Mark J. Tricolli
/s/ DAVID W. DUPREE Director
- -----------------------------------------------------
David W. Dupree
/s/ KENNETH M. DOYLE Director
- -----------------------------------------------------
Kenneth M. Doyle
</Table>
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
INSIGHT HEALTH SERVICES HOLDINGS CORP.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
/s/ MARK J. TRICOLLI Director
- -----------------------------------------------------
Mark J. Tricolli
/s/ STEVEN G. SEGAL Director
- -----------------------------------------------------
Steven G. Segal
/s/ MICHAEL N. CANNIZZARO Director
- -----------------------------------------------------
Michael N. Cannizzaro
/s/ EDWARD D. YUN Director
- -----------------------------------------------------
Edward D. Yun
/s/ DAVID W. DUPREE Director
- -----------------------------------------------------
David W. Dupree
/s/ KENNETH M. DOYLE Director
- -----------------------------------------------------
Kenneth M. Doyle
</Table>
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
INSIGHT HEALTH CORP.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI
- ----------------------------------------------------- President and Chief Executive Officer and
Steven T. Plochocki sole Director (principal executive officer)
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
SIGNAL MEDICAL SERVICES, INC.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI
- ----------------------------------------------------- President and Chief Executive Officer and
Steven T. Plochocki sole Director (principal executive officer)
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
OPEN MRI, INC.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI
- ----------------------------------------------------- President and Chief Executive Officer and
Steven T. Plochocki sole Director (principal executive officer)
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
MAXUM HEALTH CORP.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI
- ----------------------------------------------------- President and Chief Executive Officer and
Steven T. Plochocki sole Director (principal executive officer)
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
RADIOSURGERY CENTERS, INC.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
MAXUM HEALTH SERVICES CORP.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
MRI ASSOCIATES, L.P.
By: InSight Health Corp., its general
partner
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- --------------------------------------------- sole Director of InSight Health Corp., its
Steven T. Plochocki general partner (principal executive officer)
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- --------------------------------------------- Officer of InSight Health Corp., its general
Thomas V. Croal partner (principal financial and accounting
officer)
</Table>
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
MAXUM HEALTH SERVICES OF NORTH
TEXAS, INC.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
MAXUM HEALTH SERVICES OF DALLAS, INC.
By: /s/ STEVEN T. PLOCHOCKI
--------------------------------------
Name: Steven T. Plochocki
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
NDDC, INC.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
DIAGNOSTIC SOLUTIONS CORP.
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director (principal executive officer)
Steven T. Plochocki
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial and accounting
Thomas V. Croal officer)
</Table>
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Newport Beach,
State of California, on March 22, 2002.
WILKES-BARRE IMAGING, L.L.C.
By: InSight Health Corp., its sole
member and sole manager
By: /s/ STEVEN T. PLOCHOCKI
------------------------------------
Name: Steven T. Plochocki
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities indicated on March 22, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ STEVEN T. PLOCHOCKI President and Chief Executive Officer and
- ----------------------------------------------------- sole Director of InSight Health Corp., its
Steven T. Plochocki sole member and sole manager (principal
executive officer)
/s/ THOMAS V. CROAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer of InSight Health Corp., its sole
Thomas V. Croal member and sole manager (principal financial
and accounting officer)
</Table>
II-22
EXHIBIT INDEX
<Table>
2.1 -- Agreement and Plan of Merger dated as of June 29, 2001, by
and among InSight Health Services Holdings Corp., JWCH
Merger Corp. and InSight, previously filed and incorporated
herein by reference from InSight's Current Report on Form
8-K, filed July 2, 2001.
2.2 -- Amendment No. 1 to Agreement and Plan of Merger dated as of
June 29, 2001, by and among InSight Health Services Holdings
Corp., JWCH Merger Corp. and InSight, previously filed and
incorporated by reference from InSight's Annual Report on
Form 10-K, filed September 14, 2001.
2.3 -- Amendment No. 2 to Agreement and Plan of Merger, dated as of
October 9, 2001, by and among InSight Health Services
Holdings Corp., InSight Health Services Acquisition Corp.
and InSight Health Corp., previously filed and incorporated
herein by reference from InSight's Current Report on Form
8-K, filed October 9, 2001.
2.4 -- Second Amended and Restated Stockholders Agreement, dated as
of February 8, 2002, among InSight Health Services Holdings
Corp., the JWC Holders (as defined therein), the Halifax
Holders (as defined therein), the Management Holders (as
defined therein) and the Additional Holders (as defined
therein), filed herewith.
*2.5 -- Management Agreement, dated as of October 17, 2001, by and
among J.W. Childs Advisors II., L.P., Halifax Genpar, L.P.,
InSight Health Services Holdings Corp. and InSight Health
Services Corp.
*3.1 -- Certificate of Incorporation of InSight, as amended.
*3.2 -- Bylaws of InSight, as amended.
*3.3 -- Certificate of Incorporation of InSight Health Services
Holdings Corp., as amended.
*3.4 -- Bylaws of InSight Health Services Holdings Corp.
*3.5 -- Certificate of Incorporation of InSight Health Corp., as
amended.
*3.6 -- Bylaws of InSight Health Corp., as amended.
*3.7 -- Certificate of Incorporation of Signal Medical Services,
Inc., as amended.
*3.8 -- Bylaws of Signal Medical Services, Inc., as amended.
*3.9 -- Certificate of Incorporation of Open MRI, Inc., as amended.
*3.10 -- Bylaws of Open MRI, Inc.
*3.11 -- Certificate of Incorporation of Maxum Health Corp., as
amended.
*3.12 -- Bylaws of Maxum Health Corp., as amended.
*3.13 -- Certificate of Incorporation of Radiosurgery Centers, Inc.
*3.14 -- Bylaws of Radiosurgery Centers, Inc.
*3.15 -- Certificate of Incorporation of Maxum Health Services Corp.,
as amended.
*3.16 -- Bylaws of Maxum Health Services Corp.
*3.17 -- Certificate of Limited Partnership of MRI Associates, L.P.
*3.18 -- Agreement of Limited Partnership of MRI Associates, L.P.
*3.19 -- Certificate of Incorporation of Maxum Health Services of
North Texas, Inc.
*3.20 -- Bylaws of Maxum Health Services of North Texas, Inc.
*3.21 -- Certificate of Incorporation of Maxum Health Services of
Dallas, Inc.
*3.22 -- Bylaws of Maxum Health Services of Dallas, Inc.
*3.23 -- Certificate of Incorporation of NDDC, Inc.
*3.24 -- Bylaws of NDDC, Inc.
*3.25 -- Certificate of Incorporation of Diagnostic Solutions Corp.,
as amended.
*3.26 -- Bylaws of Diagnostic Solutions Corp.
3.27 -- Certificate of Organization of Wilkes-Barre Imaging, L.L.C.,
filed herewith.
3.28 -- Operating Agreement of Wilkes-Barre Imaging, L.L.C., filed
herewith.
*4.1 -- Indenture with respect to 9 7/8% Senior Subordinated Notes
due 2011 with State Street Bank and Trust Company, N.A., as
Trustee, dated October 30, 2001.
</Table>
<Table>
4.2 -- Supplemental Indenture with respect to Wilkes-Barre Imaging, L.L.C. with State Street Bank and Trust
Company, N.A., dated February 25, 2002, filed herewith.
*4.3 -- Purchase Agreement, dated October 25, 2001 by and among InSight, Banc of America Securities LLC and
First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011.
*4.4 -- Registration Rights Agreement, dated October 30, 2001, by and among InSight, Banc of America Securities
LLC and First Union Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due 2011.
5.1 -- Opinion of Kaye Scholer LLP, filed herewith.
5.2 -- Opinion of Hunton & Williams, filed herewith.
8.1 -- Tax Opinion of Kaye Scholer LLP, filed herewith.
10.1 -- Voting Agreement dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger
Corp., Carlyle Partners II, L.P., Carlyle Partners III, L.P., Carlyle International Partners II, L.P.,
Carlyle International Partners III, L.P., C/S International Partners, State Board of Administration of
Florida, Carlyle Investment Group, L.P., Carlyle-InSight International Partners, L.P., Carlyle-InSight
Partners L.P. and T.C. Group, LLC, previously filed and incorporated herein by reference from InSight's
Current Report on Form 8-K, filed July 2, 2001.
10.2 -- Voting Agreement dated as of July 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger
Corp. and General Electric Company, previously filed and incorporated herein by reference from InSight's
Current Report on Form 8-K, filed July 2, 2001.
10.3 -- Voting Agreement, dated as of June 29, 2001, among InSight Health Services Holdings Corp., JWCH Merger
Corp. and GE Fund, previously filed and incorporated herein by reference from InSight's Current Report
on Form 8-K, filed July 2, 2001.
*10.4 -- Credit Agreement, dated October 17, 2001, by and among InSight, Banc of America Securities LLC and First
Union Securities, LLC.
*10.5 -- Note Purchase Agreement, dated as of October 17, 2001, by and among InSight Health Services Acquisition
Corp., InSight Health Services Corp., InSight Health Services Holdings Corp., the Subsidiary Guarantors
(as defined therein), Banc of America Bridge LLC, and Banc of America Securities LLC.
*10.6 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan.
*10.7 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29,
2001, by and between InSight Health Services Holdings Corp. and Steven T. Plochocki.
*10.8 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29,
2001, by and between InSight Health Services Holdings Corp. and Michael A. Boylan.
*10.9 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29,
2001, by and between InSight Health Services Holdings Corp. and Thomas V. Croal.
*10.10 -- InSight Health Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated June 29,
2001, by and between InSight Health Services Holdings Corp. and Michael S. Madler.
*10.11 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Steven T.
Plochocki.
*10.12 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Patricia
R. Blank.
*10.13 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Michael
A. Boylan.
*10.14 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Thomas V.
Croal.
*10.15 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Brian G.
Drazba.
*10.16 -- Executive Employment Agreement, dated June 29, 2001, between InSight Health Services Corp. and Michael
S. Madler.
</Table>
<Table>
*10.17 -- Executive Employment Agreement, dated December 7, 2001,
between InSight Health Services Corp. and Marilyn U.
MacNiven-Young.
10.18 -- Executive Employment Agreement, dated June 29, 2001, between
InSight Health Services Corp. and Cecilia A. Guastaferro,
filed herewith.
*10.19 -- Form of InSight Health Services Holdings Corp. Performance
Based Option Agreement.
*12.1 -- Computation of ratio of earnings to fixed charges.
*21 -- Subsidiaries of InSight.
23.1 -- Consent of Independent Public Accountants, filed herewith.
23.2 -- Consent of Kaye Scholer LLP, included in Exhibit 5.1 hereto.
23.3 -- Consent of Hunton & Williams, included in Exhibit 5.2
hereto.
25.1 -- Form T-1 Statement regarding eligibility of State Street
Bank and Trust Company, N.A., as Trustee, filed herewith.
99.1 -- Form of Letter of Transmittal, filed herewith.
99.2 -- Form of Notice of Guaranteed Delivery, filed herewith.
99.3 -- Broker Letter, filed herewith.
99.4 -- Client Letter, filed herewith.
</Table>
- ---------------
* Previously filed.