**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

** **

----

 

**FORM 10-Q**

**(MarkOne)**

** **

| **ý**                                                                                                                                                                                                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
| **For  the quarterly period ended March 31, 2002**                                                                                                                                                                           |
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
| **OR**                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
| **o**                                                                                                                                                                                                                        | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
| **For  the transition period  from               to                 ** |
|                                                                                                                                                                                                                         |                                                                                          |   |   |   |
| **Commission  file number 333-75984**                                                                                                                                                                                        |

 

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                        |   | **04-3570028**      |
|-------------------------------------------------------------------------------------|--------|---------------------|
| (State or other  jurisdiction                                                       |   | (I.R.S. Employer    |
| of incorporation or  organization)                                                  |   | Identification No.) |
|                                                                                |   |                |
| **4400  MacArthur Blvd., Suite 800, Newport Beach, CA**                             |   | **92660**           |
| (Address of principal  executive offices)                                           |   | (Zip code)          |
|                                                                                |   |                |
| **(949)  476-0733**                                                                 |
| (Registrant’s telephone  number including area code)                           |
|                                                                                |   |                |
| **N/A**                                                                             |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  o   No  ý

 

 

Indicate thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date: 5,468,764  shares of Common Stock as of May 10, 2002.

 

The number ofpages in this Form 10-Q is 36.

 

 

 

 

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

 

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION |
|------------|-----------------------|
|       |                  |   |
| ITEM 1.    |                  | FINANCIAL STATEMENTS |
|       |                  |   |
|       |                  | Condensed  Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001  (unaudited) |
|       |                  |   |
|       |                  |   |
|       |                  | Condensed  Consolidated Statements of Operations for the nine months ended March 31,  2002, the period from July 1, 2001 through October 17, 2001, and  the nine months ended March 31, 2001 (unaudited) |
|       |                  |   |
|       |                  | Condensed  Consolidated Statements of Income for the three months ended March 31, 2002  and 2001 (unaudited) |
|       |                  |   |
|       |                  | Condensed  Consolidated Statements of Stockholders’ Equity for the period from July 1,  2001 through October 17, 2001, and the nine months ended March 31,  2002 (unaudited) |
|       |                  |   |
|       |                  | Condensed  Consolidated Statements of Cash Flows for the nine months ended March 31,  2002, the period from July 1, 2001 through October 17, the 2001, and nine  months ended March 31, 2001 (unaudited) |
|       |                  |   |
|       |                  | Notes  to Condensed Consolidated Financial Statements |
|       |                  |   |
|       |                  | In accordance with SEC Rule 3-10 of Regulation S-X,  the condensed consolidated financial statements of InSight Health Services  Holdings Corp. (the “Company”) are included herein and separate financial  statements of InSight Health Services Corp. (“InSight”), the Company’s wholly  owned subsidiary, and InSight’s subsidiary guarantors are not included.  Condensed financial data for InSight and  its subsidiary guarantors is included in Note 12 to the Condensed  Consolidated Financial Statements. |
|       |                  |   |
| ITEM 2.    |                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|       |                  |   |
|       |                  |   |
| ITEM 3.    |                  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|       |                  |   |
| PART  II.  | OTHER INFORMATION     |
|       |                  |   |
| ITEM 2.    |                  | CHANGES IN  SECURITIES AND USE OF PROCEEDS |
|       |                  |   |
| SIGNATURES |

 

2

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ITEM 1.  FINANCIALSTATEMENTS

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS****(Unaudited)**

**(Amounts inthousands, except share data)**

 
|                                                                                                                     |   | **Company**   |    | **Predecessor** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------|---------|-----------------|--------|
|                                                                                                                     |   | **March 31,** |    | **June 30,**    |   |
|                                                                                                                     |   | **2002**      |    | **2001**        |   |
| ASSETS                                                                                                                   |   |          |    |            |   |
| CURRENT ASSETS:                                                                                                          |   |          |    |            |   |
| Cash and cash equivalents                                                                                                |   | $             | 30,686  |            | $      | 23,254 |   |
| Trade accounts receivables,  net                                                                                         |   | 44,115        |    | 43,355          |   |
| Other current assets                                                                                                     |   | 10,721        |    | 8,379           |   |
| Total current assets                                                                                                     |   | 85,522        |    | 74,988          |   |
|                                                                                                                     |   |          |    |            |   |
| PROPERTY AND EQUIPMENT, net  of accumulated depreciation and amortization of $14,968 and $87,964, respectively           |   | 156,113       |    | 148,255         |   |
|                                                                                                                     |   |          |    |            |   |
| INVESTMENTS IN PARTNERSHIPS                                                                                              |   | 2,009         |    | 1,783           |   |
| OTHER ASSETS                                                                                                             |   | 21,047        |    | 6,828           |   |
| OTHER INTANGIBLE ASSETS,  net                                                                                            |   | 18,860        |    | -               |   |
| GOODWILL, net                                                                                                            |   | 215,928       |    | 89,202          |   |
|                                                                                                                     |   | $             | 499,479 |            | $      | 321,056 |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                     |   |          |    |            |   |
| CURRENT LIABILITIES:                                                                                                     |   |          |    |            |   |
| Current portion of  equipment, capital leases and other notes                                                            |   | $             | 3,235   |            | $      | 33,862 |   |
| Accounts payable and other  accrued expenses                                                                             |   | 33,293        |    | 24,335          |   |
| Total current liabilities                                                                                                |   | 36,528        |    | 58,197          |   |
|                                                                                                                     |   |          |    |            |   |
| LONG-TERM LIABILITIES:                                                                                                   |   |          |    |            |   |
| Equipment, capital leases  and other notes, less current portion                                                         |   | 375,723       |    | 194,391         |   |
| Other long-term liabilities                                                                                              |   | 3,365         |    | 2,997           |   |
| Total long-term liabilities                                                                                              |   | 379,088       |    | 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, 5,468,764 shares issued and outstanding  at March 31, 2002 |   | 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                                                                                               |   | 87,586        |    | 23,926          |   |
| Accumulated other  comprehensive income                                                                                  |   | 324           |    | -               |   |
| Retained earnings  (accumulated deficit)                                                                                 |   | (4,052        | )       | 4,446           |   |
| Total stockholders' equity                                                                                               |   | 83,863        |    | 65,471          |   |
|                                                                                                                     |   | $             | 499,479 |            | $      | 321,056 |   |

 

The accompanying notes are anintegral part of these condensed consolidated balance sheets.

 

3

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**

**(Amounts in thousands)**

** **
|                                                            |   | **Company**      |   | **Predecessor**  |   | **Predecessor**  |   |
|-----------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                            |   | **Nine  Months** |   | **Period  from** |   | **Nine  Months** |   |
|                                                            |   | **Ended**        |   | **July  1 to**   |   | **Ended**        |   |
|                                                            |   | **March  31,**   |   | **October  17,** |   | **March  31,**   |   |
|                                                            |   | **2002**         |   | **2001**         |   | **2001**         |   |
| REVENUES:                                                       |   |             |   |             |   |             |   |
| Contract services                                               |   | $                | 47,986 |             | $      | 29,767           |   | $ | 78,191 |   |
| Patient services                                                |   | 50,456           |   | 33,693           |   | 79,173           |   |
| Other                                                           |   | 195              |   | 218              |   | 465              |   |
| Total revenues                                                  |   | 98,637           |   | 63,678           |   | 157,829          |   |
|                                                            |   |             |   |             |   |             |   |
| COSTS OF OPERATIONS:                                            |   |             |   |             |   |             |   |
| Costs of services                                               |   | 52,468           |   | 32,197           |   | 81,864           |   |
| Provision for doubtful  accounts                                |   | 1,679            |   | 1,110            |   | 2,659            |   |
| Equipment leases                                                |   | 3,374            |   | 2,557            |   | 6,582            |   |
| Depreciation and  amortization                                  |   | 16,857           |   | 9,823            |   | 30,907           |   |
| Total costs of operations                                       |   | 74,378           |   | 45,687           |   | 122,012          |   |
|                                                            |   |             |   |             |   |             |   |
| Gross profit                                                    |   | 24,259           |   | 17,991           |   | 35,817           |   |
|                                                            |   |             |   |             |   |             |   |
| CORPORATE OPERATING  EXPENSES                                   |   | 4,856            |   | 3,184            |   | 7,981            |   |
|                                                            |   |             |   |             |   |             |   |
| Income from company  operations                                 |   | 19,403           |   | 14,807           |   | 27,836           |   |
|                                                            |   |             |   |             |   |             |   |
| EQUITY IN EARNINGS OF  UNCONSOLIDATED PARTNERSHIPS              |   | 264              |   | 382              |   | 713              |   |
|                                                            |   |             |   |             |   |             |   |
| ACQUISITION RELATED  COMPENSATION CHARGE                        |   | -                |   | (15,616          | )      | -                |   |
|                                                            |   |             |   |             |   |             |   |
| Operating income (loss)                                         |   | 19,667           |   | (427             | )      | 28,549           |   |
|                                                            |   |             |   |             |   |             |   |
| INTEREST EXPENSE, net                                           |   | 16,341           |   | 6,321            |   | 17,672           |   |
|                                                            |   |             |   |             |   |             |   |
| Income (loss) before income  taxes and extraordinary item       |   | 3,326            |   | (6,748           | )      | 10,877           |   |
|                                                            |   |             |   |             |   |             |   |
| PROVISION (BENEFIT) FOR  INCOME TAXES                           |   | 1,330            |   | (2,100           | )      | 1,381            |   |
|                                                            |   |             |   |             |   |             |   |
| Income (loss) before  extraordinary item                        |   | 1,996            |   | (4,648           | )      | 9,496            |   |
|                                                            |   |             |   |             |   |             |   |
| EXTRAORDINARY ITEM - Loss  on debt extinguishment, net of taxes |   | (6,048           | )      | -                |   | -                |   |
|                                                            |   |             |   |             |   |             |   |
| Net income (loss)                                               |   | $                | (4,052 | )                | $      | (4,648           | )      | $ | 9,496 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

4

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME****(Unaudited)**

**(Amountsin thousands)**

 
|                                                            |   | **Company**      |   | **Predecessor**  |   |
|-----------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                            |   | **Three Months** |   | **Three Months** |   |
|                                                            |   | **Ended**        |   | **Ended**        |   |
|                                                            |   | **March 31,**    |   | **March 31,**    |   |
|                                                            |   | **2002**         |   | **2001**         |   |
| REVENUES:                                                       |   |             |   |             |   |
| Contract services                                               |   | $                | 26,926 |             | $      | 26,023 |   |
| Patient services                                                |   | 28,510           |   | 27,670           |   |
| Other                                                           |   | 90               |   | 122              |   |
| Total revenues                                                  |   | 55,526           |   | 53,815           |   |
|                                                            |   |             |   |             |   |
| COSTS OF OPERATIONS:                                            |   |             |   |             |   |
| Costs of services                                               |   | 29,319           |   | 28,218           |   |
| Provision for doubtful  accounts                                |   | 949              |   | 987              |   |
| Equipment leases                                                |   | 1,873            |   | 1,945            |   |
| Depreciation and  amortization                                  |   | 9,034            |   | 9,971            |   |
| Total costs of operations                                       |   | 41,175           |   | 41,121           |   |
|                                                            |   |             |   |             |   |
| Gross profit                                                    |   | 14,351           |   | 12,694           |   |
|                                                            |   |             |   |             |   |
| CORPORATE OPERATING  EXPENSES                                   |   | 2,727            |   | 2,704            |   |
|                                                            |   |             |   |             |   |
| Income from company  operations                                 |   | 11,624           |   | 9,990            |   |
|                                                            |   |             |   |             |   |
| EQUITY IN EARNINGS OF  UNCONSOLIDATED PARTNERSHIPS              |   | 154              |   | 288              |   |
|                                                            |   |             |   |             |   |
| Operating income                                                |   | 11,778           |   | 10,278           |   |
|                                                            |   |             |   |             |   |
| INTEREST EXPENSE, net                                           |   | 8,651            |   | 5,765            |   |
|                                                            |   |             |   |             |   |
| Income before income taxes  and extraordinary item              |   | 3,127            |   | 4,513            |   |
|                                                            |   |             |   |             |   |
| PROVISION FOR INCOME TAXES                                      |   | 1,330            |   | 745              |   |
|                                                            |   |             |   |             |   |
| Income before extraordinary  item                               |   | 1,797            |   | 3,768            |   |
|                                                            |   |             |   |             |   |
| EXTRAORDINARY ITEM - Loss  on debt extinguishment, net of taxes |   | 1,330            |   | -                |   |
|                                                            |   |             |   |             |   |
| Net income                                                      |   | $                | 3,127  |             | $      | 3,768 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**INSIGHTHEALTH SERVICES HOLDINGS CORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY****(Unaudited)**

**(Amounts inthousands, except share data)**

 
|                                                             |   | **Preferred Stock** |   |         |   |         |   | **Additional**   |   | **Other**   |   | **Retained**      |   |              |   |
|------------------------------------------------------------------|--------|---------------------|--------|--------------|--------|--------------|--------|------------------|--------|-------------|--------|-------------------|--------|-------------------|--------|
|                                                             |   | **Series B**        |   | **Series C** |   | **Series D** |   | **Common Stock** |   | **Paid-In** |   | **Comprehensive** |   | **Earnings**      |   |   |   |
|                                                             |   | **Shares**          |   | **Amount**   |   | **Shares**   |   | **Amount**       |   | **Shares**  |   | **Amount**        |   | **Shares**        |   | **Amount** |   | **Capital** |   | **(Loss)** |   | **(Deficit)** |   | **Total** |   |
| Predecessor                                                      |   |                |   |         |   |         |   |             |   |        |   |              |   |              |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JUNE 30, 2001                                         |   | 25,000              |   | $            | 23,923 |         | 27,953 |             | $      | 13,173      |   | -                 |   | $                 | -      |   | 3,011,656 |   | $ | 3 |   | $ | 23,926 |   | $ | - |   | $ | 4,446 |   | $ | 65,471 |   |
| Stock options and warrants exercised                             |   | -                   |   | -            |   | -            |   | -                |   | -           |   | -                 |   | 13,911            |   | - |   | 145 |   | - |   | - |   | 145 |   |
| 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 |   | 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                                      |   | -                   |   | $            | -      |         | -      |             | $      | -           |   | -                 |   | $                 | -      |   | 9,349,227 |   | $ | 65 |   | $ | 76,721 |   | $ | (682 | ) | $ | (202 | ) | $ | 75,902 |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |              |   |   |   |   |   |   |   |   |   |   |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |              |   |   |   | **Additional** |   | **Other** |   |   |   |   |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   | **Common  Stock** |   | **Paid-In** |   | **Comprehensive** |   | **Accumulated** |   |   |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   | **Shares**        |   | **Amount** |   | **Capital** |   | **Income** |   | **Deficit** |   | **Total** |   |
| Company                                                          |   |                |   |         |   |         |   |             |   |        |   |              |   |              |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JUNE 30, 2001                                         |   |                |   |         |   |         |   |             |   |        |   |              |   | -                 |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   |
| Sale of common stock, net of equity issuance costs               |   |                |   |         |   |         |   |             |   |        |   |              |   | 5,461,402         |   | 5 |   | 85,758 |   | - |   | - |   | 85,763 |   |
| Issuance of common stock                                         |   |                |   |         |   |         |   |             |   |        |   |              |   | 7,362             |   | - |   | 133 |   | - |   | - |   | 133 |   |
| Issuance of stock options                                        |   |                |   |         |   |         |   |             |   |        |   |              |   | -                 |   | - |   | 1,695 |   | - |   | - |   | 1,695 |   |
| Other comprehensive income                                       |   |                |   |         |   |         |   |             |   |        |   |              |   | -                 |   | - |   | - |   | 324 |   | - |   | 324 |   |
| Net loss                                                         |   |                |   |         |   |         |   |             |   |        |   |              |   | -                 |   | - |   | - |   | - |   | (4,052 | ) | (4,052 | ) |
| BALANCE AT MARCH 31, 2002                                        |   |                |   |         |   |         |   |             |   |        |   |              |   | 5,468,764         |   | $ | 5 |   | $ | 87,586 |   | $ | 324 |   | $ | (4,052 | ) | $ | 83,863 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

6

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**

**(Amounts in thousands)**

 
|                                                                                      |   | **Company**     |   | **Predecessor** |   | **Predecessor** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------|--------|-----------------|--------|-----------------|--------|
|                                                                                      |   | **Nine Months** |   | **Period from** |   | **Nine Months** |   |
|                                                                                      |   | **Ended**       |   | **July 1 to**   |   | **Ended**       |   |
|                                                                                      |   | **March 31,**   |   | **October 17,** |   | **March 31,**   |   |
|                                                                                      |   | **2002**        |   | **2001**        |   | **2001**        |   |
| OPERATING ACTIVITIES:                                                                     |   |            |   |            |   |            |   |
| Net income (loss)                                                                         |   | $               | (4,052 | )               | $      | (4,648          | )      | $ | 9,496 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |   |            |   |            |   |            |   |
| Extraordinary loss on debt  extinguishment                                                |   | 6,048           |   | -               |   | -               |   |
| Acquisition related  compensation charge                                                  |   | -               |   | 15,616          |   | -               |   |
| Depreciation and  amortization                                                            |   | 16,857          |   | 9,823           |   | 30,907          |   |
| Cash provided by (used in)  changes in operating assets and liabilities:                  |   |            |   |            |   |            |   |
| Trade accounts receivables,  net                                                          |   | 1,618           |   | (2,378          | )      | (4,047          | )      |
| Other current assets                                                                      |   | (2,075          | )      | (3,616          | )      | 941             |   |
| Accounts payable and other  accrued expenses                                              |   | 7,943           |   | 23              |   | 2,015           |   |
| Net cash provided by  operating activities                                                |   | 26,339          |   | 14,820          |   | 39,312          |   |
|                                                                                      |   |            |   |            |   |            |   |
| INVESTING ACTIVITIES:                                                                     |   |            |   |            |   |            |   |
| Purchase of InSight common  stock                                                         |   | (187,722        | )      | -               |   | -               |   |
| Cash acquired in the  Acquisition                                                         |   | 8,429           |   | -               |   | -               |   |
| Additions to property and  equipment                                                      |   | (17,766         | )      | (20,852         | )      | (19,377         | )      |
| Other                                                                                     |   | 847             |   | (740            | )      | (311            | )      |
| Net cash used in investing  activities                                                    |   | (196,212        | )      | (21,592         | )      | (19,688         | )      |
|                                                                                      |   |            |   |            |   |            |   |
| FINANCING ACTIVITIES:                                                                     |   |            |   |            |   |            |   |
| Proceeds from stock options  exercised                                                    |   | -               |   | 145             |   | 172             |   |
| Proceeds from sale of  common stock, net of equity issuance costs                         |   | 85,763          |   | -               |   | -               |   |
| Issuance of common stock                                                                  |   | 133             |   | -               |   | -               |   |
| Payment of deferred loan  fees                                                            |   | (29,499         | )      | -               |   | -               |   |
| Principal payments of debt  and capital lease obligations                                 |   | (430,825        | )      | (8,579          | )      | (23,128         | )      |
| Proceeds from issuance of  debt                                                           |   | 575,000         |   | -               |   | -               |   |
| Other                                                                                     |   | (13             | )      | 381             |   | 869             |   |
| Net cash provided by (used  in) financing activities                                      |   | 200,559         |   | (8,053          | )      | (22,087         | )      |
|                                                                                      |   |            |   |            |   |            |   |
| INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                                         |   | 30,686          |   | (14,825         | )      | (2,463          | )      |
|                                                                                      |   |            |   |            |   |            |   |
| Cash, beginning of period                                                                 |   | -               |   | 23,254          |   | 27,133          |   |
| Cash, end of period                                                                       |   | $               | 30,686 |            | $      | 8,429           |   | $ | 24,670 |   |
|                                                                                      |   |            |   |            |   |            |   |
| SUPPLEMENTAL DISCLOSURE OF  CASH FLOW INFORMATION:                                        |   |            |   |            |   |            |   |
| Interest paid                                                                             |   | $               | 4,605  |            | $      | 6,799           |   | $ | 11,000 |   |
| Income taxes paid                                                                         |   | $               | 84     |            | $      | 943             |   | $ | 199 |   |
| Equipment additions under  capital leases                                                 |   | $               | -      |            | $      | -               |   | $ | 7,404 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

7

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**INSIGHT HEALTH SERVICESHOLDINGS CORP. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

 

 

**1.   ORGANIZATIONAND ACQUISITION**

 

InSight Health Services Holdings Corp. (Company), a Delaware corporation,was incorporated on June 13, 2001 under the name JWC/Halifax HoldingsCorp.   The Company was funded throughan equity contribution from J.W. Childs Equity Partners II, Halifax CapitalPartners and certain of their affiliates. On June 29, 2001, the Company’s name was changed to InSight HealthServices Holdings Corp.  The Company andits former wholly owned subsidiary, InSight Health Services Acquisition Corp.(Acquisition Corp.) were created to acquire all the outstanding shares ofInSight Health Services Corp. (InSight).

 

On October 17, 2001, the Company acquired InSight pursuant to anagreement and plan of merger dated June 29, 2001, as amended, among theCompany, Acquisition Corp. and InSight (the Acquisition).  Acquisition Corp. was merged with and intoInSight, with InSight being the surviving corporation.  The operations of the Company after theAcquisition are substantially the same as the operations of InSight prior tothe Acquisition.  In addition, theCompany has no operations other than its investment in InSight.  As such, InSight is considered thepredecessor to the Company in accordance with Regulation S-X.

 

At the effective time of the Acquisition, InSight became a wholly ownedsubsidiary of the Company.  Pursuant tothe 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 theAcquisition.  Holders of options andwarrants, which prior to the Acquisition were exercisable for InSight commonstock, received the difference between $18.00 and the exercise price of eachshare of common stock the holder could have acquired pursuant to the terms ofthe 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 operationsof InSight.  In addition, certainmembers of senior management rolled a portion of their InSight common stockoptions into stock options of the Company. InSight’s stockholders, option holders and warrant holders receivedaggregate cash consideration of approximately $187.7 million as a result of theAcquisition.

 

Concurrently with the Acquisition, InSight (i) repurchased by tenderoffer all of its 9 5/8% senior subordinated notes due 2008 in an aggregateprincipal amount of $100 million, (ii) repaid its then outstanding seniorcredit facilities and certain other indebtedness and (iii) paid fees andexpenses 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 (subsequently refinanced (Note 10)); 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 ofMarch 31, 2002, the unaudited condensed consolidated statements of operationsfor the nine and three months ended March 31, 2002, and the unaudited condensedconsolidated statement of cash flows for the nine months ended March 31, 2002,reflect the consolidated financial position, results of operations and cashflows of the Company and also include the consolidated financial position,statements of operations and cash flows of InSight from the date of the Acquisitionand include all material adjustments required under purchase accounting.  InSight is considered the predecessor to theCompany in 

 

8

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accordance with Regulation S-X. As such, the historical financial statements of InSight prior to theAcquisition are included in the accompanying unaudited condensed consolidatedfinancial statements, including the condensed consolidated balance sheet as ofJune 30, 2001, the condensed consolidated statements of operations for theperiods from July 1, 2001 to October 17, 2001 and for the nine and three monthsended March 31, 2001, and the condensed consolidated statements of cash flowsfor the period from July 1, 2001 to October 17, 2001 and for the nine monthsended March 31, 2001 (collectively Predecessor financial statements).  The Predecessor financial statements havenot been adjusted to reflect the acquisition of InSight by the Company.  As such, the condensed consolidatedfinancial statements of the Company after the Acquisition are not directlycomparable to the Predecessor financial statements prior to the Acquisition.

 

Unaudited combined results of the Company assuming the Acquisition hadoccurred as of July 1, 2001 are presented below.  These combined results have been prepared for comparativepurposes only and do not purport to be indicative of what operating resultswould have been, and may not be indicative of future operating results (amountsin thousands):

 

 

|                                              |   | **Nine Months Ended** |    |
|---------------------------------------------------|--------|-----------------------|---------|
|                                              |   | **March 31,**         |    |
|                                              |   | **2002**              |    | **2001** |   |
|                                              |   | **(unaudited)**       |    |
| Revenues                                          |   | $                     | 162,315 |   | $ | 157,829 |   |
| Costs of operations                               |   | 120,065               |    | 122,012 |   |
| Gross profit                                      |   | 42,250                |    | 35,817 |   |
| Corporate operating expenses                      |   | 8,040                 |    | 7,981 |   |
| Income from company operations                    |   | 34,210                |    | 27,836 |   |
| Equity in earnings of unconsolidated partnerships |   | 646                   |    | 713 |   |
| Acquisition related compensation charge           |   | (15,616               | )       | - |   |
| Operating income                                  |   | 19,240                |    | 28,549 |   |
| Interest expense                                  |   | 22,662                |    | 17,672 |   |
| Income (loss) before income taxes                 |   | (3,422                | )       | 10,877 |   |
| Provision (benefit) for income taxes              |   | (770                  | )       | 1,381 |   |
| Income (loss) before extraordinary item           |   | $                     | (2,652  | ) | $ | 9,496 |   |
|                                                   |        |                       |         |  |  |  |  |  |

 

**3.   PURCHASEACCOUNTING**

 

The Acquisition was accounted for as a purchase by the Company.  The preliminary purchase accountingadjustments of the Company have been recorded in the accompanying unauditedcondensed consolidated financial statements as of and for any periodssubsequent to October 17, 2001.  Theexcess purchase price paid by the Company over its preliminary estimates of thefair market value of the tangible assets and liabilities of InSight as of thedate of the Acquisition was approximately $235.2 million and is reflected asGoodwill, net and Other Intangible Assets, net in the accompanying unauditedcondensed consolidated balance sheet as of March 31, 2002.  In accordance with Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill andOther Intangible Assets, “ thenew intangible asset balance has been allocated between identifiable intangibleassets and remaining goodwill.  Goodwillwill not be amortized but is subject to an ongoing assessment forimpairment.  The determination of thefair value of assets and liabilities at the Acquisition date as well as theidentification of other intangible assets is continuing, and the finalallocation may be significantly different. A summary of the assets acquired and liabilities assumed in theAcquisition follows (amounts in thousands):

 

| 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 |   |

 

 

9

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The net book valueof other intangible assets and their estimated useful lives are as follows(amounts in thousands):

 

| Trademark | $      | 8,680  |    | Indefinite Life |   |
|-----------|--------|--------|---------|-----------------|--------|
| Contracts | 11,180 |   | 5 Years |            |

 

**4.  NATURE OF BUSINESS**

 

The Company, through InSight and its consolidated subsidiaries,provides diagnostic imaging, treatment and related management services in 28states throughout the United States. The Company has two reportable segments:  Mobile Division and Fixed-Site Division.  The Company’s services are provided througha network of 85 mobile magnetic resonance imaging (MRI) facilities, sevenmobile positron emission tomography (PET) facilities, four mobile lithotripsyfacilities (collectively, Mobile Facilities), 40 fixed–site MRIfacilities (Fixed Facilities), 27 multi–modality imaging centers(Centers), one Leksell Stereotactic Gamma Knife treatment center, one PET FixedFacility, and one radiation oncology center. An additional radiation oncology center is operated by the Company aspart of one of its Centers.  The Companyhas 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 additionto 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 unauditedcondensed consolidated financial statements of the Company and Predecessorincluded herein have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial statements and donot include all of the information and disclosures required by accountingprinciples generally accepted in the United States for annual financialstatements.  These financial statementsshould be read in conjunction with the consolidated financial statements andrelated footnotes included as part of the Predecessor’s Annual Report on Form10-K for the period ended June 30, 2001 filed with the Securities and ExchangeCommission (SEC) on October 14, 2001. In the opinion of management, all adjustments (consisting of normalrecurring accruals) necessary for fair presentation of results for the periodhave been included.  The results ofoperations for the periods ended March 31, 2002 are not necessarily indicativeof the results to be achieved for the full fiscal year.

 

Certainreclassifications have been made to conform prior year amounts to the currentyear presentation.

 

**6. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS**

 

The unaudited condensed consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries.  The Company’s investment interests inpartnerships or limited liability companies (Partnerships) are accounted forunder the equity method of accounting for ownership of 50 percent or less whenthe Company does not exercise significant control over the operations of thePartnerships and does not have primary responsibility for the Partnerships’long-term debt.  The Company’s investmentinterests in Partnerships are consolidated for ownership of 50 percent ownedentities when the Company exercises significant control over the operations andis primarily responsible for the associated long-term debt.   Total assets and revenues as of and for thenine months ended March 31, 2002 for the Company’s 50 percent controlled entitywhich is consolidated were approximately $2.1 million and $4.4 million,respectively.

 

**7.  SEGMENT INFORMATION**

 

Effective for the quarter ended March 31, 2002, the Company changed itssegment reporting to conform to a modified internal management structure.  The new reportable segments are MobileDivision and Fixed-Site Division, which are business units defined primarily bythe type of service provided.  Thesesegments replaced the Western Division and the Eastern Division, which werebusiness units defined by management’s division of 

 

10

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responsibility, based on geographic area, between two executive vicepresidents.  The Mobile Divisionoperates primarily Mobile Facilities while the Fixed-Site Division operatesprimarily Centers and Fixed Facilities. The Company does not allocate income taxes to the two Divisions.  The Company manages cash flows and assets ona consolidated basis, and not by segment, and does not allocate or reportassets and capital expenditures by segment. Prior period information has been restated to reflect the change insegments.

 

The following tables summarize the operating results by segment(amounts in thousands)(unaudited):

 
| Company                                             |   |       |   |           |   |      |   |             |   |
|-----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Nine  months ended March 31, 2002:                  |   |       |   |           |   |      |   |             |   |
|                                                |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
| Contract services revenues                          |   | $          | 38,168 |           | $      | 6,709     |   | $                | 3,109  |   | $ | 47,986 |   |
| Patient services revenues                           |   | 4,841      |   | 45,615         |   | -         |   | 50,456           |   |
| Other revenues                                      |   | 128        |   | 87             |   | (20       | )      | 195              |   |
| Total revenues                                      |   | 43,137     |   | 52,411         |   | 3,089     |   | 98,637           |   |
|                                                |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                      |   | 7,177      |   | 6,496          |   | 3,184     |   | 16,857           |   |
| Total costs of operations                           |   | 30,931     |   | 37,313         |   | 6,134     |   | 74,378           |   |
| Equity in earnings of  unconsolidated partnerships  |   | 160        |   | 104            |   | -         |   | 264              |   |
| Operating income (loss)                             |   | 12,366     |   | 15,202         |   | (7,901    | )      | 19,667           |   |
| Interest expense, net                               |   | 4,007      |   | 3,796          |   | 8,538     |   | 16,341           |   |
| Income (loss) before income  taxes                  |   | 8,359      |   | 11,406         |   | (16,439   | )      | 3,326            |   |
|                                                |   |       |   |           |   |      |   |             |   |
| Predecessor                                         |   |       |   |           |   |      |   |             |   |
| Period from July 1, 2001  through October 17, 2001: |   |       |   |           |   |      |   |             |   |
|                                                |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
| Contract services revenues                          |   | $          | 24,001 |           | $      | 3,820     |   | $                | 1,946  |   | $ | 29,767 |   |
| Patient services revenues                           |   | 3,402      |   | 30,291         |   | -         |   | 33,693           |   |
| Other revenues                                      |   | 92         |   | 88             |   | 38        |   | 218              |   |
| Total revenues                                      |   | 27,495     |   | 34,199         |   | 1,984     |   | 63,678           |   |
|                                                |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                      |   | 4,542      |   | 3,915          |   | 1,366     |   | 9,823            |   |
| Total costs of operations                           |   | 18,536     |   | 23,598         |   | 3,553     |   | 45,687           |   |
| Equity in earnings of  unconsolidated partnerships  |   | 218        |   | 164            |   | -         |   | 382              |   |
| Acquisition related  compensation charge            |   | -          |   | -              |   | (15,616   | )      | (15,616          | )      |
| Operating income (loss)                             |   | 9,177      |   | 10,765         |   | (20,369   | )      | (427             | )      |
| Interest expense, net                               |   | 2,586      |   | 2,317          |   | 1,418     |   | 6,321            |   |
| Income (loss) before income  taxes                  |   | 6,591      |   | 8,448          |   | (21,787   | )      | (6,748           | )      |
|                                                |   |       |   |           |   |      |   |             |   |
| Predecessor                                         |   |       |   |           |   |      |   |             |   |
| Nine months ended March 31,  2001:                  |   |       |   |           |   |      |   |             |   |
|                                                |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
| Contract services revenues                          |   | $          | 63,051 |           | $      | 9,694     |   | $                | 5,446  |   | $ | 78,191 |   |
| Patient services revenues                           |   | 8,384      |   | 70,994         |   | (205      | )      | 79,173           |   |
| Other revenues                                      |   | 148        |   | 131            |   | 186       |   | 465              |   |
| Total revenues                                      |   | 71,583     |   | 80,819         |   | 5,427     |   | 157,829          |   |
|                                                |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                      |   | 14,008     |   | 11,918         |   | 4,981     |   | 30,907           |   |
| Total costs of operations                           |   | 50,320     |   | 60,087         |   | 11,605    |   | 122,012          |   |
| Equity in earnings of  unconsolidated partnerships  |   | 737        |   | (24            | )      | -         |   | 713              |   |
| Operating income (loss)                             |   | 22,000     |   | 20,708         |   | (14,159   | )      | 28,549           |   |
| Interest expense, net                               |   | 7,074      |   | 6,377          |   | 4,221     |   | 17,672           |   |
| Income (loss) before income  taxes                  |   | 14,926     |   | 14,331         |   | (18,380   | )      | 10,877           |   |

 

11

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| Company                                            |   |       |   |           |   |      |   |             |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Three months ended March  31, 2002:                |   |       |   |           |   |      |   |             |   |
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
| Contract services revenues                         |   | $          | 21,030 |           | $      | 4,081     |   | $                | 1,815  |   | $ | 26,926 |   |
| Patient services revenues                          |   | 2,742      |   | 25,768         |   | -         |   | 28,510           |   |
| Other revenues                                     |   | 99         |   | 40             |   | (49       | )      | 90               |   |
| Total revenues                                     |   | 23,871     |   | 29,889         |   | 1,766     |   | 55,526           |   |
|                                               |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                     |   | 3,822      |   | 3,425          |   | 1,787     |   | 9,034            |   |
| Total costs of operations                          |   | 17,319     |   | 20,620         |   | 3,236     |   | 41,175           |   |
| Equity in earnings of  unconsolidated partnerships |   | 98         |   | 56             |   | -         |   | 154              |   |
| Operating income (loss)                            |   | 6,650      |   | 9,325          |   | (4,197    | )      | 11,778           |   |
| Interest expense, net                              |   | 2,127      |   | 2,095          |   | 4,429     |   | 8,651            |   |
| Income (loss) before income  taxes                 |   | 4,523      |   | 7,230          |   | (8,626    | )      | 3,127            |   |
|                                               |   |       |   |           |   |      |   |             |   |
| Predecessor                                        |   |       |   |           |   |      |   |             |   |
| Three months ended March  31, 2001:                |   |       |   |           |   |      |   |             |   |
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
| Contract services revenues                         |   | $          | 21,144 |           | $      | 3,177     |   | $                | 1,702  |   | $ | 26,023 |   |
| Patient services revenues                          |   | 2,799      |   | 24,871         |   | -         |   | 27,670           |   |
| Other revenues                                     |   | 42         |   | 53             |   | 27        |   | 122              |   |
| Total revenues                                     |   | 23,985     |   | 28,101         |   | 1,729     |   | 53,815           |   |
|                                               |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                     |   | 4,508      |   | 3,866          |   | 1,597     |   | 9,971            |   |
| Total costs of operations                          |   | 16,956     |   | 20,641         |   | 3,524     |   | 41,121           |   |
| Equity in earnings of  unconsolidated partnerships |   | 274        |   | 14             |   | -         |   | 288              |   |
| Operating income (loss)                            |   | 7,303      |   | 7,474          |   | (4,499    | )      | 10,278           |   |
| Interest expense, net                              |   | 2,296      |   | 2,134          |   | 1,335     |   | 5,765            |   |
| Income (loss) before income  taxes                 |   | 5,007      |   | 5,340          |   | (5,834    | )      | 4,513            |   |

 

**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 recognizeall derivatives as either assets or liabilities in the statement of financialcondition and measure those instruments at fair value.  Under SFAS 133 an entity may designate aderivative as a hedge of exposure to either changes in:  (a) the fair value of a recognized asset orliability or firm commitment, (b) cash flows of a recognized or forecastedtransaction, or (c) foreign currencies of a net investment in foreignoperations, firm commitments, available-for-sale securities or a forecastedtransaction.  Additionally, anyineffective portion of the hedging transaction is recorded currently in netincome with the remainder deferred in accumulated other comprehensive income(loss).

 

The Company has established policies and procedures to permit limitedtypes and amounts of off-balance sheet hedges to help manage interest raterisk.  InSight had entered into aninterest rate swap to pay a fixed rate of interest to the counterparty andreceived a floating rate of interest and had designated the interest rate swapas a cash flow hedge of its floating rate debt.  Such swaps have the effect of converting variable rate borrowingsinto fixed rate borrowings.

 

Subsequent to the Acquisition, the Company re-designated the acquiredswap as a cash flow hedge and established a new hedging relationship with thenew senior credit facilities.  At March31, 2002, the notional amount of this swap was $35.5 million with a fair valueloss of approximately $1.1 million.  Thefair value of the swap at the time of the Acquisition  represents hedge ineffectiveness that will be recognized in netincome over the remaining life of the swap. Approximately $415,000 of hedge ineffectiveness was recognized as areduction to interest expense for the period ended March 31, 2002.

** **

12

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**9.   COMPREHENSIVE INCOME (LOSS)**

 

Components ofcomprehensive income are changes in equity other than those resulting frominvestments by owners and distributions to owners. Net income (loss) is theprimary component of comprehensive income. For the Company, the only componentof comprehensive income other than net income (loss) is the change inunrealized gain or loss on derivatives qualifying for hedge accounting, net oftax. The aggregate amount of such changes to equity that have not yet beenrecognized in net income are reported in the equity portion of the condensedconsolidated balance sheets as accumulated other comprehensive income (loss).

 

**10.  DEBT**

 

On October 17,2001, in connection with the Acquisition, InSight repurchased by tender offerall of its 9 5/8% senior subordinated notes due 2008 in an aggregate principalamount of $100 million and repaid its then outstanding credit facilities andcertain other indebtedness.

 

On October 30,2001, the Company, through InSight, its wholly owned subsidiary, issued new 97/8% senior subordinated notes due 2011 (Notes) in the aggregate principalamount of $225 million.  The netproceeds from the issuance of the Notes was approximately $211.5 million, $200million of which was used to retire in full the senior subordinated bridgefinancing and the balance of which is being used for general corporatepurposes.  As a result, an extraordinaryloss of approximately $7.4 million was recorded related to the write-off ofassociated debt issuance costs.

 

On December 27,2001 the Company filed a registration statement on Form S-4 with the SEC toregister an offer to exchange all of the outstanding Notes for new notesregistered under the Securities Act of 1933, as amended.  The registration statement became effectiveon April 2, 2002.  The terms of theexchange notes to be issued in the exchange offer are substantially identicalto the Notes; however the exchange notes will be freely tradeable, except inlimited circumstances.  The exchangeoffer expired on May 10, 2002, at which time 100% of the outstanding Notes hadbeen tendered and not withdrawn.

 

**11.  NEW PRONOUNCEMENTS**

 

In June 2001, the FASB issued two new pronouncements:  SFAS No. 141, “Business Combinations, “ andSFAS No. 142, “Goodwill and Other Intangible Assets. “   SFAS 141 applies to all businesscombinations with a closing date after June 30, 2001.  SFAS 141 eliminates the pooling-of-interests method of accountingand further clarifies the criteria for recognition of intangible assetsseparately from goodwill.  InSightadopted SFAS 141, effective July 1, 2001.

 

In accordance with SFAS 141, the Company engaged a valuation specialistto assist the Company in identifying acquired intangible assets, theirrespective fair values and amortization period related to the Acquisition.  The Company has made a tentative allocationof values to these identifiable intangible assets based on preliminaryestimates (Note 3).  The finalallocation of goodwill and other intangible assets may differ significantlyfrom current estimates.

 

SFAS 142 eliminates the amortization of goodwill, permitsindefinite-lived intangible assets and initiates an annual review forimpairment.  Identifiable intangibleassets 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 netgoodwill balance and to perform a transitional goodwill impairment test of July1, 2001, and thereafter an impairment test at least annually.  Impairment results when the fair value ofInSight’s reporting segments, including goodwill, is less than its carryingvalue.  SFAS 142 permits nine monthsfrom the adoption date to complete a review of goodwill for impairment andrecord necessary adjustments prior to the end of fiscal 2002.  InSight concluded that the book value ofgoodwill was not impaired as of July 1, 2001.

 

In August 2001,the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  SFAS 144 addressesfinancial accounting and reporting for the impairment or disposal of long-lived

 

13

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assets.  SFAS 144 supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of, “ and the accounting and reporting provisions of APB OpinionNo. 30, “Reporting the Results of Operations — Reporting the Effects andTransactions, “ for the disposal of a segment of a business (as previouslydefined in that Opinion).  Theprovisions of SFAS 144 are effective for financial statements issued for fiscalyears beginning after December 15, 2001 (with earlier application beingencouraged) and generally are to be applied prospectively.  The Company does not expect the adoption ofSFAS 144 to have a material impact on the Company’s financial condition andresults of operations.

 

**12.  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

The Notes issuedon October 30, 2001 by InSight, the Company’s wholly owned subsidiary, and theexchange notes to be issued in the exchange offer, are or will be guaranteed bythe Company (Parent Company) and all of InSight’s wholly owned subsidiaries(Guarantor Subsidiaries).  Theseguarantees are full, unconditional, joint and several.  The following condensed consolidatingfinancial information has been prepared and presented pursuant to SECRegulation S-X Rule 3-10 “Financial statements of guarantors and issuers ofguaranteed securities registered or being registered. “  This information is not intended to presentthe financial position, results of operations and cash flows of the individualcompanies or groups of companies in accordance with accounting principlesgenerally accepted in the United States.

 

14

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)**

**MARCH 31,2002**

**(Amounts inthousands)**

**(Company)**

 

 
|                                                             |   | **PARENT**  |   |        |   |             |   | **NON-**         |    |             |   |             |   |
|------------------------------------------------------------------|--------|-------------|--------|-------------|--------|------------------|--------|------------------|---------|------------------|--------|------------------|--------|
|                                                             |   | **COMPANY** |   |        |   | **GUARANTOR**    |   | **GUARANTOR**    |    |             |   |             |   |
|                                                             |   | **ONLY**    |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES** |    | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
| ASSETS                                                           |   |        |   |        |   |             |   |             |    |             |   |             |   |
| Current assets:                                                  |   |        |   |        |   |             |   |             |    |             |   |             |   |
| Cash and cash equivalents                                        |   | $           | -      |        | $      | -                |   | $                | 27,687  |             | $      | 2,999            |   | $ | - |   | $ | 30,686 |   |
| Trade accounts receivables,  net                                 |   | -           |   | -           |   | 35,044           |   | 9,071            |    | -                |   | 44,115           |   |
| Other current assets                                             |   | -           |   | -           |   | 10,544           |   | 177              |    | -                |   | 10,721           |   |
| Intercompany accounts  receivable                                |   | 87,915      |   | 375,750     |   | 24,693           |   | -                |    | (488,358         | )      | -                |   |
| Total current assets                                             |   | 87,915      |   | 375,750     |   | 97,968           |   | 12,247           |    | (488,358         | )      | 85,522           |   |
| Property and equipment, net                                      |   | -           |   | -           |   | 134,303          |   | 21,810           |    | -                |   | 156,113          |   |
| Investments in partnerships                                      |   | -           |   | -           |   | 2,009            |   | -                |    | -                |   | 2,009            |   |
| Investments in consolidated  subsidiaries                        |   | (4,052      | )      | (4,052      | )      | 8,824            |   | -                |    | (720             | )      | -                |   |
| Other assets                                                     |   | -           |   | -           |   | 21,047           |   | -                |    | -                |   | 21,047           |   |
| Goodwill and other  intangible assets, net                       |   | -           |   | -           |   | 230,008          |   | 4,780            |    | -                |   | 234,788          |   |
|                                                             |   | $           | 83,863 |        | $      | 371,698          |   | $                | 494,159 |             | $      | 38,837           |   | $ | (489,078 | ) | $ | 499,479 |   |
|                                                             |   |        |   |        |   |             |   |             |    |             |   |             |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                             |   |        |   |        |   |             |   |             |    |             |   |             |   |
| Current liabilities:                                             |   |        |   |        |   |             |   |             |    |             |   |             |   |
| Current portion of  equipment, capital leases and other notes    |   | $           | -      |        | $      | 1,500            |   | $                | 1,475   |             | $      | 260              |   | $ | - |   | $ | 3,235 |   |
| Accounts payable and other  accrued expenses                     |   | -           |   | -           |   | 32,222           |   | 1,071            |    | -                |   | 33,293           |   |
| Intercompany accounts  payable                                   |   | -           |   | -           |   | 463,665          |   | 24,693           |    | (488,358         | )      | -                |   |
| Total current liabilities                                        |   | -           |   | 1,500       |   | 497,362          |   | 26,024           |    | (488,358         | )      | 36,528           |   |
| Equipment, capital leases  and other notes, less current portion |   | -           |   | 374,250     |   | 398              |   | 1,075            |    | -                |   | 375,723          |   |
| Other long-term liabilities                                      |   | -           |   | -           |   | 451              |   | 2,914            |    | -                |   | 3,365            |   |
| Stockholders' equity  (deficit)                                  |   | 83,863      |   | (4,052      | )      | (4,052           | )      | 8,824            |    | (720             | )      | 83,863           |   |
|                                                             |   | $           | 83,863 |        | $      | 371,698          |   | $                | 494,159 |             | $      | 38,837           |   | $ | (489,078 | )  | $ | 499,479 |   |

 

 

15

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)**

**JUNE 30,2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                             |   |        |    | **GUARANTOR**    |   | **NON-GUARANTOR** |   |             |   |             |   |
|------------------------------------------------------------------|--------|-------------|---------|------------------|--------|-------------------|--------|------------------|--------|------------------|--------|
|                                                             |   | **INSIGHT** |    | **SUBSIDIARIES** |   | **SUBSIDIARIES**  |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
| ASSETS                                                           |   |        |    |             |   |              |   |             |   |             |   |
| Current assets:                                                  |   |        |    |             |   |              |   |             |   |             |   |
| Cash and cash equivalents                                        |   | $           | -       |             | $      | 20,027            |   | $                | 3,227  |             | $      | - |   | $ | 23,254 |   |
| Trade accounts receivables,  net                                 |   | -           |    | 34,873           |   | 8,482             |   | -                |   | 43,355           |   |
| Other current assets                                             |   | -           |    | 8,338            |   | 41                |   | -                |   | 8,379            |   |
| Intercompany accounts  receivable                                |   | 239,635     |    | 22,351           |   | -                 |   | (261,986         | )      | -                |   |
| Total current assets                                             |   | 239,635     |    | 85,589           |   | 11,750            |   | (261,986         | )      | 74,988           |   |
| Property and equipment, net                                      |   | -           |    | 128,578          |   | 19,677            |   | -                |   | 148,255          |   |
| Investments in partnerships                                      |   | -           |    | 1,783            |   | -                 |   | -                |   | 1,783            |   |
| Investments in consolidated  subsidiaries                        |   | (3,501      | )       | 7,946            |   | -                 |   | (4,445           | )      | -                |   |
| Other assets                                                     |   | -           |    | 6,828            |   | -                 |   | -                |   | 6,828            |   |
| Goodwill, net                                                    |   | -           |    | 84,358           |   | 4,844             |   | -                |   | 89,202           |   |
|                                                             |   | $           | 236,134 |             | $      | 315,082           |   | $                | 36,271 |             | $      | (266,431 | ) | $ | 321,056 |   |
|                                                             |   |        |    |             |   |              |   |             |   |             |   |
| LIABILITIES AND  STOCKHOLDERS' EQUITY                            |   |        |    |             |   |              |   |             |   |             |   |
| Current liabilities:                                             |   |        |    |             |   |              |   |             |   |             |   |
| Current portion of  equipment, capital leases and other notes    |   | $           | 20,810  |             | $      | 12,407            |   | $                | 645    |             | $      | - |   | $ | 33,862 |   |
| Accounts payable and other  accrued expenses                     |   | -           |    | 23,241           |   | 1,094             |   | -                |   | 24,335           |   |
| Intercompany accounts  payable                                   |   | -           |    | 239,635          |   | 22,351            |   | (261,986         | )      | -                |   |
| Total current liabilities                                        |   | 20,810      |    | 275,283          |   | 24,090            |   | (261,986         | )      | 58,197           |   |
| Equipment, capital leases  and other notes, less current portion |   | 149,853     |    | 42,728           |   | 1,810             |   | -                |   | 194,391          |   |
| Other long-term liabilities                                      |   | -           |    | 572              |   | 2,425             |   | -                |   | 2,997            |   |
| Stockholders' equity  (deficit)                                  |   | 65,471      |    | (3,501           | )      | 7,946             |   | (4,445           | )      | 65,471           |   |
|                                                             |   | $           | 236,134 |             | $      | 315,082           |   | $                | 36,271 |             | $      | (266,431 | ) | $ | 321,056 |   |

 

 

16

----

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)**

**FOR THE NINEMONTHS ENDED MARCH 31, 2002**

**(Amounts inthousands)**

**(Company)**

 
|                                                                       |   | **PARENT**  |   |        |   |             |   | **NON-**         |   |            |   |             |   |
|----------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|------------------|--------|------------------|--------|-----------------|--------|------------------|--------|
|                                                                       |   | **COMPANY** |   |        |   | **GUARANTOR**    |   | **GUARANTOR**    |   |            |   |             |   |
|                                                                       |   | **ONLY**    |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Revenues                                                                   |   | $           | -      |        | $      | -                |   | $                | 82,111 |            | $      | 16,526           |   | $ | - |   | $ | 98,637 |   |
| Costs of operations                                                        |   | -           |   | -           |   | 61,054           |   | 13,324           |   | -               |   | 74,378           |   |
| Gross profit                                                               |   | -           |   | -           |   | 21,057           |   | 3,202            |   | -               |   | 24,259           |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Corporate operating  expenses                                              |   | -           |   | -           |   | 4,856            |   | -                |   | -               |   | 4,856            |   |
| Income from company  operations                                            |   | -           |   | -           |   | 16,201           |   | 3,202            |   | -               |   | 19,403           |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Equity in earnings of  unconsolidated partnerships                         |   | -           |   | -           |   | 264              |   | -                |   | -               |   | 264              |   |
| Operating income                                                           |   | -           |   | -           |   | 16,465           |   | 3,202            |   | -               |   | 19,667           |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Interest expense, net                                                      |   | -           |   | -           |   | 15,456           |   | 885              |   | -               |   | 16,341           |   |
| Income before income taxes                                                 |   | -           |   | -           |   | 1,009            |   | 2,317            |   | -               |   | 3,326            |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Provision for income taxes                                                 |   | -           |   | -           |   | 1,330            |   | -                |   | -               |   | 1,330            |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Income (loss) before equity  in income (loss) of consolidated subsidiaries |   | -           |   | -           |   | (321             | )      | 2,317            |   | -               |   | 1,996            |   |
| Equity in income (loss) of  consolidated subsidiaries                      |   | (4,052      | )      | (4,052      | )      | 2,317            |   | -                |   | 5,787           |   | -                |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Income (loss) before  extraordinary item                                   |   | (4,052      | )      | (4,052      | )      | 1,996            |   | 2,317            |   | 5,787           |   | 1,996            |   |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Extraordinary item - loss  on debt extinguishment, net                     |   | -           |   | -           |   | (6,048           | )      | -                |   | -               |   | (6,048           | )      |
|                                                                       |   |        |   |        |   |             |   |             |   |            |   |             |   |
| Net income (loss)                                                          |   | $           | (4,052 | )           | $      | (4,052           | )      | $                | (4,052 | )               | $      | 2,317            |   | $ | 5,787 |   | $ | (4,052 | ) |

 

 

17

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)**

**FOR THEPERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                                |   |        |   | **GUARANTOR**    |   | **NON-GUARANTOR** |   |            |   |             |   |
|---------------------------------------------------------------------|--------|-------------|--------|------------------|--------|-------------------|--------|-----------------|--------|------------------|--------|
|                                                                |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES**  |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Revenues                                                            |   | $           | -      |             | $      | 50,352            |   | $               | 13,326 |             | $      | - |   | $ | 63,678 |   |
| Costs of operations                                                 |   | -           |   | 35,316           |   | 10,371            |   | -               |   | 45,687           |   |
| Gross profit                                                        |   | -           |   | 15,036           |   | 2,955             |   | -               |   | 17,991           |   |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Corporate operating  expenses                                       |   | -           |   | 3,184            |   | -                 |   | -               |   | 3,184            |   |
| Income from company  operations                                     |   | -           |   | 11,852           |   | 2,955             |   | -               |   | 14,807           |   |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Equity in earnings of  unconsolidated partnerships                  |   | -           |   | 382              |   | -                 |   | -               |   | 382              |   |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Acquisition related  compensation charge                            |   | -           |   | (15,616          | )      | -                 |   | -               |   | (15,616          | )      |
| Operating income (loss)                                             |   | -           |   | (3,382           | )      | 2,955             |   | -               |   | (427             | )      |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Interest expense, net                                               |   | -           |   | 5,647            |   | 674               |   | -               |   | 6,321            |   |
| Income (loss) before income  taxes                                  |   | -           |   | (9,029           | )      | 2,281             |   | -               |   | (6,748           | )      |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Provision (benefit) for  income taxes                               |   | -           |   | (2,100           | )      | -                 |   | -               |   | (2,100           | )      |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Income (loss) before equity  in income of consolidated subsidiaries |   | -           |   | (6,929           | )      | 2,281             |   | -               |   | (4,648           | )      |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Equity in income (loss) of  consolidated subsidiaries               |   | (4,648      | )      | 2,281            |   | -                 |   | 2,367           |   | -                |   |
|                                                                |   |        |   |             |   |              |   |            |   |             |   |
| Net income (loss)                                                   |   | $           | (4,648 | )                | $      | (4,648            | )      | $               | 2,281  |             | $      | 2,367 |   | $ | (4,648 | ) |

 

18

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)**

**FOR THE NINEMONTHS ENDED MARCH 31, 2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                         |   |        |   | **GUARANTOR**    |   | **NON-GUARANTOR** |   |            |   |             |   |
|--------------------------------------------------------------|--------|-------------|--------|------------------|--------|-------------------|--------|-----------------|--------|------------------|--------|
|                                                         |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES**  |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Revenues                                                     |   | $           | -      |             | $      | 130,582           |   | $               | 27,247 |             | $      | - |   | $ | 157,829 |   |
| Costs of operations                                          |   | -           |   | 100,231          |   | 21,781            |   | -               |   | 122,012          |   |
| Gross profit                                                 |   | -           |   | 30,351           |   | 5,466             |   | -               |   | 35,817           |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Corporate operating  expenses                                |   | -           |   | 7,981            |   | -                 |   | -               |   | 7,981            |   |
| Income from company  operations                              |   | -           |   | 22,370           |   | 5,466             |   | -               |   | 27,836           |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Equity in earnings of  unconsolidated partnerships           |   | -           |   | 713              |   | -                 |   | -               |   | 713              |   |
| Operating income                                             |   | -           |   | 23,083           |   | 5,466             |   | -               |   | 28,549           |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Interest expense, net                                        |   | -           |   | 16,068           |   | 1,604             |   | -               |   | 17,672           |   |
| Income before income taxes                                   |   | -           |   | 7,015            |   | 3,862             |   | -               |   | 10,877           |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Provision for income taxes                                   |   | -           |   | 1,381            |   | -                 |   | -               |   | 1,381            |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Income before equity in  income of consolidated subsidiaries |   | -           |   | 5,634            |   | 3,862             |   | -               |   | 9,496            |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Equity in income of  consolidated subsidiaries               |   | 9,496       |   | 3,862            |   | -                 |   | (13,358         | )      | -                |   |
|                                                         |   |        |   |             |   |              |   |            |   |             |   |
| Net income                                                   |   | $           | 9,496  |             | $      | 9,496             |   | $               | 3,862  |             | $      | (13,358 | ) | $ | 9,496 |   |

 

19

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)**

**FOR THETHREE MONTHS ENDED MARCH 31, 2002**

**(Amounts inthousands)**

**(Company)**

** **
|                                                         |   | **PARENT**  |   |        |   |             |   | **NON-**         |   |            |    |             |   |
|--------------------------------------------------------------|--------|-------------|--------|-------------|--------|------------------|--------|------------------|--------|-----------------|---------|------------------|--------|
|                                                         |   | **COMPANY** |   |        |   | **GUARANTOR**    |   | **GUARANTOR**    |   |            |    |             |   |
|                                                         |   | **ONLY**    |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES** |   | **ELIMINATION** |    | **CONSOLIDATED** |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Revenues                                                     |   | $           | -      |        | $      | -                |   | $                | 45,138 |            | $       | 10,388           |   | $ | - |   | $ | 55,526 |   |
| Costs of operations                                          |   | -           |   | -           |   | 32,848           |   | 8,327            |   | -               |    | 41,175           |   |
| Gross profit                                                 |   | -           |   | -           |   | 12,290           |   | 2,061            |   | -               |    | 14,351           |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Corporate operating  expenses                                |   | -           |   | -           |   | 2,727            |   | -                |   | -               |    | 2,727            |   |
| Income from company  operations                              |   | -           |   | -           |   | 9,563            |   | 2,061            |   | -               |    | 11,624           |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Equity in earnings of  unconsolidated partnerships           |   | -           |   | -           |   | 154              |   | -                |   | -               |    | 154              |   |
| Operating income                                             |   | -           |   | -           |   | 9,717            |   | 2,061            |   | -               |    | 11,778           |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Interest expense, net                                        |   | -           |   | -           |   | 8,113            |   | 538              |   | -               |    | 8,651            |   |
| Income before income taxes                                   |   | -           |   | -           |   | 1,604            |   | 1,523            |   | -               |    | 3,127            |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Provision for income taxes                                   |   | -           |   | -           |   | 1,330            |   | -                |   | -               |    | 1,330            |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Income before equity in  income of consolidated subsidiaries |   | -           |   | -           |   | 274              |   | 1,523            |   | -               |    | 1,797            |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Equity in income of  consolidated subsidiaries               |   | 3,127       |   | 3,127       |   | 1,523            |   | -                |   | (7,777          | )  | -                |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Income before extraordinary  item                            |   | 3,127       |   | 3,127       |   | 1,797            |   | 1,523            |   | (7,777          | )       | 1,797            |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Extraordinary item - loss  on debt extinguishment, net       |   | -           |   | -           |   | 1,330            |   | -                |   | -               |    | 1,330            |   |
|                                                         |   |        |   |        |   |             |   |             |   |            |    |             |   |
| Net income                                                   |   | $           | 3,127  |        | $      | 3,127            |   | $                | 3,127  |            | $       | 1,523            |   | $ | (7,777 | ) | $ | 3,127 |   |
|                                                              |        |             |        |             |        |                  |        |                  |        |                 |         |                  |        |  |  |  |  |  |  |  |

 

 

20

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME (Unaudited)**

**FOR THETHREE MONTHS ENDED MARCH 31, 2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                         |   |        |   | **GUARANTOR**    |   | **NON-GUARANTOR** |   |            |    |             |   |
|--------------------------------------------------------------|--------|-------------|--------|------------------|--------|-------------------|--------|-----------------|---------|------------------|--------|
|                                                         |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES**  |   | **ELIMINATION** |    | **CONSOLIDATED** |   |
| Revenues                                                     |   | $           | -      |             | $      | 44,339            |   | $               | 9,476   |             | $      | - |   | $ | 53,815 |   |
| Costs of operations                                          |   | -           |   | 33,492           |   | 7,629             |   | -               |    | 41,121           |   |
| Gross profit                                                 |   | -           |   | 10,847           |   | 1,847             |   | -               |    | 12,694           |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Corporate operating  expenses                                |   | -           |   | 2,704            |   | -                 |   | -               |    | 2,704            |   |
| Income from company  operations                              |   | -           |   | 8,143            |   | 1,847             |   | -               |    | 9,990            |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Equity in earnings of  unconsolidated partnerships           |   | -           |   | 288              |   | -                 |   | -               |    | 288              |   |
| Operating income                                             |   | -           |   | 8,431            |   | 1,847             |   | -               |    | 10,278           |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Interest expense, net                                        |   | -           |   | 5,441            |   | 324               |   | -               |    | 5,765            |   |
| Income before income taxes                                   |   | -           |   | 2,990            |   | 1,523             |   | -               |    | 4,513            |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Provision for income taxes                                   |   | -           |   | 745              |   | -                 |   | -               |    | 745              |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Income before equity in  income of consolidated subsidiaries |   | -           |   | 2,245            |   | 1,523             |   | -               |    | 3,768            |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Equity in income of  consolidated subsidiaries               |   | 3,768       |   | 1,523            |   | -                 |   | (5,291          | )  | -                |   |
|                                                         |   |        |   |             |   |              |   |            |    |             |   |
| Net income                                                   |   | $           | 3,768  |             | $      | 3,768             |   | $               | 1,523   |             | $      | (5,291 | ) | $ | 3,768 |   |

 

 

21

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)**

**FOR THE NINEMONTHS ENDED MARCH 31, 2002**

**(Amounts inthousands)**

**(Company)**

 
|                                                                                                |   | **PARENT**  |   |        |   |             |   | **NON-**         |   |             |   |             |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                                |   | **COMPANY** |   |        |   | **GUARANTOR**    |   | **GUARANTOR**    |   |             |   |             |   |
|                                                                                                |   | **ONLY**    |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
| OPERATING ACTIVITIES:                                                                               |   |        |   |        |   |             |   |             |   |             |   |             |   |
| Net income (loss)                                                                                   |   | $           | (4,052 | )           | $      | (4,052           | )      | $                | (4,052 | )                | $      | 2,317            |   | $ | 5,787 |   | $ | (4,052 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |   |        |   |        |   |             |   |             |   |             |   |             |   |
| Extraordinary loss on debt  extinguishment                                                          |   | -           |   | -           |   | 6,048            |   | -                |   | -                |   | 6,048            |   |
| Depreciation and  amortization                                                                      |   | -           |   | -           |   | 14,802           |   | 2,055            |   | -                |   | 16,857           |   |
| Equity in income (loss) of  consolidated subsidiaries                                               |   | 4,052       |   | 4,052       |   | (2,317           | )      | -                |   | (5,787           | )      | -                |   |
| Cash provided by (used in)  changes in operating assets and liabilities:                            |   |        |   |        |   |             |   |             |   |             |   |             |   |
| Trade accounts receivables  , net                                                                   |   | -           |   | -           |   | 1,761            |   | (143             | )      | -                |   | 1,618            |   |
| Intercompany receivables,  net                                                                      |   | 101,826     |   | (210,290    | )      | 109,877          |   | (1,413           | )      | -                |   | -                |   |
| Other current assets                                                                                |   | -           |   | -           |   | (2,040           | )      | (35              | )      | -                |   | (2,075           | )      |
| Accounts payable and other  accrued expenses                                                        |   | -           |   | -           |   | 7,936            |   | 7                |   | -                |   | 7,943            |   |
| Net cash provided by (used  in) operating activities                                                |   | 101,826     |   | (210,290    | )      | 132,015          |   | 2,788            |   | -                |   | 26,339           |   |
|                                                                                                |   |        |   |        |   |             |   |             |   |             |   |             |   |
| INVESTING ACTIVITIES:                                                                               |   |        |   |        |   |             |   |             |   |             |   |             |   |
| Purchase of InSight common  stock                                                                   |   | (187,722    | )      | -           |   | -                |   | -                |   | -                |   | (187,722         | )      |
| Cash acquired in the  Acquisition                                                                   |   | -           |   | -           |   | 4,773            |   | 3,656            |   | -                |   | 8,429            |   |
| Additions to property and  equipment                                                                |   | -           |   | -           |   | (14,312          | )      | (3,454           | )      | -                |   | (17,766          | )      |
| Other                                                                                               |   | -           |   | -           |   | 847              |   | -                |   | -                |   | 847              |   |
| Net cash provided by (used  in) investing activities                                                |   | (187,722    | )      | -           |   | (8,692           | )      | 202              |   | -                |   | (196,212         | )      |
|                                                                                                |   |        |   |        |   |             |   |             |   |             |   |             |   |
| FINANCING ACTIVITIES:                                                                               |   |        |   |        |   |             |   |             |   |             |   |             |   |
| Proceeds from sale of  common stock, net of equity issuance costs                                   |   | 85,763      |   | -           |   | -                |   | -                |   | -                |   | 85,763           |   |
| Issuance of common stock                                                                            |   | 133         |   | -           |   | -                |   | -                |   | -                |   | 133              |   |
| Payment of deferred loan  fees                                                                      |   | -           |   | -           |   | (29,499          | )      | -                |   | -                |   | (29,499          | )      |
| Principal payments of debt  and capital lease obligations                                           |   | -           |   | (364,710    | )      | (66,013          | )      | (102             | )      | -                |   | (430,825         | )      |
| Proceeds from issuance of  debt                                                                     |   | -           |   | 575,000     |   | -                |   | -                |   | -                |   | 575,000          |   |
| Other                                                                                               |   | -           |   | -           |   | (124             | )      | 111              |   | -                |   | (13              | )      |
| Net cash provided by (used  in) financing activities                                                |   | 85,896      |   | 210,290     |   | (95,636          | )      | 9                |   | -                |   | 200,559          |   |
|                                                                                                |   |        |   |        |   |             |   |             |   |             |   |             |   |
| INCREASE IN CASH AND CASH  EQUIVALENTS                                                              |   | -           |   | -           |   | 27,687           |   | 2,999            |   | -                |   | 30,686           |   |
|                                                                                                |   |        |   |        |   |             |   |             |   |             |   |             |   |
| Cash, beginning of period                                                                           |   | -           |   | -           |   | -                |   | -                |   | -                |   | -                |   |
| Cash, end of period                                                                                 |   | $           | -      |        | $      | -                |   | $                | 27,687 |             | $      | 2,999            |   | $ | - |   | $ | 30,686 |   |

 

 

22

----

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)**

**FOR THEPERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                                                      |   |        |   | **GUARANTOR**    |   | **NON-GUARANTOR** |   |             |   |             |   |
|-------------------------------------------------------------------------------------------|--------|-------------|--------|------------------|--------|-------------------|--------|------------------|--------|------------------|--------|
|                                                                                      |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES**  |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|                                                                                      |   |        |   |             |   |              |   |             |   |             |   |
| OPERATING ACTIVITIES:                                                                     |   |        |   |             |   |              |   |             |   |             |   |
| Net income (loss)                                                                         |   | $           | (4,648 | )                | $      | (4,648            | )      | $                | 2,281  |             | $      | 2,367 |   | $ | (4,648 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |   |        |   |             |   |              |   |             |   |             |   |
| Acquisition related  compensation charge                                                  |   | -           |   | 15,616           |   | -                 |   | -                |   | 15,616           |   |
| Depreciation and  amortization                                                            |   | -           |   | 8,250            |   | 1,573             |   | -                |   | 9,823            |   |
| Equity in income (loss) of  consolidated subsidiaries                                     |   | 4,648       |   | (2,281           | )      | -                 |   | (2,367           | )      | -                |   |
| Cash provided by (used in)  changes in operating assets and liabilities:                  |   |        |   |             |   |              |   |             |   |             |   |
| Trade accounts receivables  , net                                                         |   | -           |   | (1,932           | )      | (446              | )      | -                |   | (2,378           | )      |
| Intercompany receivables,  net                                                            |   | 5,058       |   | (5,090           | )      | 32                |   | -                |   | -                |   |
| Other current assets                                                                      |   | -           |   | (3,515           | )      | (101              | )      | -                |   | (3,616           | )      |
| Accounts payable and other  accrued expenses                                              |   | -           |   | 53               |   | (30               | )      | -                |   | 23               |   |
| Net cash provided by  operating activities                                                |   | 5,058       |   | 6,453            |   | 3,309             |   | -                |   | 14,820           |   |
|                                                                                      |   |        |   |             |   |              |   |             |   |             |   |
| INVESTING ACTIVITIES:                                                                     |   |        |   |             |   |              |   |             |   |             |   |
| Additions to property and  equipment                                                      |   | -           |   | (18,609          | )      | (2,243            | )      | -                |   | (20,852          | )      |
| Other                                                                                     |   | -           |   | (740             | )      | -                 |   | -                |   | (740             | )      |
| Net cash used in investing  activities                                                    |   | -           |   | (19,349          | )      | (2,243            | )      | -                |   | (21,592          | )      |
|                                                                                      |   |        |   |             |   |              |   |             |   |             |   |
| FINANCING ACTIVITIES:                                                                     |   |        |   |             |   |              |   |             |   |             |   |
| Proceeds from stock options  exercised                                                    |   | 145         |   | -                |   | -                 |   | -                |   | 145              |   |
| Principal payments of debt  and capital lease obligations                                 |   | (5,203      | )      | (2,358           | )      | (1,018            | )      | -                |   | (8,579           | )      |
| Other                                                                                     |   | -           |   | -                |   | 381               |   | -                |   | 381              |   |
| Net cash used in financing  activities                                                    |   | (5,058      | )      | (2,358           | )      | (637              | )      | -                |   | (8,053           | )      |
|                                                                                      |   |        |   |             |   |              |   |             |   |             |   |
| INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                                         |   | -           |   | (15,254          | )      | 429               |   | -                |   | (14,825          | )      |
|                                                                                      |   |        |   |             |   |              |   |             |   |             |   |
| Cash, beginning of period                                                                 |   | -           |   | 20,027           |   | 3,227             |   | -                |   | 23,254           |   |
| Cash, end of period                                                                       |   | $           | -      |             | $      | 4,773             |   | $                | 3,656  |             | $      | - |   | $ | 8,429 |   |
|                                                                                           |        |             |        |                  |        |                   |        |                  |        |                  |        |  |  |  |  |  |  |

 

 

23

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)**

**FOR THE NINEMONTHS ENDED MARCH 31, 2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                                               |   |        |   | **GUARANTOR**    |   | **NON-GUARANTOR** |   |             |   |             |   |
|------------------------------------------------------------------------------------|--------|-------------|--------|------------------|--------|-------------------|--------|------------------|--------|------------------|--------|
|                                                                               |   | **INSIGHT** |   | **SUBSIDIARIES** |   | **SUBSIDIARIES**  |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|                                                                               |   |        |   |             |   |              |   |             |   |             |   |
| OPERATING ACTIVITIES:                                                              |   |        |   |             |   |              |   |             |   |             |   |
| Net income                                                                         |   | $           | 9,496  |             | $      | 9,496             |   | $                | 3,862  |             | $      | (13,358 | ) | $ | 9,496 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |   |        |   |             |   |              |   |             |   |             |   |
| Depreciation and  amortization                                                     |   | -           |   | 26,914           |   | 3,993             |   | -                |   | 30,907           |   |
| Equity in income of  consolidated subsidiaries                                     |   | (9,496      | )      | (3,862           | )      | -                 |   | 13,358           |   | -                |   |
| Cash provided by (used in)  changes in operating assets and liabilities:           |   |        |   |             |   |              |   |             |   |             |   |
| Trade accounts receivables                                                         |   | -           |   | (612             | )      | (3,435            | )      | -                |   | (4,047           | )      |
| Intercompany receivables,  net                                                     |   | 13,622      |   | (22,233          | )      | 8,611             |   | -                |   | -                |   |
| Other current assets                                                               |   | -           |   | 871              |   | 70                |   | -                |   | 941              |   |
| Accounts payable and other  accrued expenses                                       |   | -           |   | 1,780            |   | 235               |   | -                |   | 2,015            |   |
| Net cash provided by  operating activities                                         |   | 13,622      |   | 12,354           |   | 13,336            |   | -                |   | 39,312           |   |
|                                                                               |   |        |   |             |   |              |   |             |   |             |   |
| INVESTING ACTIVITIES:                                                              |   |        |   |             |   |              |   |             |   |             |   |
| Additions to property and  equipment                                               |   | -           |   | (10,161          | )      | (9,216            | )      | -                |   | (19,377          | )      |
| Other                                                                              |   | -           |   | 3,680            |   | (3,991            | )      | -                |   | (311             | )      |
| Net cash used in investing  activities                                             |   | -           |   | (6,481           | )      | (13,207           | )      | -                |   | (19,688          | )      |
|                                                                               |   |        |   |             |   |              |   |             |   |             |   |
| FINANCING ACTIVITIES:                                                              |   |        |   |             |   |              |   |             |   |             |   |
| Proceeds from stock options  exercised                                             |   | 172         |   | -                |   | -                 |   | -                |   | 172              |   |
| Principal payments of debt  and capital lease obligations                          |   | (13,794     | )      | (9,669           | )      | 335               |   | -                |   | (23,128          | )      |
| Other                                                                              |   | -           |   | -                |   | 869               |   | -                |   | 869              |   |
| Net cash provided by (used  in) financing activities                               |   | (13,622     | )      | (9,669           | )      | 1,204             |   | -                |   | (22,087          | )      |
|                                                                               |   |        |   |             |   |              |   |             |   |             |   |
| INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                                  |   | -           |   | (3,796           | )      | 1,333             |   | -                |   | (2,463           | )      |
|                                                                               |   |        |   |             |   |              |   |             |   |             |   |
| Cash, beginning of period                                                          |   | -           |   | 25,572           |   | 1,561             |   | -                |   | 27,133           |   |
| Cash, end of period                                                                |   | $           | -      |             | $      | 21,776            |   | $                | 2,894  |             | $      | - |   | $ | 24,670 |   |

 

 

24

----

 

 
| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESU****LTS  OF OPERATIONS** |
|-------------|------------------------------------------------------------------------------------------------------|

 

The statementscontained in this report that are not purely historical or which might beconsidered an opinion or projection concerning the Company or its business,whether express or implied, are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995.  These statements may include statementsregarding the Company’s expectations, intentions, plans or strategies regardingthe future.  All forward-lookingstatements included in this report are based upon information available to theCompany on the date hereof, and the Company assumes no obligation to update anysuch forward-looking statements.  It isimportant to note that the Company’s actual results could differ materiallyfrom those described or implied in such forward-looking statements because ofcertain factors which could affect the Company.  Such forward-looking statements should be evaluated in light of thefollowing factors: availability of financing; limitations and delays inreimbursement by third-party payors; contract renewals and financial stabilityof customers; the potential for rapid and significant changes in technology andtheir effect on the Company’s operations; operating, legal, governmental andregulatory risks; conditions within the health care environment; adverseutilization trends for certain diagnostic imaging procedures; economic,political and competitive forces affecting the Company’s business; competitionin the Company’s markets; the Company’s ability to successfully integrateacquisitions; and the risk factors described in the Company’s periodic filingswith the SEC on Forms 10-K, 10-Q and 8-K (if any) and its registrationstatement on Form S-4 filed with the SEC on December 27, 2001, as amended.

 

**ACQUISITIONAND RELATED FINANCING TRANSACTIONS**

 

InSight Health Services Holdings Corp. (Company), a Delaware corporation,was incorporated on June 13, 2001 under the name JWC/Halifax HoldingsCorp.   The Company was funded throughan equity contribution from J.W. Childs Equity Partners II, Halifax CapitalPartners and certain other affiliates. On June 29, 2001, the Company’s name was changed to InSight HealthServices Holdings Corp.  The Company andits former wholly owned subsidiary, InSight Health Services Acquisition Corp.(Acquisition Corp.) were created to acquire all the outstanding shares ofInSight Health Services Corp. (InSight).

 

On October 17, 2001, the Company acquired InSight pursuant to anagreement and plan of merger dated June 29, 2001, as amended, among theCompany, Acquisition Corp. and InSight (the Acquisition).  Acquisition Corp. was merged with and intoInSight, with InSight being the surviving corporation.  The operations of the Company after theAcquisition are substantially the same as the operations of InSight prior tothe Acquisition.  In addition, theCompany has no operations other than its investment in InSight.  As such, InSight is considered thepredecessor to the Company in accordance with Regulation S-X.

 

At the effective time of the Acquisition, InSight became a wholly ownedsubsidiary of the Company.  Followingthe Acquisition, the common stock of InSight was delisted from the NASDAQ SmallCap Market.  Pursuant to the terms ofthe merger agreement, each of InSight’s stockholders received $18.00 in cashfor each share of common stock owned prior to the Acquisition.  Holders of options and warrants, which priorto the Acquisition were exercisable for InSight common stock, received thedifference between $18.00 and the exercise price of each share of common stockthe holder could have acquired pursuant to the terms of the options andwarrants, 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 operationsof InSight.  In addition, certainmembers of senior management rolled a portion of their InSight common stockoptions into stock options of the Company. InSight’s stockholders, option holders and warrant holders receivedaggregate cash consideration of approximately $187.7 million as a result of theAcquisition.

 

Concurrently with the Acquisition, InSight (i) repurchased by tenderoffer all of its 9 5/8% senior subordinated notes due 2008 in an aggregateprincipal amount of $100 million, (ii) repaid its then outstanding seniorcredit facilities and certain other indebtedness and (iii) paid fees andexpenses relating to the Acquisition and related financing transactions.

 

25

----

 

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 $98.1 million; management options  and common stock rollover with a total net value of approximately $1.9  million |

 

On October 30, 2001, the Company, through InSight, its wholly ownedsubsidiary, issued new 97/8% senior subordinated notes due 2011(Notes) in the aggregate principal amount of $225 million.  The net proceeds from the issuance of theNotes was approximately $211.5 million, $200 million of which was used toretire in full the senior subordinated bridge financing and the balance ofwhich is being used for general corporate purposes.  The Company recorded an extraordinary loss on extinguishment ofthe senior subordinated bridge financing of approximately $7.4 million.

 

The results of operations and cash flows of the Company for the ninemonths ended March 31, 2002 have been derived by combining the results ofoperations and cash flows of the Company for the nine months ended March 31,2002 with the results of operations and cash flows of InSight from July 1, 2001to October 17, 2001, the date of the Acquisition.  The results of operations and cash flows of InSight prior to theAcquisition incorporated in this discussion are the historical results and cashflows of InSight, the predecessor to the Company.  InSight’s results do not reflect any purchase accountingadjustments included in the results of the Company after the Acquisition, andthus are not directly comparable. Because of the effects of purchase accounting applied as a result of theAcquisition and the additional interest expense associated with the debtincurred to finance the Acquisition, the results of operations of the Companyare not comparable in all respects to the results of operations prior to theAcquisition.  However, the Company’smanagement believes a discussion of the operations by combining the results ofthe Company and InSight is more meaningful as the Company’s operating revenuesand expenses have not been affected by the Acquisition and splitting up theresults between pre- and post-Acquisition periods would make comparisons of theoperating trends to the prior year very different.

 

Management’s discussion and analysis of financial condition, results ofoperations, liquidity and capital resources contained within this report onForm 10-Q is more clearly understood when read in conjunction with the Notes tothe Condensed Consolidated Financial Statements.  The Notes to the Condensed Consolidated Financial Statementselaborate on certain terms that are used throughout this discussion and provideinformation about the Company and the basis of presentation used in this reporton Form 10-Q.

 

**BUSINESSDEVELOPMENT**

 

The Company’s objective is to be the leading provider of outsourceddiagnostic imaging services in its target markets by further developing and expandingits regional diagnostic imaging networks that emphasize quality of care,produce cost–effective diagnostic information and provide superiorservice and convenience to its customers. The strategy is focused on three components.   Firstly, the Company intends to maximize utilization of itsexisting facilities by (i) broadening its physician referral base andgenerating new sources of revenues through selective marketing activities; (ii)focusing its marketing efforts on attracting additional managed care customers;(iii) adding new modalities such as CT, ultrasound and bone densitometry at itsexisting facilities to realize economies of scale and increase overallprocedure volume; (iv) expanding current imaging applications of existingmodalities to increase overall procedure volume; (v) focusing on its ability toconvert developing Mobile Facilities to Fixed Facilities; and (vi) maximizingcost efficiencies through increased purchasing power and by continued reductionof expenses.

 

Secondly, the Company intends to pursue expansion opportunities withinits existing regional networks by opening new Fixed Facilities, Centers anddeveloping Mobile Facilities where attractive returns on investment can beachieved and sustained.  Managementbelieves that Mobile PET Facilities present a growth opportunity due toincreased physician acceptance of PET as a diagnostic tool, recently expandedMedicare coverage of PET

 

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procedures and favorable reimbursement levels, although effectiveJanuary 1, 2002, the Centers for Medicare and Medicaid Services (CMS) reducedthe Medicare payments for PET services to hospital outpatients, as discussedbelow.  The Company also intends to pursuejoint venture opportunities with hospitals because management believes thatthey have the potential to provide the Company with a steady source ofprocedure volume.  In addition,management believes that this will be an area for additional growth because theCompany expects hospitals to respond to recent federal health care regulatorychanges by outsourcing radiology services to imaging centers that are jointlyowned and managed with third parties.

 

Finally, the Company intends to continue to increase its marketpresence in its existing regional markets where it can increase economies ofscale or new markets where it believes it can establish a strong regionalnetwork, through disciplined and strategic acquisitions.  The Company believes it is well positionedto capitalize on the ongoing consolidation of the imaging industry.  The Company believes that the expansion ofits business through such acquisitions is a key factor in improvingprofitability.  Generally, acquisitionopportunities are aimed at increasing revenues and operating income, andmaximizing utilization of existing capacity and increasing economies ofscale.  Incremental operating incomeresulting from future acquisitions will vary depending on geographic location,whether facilities are Mobile or Fixed, the range of services provided and theCompany’s ability to integrate the acquired businesses into its existinginfrastructure.  Since 1996, the Companyhas completed 12 acquisitions.  Noassurance can be given, however, that the Company will be able to identifysuitable acquisition candidates and thereafter complete such acquisitions onterms acceptable to the Company.   Inconnection with the acquisition and related financing transactions discussedabove, InSight has a $75 million delayed draw term loan facility available topursue acquisition opportunities.  As ofMay 10, 2002, there were no borrowings under this facility.

 

In fiscal 2001,the Company opened a radiology co-source outpatient Fixed Facility in MarinaDel Rey, California, which was financed with internally generated funds and acapital lease from General Electric Company (GE); and a PET Fixed Facility inLouisville, Kentucky, which was financed with outside financing.

 

In fiscal 2002,the Company opened a radiology co-source outpatient Fixed Facility in Largo,Florida, which was financed with an operating lease from GE; and a FixedFacility in Bangor, Maine, which was financed with internally generated funds.

 

**F****INANCIAL CONDITION,LIQUIDITY AND CAPITAL RESOURCES**

 

The Company operates in a capital intensive, high fixed cost industrythat requires significant amounts of working capital to fund operations,particularly the initial start-up and development expenses of new operations;and yet is constantly under external pressure from both customers andcompetitors to contain costs and reduce prices.

 

In connection with the Acquisition, InSight entered into new creditfacilities with Bank of America, N.A. and a syndication of other lendersconsisting of (i) a $150 million seven year term loan B, (ii) a $75 millionseven year delayed-draw term loan facility, and (iii) a $50 million nine yearrevolving credit facility (New Credit Facilities).  The entire $150 million term loan B was used to consummate theAcquisition.  Borrowings under the NewCredit Facilities bear interest at LIBOR plus 3.5%.  The Company is required to pay an annual unused facility fee ofbetween 0.5% and 2.0%, payable quarterly, on unborrowed amounts under bothfacilities.  The Company expects to usethe delayed-draw facility, which is available through the second anniversary ofthe consummation of the Acquisition, to fund future acquisitions and capitalexpenditures.  The Company expects touse the revolving credit facility primarily to fund its future working capitalneeds.  As of May 10, 2002, there wereno borrowings under the revolving credit facility.

 

The New Credit Facilities contain various restrictive covenants whichprohibit the Company from prepaying other indebtedness, including the Notes,and require the Company to maintain specified financial ratios and satisfyfinancial condition tests.  In addition,the New Credit Facilities prohibit the Company from declaring or paying anydividends and prohibit it from making any payments with respect to the Notes ifthe Company fails to perform its obligations under, or fails to meet theconditions of, the New Credit Facilities or if payment creates a default underthe New Credit Facilities.

 

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In addition to the indebtedness under the New Credit Facilities, theCompany, through InSight, its wholly owned subsidiary, issued $225 millionaggregate principal amount of the Notes in a private placement exempt fromregistration under the Securities Act of 1933, as amended (Securities Act).  The indenture governing the Notes amongother things, (i) restricts the ability of InSight and certain subsidiaries,including the guarantors of the Notes, to incur additional indebtedness, issueshares of preferred stock, incur liens, pay dividends or make certain otherrestricted payments and enter into certain transactions with affiliates, (ii)places certain restrictions on the ability of certain subsidiaries, includingthe guarantors of the Notes, to pay dividends or make certain payments toInSight, and (iii) places restrictions on the ability of InSight and certainsubsidiaries, including the guarantors of the Notes, to merge or consolidatewith any other person or sell, assign, transfer, lease, convey or otherwisedispose of all or substantially all of the assets of  InSight.  On December 27,2001, the Company filed a registration statement on Form S-4 with the SEC toregister an offer to exchange all of the outstanding Notes with new notesregistered under the Securities Act. The terms of the exchange notes to be issued in the exchange offer aresubstantially identical to the Notes; however, the exchange notes will befreely tradeable, except in limited circumstances.  The exchange offer expired on May 10, 2002, at which time 100% ofthe outstanding Notes had been tendered and not withdrawn.

 

Net cash provided by operating activities was approximately $41.2million for the nine months ended March 31, 2002.  Cash provided by operating activities resulted primarily from netincome before depreciation, amortization, the extraordinary loss on debtextinguishment and the acquisition related compensation charge (approximately$41.0 million) and an increase in accounts payable and other accrued expenses(approximately $6.6 million), partially offset by an increase in trade accountsreceivables, net (approximately $0.8 million) and an increase in other currentassets (approximately $5.7 million).

 

Net cash used in investing activities was approximately $217.8 millionfor the nine months ended March 31, 2002. Cash used in investing activities resulted primarily from the purchaseof InSight common stock, net of cash acquired in the Acquisition (approximately$179.3 million) and the Company purchasing or upgrading diagnostic imagingequipment at its existing facilities (approximately $38.6 million).

 

Net cash provided by financing activities was approximately $192.5million for the nine months ended March 31, 2002, resulting primarily from theproceeds from sale of common stock, net of equity issuance costs (approximately$85.8 million) and borrowings of debt (approximately $575.0 million), partiallyoffset by principal payments of debt and capital lease obligations(approximately $439.4 million), and payments of deferred loan fees(approximately $29.5 million).

 

The Company has committed to purchase or lease in connection with thedevelopment of new Fixed and Mobile Facilities and replacement or upgrades ofdiagnostic imaging equipment at Centers, Fixed and Mobile Facilities, at anaggregate cost of approximately $12.1 million, nine diagnostic imaging systemsfor delivery through August 2002.  TheCompany expects to use either internally generated funds, its New CreditFacilities, or leases from GE and others to finance the purchase of suchequipment.  The Company may purchase,lease or upgrade other diagnostic imaging systems as opportunities arise toplace new equipment into service when new contract services agreements aresigned, existing agreements are renewed, acquisitions are completed, or newCenters, Fixed and Mobile Facilities are developed in accordance with theCompany’s business strategy.

 

In addition, in connection with the implementation of the electronictransaction, security and privacy standards mandated by the Health InsurancePortability and Accountability Act (HIPAA), the Company expects to spendapproximately $1.5 million to make necessary software upgrades to its radiologyinformation system to make the system compliant with the HIPAA transactionstandards by late 2002 and with the privacy standards by 2003.

 

The Company believesthat, based on current levels of operations and anticipated growth, its cashfrom operations, together with other available sources of liquidity, will besufficient through March 31, 2003 to fund anticipated capital expenditures andmake required payments of principal and interest on its debt, includingpayments due on the Notes and obligations under the New Credit Facilities.   In addition, the Company continuallyevaluates potential acquisitions and expects to fund such acquisitions from itsavailable sources of liquidity, as discussed above.  The Company’s acquisition strategy may require sources of capitalin addition to that currently available to the Company.   No assurance can be given that suchnecessary additional funds will be available to the Company on terms acceptableto the Company or at all.

 

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**RESULTSOF OPERATIONS**

 

Effective for the quarter ended March 31, 2002, the Company changed itssegment reporting to conform to a modified internal management structure.  The new reportable segments are MobileDivision and Fixed-Site Division, which are business units defined primarily bythe type of service provided.  Thesesegments replaced the Western Division and the Eastern Division, which werebusiness units defined by management’s division of responsibility, based ongeographic area, between two executive vice presidents.  The Mobile Division operates primarilyMobile Facilities while the Fixed-Site Division operates primarily Centers andFixed Facilities, although each Division generates both contract services andpatient services revenues.  The Companymanages cash flows and assets on a consolidated basis, and not by segment, anddoes not allocate or report assets and capital expenditures by segment.  The results of operations of the Company forthe nine months ended March 31, 2002 have been derived by combining the resultsof operations of the Company for the nine months ended March 31, 2002 with theresults of operations of InSight from July 1, 2001 to October 17, 2001, thedate of the Acquisition.

 

**NINEMONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31, 2001**

 

REVENUES:  Revenuesincreased approximately 2.9% from approximately $157.8 million for the ninemonths ended March 31, 2001, to approximately $162.3 million for the ninemonths ended March 31, 2002.  Thisincrease was due primarily to the opened Fixed Facilities discussed above(approximately $0.7 million) and an increase in patient services revenues(approximately $4.3 million) at existing facilities, partially offset by adecrease in contract services and other revenues (approximately $0.5 million)at existing facilities.  Revenues forthe Mobile Division and Fixed-Site Division represented approximately 44% and53%, respectively, of total revenues for the nine months ended March 31,2002.  However, the percentages will beaffected by future acquisitions and the establishment of Centers, Fixed andMobile Facilities.

 

Contract services revenues decreased approximately 0.5% fromapproximately $78.2 million for the nine months ended March 31, 2001, toapproximately $77.8 million for the nine months ended March 31, 2002.  This decrease was due to the loss of severalhigh volume contracts which were replaced by contracts which initially have lowervolumes.   Contract services revenuesfor the Mobile Division and Fixed-Site Division represented approximately 80%and 14%, respectively, of contract services revenues for the nine months endedMarch 31, 2002.  However, thepercentages will be affected by future acquisitions and the establishment ofCenters, Fixed and Mobile Facilities.

 

Contract services revenues, primarily earned by the Company’s MobileFacilities, represented approximately 48% of total revenues for the nine monthsended March 31, 2002.  Each yearapproximately one-quarter to one-third of the contract services agreements aresubject to renewal.  It is expected thatsome high volume customer accounts will elect not to renew their agreements andinstead will purchase or lease their own diagnostic imaging equipment and somecustomers may choose an alternative services provider.  In the past where agreements have not beenrenewed, the Company has been able to obtain replacement customer accounts.  While some replacement accounts have initiallybeen smaller than the lost accounts, such replacement accounts revenues havegenerally increased over the term of the agreement.  The non-renewal of a single customer agreement would not have amaterial impact on the Company’s contract services revenues; however,non-renewal of several agreements could have a material impact on contractservices revenues.

 

As a result of the implementation of the new Outpatient ProspectivePatient System (OPPS) for outpatient services, effective August 1, 2000Medicare began paying hospitals for outpatient services based on ambulatorypayment classification (APC) groups rather than on a hospital’s costs.  Each APC has been assigned a payment weightby the CMS.  Under the new OPPS, thepayment due a hospital for performing an outpatient service will be an amountbased on the APC weight, a dollar based conversion factor, a geographicadjustment factor to account for area labor cost differences and any otheradjustments applicable to the hospital or case.  Because the new OPPS appeared to have a severe adverse economiceffect on hospitals, Congress enacted additional legislation in the BalancedBudget Refinement Act of 1999 (BBA) to ease such effect through 2003.  Under the BBA, hospitals may receiveadditional 

 

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payments for new technologies, transitional pass-through for innovativemedical devices, drugs and biologics, outlier adjustments and transitionalpayment corridors.  In addition, theBenefits Improvement and Protection Act of 2000 included certain provisionsrequiring CMS to revise the APCs to separate contrast-enhanced diagnosticimaging procedures from those that are not contrast-enhanced.   Payment for unenhanced diagnosticprocedures was reduced as a result of implementation of these provisionseffective January 1, 2002, but the APC rates for certain contrast-enhanceddiagnostic procedures were increased. The APC rates which became effective on January 1, 2002 also reducedMedicare payment for PET services provided to hospital outpatients.

 

As a result of the implementation of the new OPPS, the Company believesthat its hospital customers may seek reductions in contractual rates to theextent the hospital believes it will pay more to the Company than it will receivefrom Medicare and other third-party payors. The reduction of contractual rates for a single customer or loss of asingle customer to a competitor prepared to reduce contractual rates would nothave a material adverse impact on the Company’s contract services revenues;however, the reduction in contractual rates for several customers or loss ofseveral contracts could have a material impact on the Company’s business,financial condition and results of operations.

 

On the other hand, the Company believes that the impact of the new OPPSon hospital payments for diagnostic imaging services, especially for MRI and CTservices, may cause hospitals to consider restructuring their diagnosticoutpatient imaging services as freestanding centers which are unaffected by thenew OPPS.  This may provide the Companywith additional opportunities for its radiology co-source product whichinvolves the joint ownership and management of single and multi-modalityimaging centers with hospitals.  Giventhe infancy and complexity of the new OPPS, it is difficult to determinewhether hospitals will be receiving less from Medicare (after they takeadvantage of the transitional payments that may be available under the BBA) andto what extent they will attempt to renegotiate existing contractualarrangements.

 

Patient services revenues, primarily earned by the Company’s FixedFacilities and Centers, represented approximately 52% of total revenues for thenine months ended March 31, 2002. Patient services revenues increased approximately 6.2% fromapproximately $79.2 million for the nine months ended March 31, 2001, toapproximately $84.1 million for the nine months ended March 31, 2002.  This increase was due primarily to theopened Fixed Facilities discussed above (approximately $0.7 million) and anincrease in revenues at existing facilities (approximately $4.2 million).  The increase at existing facilities was dueto higher utilization (approximately 6%), partially offset by nominal changesin reimbursement from third party payors. Patient services revenues for the Mobile Division and Fixed-SiteDivision represented approximately 10% and 90%, respectively, of patientservices revenues for the nine months ended March 31, 2002.  However, the percentages will be affected byfuture acquisitions and the establishment of Centers, Fixed and MobileFacilities.  The Company believes itspatient services revenues received from Medicare will not be materiallyimpacted by the new OPPS because it primarily operates freestanding FixedFacilities and Centers which are unaffected thereby.  However, regulations were recently adopted by the Medicareprogram which, effective January 1, 2002, reduced Medicare payment fordiagnostic imaging services, including MRI and other services the Companyprovides in non-hospital settings, by approximately 7% to 9%.  These regulations are expected to negativelyimpact patient services revenues in the annual amount of approximately $2million based on current revenue amounts.

 

Management believes that any future increases in revenues at existingfacilities can be achieved primarily by higher utilization and not by increasesin procedure prices; however, slower start-ups of new operations, excesscapacity of diagnostic imaging equipment, increased competition, and theexpansion of managed care may impact utilization and make it difficult for theCompany to achieve revenue increases in the future, absent the execution ofprovider agreements with managed care companies and other payors, and theexecution of the Company’s business strategy, particularly acquisitions

 

COSTS OF OPERATIONS:  Costs ofoperations decreased approximately 1.6% from approximately $122.0 million forthe nine months ended March 31, 2001, to approximately $120.1 million for thenine months ended March 31, 2002.  Thisdecrease was due to the elimination of goodwill amortization as a result of theadoption of SFAS 142 discussed below, net of amortization as a result of theAcquisition (approximately $3.5 million), partially offset by costs related to theopened Fixed Facilities discussed above (approximately $0.7 million) andincreased costs at existing facilities (approximately $0.9 million).  The increase at existing facilities

 

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was due primarily to higher salaries, benefits and insurance, partiallyoffset by lower supply, transportation, marketing, equipment lease anddepreciation expenses.

 

Costs of operations, as a percentage of total revenues, decreased fromapproximately 77.3% for the nine months ended March 31, 2001, to approximately74.0% for the nine months ended March 31, 2002.  The percentage decrease is due to the elimination of goodwillamortization and reduced costs in equipment leases, depreciation, supply,transportation and marketing costs, partially offset by higher salary andbenefits and insurance costs.  TheCompany is continuing its effort to improve operating efficiencies through costreduction initiatives, which are focused primarily on costs for diagnosticimaging equipment, including lease, depreciation and maintenance and occupancy,marketing and salary and benefits.

 

CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 0.8%, fromapproximately $7.98 million for the nine months ended March 31, 2001, toapproximately $8.04 million for the nine months ended March 31, 2002.  This increase was due primarily to increasedoccupancy and business development costs, offset by reduced communications andconsulting costs.  Corporate operatingexpenses, as a percentage of total revenues, decreased from approximately 5.1%for the nine months ended March 31, 2001, to approximately 5.0% for the ninemonths ended March 31, 2002.

 

ACQUISITION RELATED COMPENSATION CHARGE: For the nine months ended March 31, 2002, InSight recorded a charge ofapproximately $15.6 million related to the exercise of InSight common stockoptions and warrants as a result of the Acquisition.

 

INTEREST EXPENSE, NET:  Interestexpense, net increased approximately 28.2% from approximately $17.7 million forthe nine months ended March 31, 2001, to approximately $22.7 million for thenine months ended March 31, 2001.  Thisincrease was primarily to additional debt related to the Acquisition andrelated financing activities discussed above.

 

###### **PROVISION FOR INCOME TAXES**:  Provision for income taxes decreased fromapproximately $1.4 million for the nine months ended March 31, 2001, to abenefit of approximately $0.8 million for the nine months ended March 31, 2002.  The decrease in provision is due to theCompany recording a tax provision at the statutory rate of 40%, partiallyoffset by a benefit of approximately $2.1 million to recognize anticipatedutilization of certain net operating loss carrybacks.

 

EBITDA:  Earningsbefore interest, taxes, depreciation, amortization and the acquisition relatedcompensation charge (EBITDA) increased approximately 3.4% from approximately$59.5 million for the nine months ended March 31, 2001, to approximately $61.5million for the nine months ended March 31, 2002.  This increase was primarily due to higher revenues at existingfacilities partially offset by higher costs of services.  EBITDA for the Fixed-Site Division increasedapproximately 11.7% from approximately $32.6 million for the nine months endedMarch 31, 2001 to approximately $36.4 million for the nine months ended March31, 2002.  EBITDA for the MobileDivision decreased approximately 7.5% from approximately $36.0 million for thenine months ended March 31, 2001 to approximately $33.3 million for the ninemonths ended March 31, 2002.   Thereduction in EBITDA in the Mobile Division is due primarily to the lowercontract services revenues discussed above. EBITDA should not be considered an alternative to, or more meaningfulthan, income from company operations or other traditional indicators ofoperating performance and cash flow from operating activities determined inaccordance with accounting principles generally accepted in the United States.

 

EXTRAORDINARY ITEM:  The Companyrecorded an extraordinary loss of approximately $6.0 million related to thewrite-off of associated debt issuance costs, as a result of the Acquisition andrelated financing transactions, net of anticipated tax benefits ofapproximately $1.3 million.

 

**THREEMONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31, 2001**

 

REVENUES:  Revenuesincreased approximately 3.2% from approximately $53.8 million for the threemonths ended March 31, 2001, to approximately $55.5 million for the threemonths ended March 31, 2002.  Thisincrease was due primarily to an increase in contract services, patientservices and other revenues (approximately $1.5

 

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million) at existing facilities, and to revenues generated at theopened Fixed Facilities discussed above (approximately $0.2 million).  Revenues for the Mobile Division andFixed-Site Division represented approximately 43% and 54%, respectively, oftotal revenues for the three months ended March 31, 2002.

 

Contract services revenues increased approximately 3.5% fromapproximately $26.0 million for the three months ended March 31, 2001, toapproximately $26.9 million for the three months ended March 31, 2002.  This increase was due to higher utilizationat the Company’s existing mobile customer base offset by the loss of certainhigh volume contracts which were replaced by contracts which initially havelower volumes. Contract services revenues for the Mobile Division andFixed-Site Division represented approximately 78% and 15%, respectively, ofcontract services revenues for the three months ended March 31, 2002.

 

Patient services revenues increased approximately 2.9% fromapproximately $27.7 million for the three months ended March 31, 2001, toapproximately $28.5 million for the three months ended March 31, 2002.  This increase was due primarily to anincrease in revenues at existing facilities (approximately $0.6 million) andthe opened Fixed Facilities discussed above (approximately $0.2 million).  The increase at existing facilities was dueto higher utilization (approximately 5%), partially offset by the decrease inreimbursement from Medicare discussed above and nominal changes inreimbursement from third party payors.  Patient services revenues for the Mobile Division and Fixed-SiteDivision represented approximately 10% and 90%, respectively, of patientservices revenues for the three months ended March 31, 2002.

 

COSTS OF OPERATIONS:  Costs ofoperations increased approximately 0.2% from approximately $41.1 million forthe three months ended March 31, 2001, to approximately $41.2 million for thethree months ended March 31, 2002.  Thisincrease was due primarily to costs related to the opened Fixed Facilitiesdiscussed above (approximately $0.3 million) and an increase in costs atexisting facilities (approximately $0.6 million), partially offset by theelimination of goodwill amortization as a result of the adoption of SFAS 142discussed below, net of amortization as a result of the Acquisition(approximately $0.8 million).

 

Costs of operations, as a percentage of total revenues, decreased fromapproximately 76.4% for the three months ended March 31, 2001, to approximately74.2% for the three months ended March 31, 2002.  The percentage decrease is due to the elimination of the goodwillamortization and reduced costs in equipment leases, transportation and supplycosts, offset by higher salary, benefits and insurance costs.

 

CORPORATE OPERATING EXPENSES: Corporate operating expenses increased approximately 1.1%, fromapproximately $2.70 million for the three months ended March 31, 2001, toapproximately $2.73 million for the three months ended March 31, 2002.  This increase was due primarily to occupancyand business development costs offset by reduced communication and consultingcosts.  Corporate operating expenses, asa percentage of total revenues, decreased from approximately 5.0% for the threemonths ended March 31, 2001, to approximately 4.9% for the three months endedMarch 31, 2002.

 

INTEREST EXPENSE, NET:  Interestexpense, net increased approximately 50.0% from approximately $5.8 million forthe three months ended March 31, 2001, to approximately $8.7 million for thethree months ended March 31, 2002.  Thisincrease was due primarily to additional debt related to the Acquisition andrelated financing activities.

 

PROVISION FOR INCOME TAXES: Provision for income taxes increased from approximately $0.7 million forthe three months ended March 31, 2001 to approximately $1.3 million for thethree months ended March 31, 2002.  Theincrease in provision is due to the Company recording a benefit in the threemonths ended March 31, 2001 to recognize anticipated utilization of certain netoperating loss carryforwards.

 

EBITDA:  Earningsbefore interest, taxes, depreciation and amortization charge (EBITDA) increasedapproximately 3.0% from approximately $20.2 million for the three months endedMarch 31, 2001, to approximately $20.8 million for the three months ended March31, 2002.  This increase was primarilydue to higher revenues at existing facilities, partially offset by higher costsof services.  EBITDA for the Fixed-SiteDivision increased approximately 13.3% from approximately $11.3 million for thethree months ended March 31, 2001 to approximately $12.8 million for the threemonths ended March 31, 2002.  EBITDA forthe Mobile Division decreased approximately 11.0% from approximately $11.8million for the three months ended March 31, 2001 to 

 

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approximately $10.5 million for the three months ended March 31,2002.  The reduction in EBITDA in theMobile Division is due primarily to higher costs of services and to start-upcosts relating to certain Mobile PET facilities.  EBITDA should not be considered an alternative to, or moremeaningful than, income from company operations or other traditional indicatorsof operating performance and cash flow from operating activities determined inaccordance with accounting principles generally accepted in the United States.

 

#### **NEW PRONOUNCEMENTS**

 

In June 2001, the FASB issued two new pronouncements:  SFAS No. 141, “Business Combinations, “ andSFAS No. 142, “Goodwill and Other Intangible Assets. “   SFAS 141 applies to all business combinationswith a closing date after June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of accounting andfurther clarifies the criteria for recognition of intangible assets separatelyfrom goodwill.  InSight adopted SFAS141, effective July 1, 2001.

 

In accordance with SFAS 141 the Company engaged a valuation specialistto assist the Company in identifying acquired intangible assets, theirrespective fair values and amortization periods related to theAcquisition.  The Company has made atentative allocation of values to these identifiable intangible assets based onpreliminary estimates.  The finalallocation of goodwill and other intangible assets may differ significantlyfrom current estimates.

 

SFAS 142 eliminates the amortization of goodwill, permitsindefinite-lived intangible assets and initiates an annual review forimpairment.  Identifiable intangibleassets 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 netgoodwill balance and to perform a transitional goodwill impairment test of July1, 2001, and thereafter an impairment test at least annually.  Impairment results when the fair value ofInSight’s reporting segments, including goodwill, is less than its carryingvalue.  SFAS 142 permits nine monthsfrom the adoption date to complete a review of goodwill for impairment andrecord necessary adjustments prior to the end of fiscal 2002.  InSight concluded that the book value ofgoodwill was not impaired as of July 1, 2001.

 

Also in June 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  SFAS 143 addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. It applies to legal obligations associated with the retirement oflong-lived assets that result from the acquisition, construction, developmentand/or the normal operation of a long-lived asset, except for certainobligations of lessees.  SFAS 143requires that the fair value of a liability for an asset retirement obligationbe recognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset. SFAS 143 is effective for financial statements issued forfiscal years beginning after June 15, 2002 (with earlier application beingencouraged).  The Company does notexpect the adoption of SFAS 143 to have a material impact on the Company’sfinancial condition and results of operations.

 

In August 2001,the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  SFAS 144 addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  SFAS 144 supersedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of, “ and the accounting and reporting provisions of APBOpinion No. 30, “Reporting the Results of Operations — Reporting the Effectsand Transactions, “ for the disposal of a segment of a business (as previouslydefined in that Opinion).  Theprovisions of SFAS 144 are effective for financial statements issued for fiscalyears beginning after December 15, 2001 (with earlier application beingencouraged) and generally are to be applied prospectively.  The Company does not expect the adoption ofSFAS 144 to have a material impact on the Company’s financial condition andresults of operations.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’s discussion and analysis of financial condition and resultsof operations, as well as, disclosures included elsewhere in this report onForm 10-Q are based upon the Company’s condensed consolidated financial statements,which

 

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have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these condensed consolidatedfinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosure of contingencies. The Company believes the criticalaccounting policies that most impact the condensed consolidated financialstatements can be described below.  Asummary of the significant accounting policies of the Company can be found inNote 1 to the consolidated financial statements which is included in Item 8. ofInSight’s Annual Report on Form 10-K for the year ended June 30, 2001.

 

Trade Accounts Receivables:  TheCompany reviews its trade accounts receivables and its estimates of theallowance for doubtful accounts and contractual adjustments each period.  The amount of the allowance includesmanagement’s estimate of the amounts expected to be written off on specificaccounts and for write-offs on other unidentified accounts.  In estimating the write-offs and adjustmentson specific accounts, management relies on a combination of in-house analysisand a review of contractual payment rates from private health insuranceprograms or under the federal Medicare program.  In estimating the allowance for unidentified write-offs andadjustments, management relies on historical experience. Estimates ofuncollectible amounts are revised each period, and changes are recorded in theperiod they become known. The amounts the Company will ultimately realize coulddiffer materially from the amounts assumed in arriving at the allowance fordoubtful accounts and contractual adjustments in the condensed consolidatedfinancial statements at March 31, 2002.

 

**ITEM 3****.    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company provides its services in the United States and receivespayment for its services exclusively in United States dollars.  Accordingly, the Company’s business isunlikely to be affected by factors such as changes in foreign market conditionsor foreign currency exchange rates.

 

The Company’s market risk exposure relates primarily to interest rates,where the Company will periodically use interest rate swaps to hedge variableinterest rates on long-term debt under its New Credit Facilities.  The Company does not engage in activitiesusing complex or highly leveraged instruments.

 

In fiscal 1998, in the normal course of business, InSight entered intoan interest rate swap with a notional amount of $40.0 million, for the purposeof fixing the interest rate of a corresponding amount of $40.0 million offloating rate debt.  This swap had athree year term and was extendable for an additional three years at the optionof the bank.  Under SFAS 133, extendableswaps do not meet the criteria for hedge accounting and changes in fair valueare recognized currently in earnings. During the year ended June 30, 2001, InSight recorded additionalinterest expense of approximately $0.7 million due to changes in the fair valueof the swap.  In March 2001, the swapwas extended for an additional three years by the bank and the Company expects theswap to qualify for hedge accounting through its maturity.

 

At March 31, 2002, the Company had outstanding long-term debt ofapproximately $149.3 million, which has floating rate terms.  The Company had outstanding an interest rateswap, converting $35.5 million of its floating rate debt to fixed ratedebt.  The effect on pre-tax income of a0.125% variance in interest rates would be approximately $0.2 million on anannual basis.  Under the terms of theinterest rate swap agreement, the Company is exposed to credit loss in theevent of nonperformance by the swap counterparty; however, the Company does notanticipate nonperformance by the counterparty.

 

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**PART II****  —  OTHER INFORMATION**

 

**ITEM 2.**** CHANGES IN SECURITIES ANDUSE OF PROCEEDS**

 

(c)                                        The following is a list of securitiessold by the Company during the period covered by this report on Form 10-Qwhich, pursuant to the exemption provided under Section 4(2) of the SecuritiesAct, were not registered under the Securities Act:

 

1.                          On February 25, 2002, the Company issued7,362 shares of the Company's common stock to Roy Assael (Purchaser) pursuantto a Membership Interest Purchase Agreement dated February 25, 2002 between theCompany and Purchaser, in consideration of the purchase of Purchaser’s 10%membership interest in Wilkes-Barre Imaging, LLC, by a wholly owned subsidiaryof the Company.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| **INSIGHT  HEALTH SERVICES HOLDINGS CORP.** |
|---------------------------------------------|
|                                        |   |
|                                        |   |
|                                        |   |
| By                                          | /s/  Steven  T. Plochocki |
|                                        | Steven T. Plochocki |
|                                        | President and Chief Executive Officer |
|                                        |   |
|                                        |   |
|                                        |   |
| By                                          | /s/  Thomas  V. Croal |
|                                        | Thomas V. Croal |
|                                        | Executive Vice President and |
|                                        | Chief Financial Officer |
|                                        |   |
|                                        |   |
| May 14, 2002                                |

 

 

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