**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

**(MarkOne)**

 

**ý****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE FISCAL YEAR ENDED JUNE 30,2002**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIODFROM              TO              **

 

**COMMISSION FILE NUMBER 333-75984**

 

| **INSIGHT  HEALTH SERVICES HOLDINGS CORP.**                                                                                                                                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                              |   |   |
| **DELAWARE**                                                                                                                                                                                                                                                      |   | **04-3570028** |
| (State or other  jurisdiction  of incorporation or  organization)                                                                                                                                                                                                 |   | (I.R.S. Employer  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)                                                                                                                                                                                                         |

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:NONE**

**SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:NONE**

(Title of Class)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ýNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein and will not be contained,to the best of the Registrant’s knowledge, in definitive proxy or informativestatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

The aggregate market value of the voting stock held by non-affiliatesof the Registrant as of August 30, 2002 (based on the price at which the commonstock was valued on that date) was $132,516. The number of shares outstanding of the Registrant’s common stock as ofAugust 30, 2002 was 5,468,764.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Certain exhibits are incorporated herein by reference as set forth inItem 15(a) (3), Exhibits, in Part IV.

 

 

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**PART I**

 

**ITEM1.          BUSINESS**

 

**ORGANIZATION AND ACQUISITION**

 

InSight Health Services Holdings Corp. (“Company”), a Delawarecorporation, was incorporated on June 13, 2001 under the name JWC/HalifaxHoldings Corp.   The Company was fundedthrough an equity contribution from J.W. Childs Equity Partners II, L.P.,Halifax Capital Partners, L.P. and certain of their affiliates.  On June 29, 2001, the Company’s name waschanged to InSight Health Services Holdings Corp.  The Company and its former wholly owned subsidiary, InSightHealth Services Acquisition Corp. (“Acquisition Corp.”) were created to acquireall the outstanding shares of InSight 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 and becoming a whollyowned subsidiary of the Company.  Theconsolidated operations of the Company after the Acquisition are substantiallyconsistent with the operations of InSight prior to the Acquisition.  In addition, the Company has no operationsother than its investment in InSight. As such, InSight is considered the predecessor to the Company inaccordance with Regulation S-X.  Unlessthe context requires otherwise, references in this report on Form 10-K to theCompany generally will be to the Company and its subsidiaries, principallyInSight.

 

The principal executive offices of the Company are located at 4400MacArthur Blvd., Suite 800, Newport Beach, California 92660, and its telephonenumber is (949) 476-0733.

 

**CENTERSIN OPERATION**

 

The Company, through InSight and its subsidiaries, provides diagnosticimaging, treatment and related management services in 29 states throughout theUnited States.  The Company has tworeportable segments:  Mobile Divisionand Fixed-Site Division.  The Company’sservices are provided through a network of 88 mobile magnetic resonance imaging(“MRI”) facilities, eight mobile positron emission tomography (“PET”)facilities, four mobile lithotripsy facilities (collectively, “MobileFacilities”), 41 fixed-site MRI facilities (“Fixed Facilities”), 28multi-modality fixed-site imaging centers (“Centers”), one Leksell StereotacticGamma Knife fixed-site treatment center, one PET fixed-site center, and oneradiation oncology fixed-site center. An additional radiation oncology fixed-site center is operated by theCompany as part of one of its Centers. The Company has a substantial presence in California, Texas, NewEngland, the Carolinas, Florida and the Midwest (Indiana and Ohio).  Information related to these facilities andthe Division in which they are located is set forth below:

 
|                  |   | **Mobile Division** |   | **Fixed-Site Division** |   |
|-----------------------|--------|---------------------|--------|-------------------------|--------|
| Mobile MRI Facilities |   | 85                  |   | 3                       |   |
| Fixed MRI Facilities  |   | 19                  |   | 22                      |   |
| Centers               |   | —              |   | 28                      |   |
| Other facilities      |   | 14                  |   | 1                       |   |

 

The Mobile Division includes 19 parked Mobile Facilities, each of whichserves a single customer.  TheFixed-Site Division includes three Mobile Facilities as part of the Company’sFixed-Site Division operations in Maine.

 

Certain financial information regarding the Company’s reportablesegments is included within Note 18 of the Notes to the Consolidated FinancialStatements, which are a part of this report.

 

At its Centers, the Company typically offers other services in additionto MRI, including computed tomography (“CT”), diagnostic and fluoroscopicx-ray, mammography, diagnostic ultrasound, nuclear medicine, bone densitometry,nuclear cardiology, and cardiovascular services.

 

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**DIAGNOSTICIMAGING AND TREATMENT TECHNOLOGY**

 

During approximately the last 30 years there has been a major effortundertaken by the medical and scientific communities to develop cost-effectivediagnostic imaging technologies and to minimize the risks associated with theapplication of such technologies. The major categories of diagnostic imagingsystems currently offered in the medical marketplace are MRI systems, CTscanners, PET scanners, digital ultrasound systems, computer-based nucleargamma cameras, conventional x-ray and radiography/fluoroscopy systems, each ofwhich (other than conventional x-ray) represents the marriage of computertechnology and various medical imaging modalities.  Patients exposed to x-rays and to gamma rays employed in nuclearmedicine receive potentially harmful ionizing radiation.  Much of the thrust of product developmentduring the period has been to reduce the hazards associated with conventionalx-ray and nuclear medicine techniques and to develop new, virtually harmlessimaging technologies such as ultrasound and MRI.

 

MRI: Magnetic resonance is atechnique that utilizes low energy radiowaves to manipulate protons (usuallyhydrogen) in the body. MRI systems place patients in a magnetic field.  Once in the magnetic field, the protons in apatient’s body will tend to align with the magnetic field.  Radio frequency (“RF”) waves, produced by aradio antenna coil, which surrounds the body part to be imaged, are “pulsed”against the magnetic field.  The RFenergy is then turned off, and the protons are observed for different types ofbehavior, movement or “relaxation.” Different tissues have different relaxation times, depending on theamount of hydrogen or water in each proton. The data on each proton’s behavior is collected digitally by thesystem’s computer and then reconstructed into cross–sectional images inthree-dimensional planes of orientation. The resulting image reproduces soft tissue anatomy (as found in thebrain, spinal cord and interior ligaments of body joints such as the knee) withsuperior clarity, not available by any other currently existing imagingmodality.  A typical MRI examinationtakes from 20 to 45 minutes. MRI systems are typically priced in the range of$0.9 million to $2.0 million each, depending upon the system configuration,magnet design and field strength.

 

There are no known hazards to the general population from magnetic andRF fields of the intensity to which a patient is exposed in a clinical MRIsystem.  Equipment literature recommendsthat, until further information is available, pregnant women should be scannedonly under limited circumstances. Furthermore, MRI magnets may disrupt the operation of cardiac pacemakersand may react with metal implants utilized in various surgical procedures.  Additionally, some MRI examinations require injectionof a paramagnetic contrast material, allowing for better visualization of theanatomy.  Although it is unusual, somepatients may develop a significant adverse reaction to these contrastmaterials; however, chances of fatalities as a result of such reaction areremote.  Patients are screened tosafeguard against potential risks, but screening may nevertheless fail toidentify the hazard.

 

Because the signals used to produce magnetic resonance images containboth chemical and structural information, the Company believes this techniquehas greater potential for more important diagnostic applications than any otherimaging technology currently in use. While existing MRI systems demonstrate excellent portrayals ofanatomical structures within the human body, of even greater significance isthe fact that MRI is also sensitive to subtle differences between tissues.  Thus, MRI offers not only the opportunityfor highly effective classical diagnosis, but also the potential for futuremonitoring of chemical processes within the body.  Recent technological advancements include:  (i) magnetic resonance spectroscopy, whichcan differentiate malignant from benign lesions in the brain and prostate and(ii) magnetic resonance angiography, which can produce non-invasive images ofblood vessels and obviate the need for invasive conventional x-ray angiographyprocedures.

 

OPEN MRI:  Technological advances in software and gradient coil technologyfor MRI systems have allowed equipment with lower magnetic field strength andopen architecture design to offer significantly improved image quality.  Most Open MRI systems use permanentelectromagnetic technology, which substantially lowers both siting and servicecosts, but does not provide images as efficiently as high-field MRIsystems.  The open design allows forstudies not normally possible in conventional MRI systems, includingexaminations of infants, pediatric patients, claustrophobic patients, large orobese patients and patients suffering from post-traumatic stress syndrome.  Open MRI is also capable of conductingmusculoskeletal exams that require the patient to move or flex, such askinematic knee studies.  A typical OpenMRI non-kinematic exam takes from 45 to 90 minutes.  Open MRI systems are priced in the range of $0.6 million to $1.3million each.

 

CT: CT technology consists of a doughnut-shaped gantry structure into whicha patient, resting on a remotely controlled couch assembly, is positioned toscan the anatomical region of interest. The scanning process is performed by the rotation of a high output x-raytube around the patient.  The x-ray tubeemits a thin fan-shaped beam of x-rays that passes through the patient and isabsorbed by an array of x-ray detectors located on the opposite side of thepatient from the x-ray tube.  Thedetected x-rays are then converted into digital measurements of x-ray intensitydirectly proportional to the density of the portion of the patient throughwhich the beam passes.  These digitalmeasurements of x-ray intensity are then processed by a specialized imagereconstruction computer system into a cross–sectional image of theanatomical region of interest.  Thepatient is then indexed on the couch and

 

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another scan is performed and then another, creating a “stack” ofcross-sectional images constituting the complete diagnostic imagingprocedure.  In the last two years, CTtechnology has made significant advancements by decreasing the slice thicknessof tissue, reducing radiation exposure to the patient, and reducing the time ittakes to acquire the images.  Theadvancements are referred to as multi-detector computerized technology(“MDCT”).  The new MDCT systems permithigh resolution imaging of organs, blood vessels, and coronary arteries.

 

Typical scanning times for a single cross-sectional image are in thehalf second to six second range, depending on the type of CT system andspecific technique being performed.  Acomplete CT examination takes from 15 to 45 minutes, depending on thecomplexity of the examination and number of individual cross-sectional imagesrequired.  CT systems are typicallypriced in the range of $0.3 million to $1.2 million each, depending upon thespecific performance characteristics of the systems.  Based on the fact that CT systems have been commercially marketedfor approximately 30 years, the Company believes that CT is a relatively maturetechnology and, therefore, not subject to significant risk of obsolescence.

 

Certain CT examinations require the injection of an iodine-basedcontrast material, allowing for better visualization of the anatomy.  Although it is very unusual, some patientsmay develop a significant adverse reaction to this contrast material.  Fatalities as a result of such reaction haveoccurred, but are rare.  In an effort toscan only appropriate patients, all patients are required to answer aquestionnaire, which helps to identify those patients who may suffer an adversereaction to this contrast material.

 

PET:  PET scanning involves the administration of a radiopharmaceuticalagent with a positron-emitting isotope and the measurement for the distributionof that isotope to create images for diagnostic purposes.  PET scans provide the capability todetermine how metabolic activity impacts other aspects of physiology in thedisease process by correlating the reading from the PET study with otherstudies such as CT or MRI.  PETtechnology has been found highly effective and appropriate in certain clinicalcircumstances for the detection and assessment of tumors throughout the body,the evaluation of certain cardiac conditions and the assessment of epilepsyseizure sites.  The information providedby PET technology often obviates the need to perform further highly invasiveand/or diagnostic surgical procedures. Interest in PET scanning has increased recently due to several factorsincluding: (i) the expansion of available hardware options through theintroduction of dual head gamma camera coincidence detection; (ii) increasedpayor coverage and reimbursement; (iii) the availability of the isotopeswithout an in-house cyclotron; and (iv) a growing recognition by cliniciansthat PET is a powerful diagnostic tool that can be used to evaluate and guidemanagement of a patient’s disease.  PETscanners are typically priced in the range of $1.0 million to $1.4 millioneach.  Radiopharmaceutical distributionnetworks have been established across the United States to ensure consistentavailability of and access to the isotopes. The development of these networks has made mobile PET a businessdevelopment opportunity.

 

ULTRASOUND:  Ultrasound systems emit, detect and processhigh frequency sound waves to generate images of soft tissues and internal bodyorgans.  The sound waves used inultrasound do not involve ionizing radiation and are not known to cause anyharmful effects to the patient.

 

NUCLEAR MEDICINE:  Nuclear medicine gamma cameras, which arebased upon the detection of gamma radiation generated by radioactivepharmaceuticals injected or inhaled into the body, are used to provideinformation about organ function as opposed to anatomical structure.

 

X-RAY:   X-ray is the most common energy source used in imaging the bodyand is now employed in the following three imaging modalities: (i) conventionalx-ray systems, the oldest method of imaging, are typically used to image bonesand contrast-enhanced vasculature and organs and constitute the largest numberof installed systems; (ii) CT scanners utilize computers to producecross-sectional images of particular organs or areas of the body; and (iii)digital x-ray systems add computer image processing capability to conventionalx-ray systems.

 

MAMMOGRAPHY:  Mammography is a low-level conventionalx-ray of the breasts.  Its primarypurpose is to detect lesions (abnormal growths) in the breast that may be toosmall or deeply buried to be felt in regular breast examination.  The benefits of digital mammography arelower radiation doses to the breast, higher sensitivity to lesions, and reducedprocedure times compared to conventional film mammography.

 

RADIATION ONCOLOGY:  Radiation oncology generally uses externalbeam radiation from a linear accelerator to treat cancer with ionizingradiation of the same type, but at higher doses, as used for diagnostic x-rays.  In addition

 

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to x-rays, certain linear accelerators have the capacity to produceelectrons.  While x-ray radiation canpenetrate the body a certain distance before delivering its maximum dose, and thereforecan treat internal structures, electrons have less penetrating ability andpermit the clinician to treat superficial lesions.  Radiation oncology also includes brachytherapy, which implantsradioactive sources directly into or near a tumor.

 

LITHOTRIPSY:  Lithotripsy is a non-invasive procedure forthe treatment of kidney stones, typically performed on an outpatient basis,that eliminates the need for lengthy hospital stays and extensive recoveryperiods associated with surgery. Lithotripters shatter kidney stones through the use of extracorporealshockwaves, following which the resulting kidney stone fragments pass out ofthe body naturally.

 

BONE DENSITOMETRY:  Bone densitometry, using an advancedtechnology called DEXA (dual-energy X-ray absorptiometry), safely, accuratelyand painlessly measures bone density and the mineral content of bone for thediagnosis of osteoporosis and other bone diseases.  Bone densitometry uses an extremely low level of radiation andgives a quantifiable measurement of the patient’s bone mass.  When detected in its earlier stages,osteoporosis and other bone diseases can be treated with new drug therapiesthat have been shown to effectively slow or reverse the bone-loss process.

 

GAMMA KNIFE:  The Gamma Knife is a radiosurgical deviceused to treat intracranial neoplasms and vascular anomalies, which areinaccessible or unsuitable for conventional invasive surgery.  The Gamma Knife was designed to provideneurosurgeons and radiation therapists with the ability to performradiosurgery, using high-energy gamma rays, instead of conventional invasivetechniques (open surgery), thereby generally eliminating the risk of infectionand intracerebral bleeding.  The GammaKnife delivers a single high dose of ionizing radiation emanating from 201individual Cobalt 60 sources focused on a common target producing an intenseconcentration of radiation at the target site, destroying the lesion whilespreading the entry radiation dose uniformly and harmlessly over the patient’sskull.  The Gamma Knife treatmentrequires no open surgical intervention, no lengthy hospital stay and no risk ofpost-surgical bleeding or infection. When compared to the average length of stay and costs associated withconventional surgery, the Gamma Knife greatly reduces the cost of neurosurgicaltreatment.  Typical treatment time isapproximately 10 to 15 minutes per area of interest.  In addition, other applications for the Gamma Knife includetreatment of patients for chronic pain and motion disorders such as Parkinson’sdisease, epilepsy and trigeminal neuralgia. A Gamma Knife system typically costs approximately $3.0 million.

 

**BUSINESSDEVELOPMENT**

 

The Company’s objective is to be the leading provider of outsourceddiagnostic imaging services in its target markets by further developing andexpanding its regional diagnostic imaging networks that emphasize quality ofcare, 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 continued reduction ofexpenses.

 

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 procedures and favorable reimbursement levels,although effective January 1, 2002, The Centers for Medicare and MedicaidServices (“CMS”) reduced the Medicare payments for PET services to hospitaloutpatients, as discussed below.  TheCompany also intends to pursue joint venture opportunities with hospitalsbecause management believes that they have the potential to provide the Companywith a steady source of procedure volume. In addition, management believes that this will be an area foradditional growth because the Company expects hospitals to respond to recentfederal health care regulatory changes by outsourcing radiology services toimaging centers that are jointly owned and managed with third parties.

 

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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 positioned tocapitalize 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 discussedbelow, InSight has a $75 million delayed draw term loan facility availableuntil October 17, 2003 to pursue acquisition opportunities.  As of August 30, 2002, there were noborrowings under this facility.

 

In fiscal 2000, InSight completed two acquisitions as follows: twoFixed Facilities in Indianapolis and Clarksville, Indiana, respectively; and a90% interest in a partnership which owns a Center in Wilkes-Barre,Pennsylvania.  In fiscal 2002, theCompany purchased the remaining 10% interest in the partnership.  InSight utilized bank financing to fund thepurchase price of these acquisitions.

 

In fiscal 2000, InSight opened the following:  a radiology co-source outpatient Fixed Facility in Granada Hills,California; a radiology co-source outpatient Center in Henderson, Nevada; andan Open MRI Fixed Facility in Pleasanton, California.  These were financed through both capital leases and internallygenerated funds.

 

In fiscal 2001, InSight opened a radiology co-source outpatient FixedFacility in Marina Del Rey, California, which was financed with internallygenerated funds and a capital lease; and a PET fixed-site center in Louisville,Kentucky, which was financed with outside financing.  In the first quarter of fiscal 2003, the Company sold itsinterest in the PET fixed-site center.

 

In fiscal 2002, InSight opened a radiology co-source outpatient FixedFacility in Largo, Florida, which was financed with an operating lease: and aFixed Facility in Bangor, Maine, which was financed with internally generatedfunds.

 

In the first quarter of fiscal 2003, the Company opened a FixedFacility in Encinitas, California, which was financed with internally generatedfunds and a capital lease.

 

**GOVERNMENT REGULATION**

 

The health care industry is highly regulatedand changes in laws and regulations can be significant. Changes in the law ornew interpretation of existing laws can have a material effect on permissibleactivities of the Company, the costs of doing business and the amount ofreimbursement by government and private payors.  The federal government and all states in which the Companyoperates regulate various aspects of the Company’s business. Failure to comply with these lawscould adversely affect the Company’sability to receive reimbursement for its services and could subject the Companyand its officers and agents to civil and criminal penalties.

 

FEDERAL FALSE CLAIMS ACT:  There has been an increase in actionsbrought under the federal False Claims Act and, in particular, under the Act’s *qui tam or* “whistleblower” provisions.  These provisions allow a private individualto initiate an action in the name of the government alleging that the defendanthas submitted false claims seeking payment from the federal government.  After the whistleblower initiates thelawsuit, the government must decide whether to intervene and take overprosecution of the case.   During theperiod when the government is determining whether to intervene, all pleadingsremain under seal and the pendency of the lawsuit is kept secret, even from thenamed defendants.  If the governmentdeclines to join the lawsuit, the whistleblower may choose to pursue the casewithout the government’s assistance.  Inthat event, however, the government must be kept apprised of the progress ofthe lawsuit, and retains the right to intervene at a later stage.

 

An entity found to have violated the federal False Claims Act must paythree times the actual damages sustained by the government, plus civilpenalties of $5,500 to $11,000 for each separate false claim, as well as thegovernment’s attorneys’ fees.  To establishliability, the government (or the whistleblower) must prove that the defendantacted “knowingly.”  Under the Act, falseclaims are submitted knowingly when the provider has actual knowledge of their

 

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falsity or acts with deliberate ignorance or reckless disregard oftheir truth or falsity.  Simplenegligence, however, should not give rise to liability. Thus, if an entityknowingly submits or causes another person to submit a false claim to the government,it may be liable under the Act. Assuming the government could prove the requisite intent on the part ofthe Company, examples of actions which may lead to potential False Claims Actexposure are:  (i) failure to complywith the many technical billing requirements applicable to the Company’sMedicare and Medicaid business; (ii) failure to comply with Medicarerequirements concerning the circumstances under which a hospital, rather thanthe Company, must bill Medicare for diagnostic imaging services the Companyprovides to outpatients treated by the hospital; (iii) failure of the Company’shospital customers to accurately identify and report the Company’s reimbursableand allowable services to Medicare; (iv) failure to comply with the prohibitionagainst billing for services ordered or supervised by a physician who isexcluded from any federal health care programs, or the prohibition againstemploying or contracting with any person or entity excluded from any federalhealth care programs; (v) failure to comply with the Medicare physiciansupervision requirements for the services the Company provides, or the Medicaredocumentation requirements concerning such physician supervision; (vi)violations of the Anti-kickback Statute or Stark Law (see “Anti-kickbackStatues” and “Stark II; State Physician Self-Referral Laws”); and (vii) thepast conduct of the businesses the Company has acquired.

 

Whether or not the federal government intervenes in the False ClaimsAct lawsuit, it is entitled to the lion’s share of any recovery.   In a successful action, the whistlebloweris generally awarded no less than 15%, but no more than 30%, of therecovery.  The percentage to which thewhistleblower is entitled varies, depending on whether the governmentintervened in the case and other factors.

 

Recently, the number of False Claims Act suits brought against healthcare providers by government regulators and private individuals has increasedsubstantially. In addition, various states are considering or have enacted lawsmodeled after the federal False Claims Act. If a False Claims Act case is brought against the Company, even if it isdismissed with no judgment or settlement, the Company could incur substantiallegal fees and other costs relating to an investigation or litigation. TheCompany strives to ensure that its documentation is complete, its billing andcoding are accurate, and that all aspects of its operations are consistent withregulatory requirements.  See“Compliance Program.”  However, thecosts of defending False Claims Act lawsuits, as well as the sanctions that maybe imposed under the Act and the diversion of management resources couldadversely affect the Company’s business, financial condition and results ofoperations.

 

ANTI-KICKBACK STATUTES:  The Company is subject to numerous federaland state laws governing financial and other arrangements between and amonghealth care providers, payors and other industry participants.   One of the most prominent of these laws isthe federal anti-kickback statute.  Thisstatute prohibits the knowing and willful solicitation, offer, payment oracceptance of any remuneration, direct or indirect, in cash or in kind, inreturn for, or to induce the referral of items or services covered by Medicare,Medicaid and certain other governmental health care programs.  To establish anti-kickback liability thegovernment must prove that the defendant acted intentionally.  Violation of the anti-kickback statute mayresult in criminal and civil penalties and exclusion from Medicare, Medicaidand other federal health care programs.

 

As noted above, some courts have permitted False Claims Actwhistleblowers to file actions based on alleged anti-kickback violations.  In addition, many states have enactedsimilar statutes, applying the kickback prohibitions outside the context offederally sponsored health care benefit programs.

 

In recent years, there has been increasing scrutiny by law enforcementauthorities, the Department of Health and Human Services (“HHS”), the courtsand Congress of financial arrangements between health care providers andpotential referral sources to ensure that such arrangements do not violate theanti-kickback statute.  The statute isbroadly worded and several courts have liberally construed its provisions.  Consequently, many common industry practicescould violate the statute if undertaken with the requisite intent to induce thereferral of Medicare or Medicaid business.

 

Not surprisingly, the anti-kickback statute has been applied to a widerange of financial arrangements, including under certain circumstances:  (i) distributions of partnership andcorporate profits to investors who refer federal health care program patientsto a corporation or partnership in which they have an ownership interest;and  (ii) service contracts andequipment leases that are intended, even if only in part, to provide direct orindirect remuneration for patient referrals or similar opportunities to furnishitems or services reimbursable by a federal health care program. The anti-kickbackstatute, however, does contain exceptions and the Secretary of HHS has

 

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promulgated several regulatory “safe harbors.”  Arrangements that meet the specificrequirements of a safe harbor are protected from liability under theanti-kickback statute.  These safeharbors are narrowly drawn and many financial relationships common in theindustry do not qualify for protection. The failure of an arrangement to fit within a safe harbor, however, doesnot mean that the arrangement is illegal. Rather, such arrangements are subject to a traditional facts andcircumstances analysis to determine whether they run afoul of the anti-kickbackstatute’s prohibitions.

 

The Company believes that its operations materially comply with thefederal anti-kickback statute and similar regulatory prohibitions.  However, because of the breadth of thestatute and the narrowly drawn exceptions and safe harbors, not all of theCompany’s arrangements fit within an exception or qualify for safe harborprotection.  Compliance with the safeharbor requirements, however, is not mandatory and the Company believes thatits arrangements that do not fit within a safe harbor are nonethelessappropriate.  Because the anti-kickbackstatute and similar laws have been broadly interpreted, there can be noassurance that law enforcement officials or others will not challenge theCompany’s operations under these statutes. Should any anti-kickback investigation be initiated or claim filed, itwould divert the attention of management, negatively affecting theCompany.  Moreover, the costs ofdefending such a claim, as well as any sanctions that may be imposed on theCompany, could adversely affect the Company’s business, financial condition andresults of operations.

 

CIVIL MONEY PENALTY LAW AND OTHER FEDERAL STATUTES:  The Civil Money Penalty (“CMP”) law covers avariety of practices.  It provides ameans of administrative enforcement of the anti-kickback statute, and prohibitsfalse claims, claims for medically unnecessary services, violations of Medicareparticipating provider or assignment agreements and other practices.  The statute gives the Office of theInspector General of HHS the power to seek substantial civil fines, exclusionand other sanctions against providers or others who run afoul of the CMPprohibitions.

 

In addition to the anti-fraud statutes described above, in 1996,Congress created the new federal crimes of health care fraud and making falsestatements relating to health care matters.   The health care fraud statute prohibits knowingly and willfullyexecuting a scheme to defraud any health care benefit program, includingprivate payors.  A violation of this statuteis a felony and may result in fines, imprisonment or exclusion from governmentsponsored programs such as the Medicare and Medicaid programs.  The false statements statute prohibitsknowingly and willfully falsifying, concealing or covering up a material factor making any materially false, fictitious or fraudulent statement inconnection with the delivery of or payment for health care benefits, items orservices, including those provided by private payors.  A violation of this statute is a felony and may result in finesor imprisonment.

 

The Company believes that its operations materially comply with the CMPlaw and the new health care fraud statutes. These prohibitions, however, are broadly worded and there is limitedauthority interpreting their parameters. Therefore, there can be no assurance that the government will not pursuea claim against the Company based on these statutes.  Such a claim would divert the attention of management and couldresult in substantial penalties which could adversely affect the Company’sbusiness, financial condition and results of operations.

 

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT(“HIPAA”):  In 1996,Congress passed HIPAA.  Although themain focus of HIPAA was to make health insurance coverage portable, HIPAA hasbecome a short-hand reference to new standards for electronic transactions andprivacy and security obligations imposed on providers and others who handlepersonal health information.  HIPAArequires most health care providers to adopt standard formats for commonelectronic transactions with health plans, and to maintain the privacy andsecurity of individual patients’ health information.  The privacy standards will go into effect in April 2003 and thestandards for electronic transactions in October 2003.

 

The Company is beginning to address compliance with HIPAA and expectsto spend approximately $1.5 million for necessary software upgrades to make itsproprietary computer operating system compliant with HIPAA privacy standards byApril 2003 and HIPAA transaction standards by October 2003 (of whichapproximately $0.3 million had been spent as of June 30, 2002).  A violation of HIPAA’s privacy provisionsmay result in criminal and civil penalties, which could adversely affect theCompany’s business, financial condition and results of operations.

 

STARK II; STATE PHYSICIAN SELF-REFERRAL LAWS:  The federal Physician Self-Referral or“Stark” law prohibits a physician from referring Medicare patients for certain“designated health services” (“DHS”) to an entity with which the physician (oran immediate family member of the physician) has a financial relationshipunless an

 

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exception applies.  In addition,the receiving entity is prohibited from billing for services provided pursuantto the prohibited referral.

 

Designated health services under Stark include radiology services (MRI,CT, x-ray, ultrasound and others), radiation therapy, inpatient and outpatienthospital services and several other services. A violation of the Stark law does not require a showing of intent.  If a physician has a financial relationshipwith an entity that does not qualify for an exception, the referral of Medicarepatients to that entity for DHS is prohibited and, if the entity bills for suchservices, the Stark sanctions apply.

 

Sanctions for violating Stark include denial of payment, mandatoryrefunds, civil money penalties and /or exclusion from the Medicare program. Inaddition, some courts have allowed federal False Claims Act lawsuits premisedon Stark Law violations.

 

The federal Stark Law prohibition is expansive, its statutory languageambiguous, and the guidance from the regulators often contradictory.  Consequently the statute has beennotoriously difficult to interpret.   In1995, the Health Care Financing Administration (recently renamed CMS) publishedfinal regulations interpreting the Stark prohibition as applied to clinicallaboratory services.  In 1998, CMSreleased proposed regulations interpreting Stark as applied to all DHS.  In 2001, CMS finally published a portion ofthe final Stark regulations.  Theseregulations went into effect in January 2002. The second portion or phase of the final Stark regulations has yet to bepublished.  With each set ofregulations, CMS’s interpretation of the statute evolved.  This has resulted in considerable confusionconcerning the scope of the referral prohibition and the requirements of thevarious exceptions.

 

CMS has not given a definitive date for the publication of theremaining final regulations.  It isnoteworthy, however, that the agency has taken the position that the Stark Lawis self-effectuating and does not require implementing regulations.   Thus, the government believes thatphysicians and others must comply with the Stark Law prohibitions regardless ofthe state of the regulatory guidance.

 

The Stark Law does not directly prohibit referral of Medicaid patients,but rather denies federal financial participation to state Medicaid programsfor services provided pursuant to a tainted referral.  Thus, Medicaid referrals are subject to whatever sanctions therelevant state has adopted.  Severalstates in which the Company operates have enacted or are consideringlegislation that prohibits “self-referral” arrangements or requires physiciansor other health care providers to disclose to patients any financial interestthey have in a health care provider to whom they refer patients.  Possible sanctions for violating these statestatues include loss of licensure, civil fines and criminal penalties.  The laws vary from state to state and seldomhave been interpreted by the courts or regulatory agencies.  Nonetheless, strict enforcement of theserequirements is likely.

 

The Company believes its operations materially comply with the federaland state physician self-referral laws. However, given the ambiguity of these statutes, the uncertainty of theregulations and the lack of judicial guidance on many key issues, there can beno assurance that the Stark Law or other physician self-referral regulationswill not be interpreted in a manner that could adversely affect the Company’sbusiness, financial condition and results of operations.

 

FDA:  The U.S. Food and Drug Administration (“FDA”) has issued therequisite approvals for all of the MRI, CT, PET, lithotripsy and Gamma Knifesystems used by the Company.  With theexception of certain mammography facilities, the Company believes that nofurther FDA approval is required in connection with equipment currently inoperation or proposed to be operated. Under regulations issued by the FDApursuant to the Mammography Quality Standards Act of 1992, all mammographyfacilities must have a certificate issued by the FDA.  In order to obtain a certificate, mammography facilities must beaccredited by an FDA approved accreditation body (a private, non-profitorganization or state agency) or other entity designated by the FDA.

 

Mammography facilities must also comply with FDA’s mammographystandards, which include annual inspections by an FDA approved accreditationbody or FDA designated entity. Compliance with FDA mammography quality standards, which apply todiagnostic and screening mammography, is also required for Medicarereimbursement.  Congress has extendedMedicare benefits to include coverage of screening mammography.

 

Although all of the Company’s facilities that provide mammographyservices currently are accredited by the Mammography Accreditation Program ofthe American College of Radiology, an FDA approved accreditation body, and theCompany anticipates

 

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continuing to meet the requirements for accreditation, the withdrawalof such accreditation could result in revocation or suspension of certificationby the FDA, ineligibility for Medicare reimbursement and sanctions, includingmonetary penalties.

 

RADIOLOGIST AND FACILITY LICENSING:  The radiologists with whom the Companycontracts to provide professional services are subject to licensing and relatedregulations by the states, including registrations relating to the use ofradioactive materials.  The Company requiresits radiologists to maintain appropriate licensure and registrations.  In addition, some states also imposelicensing or other requirements on the Company or its facilities, and otherstates may impose similar requirements in the future.  Some local authorities also require the Company to obtain variouslicenses, permits and approvals.  TheCompany believes that it has obtained all material licenses and permits;however, no assurance can be made either that the criteria governing licensingor permitting will not evolve or that additional laws and licensingrequirements governing the Company’s facilities will not be enacted.  Such changes could adversely affect on theCompany’s business, financial condition and results of operations.

 

LIABILITY INSURANCE:  The hospitals and physicians who use theCompany’s diagnostic imaging systems are involved in the delivery of healthcare services to the public and, therefore, are exposed to the risk ofliability claims. The Company’s position is that it does not engage in thepractice of medicine.  The Companyprovides only the equipment and technical components of diagnostic imaging,including certain limited nursing services, and has not experienced anymaterial losses due to claims for malpractice. Nevertheless, claims for malpractice have been asserted against theCompany in the past and any future claims, if successful, could entailsignificant defense costs and result in substantial damage awards to theclaimants, which may exceed the limits of any available insurancecoverage.  The Company maintainsprofessional liability insurance in amounts it believes are adequate for itsbusiness of providing diagnostic imaging, treatment and management services.  In addition, the radiologists or otherhealth care professionals with whom the Company contracts are required by theircontracts to carry adequate medical malpractice insurance.  Successful malpractice claims assertedagainst the Company, to the extent not covered by the Company’s liabilityinsurance, could adversely affect the Company’s business, financial conditionand results of operations.

 

INDEPENDENT DIAGNOSTIC TREATMENT FACILITIES:  CMS has established a new category ofMedicare provider intended to replace Independent Physiological Laboratories(“IPLs”), referred to as Independent Diagnostic Treatment Facilities (“IDTFs”).Under the IDTF regulations, imaging centers have the option to participate inthe Medicare program as either IDTFs or medical groups.  The IDTF regulations include more specificoperational requirements than were previously required for IPLs.  The Company has converted all of its Centersand Fixed Facilities from IPLs to IDTFs, except in those states where themedical group model is required.  Inaddition, since the IDTF designation is relatively new, it is unclear to whatextent and in what manner IDTFs will be monitored by CMS, but it is probablethat CMS will exercise increased oversight of IDTFs compared to IPLs.   This could adversely affect the Company’sbusiness, financial condition and results of operations.

 

CERTIFICATES OF NEED:  Some states require hospitals and certainother health care facilities and providers to obtain a certificate of need(“CON”) or similar regulatory approval before: (i) establishing certain healthcare operations or services; (ii) incurring certain capital expenditures;and/or  (iii) the acquisition of majormedical equipment including MRI, PET and Gamma Knife systems. CON regulationsmay limit or preclude the Company from providing diagnostic imaging services orsystems in certain states. The Company believes it has complied or will complywith applicable CON requirements in those states where it operates.  Nevertheless, a significant increase in thenumber of states regulating the Company’s business within the CON or statelicensure framework could adversely affect the Company’s business, financialcondition and results of operations. Conversely, repeal of existing CON regulations in jurisdictions wherethe Company has obtained or operates under a CON could also adversely affectthe Company’s business, financial condition and results of operations asbarriers to entry are reduced or removed. This is an area of continuing legislative activity, and there can be noassurance that the CON and licensing statutes will not be modified in thefuture in a manner which could adversely affect the Company’s business,financial condition and results of operations.

 

**REIMBURSEMENT OF HEALTH CARE COSTS**

 

MEDICARE:  The Medicare program is a federal health insurance program thatprovides certain health care benefits to beneficiaries who are 65 years of ageor older, disabled or otherwise qualified to receive coverage.  “Part A” of the Medicare program providesreimbursement for inpatient hospital and other facility services and “Part B”of the

 

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program provides reimbursement for certain physician, diagnostic andother outpatient services.  Providersare paid by the federal government in accordance with regulations promulgatedby the HHS.  Generally, providers mustaccept Medicare payments as payment in full and can recover only limiteddeductible and co-insurance amounts from Medicare beneficiaries.  Under Medicare Part B, the reimbursementavailable for radiology services includes a component for the professionalservices (the “professional component”) as well as a “technical component” foroverhead expenses such as the facilities, equipment and non-physician staff.

 

CMS recently implemented a new prospective payment system for hospitaloutpatient services (“OPPS”). Effective August 1, 2000, Medicare began payinghospitals for outpatient services based on ambulatory payment classification(“APC”) groups rather than on a hospital’s costs.  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 soften the negative financial effectsfor a specific period of time (through 2003).  Under the BBA, hospitals may receive additional payments for newtechnologies, transitional pass-through payments for innovative medicaldevices, drugs and biologics, outlier adjustments and transitional paymentcorridors.

 

As the BBA transitional payments phase out or expire, some of theCompany’s hospital customers may decide to discontinue or restructure theirarrangements with providers of diagnostic imaging services.  This may have a material adverse effect onthe Company’s operations.   In addition,the Benefits Improvement and Protection Act of 2000 (“BIPA”) included certainprovisions requiring CMS to revise the APCs to separate contrast-enhanceddiagnostic imaging procedures from those that are not contrast-enhanced.  Effective January 1, 2002, CMS reducedpayment for unenhanced diagnostic procedures and increased payment forcontrast-enhanced diagnostic procedures.  The extent to which this disparity in reimbursement will continue isunclear.

 

Congressional and regulatory actions reflect industry-wide costcontainment pressures which the Company believes will affect all health careproviders for the foreseeable future. Even though a recent initiative by CMS toimpose a 24% reduction in Medicare payment for the technical component ofdiagnostic imaging services provided in non-hospital settings was indefinitelypostponed due to flaws in CMS cost study methodology, CMS has indicated that itwill continue to evaluate diagnostic imaging technical componentreimbursement.  There can be no assurancethat Medicare Part B payment for diagnostic imaging services will not befurther reduced in the future, which could adversely affect the Company’sbusiness, financial condition and results of operations.

 

In order for the Company’s hospital customers to receive payment fromMedicare with respect to the Company’s Mobile Facilities, the services must befurnished in a “provider-based” department or be a covered service furnished“under arrangements.”  On April 7, 2000,Medicare published new rules establishing financial, clinical and administrativecriteria for “provider-based” departments, as well as new requirements formanagement contracts for “provider-based” departments. These rules were amendedon August 1, 2002 and impose stricter standards for services provided offsiteof a hospital than for services provided on a hospital campus.  The Company’s services to hospitals may notmeet Medicare’s new standards for being a “provider-based” service.  If the Company’s services to hospitalcustomers are not furnished in a “provider-based” setting, the services wouldnot be covered by Medicare unless they are found to be a service furnished“under arrangements” to a hospital.  Theextent to which “under arrangements” services may be covered by Medicare whenthey do not meet the “provider-based” standards is unclear.  In BIPA, Congress “grandfathered” untilOctober 1, 2002 all sites that were paid as “provider-based” sites as ofOctober 1, 2000.  The August 2002revisions to the regulations extend the compliance deadline for “existingservices” to the first cost reporting period for a hospital that begins afterJuly 1, 2003.  During the extendedgrandfather period, existing services continue to be treated as“provider-based” and are not subject to penalties for past non-compliance solong as they either have a prior written determination of “provider-based”status, or apply for “provider-based” status before expiration of the extendedgrandfather period.  As the Medicarerules are clarified it may be necessary for the Company to modify the contractsit has with hospital customers or to take other steps that may affect theCompany’s contract services revenues or the manner in which the Companyfurnishes services to its hospital customers. These changes could have adversely affect on the Company’s business,financial condition and results of operations.

 

MEDICAID:  The Medicaid program is a jointly-funded federal and stateprogram providing coverage for low–income persons.   Apart from certain federally mandated basicservices, the services offered and reimbursement methods vary from state tostate. In many states, Medicaid reimbursement is patterned after the Medicareprogram; however, an increasing number of states have established or areestablishing payment methodologies intended to provide health care services toMedicaid patients through managed care organizations.  In addition, in a number of

 

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states, state Medicaid agencies have refused to permit entitiesorganized as IDTFs (such as most of the Company’s Centers and Fixed Facilities)to participate in the Medicaid program because the volume of services that theCompany provides to Medicaid patients is limited.

 

MANAGED CARE: Health maintenanceorganizations (“HMOs”), preferred provider organizations (“PPOs”) and othermanaged care organizations attempt to control the cost of health care services,including imposing lower payment rates, limiting services or mandating lesscostly treatment alternatives.  Managedcare contracting has become very competitive and reimbursement schedules are ator below Medicare reimbursement levels. The development and expansion of HMOs, PPOs and other managed careorganizations within the Company’s regional networks will increase payorcontrol over patients’ access to diagnostic imaging services, the selection ofthe service provider and the amount of reimbursement.  This could have a negative impact on utilization of the Company’sservices in certain markets and/or affect the revenue per procedure which theCompany can collect.  The competitionamong health care providers for contracts with all types of managed careorganizations has resulted in an average term of such contracts of between oneand three years.  See "Item 1.Business 3⁄4 Customers and Contracts”.

 

Some states have adopted expanded laws or regulations restricting theassumption of financial risk by health care providers contracting with healthplans.  While the Company is notcurrently subject to such regulations, it or its customers may in the future berestricted in their ability to assume financial risk, or may be subjected toreporting requirements if they do so. Any such restrictions could negatively affect the Company’s contractingrelationships with health plans and could adversely affect the Company’sbusiness, financial condition and results of operations.

 

PRIVATE INSURANCE:  Private health insurance programs generallyhave authorized payment for the Company’s services on satisfactory terms.  If Medicare reimbursement is reduced, theCompany believes it is likely that private health insurance programs willfollow suit, which could adversely affect the Company’s business, financialcondition and results of operations.

 

**SALESAND MARKETING**

 

The Company selectively invests in marketing activities to obtain newsources of revenues for the Company, expand business relationships, growrevenues at its existing facilities and maintain present business alliances andcontractual relationships.  Marketingactivities for the Company’s Centers and Fixed Facilities include educationprograms for physicians and physicians offices’ on new applications and uses oftechnology, customer service programs and contracting with insurance payors forvolume discounts.  Marketing activitiesfor the Company’s Mobile Facilities include direct marketing to hospitals anddeveloping leads through current customers, equipment manufacturers and othervendors, and education programs for physicians associated with hospitalcustomers.

 

**COMPETITION**

 

The health care industry in general, and the market for diagnosticimaging services in particular, is highly competitive and fragmented, with onlya few national providers.  The Companycompetes principally on the basis of its reputation for productive andcost-effective quality services.  The Company’soperations must compete with groups of radiologists, established hospitals andcertain other independent organizations, including equipment manufacturers andleasing companies that own and operate imaging equipment.  The Company will continue to encountersubstantial competition from hospitals and independent organizations, includingAlliance Imaging, Inc., Shared Medical Services, Medical Resources, Inc.,Medquest, Inc., Radiologix, Inc., U.S. Diagnostic Inc., Syncor InternationalCorporation, and certain of their affiliates. Some of the Company’s direct competitors that provide contractdiagnostic imaging services may have access to greater financial resources thanthe Company.

 

Certain hospitals, particularly the larger hospitals, may be expectedto directly acquire and operate imaging and treatment equipment on-site as partof their overall inpatient servicing capability, assume the associatedfinancial risk, employ the necessary technologists and satisfy applicable CONand licensure requirements, if any. Historically, smaller hospitals have been reluctant to purchase imagingand treatment equipment.  Thisreluctance, however, has in the past encouraged the entry of start-up venturesand other established business operations into the diagnostic imagingbusiness.  As a result, there have beenperiods in the recent past when there has been significant excess capacity inthe diagnostic imaging business in the United States, which can negativelyaffect utilization and reimbursement.  In addition, some physician practices that have not purchased imagingequipment may decide to do

 

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so, in light of the flexibility provided by the final PhysicianSelf-Referral regulations adopted in January 2001 and the increasedavailability of lower-cost specialty MRI systems and in so doing would competewith the Company.

 

**CUSTOMERSAND CONTRACTS**

 

The Company’s revenues are primarily generated from contract servicesand patient services.  Contract servicesrevenues are generally earned from services billed to a hospital or otherhealth care provider which include: (i) fee for-service arrangements in whichrevenues are based upon a contractual rate per procedure; (ii) management fees;and (iii) equipment rental in which revenues are generally based upon a fixedmonthly rental.  Contract servicesrevenues are primarily earned through Mobile Facilities and are generally paidpursuant to hospital contracts with a life span of up to five years.

 

Patient services revenues are generally earned from services billeddirectly to patients or third-party payors (generally managed careorganizations, Medicare, Medicaid, commercial insurance carriers and workers’compensation funds), on a fee-for-service basis and are primarily earnedthrough Centers, Fixed Facilities and certain Mobile Facilities.

 

The Company’s Fixed Facilities and Centers are principally dependent onthe Company’s ability (either directly or indirectly through its hospitalcustomers) to attract referrals from physicians and other health care providersrepresenting a variety of specialties. The Company’s eligibility to provide service in response to a referralis often dependent on the existence of a contractual arrangement with thereferred patient’s insurance carrier (primarily if the insurance is provided bya managed care organization).  TheCompany currently has in excess of 1,000 contracts with managed careorganizations for diagnostic imaging services provided at the Company’s FixedFacilities and Centers primarily on a discounted fee-for-service basis.  Managed care contracting has become verycompetitive and reimbursement schedules are at or below Medicare reimbursementlevels.  A significant decline inreferrals and/or reimbursement rates would adversely affect the Company’sbusiness, financial condition and results of operations. See “Item 1. Business 3⁄4Reimbursement of Health Care Costs” and “Managed Care”.

 

**DIAGNOSTICIMAGING AND OTHER EQUIPMENT**

 

The Company has technologically advanced, state-of-the-art diagnosticimaging equipment.  The Company owns orleases 200 diagnostic imaging and treatment systems, of which 138 areconventional MRI systems, 25 are Open MRI systems, 21 are CT scanners, four arelithotripters, nine are PET scanners, two are radiation oncology systems, andone is a Gamma Knife.  The Company owns166 of its imaging and treatment systems, has capital leases for 26 systems andhas operating leases for the remaining 8 systems.  Of the Company’s 138 conventional MRI systems, 78% have magnetstrength of 1.5 Tesla and 20% have magnet strength of 1.0 Tesla.  Currently, the industry standard magnetstrength for fixed and mobile MRI systems is 1.5 Tesla.  The Company is in the process of upgradingor replacing its remaining conventional MRI systems from magnet strengths ofless than 1.0 Tesla to magnet strengths of at least 1.0 Tesla.

 

The Company continues to evaluate the mix of its diagnostic imagingequipment in response to changes in technology and to the surplus capacity inthe marketplace.  The overalltechnological competitiveness of the Company’s equipment continues to improvethrough upgrades, disposal and/or trade-in of older equipment and the purchaseor execution of leases for new equipment.

 

Several substantial companies are presently engaged in the manufactureof MRI (including Open MRI), PET, CT and other diagnostic imaging equipment,including General Electric Company (“GE”), Hitachi Medical Systems, SiemensMedical Systems, and Phillips Medical Systems. The Company maintains good workingrelationships with many of the major manufacturers to better ensure an adequacyof supply as well as access to those types of diagnostic imaging systems whichappear most appropriate for the specific diagnostic or treatment center to beestablished.

 

**COMPLIANCEPROGRAM**

 

The Company voluntarily implemented a program to monitor compliancewith federal and state laws and regulations applicable to health careentities.  The Company has appointed acompliance officer who is charged with implementing and supervising thecompliance program, which includes a code of ethical conduct for the Company’s

 

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employees and affiliates and a process for reporting regulatory orethical concerns to the compliance officer, including a toll-free telephonehotline.  Management believes that theCompany’s compliance program meets the relevant standards provided by theOffice of the Inspector General of the HHS. An important part of the compliance program consists of conductingperiodic reviews of various aspects of the Company’s operations.  The compliance program also contemplatesmandatory education programs designed to familiarize the Company’s employeeswith the regulatory requirements and specific elements of the complianceprogram.

 

**EMPLOYEES**

 

As of August 30, 2002, the Company had approximately 1,200 full-time,80 part-time and 350 per diem employees. None of the Company’s employees are covered by a collective bargainingagreement. Management believes its employee relations to be satisfactory.

 

**FORWARD-LOOKINGSTATEMENTS DISCLOSURE**

 

This report on Form 10-K includes “forward-looking statements. “  Forward-looking statements includestatements concerning the Company’s plans, objectives, goals, strategies,future events, future revenues or performance, capital expenditures, financingneeds, plans or intentions relating to acquisitions, its competitive strengthsand weaknesses, its business strategy and the trends the Company anticipates inthe industry and economies in which the Company operates and other informationthat is not historical information and, in particular, appear under the heading“Management’s Discussion and Analysis of Financial Condition and Results ofOperations, “ and “Business. “  Whenused in this report the words “estimates, ” “expects, ” “anticipates, ”“projects, ” “plans, ” “intends, ” “believes, ” and variations of such words orsimilar expressions are intended to identify forward-looking statements.  All forward-looking statements, including,without limitation, the Company’s examination of historical operating trends,are based upon the Company’s current expectations and various assumptions.  The Company’s expectations, beliefs andprojections are expressed in good faith, and the Company believes there is areasonable basis for them, but there can be no assurance that the Company’sexpectations, beliefs and projections will be realized.

 

There are a number of risks and uncertainties that could cause theCompany’s actual results to differ materially from the forward-lookingstatements contained in this report. Important factors that could cause the Company’s actual results todiffer materially from the forward-looking statements made in this report areset forth in this report, including the factors described in the sectionentitled “Risk Factors,” and the following:

 

•                  limitationsand delays in reimbursement by third-party payors;

•                  contractrenewals and financial stability of customers;

•                  conditionswithin the health care environment;

•                  adverseutilization trends for certain diagnostic imaging procedures;

•                  theCompany’s ability to successfully integrate acquisitions;

•                  marketcompetition;

•                  thepotential for rapid and significant changes in technology and their effect onthe Company’s operations;

•                  operating,legal, governmental and regulatory risks; and

•                  economic,political and competitive forces affecting the Company’s business.

 

If any of these risks or uncertainties materialize, or if any of theCompany’s underlying assumptions are incorrect, the Company’s actual resultsmay differ significantly from the results that it expresses in or implies byany of its forward-looking statements. The Company does not undertake any obligation to revise these forward-lookingstatements to reflect future events or circumstances.

 

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**RISK FACTORS**

 

RISKS RELATING TO THE COMPANY AND THE DIAGNOSTICIMAGING INDUSTRY

 

**Changes in the rates or methods ofthird-party reimbursements for diagnostic imaging and therapeutic servicescould result in reduced demand for the Company**’**s services or create downward pricing pressure, whichwould result in a decline in the Company**’**s revenues and harm its financial position.**

 

The Company derives approximately 52% of its revenues from directbillings to patients and third-party payors such as Medicare, Medicaid, managedcare and private health insurance companies. Changes in the rates or methods of reimbursement for the services theCompany provides could have a significant negative impact on those revenues.Moreover, the Company’s health care provider customers on whom the Companydepends for approximately 48% of its revenues generally rely on reimbursementfrom third-party payors.  In the past,initiatives have been proposed and implemented which have had the effect ofdecreasing reimbursement rates for diagnostic imaging services provided atnon-hospital facilities.  Similarinitiatives enacted in the future may have an adverse impact on the Company’sfinancial condition and operations.  See“Item 1. Business — Reimbursement of Health Care Costs.”

 

Any changes in the rates of or conditions for reimbursement couldsubstantially reduce the number of procedures for which the Company or itscustomers can obtain reimbursement or the amounts reimbursed the Company or theCompany’s customers for services provided by the Company.  If third-party payors reduce the amount oftheir payments to the Company’s customers, its customers may seek to reducetheir payments to the Company or seek an alternate supplier of diagnosticimaging services.  Because unfavorablereimbursement policies have constricted and may continue to constrict theprofit margins of the hospitals and clinics the Company bills directly, theCompany has lowered and may continue to need to lower its fees to retainexisting customers and attract new ones. These reductions could have a significant adverse effect on theCompany’s revenues and financial results by decreasing demand for its servicesor creating downward pricing pressure.

 

**The Company**’**s revenues may fluctuate or be unpredictable and thismay harm its financial results.**

 

The amount and timing of revenues that the Company may derive from itsbusiness will fluctuate based on:

 

•                  variationsin the rate at which customers renew their contracts;

 

•                  theextent to which the Company’s mobile customers convert into a fixed-siteoperation and choose not to continue using its services;

 

•                  changesin the number of days of service the Company can offer with respect to a givendiagnostic imaging or therapeutic system due to equipment malfunctions orseasonal factors; and

 

•                  themix of contract services and patient services billing.

 

The Company may not be able to reduce its expenses, including its debtservice obligations, quickly enough to respond to these declines in revenues,which would make its business difficult to operate and would harm its financialresults.

 

**A failure to meet the Company**’**s capital expenditure requirements can adverselyaffect its business.**

 

The Company operates in a capital intensive, high fixed-cost industrythat requires significant amounts of capital to fund operations, particularlythe initial start-up and development expenses of de novo centers, or newoperations, and the acquisition of additional businesses and new imagingequipment.  The Company incurs capitalexpenditures to, among other things:

 

•                  upgrade itsimaging systems and software;

 

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•                  purchase systemsupon termination of operating leases; and

 

•                  purchase newsystems.

 

To the extent the Company is unable to generate sufficient cash fromits operations or funds are no longer available under its credit facilities, itmay be unable to meet its capital expenditure requirements and therefore unableto achieve the Company’s estimates of operating income growth.  Furthermore, there can be no assurance thatthe Company will be able to raise any necessary additional funds through bankfinancing or the issuance of equity or debt securities on terms acceptable toit, if at all.

 

**The Company may experiencecompetition from other diagnostic imaging companies and this competition couldadversely affect its revenues and its business.**

 

The market for diagnostic imaging services and systems iscompetitive.  If the Company is unableto successfully compete, its customer base would decline and its business,financial condition and results of operations would be harmed.  See “Item 1. Business-Competition”.

 

**Managed care organizations mayprevent health care providers from using the Company**’**s services, causing it to lose current and prospectivecustomers.**

 

Health care providers participating as providers under managed careplans may be required to refer diagnostic imaging procedures to specificimaging service providers depending on the plan in which each covered patientis enrolled.  These requirementscurrently inhibit health care providers from using the Company’s diagnosticimaging services in some cases.  Theproliferation of managed care may prevent an increasing number of health careproviders from using the Company’s services in the future, which would causeits revenues to decline.

 

**The Company**’**s fixed-site centers depend on physician referrals andcontractual arrangements with insurance carriers for their business.**

 

The Company’s fixed-site centers are principally dependent on theirability to attract referrals from physicians and other health care providersrepresenting a variety of specialties. The Company’s eligibility to provide service in response to a referral isoften dependent on the existence of a contractual arrangement with the referredpatient’s health plan.  The Companycurrently has in excess of 1,000 contracts with managed care organizations fordiagnostic imaging services provided at the Company’s fixed-site centers,primarily on a discounted fee-for-service basis.  A significant decline in referrals would have a material adverseeffect on the Company’s business, financial condition and results ofoperations.

 

**The Company may be unable to renew ormaintain its customer contracts, which would harm its business and financialresults.**

 

Upon expiration of the Company’s customer contracts, it is subject tothe risk that customers will cease using its imaging services and purchase orlease their own imaging systems or use the Company’s competitors’ imagingsystems.  Approximately one-third of theCompany’s MRI contracts will expire in the fiscal year ending June 30,2003.  If these contracts are notrenewed or are renewed at lower prices, the Company could experience asignificant negative impact on its business. The Company’s mobile contract renewal rate for the fiscal year endedJune 30, 2002 was approximately 85%.  Itis not always possible to immediately obtain replacement customers, andhistorically many replacement customers have been smaller facilities which havea lower number of scans than lost customers. Although the non-renewal of a single customer contract would not have amaterial impact on the Company’s contract services revenues, non-renewal of severalcontracts could have a material impact on contract services revenues.

 

**The Company may be subject toprofessional liability risks which could be costly and negatively impact itsbusiness and financial results.**

 

The Company has not experienced any material losses due to claims formalpractice.  However, claims formalpractice have been asserted against the Company in the past and any futureclaims, if successful, could entail significant defense costs and could resultin substantial damage awards to the claimants, which may exceed the limits ofany applicable insurance coverage. While the Company maintains professional liability insurance, there canbe no assurance that any claim against it will not exceed the amount of itsinsurance.  Successful malpractice

 

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claims asserted against the Company, to the extent not covered by theCompany’s liability insurance, could have a material adverse effect on itsbusiness, financial condition and results of operations.

 

In addition to being exposed to claims for malpractice, there are otherprofessional liability risks to which the Company is exposed through itsoperation of diagnostic imaging systems. See “Item 1. Business 3⁄4Diagnostic Imaging and Treatment Technology.”

 

To protect against possible professional liability either frommalpractice claims or the other risks described above, the Company maintainsprofessional liability insurance. However, if the Company is unable to maintain insurance in the future atan acceptable cost or at all or if its insurance does not fully cover it, and asuccessful malpractice or other professional liability claim was made againstthe Company, the Company could incur substantial losses.  Any successful malpractice or other professionalliability claim made against the Company not fully covered by insurance couldbe costly to defend against, result in a substantial damage award against theCompany and divert the attention of its management from its operations, whichcould have a material adverse effect on its business, financial condition andresults of operations.

 

**Technological change in the Company**’**s industry could reduce the demand for its servicesand require it to incur significant costs to upgrade its equipment.**

 

Technological change in the MRI industry has been gradual since thelast technological advancements were made in 1994.  Although the Company believes that substantially all of its MRIand other diagnostic imaging systems are upgradeable to maintain theirstate-of-the-art character, the development of new technologies or refinementsof existing ones might make its existing systems technologically oreconomically obsolete, or cause a reduction in the value of, or reduce the needfor, its systems.  MRI and other diagnosticimaging systems are currently manufactured by numerous companies.  Competition among manufacturers for agreater share of the MRI and other diagnostic imaging systems market may resultin technological advances in the speed and imaging capacity of these newsystems.  Consequently, the obsolescenceof the Company’s systems may be accelerated. Although the Company is aware of no imminent substantial technologicalchanges, should such changes occur, there can be no assurance that it would beable to acquire the new or improved systems.

 

The development of new scanning technology or new diagnosticapplications for existing technology may require the Company to adapt itsexisting technology or acquire new or technologically improved systems in orderto successfully compete.  In the future,however, it may not have the financial resources to do so, particularly givenits indebtedness.  In addition,advancing technology may enable hospitals, physicians or other diagnosticservice providers to perform procedures without the assistance of diagnosticservice providers such as the Company.

 

**The Company**’**s failure to effectively make or integrateacquisitions and establish co-sourcing arrangements through partnerships withhospitals and other health care providers could impair its business.**

 

As part of the Company’s business strategy, it has pursued and intendsto continue to pursue strategic acquisitions and establish co-sourcingarrangements through partnerships and joint ventures with hospitals and otherhealth care providers.  It iscontinuously evaluating acquisition opportunities and consolidationpossibilities, and, at any given time, may be in various stages of duediligence or preliminary discussions with respect to a number of potentialtransactions.  There can be no assurancethat the Company will succeed in identifying suitable acquisition orco-sourcing candidates or in consummating any such acquisitions or co-sourcingarrangements.  The Company’s acquisitionand co-sourcing strategies require substantial capital which may exceed thefunds available to it from internally generated funds and under the Company’scredit facilities.  There can be noassurance that the Company will be able to raise any necessary additional fundsthrough bank financing or through the issuance of equity or debt securities onterms acceptable to it, if at all.

 

Additionally, acquisitions involve the integration of acquiredoperations with the Company’s operations. Integration involves a number of risks, including:

 

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•                  demands onmanagement related to the increase in the Company’s size after an acquisition;

 

•                  the diversion ofthe Company’s management’s attention from the management of daily operations tothe integration of new operations;

 

•                  integration ofinformation systems;

 

•                  difficulties inthe assimilation and retention of employees;

 

•                  potentialadverse effects on operating results; and

 

•                  challenges inretaining customers and referral sources.

 

Although the Company believes that it has successfully integratedacquisitions in the past, there can be no assurance that it will be able tosuccessfully integrate the operations of any future acquisitions.  If it does not successfully integrateacquisitions, the Company may not realize anticipated operating advantages,economies of scale and cost savings. Also, the Company may not be able to maintain the levels of operatingefficiency acquired companies will have achieved or might achieve separately.  Successful integration of each of theiroperations will depend upon the Company’s ability to manage those operationsand to eliminate redundant and excess costs.

 

**Loss of key executives and failure toattract qualified managers, technologists and salespersons could limit theCompany**’**s growth andnegatively impact its operations.**

 

The Company depends upon its management team to a substantialextent.  As the Company grows, it willincreasingly require field managers and salespersons experience in its industryand skilled technologist to operate its diagnostic equipment.  It is impossible to predict the availabilityof qualified field managers, salespersons and technologists or the compensationlevels that will be required to hire them. In particular, there is a very high demand for qualified technologistswho are necessary to operate the Company’s systems.  The Company may not be able to hire and retain a sufficientnumber of technologists, and it may be required to pay bonuses and highersalaries to its technologists, which would increase its expenses.  The loss of the services of any member ofthe Company’s senior management or the Company’s inability to hire qualifiedfield managers, salespersons and skilled technologists at economicallyreasonable compensation levels could adversely affect its ability to operateand grow its business.

 

**The Company**’**s PET services and some of its other imaging servicesrequire the use of radioactive materials, which could subject the Company toregulation, related costs and delays and potential liabilities for injuries orviolations of environmental, health and safety laws.**

 

The Company’s PET services and some of its other imaging andtherapeutic services require radioactive materials.  While this radioactive material has a short half-life, meaning itquickly breaks down into inert, or non-radioactive substances, storage, use anddisposal of these materials present the risk of accidental environmentalcontamination and physical injury.  TheCompany is subject to federal, state and local regulations governing storage,handling and disposal of these materials and waste products.  Although the Company believes that itssafety procedures for storing, handling and disposing of these hazardousmaterials comply with the standards prescribed by law and regulation, it cannotcompletely eliminate the risk of accidental contamination or injury from thosehazardous materials.  In the event of anaccident, the Company would be held liable for any resulting damages, and anyliability could exceed the limits of or fall outside the coverage of itsinsurance.  The Company may not be ableto maintain insurance on acceptable terms, or at all.  The Company could incur significant costs and the diversion ofits management’s attention in order to comply with current or future environmental,health and safety laws and regulations.

 

**The Company may be unable toeffectively maintain its imaging and therapeutic systems or generate revenueswhen its systems are not fully operational.**

 

Timely, effective service is essential to maintaining the Company’sreputation and high utilization rates on its imaging systems.  Repairs to one of its systems can take up totwo weeks and result in a loss of revenues. The Company’s warranties and maintenance contracts do not compensate itfor loss of revenues when its systems are not fully operational.  The principal components of its operatingcosts include depreciation, salaries paid to technologists

 

18

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and drivers, annual system maintenance costs, insurance andtransportation costs.  Because themajority of these expenses are fixed, a reduction in the number of scansperformed due to out-of-service equipment will result in lower revenues andmargins.  Repairs of the Company’sequipment are performed for it by the equipment manufacturers.  These manufacturers may not be able toperform repairs or supply needed parts in a timely manner.  Thus, if the Company experiences more systemmalfunctions than anticipated or if it is unable to promptly obtain the servicenecessary to keep its systems functioning effectively, its revenues coulddecline and its ability to provide services would be harmed.

 

**The Company**’**s substantial indebtedness could adversely affect itsfinancial health and prevent the Company from fulfilling its obligations underInSight's 9 7/8% Series B senior subordinated notes.**

 

At June 30, 2002, the Company had total indebtedness of approximately$378.2 million.  The Company’ssubstantial indebtedness could have important consequences to the Company.  For example, it could:

 

•                  makeit more difficult for the Company to satisfy its obligations with respect tothe notes;

 

•                  increasethe Company’s vulnerability to general adverse economic and industryconditions;

 

•                  requirethe Company to dedicate a substantial portion of its cash flow from operationsto payments on its indebtedness, thereby reducing the availability of its cashflow to fund working capital, capital expenditures, acquisitions andinvestments and other general corporate purposes;

 

•                  limitthe Company’s flexibility in planning for, or reacting to, changes in itsbusiness and the markets in which it operates;

 

•                  placethe Company at a competitive disadvantage compared to its competitors that haveless debt; and

 

•                  limit,among other things, the Company’s ability to borrow additional funds.

 

In addition, the Company may be able to incur substantial additionalindebtedness in the future.  The termsof the indenture governing the notes and the Company's credit agreement allowit to issue and incur additional debt upon satisfaction of certainconditions.  If new debt is added tocurrent debt levels, the related risks described above could intensify.

 

RISKS RELATING TO GOVERNMENT REGULATION OF THECOMPANY’S BUSINESS

 

**Complying with federal and state regulationsis an expensive and time-consuming process, and any failure to comply couldresult in substantial penalties.**

 

The Company is directly or indirectly through its customers subject toextensive regulation by both the federal government and the states in which itconducts its business, including:

 

•                  the federalFalse Claims Act;

 

•                  the federalMedicare and Medicaid Anti-kickback Law, and state anti-kickback prohibitions

 

•                  the federalCivil Money Penalty Law;

 

•                  the federalHIPAA;

 

•                  the federalphysician self-referral prohibition commonly known as the Stark Law and thestate law equivalents of the Stark Law;

 

•                  state laws thatprohibit the practice of medicine by non-physicians, and prohibit fee-splittingarrangements involving physicians; and

 

•                  federal andstate laws governing the diagnostic imaging and therapeutic equipment used inthe Company’s business concerning patient safety, equipment operatingspecifications and radiation exposure levels.

 

19

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If the Company’s operations are found to be in violation of any of thelaws and regulations to which it or its customers are subject, it may besubject to the applicable penalty associated with the violation, includingcivil and criminal penalties, damages, fines and the curtailment of itsoperations.  Any penalties, damages,fines or curtailment of the Company’s operations, individually or in theaggregate, could adversely affect the Company’s ability to operate theCompany’s business and its financial results. The risks of the Company being found in violation of these laws andregulations is increased by the fact that many of them have not been fullyinterpreted by the regulatory authorities or the courts, and their provisionsare open to a variety of interpretations. Any action brought against the Company for violation of these laws orregulations, even if the Company successfully defends against it, could causeit to incur significant legal expenses and divert its management’s attentionfrom the operation of its business.  Fora more detailed discussion of the various state and federal regulations towhich the Company is subject, see “Item 1. Business – Government Regulation.”

 

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**ITEM2.          PROPERTIES**

 

The Company leases approximately: (i) 20,000 square feet of officespace for its executive offices in Newport Beach, California, under a leaseexpiring in December 2002; (ii) 1,800 square feet of office space for itsoperations division in Rancho Santa Margarita, California, under a leaseexpiring in 2004; (iii) 13,000 square feet of office space for a billing officein Farmington, Connecticut, under a lease expiring in 2004; (iv) 4,400 squarefeet of office space for a billing office in Merrillville, Indiana, under alease expiring in 2003; (v) 6,000 square feet of office space for a billingoffice in Santa Ana, California, under a lease expiring in 2004; (vi) 3,000square feet of office space for a billing office in Scarborough, Maine, under alease expiring in 2006, and (vii) 1,000 square feet of office space for abilling office in Wilkes-Barre, Pennsylvania, under a lease expiring in2003.  In July 2002, the Companyexecuted a lease for approximately 24,000 square feet of office space in LakeForest, California, under a lease expiring in 2007 and intends to relocate itsexecutive offices in the second quarter of fiscal 2003.  The Company believes its facilities areadequate for its reasonably foreseeable needs. In addition, the following table sets forth the other principalproperties used as imaging or treatment facilities by the Company in theFixed-Site Division (except where otherwise indicated) as of June 30, 2002:

 
| **NAME OF  FACILITY**                                 |   | **APPROXIMATE  SQUARE FEET** |   | **LOCATION**                 |
|-------------------------------------------------------|--------|------------------------------|--------|------------------------------|
|                                                  |   |                         |   |                         |
| OWNED:                                                |   |                         |   |                         |
| Northern Indiana Oncology Center                      |   | 800                          |   | Valparaiso, Indiana          |
| Sun Coast Imaging Center (1) (2)                      |   | 1,000                        |   | Largo, Florida               |
| Granada Hills Open MRI Center (1)                     |   | 1,100                        |   | Granada Hills, California    |
| Thorn Run MRI (1)                                     |   | 1,300                        |   | Coraopolis, Pennsylvania     |
| Daniel Freeman Open MRI Center (1)                    |   | 1,400                        |   | Marina Del Rey, California   |
| Greater Waterbury Imaging Center (1)                  |   | 3,700                        |   | Waterbury, Connecticut       |
| Berwyn Magnetic Resonance Center (1)                  |   | 3,800                        |   | Berwyn, Illinois             |
| Garfield Imaging Center (1)                           |   | 5,000                        |   | Monterey Park, California    |
| Wilkes-Barre Imaging Center (1)                       |   | 8,200                        |   | Wilkes-Barre, Pennsylvania   |
| LAC/USC Imaging Sciences Center (1)                   |   | 8,500                        |   | Los Angeles, California      |
| InSight Diagnostic Center-Eighth Avenue               |   | 10,000                       |   | Ft. Worth, Texas             |
| Chattanooga Outpatient Center                         |   | 14,700                       |   | Chattanooga, Tennessee       |
| Harbor/UCLA Diagnostic Imaging Center (1)             |   | 15,000                       |   | Torrance, California         |
| Diagnostic Outpatient Center (1)                      |   | 17,800                       |   | Hobart, Indiana              |
|                                                  |   |                         |   |                         |
| LEASED:                                               |   |                         |   |                         |
| Lockport MRI - Maple Road                             |   | 500                          |   | Williamsville, New York      |
| Central Maine Imaging Center                          |   | 1,000                        |   | Auburn, Maine                |
| InSight Diagnostic Imaging Center - N. 18th Place     |   | 1,800                        |   | Phoenix, Arizona             |
| Metabolic Imaging of Kentucky (2) (3)                 |   | 1,800                        |   | Louisville, Kentucky         |
| Open MRI of Indianapolis                              |   | 1,900                        |   | Indianapolis, Indiana        |
| Lockport MRI – River Road                        |   | 2,200                        |   | N. Tonawanda, New York       |
| Lockport MRI                                          |   | 2,400                        |   | Lockport, New York           |
| Open MRI of Southern Regional                         |   | 2,400                        |   | Clarksville, Indiana         |
| Whitney Imaging Center                                |   | 2,900                        |   | Hamden, Connecticut          |
| Redwood City MRI                                      |   | 2,900                        |   | Redwood City, California     |
| Lockport MRI – Sheridan Drive                    |   | 3,800                        |   | Tonawanda, New York          |
| Dublin Imaging Center                                 |   | 3,900                        |   | Dublin, Ohio                 |
| Open MRI of Bangor                                    |   | 4,000                        |   | Bangor, Maine                |
| Open MRI of Orange County                             |   | 4,000                        |   | Santa Ana, California        |
| Lockport MRI – Youngs Road                       |   | 4,000                        |   | Williamsville, New York      |
| Open MRI of Pleasanton                                |   | 4,400                        |   | Pleasanton, California       |
| InSight Diagnostic Imaging Center – 15th Avenue  |   | 4,600                        |   | Phoenix, Arizona             |
| Washington Magnetic Resonance Center                  |   | 5,000                        |   | Whittier, California         |
| Marshwood Imaging Center                              |   | 5,000                        |   | Scarborough, Maine           |
| Lockport MRI – Transit Road                      |   | 5,200                        |   | East Amherst, New York       |
| InSight Diagnostic Imaging Center – Country Club |   | 5,800                        |   | Phoenix, Arizona             |
| InSight Diagnostic Imaging Center                     |   | 5,800                        |   | Peoria, Arizona              |
| Parkway Imaging Center                                |   | 5,800                        |   | Henderson, Nevada            |
| InSight Diagnostic Center - Preston Road              |   | 5,800                        |   | Dallas/Plano, Texas          |
| Imaging Center at Murfreesboro                        |   | 6,000                        |   | Murfreesboro, Tennessee      |
| Open MRI of Hayward                                   |   | 6,500                        |   | Hayward, California          |
| Broad Street Imaging Center                           |   | 6,600                        |   | Columbus, Ohio               |
| Ocean Medical Imaging Center                          |   | 8,500                        |   | Tom’s River, New Jersey |
| Central Maine Imaging Center                          |   | 8,700                        |   | Lewiston, Maine              |
| St. John’s Regional Imaging Center               |   | 10,000                       |   | Oxnard, California           |
| InSight Diagnostic Imaging Center - E. Thomas Road    |   | 10,600                       |   | Phoenix, Arizona             |
| InSight Diagnostic Center - Forest Lane               |   | 18,500                       |   | Dallas, Texas                |
| InSight Mountain Diagnostics                          |   | 20,000                       |   | Las Vegas, Nevada            |

 

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(1)     TheCompany owns the building and holds therelated land under a long-term lease.

(2)     These facilities are included in the Company’s Mobile Division.

(3)     In the first quarter of fiscal 2003, the Company sold its interestin this fixed-site center.

 

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The Company owns 77,690 square feet of land in Ft. Worth, Texas, uponwhich the Company intended to build a Center to which certain existingoperations in Ft. Worth would be relocated; however, the Company has abandonedthose plans.

 

**ITEM 3. ****                       LEGALPROCEEDINGS**

 

The Company is engaged from time to time in the defense of lawsuitsarising out of the ordinary course and conduct of its business and hasinsurance policies covering such potential insurable losses where such coverageis cost-effective.  The Company believesthat the outcome of any such lawsuits will not have a material adverse impacton the Company’s business, financial condition and results of operations.

 

**ITEM4. ****                       SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

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**PART II**

 

**ITEM 5. ****                       MARKETFOR REGISTRANT**’**S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

The Company’s common stock is not publicly traded on any exchange or inany market.  At August 30, 2002, theCompany had five record holders of its common stock.  The Company has never paid a cash dividend on its common stock anddoes not expect to do so in the foreseeable future.  The Company’s credit agreement governing its existing creditfacilities and the indenture governing the 9 7/8% Series B seniorsubordinated notes contain restrictions on its ability to pay dividends on itscommon stock.

 

Information regarding securities authorized for issuance under theCompany’s equity compensation plans is set forth under “Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.”

 

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**ITEM6. ****                       SELECTEDFINANCIAL DATA**

 

The selected consolidated financial data presented as of and for theyear ended June 30, 2002, the period from July 1, 2001 to October 17, 2001, andfor the years ended June 30, 2001, 2000, 1999 and 1998, has been derived fromthe audited consolidated financial statements and should be read in conjunctionwith the consolidated financial statements and related notes as of June 30,2002 and 2001 and for the year ended June 30, 2002, the period from July 1,2001 to October 17, 2001, and for the years ended June 30, 2001 and 2000, and“Item 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” included elsewherein this report on Form 10-K.  Theconsolidated operations of the Company after the Acquisition are substantiallyconsistent with the operations of InSight. The Company has no operations other than its investment in InSight.  InSight is considered the predecessor to theCompany in accordance with Regulation S-X.

 
|                                  |   | **Company**                                        |    | **Predecessor**                               |     |
|---------------------------------------|--------|----------------------------------------------------|---------|-----------------------------------------------|----------|
|                                  |   | **Year  Ended  June 30,  2002 (7)**                |    | **Period from  July 1 to  October 17,  2001** |     |   |   |
|                                  |   |                                               |    | **Years Ended  June 30,**                     |     |
| **2001**                              |   | **2000**                                           |    | **1999**                                      |     | **1998** |
|                                  |   | **(Amounts in  thousands, except per share data)** |    |
| STATEMENT OF INCOME DATA:             |   |                                               |    |                                          |     |   |   |   |   |   |   |   |   |
| Revenues                              |   | $                                                  | 155,407 |                                          | $        | 63,678 |   | $ | 211,503 |   | $ | 188,574 |   | $ | 161,992 |   | $ | 119,018 |   |
| Operating income (loss) (1)  (2) (3)  |   | 32,555                                             |    | (427                                          | )        | 39,819 |   | 27,016 |   | 17,422 |   | 7,770 |   |
| Interest expense, net                 |   | 25,168                                             |    | 6,321                                         |     | 23,394 |   | 18,696 |   | 14,500 |   | 6,827 |   |
| Net income (loss) (4) (5)  (6)        |   | 9                                                  |    | (4,648                                        | )        | 13,801 |   | 7,189 |   | 6,112 |   | 512 |   |
|                                  |   |                                               |    |                                          |     |   |   |   |   |   |   |   |   |
|                                  |   | **June 30,  2002**                                 |    |                                          |     | **June 30,** |   |
|                                  |   |                                               |    |                                          | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| BALANCE SHEET DATA:                   |   |                                               |    |                                          |     |   |   |   |   |   |   |   |   |
| Working capital                       |   | $                                                  | 35,907  |                                          |     |   | $ | 16,791 |   | $ | 20,814 |   | $ | 24,651 |   | $ | 36,109 |   |
| Property and equipment, net           |   | 172,056                                            |    |                                          |     | 148,255 |   | 148,469 |   | 90,671 |   | 75,146 |   |
| Goodwill and other  intangible assets |   | 235,121                                            |    |                                          |     | 89,202 |   | 93,930 |   | 80,327 |   | 74,831 |   |
| Total assets                          |   | 499,401                                            |    |                                          |     | 321,056 |   | 328,872 |   | 238,304 |   | 231,592 |   |
| Total long-term liabilities           |   | 378,234                                            |    |                                          |     | 197,388 |   | 221,307 |   | 161,266 |   | 155,642 |   |
| Stockholders’ equity             |   | 87,376                                             |    |                                          |     | 65,471 |   | 51,487 |   | 44,106 |   | 37,858 |   |
|                                       |        |                                                    |         |                                               |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Includes a provision forsupplemental service fee termination of $6.3 million in 1998.

(2) Includes a provision forreorganization and other costs of $3.3 million in 1999.

(3) Includes an acquisitionrelated compensation charge of $15.6 million in the period from July 1, 2001 toOctober 17, 2001.

(4) Includes an income taxbenefit of $2.1 million in the period from July 1, 2001 to October 17, 2001 and$3.5 million in 1999.

(5) Includes an extraordinaryloss on debt extinguishment of $4.4 million in 2002.

(6) No cash dividends havebeen paid on the Company’s or InSight's common stock for the periods indicatedabove.

(7) Includes the results ofoperations of InSight from the date of the Acquisition.

 

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**ITEM 7.****                              MANAGEMENT**’**S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Management’s discussion and analysis of financial condition, results ofoperations, liquidity and capital resources contained within this report onForm 10-K is more clearly understood when read in conjunction with the Notes tothe Consolidated Financial Statements. The Notes to the Consolidated Financial Statements elaborate on certainterms that are used throughout this discussion and provide information aboutthe Company and the basis of presentation used in this report on Form10-K.  This report containsforward-looking statements that involve risks and uncertainties.  The Company’s actual results may differmaterially from those indicated in forward-looking statements.  See “Item 1.  Business-Forward-Looking Statements Disclosure and Risk Factors.”

 

**ACQUISITIONAND RELATED FINANCING TRANSACTIONS**

 

The Company was incorporated on June 13, 2001under the name JWC/Halifax Holdings Corp.  The Company was funded through an equity contribution from J.W. ChildsEquity Partners II, L.P., Halifax Capital Partners, L.P. and certain of theiraffiliates.  On June 29, 2001, theCompany’s name was changed toInSight Health Services Holdings Corp. The Company and its former wholly owned subsidiary, Acquisition Corp.were created to acquire all the outstanding shares of InSight.

 

On October 17, 2001, the Company acquiredInSight pursuant to an agreement and plan of merger dated June 29, 2001, asamended, among the Company, Acquisition Corp. and InSight.  Acquisition Corp. was merged with and intoInSight, with InSight being the surviving corporation and becoming a whollyowned subsidiary of the Company.  Theconsolidated operations of the Company after the Acquisition are substantiallyconsistent with the operations of InSight prior to the Acquisition.  In addition, the Company has no operationsother than its investment in InSight. As such, InSight is considered the predecessor to the Company inaccordance with Regulation S-X.

 

Following the Acquisition, the common stock of InSight was delistedfrom the NASDAQ Small Cap Market. Pursuant to the terms of the merger agreement, each of InSight’sstockholders received $18.00 in cash for each share of common stock owned priorto the Acquisition.  Holders of optionsand warrants, which prior to the Acquisition were exercisable for InSightcommon stock, received the difference between $18.00 and the exercise price ofeach share of common stock the holder could have acquired pursuant to the termsof the options and warrants, and the options and warrants were terminated.  This resulted in a charge of approximately$15.6 million, which is reflected in the accompanying statement of operationsof InSight for the period from July 1, 2001 to October 17, 2001.  In addition, certain members of seniormanagement rolled a portion of their InSight common stock options into stockoptions of the Company.  InSight’s stockholders,option holders and warrant holders received aggregate cash consideration ofapproximately $187.7 million as a result of the Acquisition.

 

Concurrently with the Acquisition, InSight:(i) repurchased by tender offer all of its 9 5/8% senior subordinated notes due2008 in an aggregate principal amount of $100 million; (ii) repaid its thenoutstanding senior credit facilities and certain other indebtedness; and (iii)paid fees and expenses relating to the Acquisition and related financing transactions.

 

These transactions were financed through:

 

•                  Borrowings of $150 million under $275 millionof new credit facilities;

 

•                  A $200 million senior subordinated bridgefinancing; and

 

•                  The investment by the Company, before equityissuance costs, of $98.1 million; management options and common stock rolloverwith a total net value of approximately $1.9 million.

 

On October 30, 2001, the Company, throughInSight, issued new 9 7/8% senior subordinated notes due 2011 (“Notes”) in theaggregate principal amount of $225 million. The net proceeds from the issuance of the Notes was approximately $211.5million, $200 million of which was used to retire in full the seniorsubordinated bridge financing and the balance of which was used for generalcorporate purposes.  The Companyrecorded an

 

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extraordinary pre-tax loss on extinguishmentof the senior subordinated bridge financing of approximately $7.4 million.

 

**BUSINESSDEVELOPMENT**

 

The Company’s objective is to be the leading provider of outsourceddiagnostic imaging services in its target markets by further developing andexpanding its regional diagnostic imaging networks that emphasize quality ofcare, 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 procedures and favorable reimbursement levels,although effective January 1, 2002, CMS reduced the Medicare payments for PETservices to hospital outpatients, as discussed above.  The Company also intends to pursue joint venture opportunitieswith hospitals because management believes that they have the potential toprovide the Company with a steady source of procedure volume.  In addition, management believes that thiswill be an area for additional growth because the Company expects hospitals torespond to recent federal health care regulatory changes by outsourcingradiology services to imaging centers that are jointly owned and managed withthird 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.  No assurancecan be given, however, that the Company will be able to identify suitableacquisition candidates and thereafter complete such acquisitions on termsacceptable to the Company.   Inconnection with the Acquisition and related financing transactions discussedbelow, InSight has a $75 million delayed draw term loan facility availableuntil October 17, 2003 to pursue acquisition opportunities.  As of August 30, 2002, there were noborrowings under this facility.

 

In fiscal 2000, InSight completed two acquisitions as follows: twoFixed Facilities in Indianapolis and Clarksville, Indiana, respectively; and a90% interest in a partnership which owns a Center in Wilkes-Barre,Pennsylvania.  In fiscal 2002, theCompany purchased the remaining 10% interest in the partnership.  The Company utilized bank financing to fundthe purchase price of these acquisitions.

 

In fiscal 2000, InSight opened the following:  a radiology co-source outpatient Fixed Facility in Granada Hills,California; a radiology co-source outpatient Center in Henderson, Nevada; andan Open MRI Fixed Facility in Pleasanton, California.  These were financed through both capital leases and internallygenerated funds.

 

In fiscal 2001, InSight opened a radiology co-source outpatient FixedFacility in Marina Del Rey, California, which was financed with internallygenerated funds and a capital lease; and a PET fixed-site center in Louisville,Kentucky, which was financed with outside financing.  In the first quarter of fiscal 2003, the Company sold itsinterest in the PET fixed-site center.

 

26

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In fiscal 2002, InSight opened a radiology co-source outpatient FixedFacility in Largo, Florida, which was financed with an operating lease; and aFixed Facility in Bangor, Maine, which was financed with internally generatedfunds.

 

In the first quarter of fiscal 2003, the Company opened a FixedFacility in Encinitas, California, which was financed with internally generatedfunds and a capital lease.

 

**FINANCIAL 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 operationsand yet is constantly under external pressure from both customers and competitorsto 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 (“Credit Facilities”).  The entire $150 million term loan B was used to consummate theAcquisition.  Borrowings under theCredit 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 paidapproximately $1.2 million during the year ended June 30, 2002 for unusedfacility fees on unborrowed amounts under both facilities.  The Company expects to use the delayed-drawfacility, which is available through October 17, 2003, to fund futureacquisitions and capital expenditures. The Company expects to use the revolving credit facility primarily tofund its future working capital needs. As of August 30, 2002, there were no borrowings under either facility.

 

The 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 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 Credit Facilities or if payment creates a default under theCredit Facilities.

 

In addition to the indebtedness under the Credit Facilities, theCompany, through InSight, issued $225 million aggregate principal amount of theNotes in a private placement exempt from registration under the Securities Actof 1933, as amended (“Securities Act”). The indenture governing the Notes among other things: (i) restricts theability of InSight and certain subsidiaries, including the guarantors of theNotes, to incur additional indebtedness, issue shares of preferred stock, incurliens, pay dividends or make certain other restricted payments and enter intocertain transactions with affiliates; (ii) places certain restrictions on theability of certain subsidiaries, including the guarantors of the Notes, to paydividends or make certain payments to InSight; and (iii) places restrictions onthe ability of InSight and certain subsidiaries, including the guarantors ofthe Notes, to merge or consolidate with any other person or sell, assign,transfer, lease, convey or otherwise dispose of all or substantially all of theassets of  InSight.  On May 20, 2002, the Company consummated anoffer to exchange all of the outstanding Notes with new notes registered underthe Securities Act.  The terms of theexchange notes are substantially identical to the Notes; however, the exchangenotes are freely tradable, except in limited circumstances.

 

Net cash provided by operating activities was approximately $54.4million for the year ended June 30, 2002. Cash provided by operating activities resulted primarily from net incomebefore depreciation, amortization, the extraordinary loss on debtextinguishment and the acquisition related compensation charge (approximately$51.7 million) and an increase in accounts payable and other accrued expenses(approximately $6.3 million), partially offset by an increase in other currentassets (approximately $3.0 million) and an increase in trade accountsreceivables, net (approximately $0.5 million).

 

Net cash used in investing activities was approximately $243.2 millionfor the year ended June 30, 2002.  Cashused in investing activities resulted primarily from the purchase of InSightcommon stock, net of cash acquired in the Acquisition (approximately $179.3million) and the Company purchasing or upgrading diagnostic imaging equipmentat its existing facilities (approximately $64.5 million).

 

Net cash provided by financing activities was approximately $191.7million for the year ended June 30, 2002, resulting primarily from the proceedsfrom sale of common stock, net of equity issuance costs (approximately $85.8

 

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million), and borrowings of debt (approximately $575.0 million),substantially offset by principal payments of debt and capital leaseobligations (approximately $425.1 million), and payments of deferred loan feesand other payments made in connection with the refinancing of notes payable(approximately $44.6 million).

 

The Company has committed to purchase or lease in connection with thedevelopment of new Fixed and Mobile Facilities and replacement of diagnosticimaging equipment at Centers, Fixed and Mobile Facilities, at an aggregate costof approximately $15.7 million, 12 diagnostic imaging systems for deliverythrough November 2002.  The Companyexpects to use either internally generated funds, its Credit Facilities orleases to finance the purchase of such equipment.  The Company may purchase, lease or upgrade other diagnosticimaging systems as opportunities arise to place new equipment into service whennew contract services agreements are signed, existing agreements are renewed,acquisitions are completed, or new Centers, Fixed and Mobile Facilities aredeveloped in accordance with the Company’s business strategy.

 

Effective June 27, 2002, the Company purchased nine pieces ofdiagnostic imaging equipment from GE which had been financed through operatingleases.  The total purchase price wasapproximately $14.2 million.  EffectiveJuly 1, 2002, the Company purchased 13 pieces of diagnostic imaging equipmentfrom GE by converting operating leases to capital leases.  The capital leases bear interest at 7.84%,have 66 month terms and contain a $1.00 buy-out at the end of each lease.  The total purchase price was approximately $23.6million.  As a result, annual equipmentlease expense will be reduced by approximately $7.8 million and depreciationand interest will be increased by approximately the same amount.  In the future, the Company intends tofinance purchase of diagnostic imaging equipment primarily with capital leases,internally generated funds, and its Credit Facilities, although the Company maychoose to enter into operating leases for certain diagnostic imaging equipment.

 

The Company’s contractual obligations for long-term debt, includingcapital lease obligations and noncancellable leases (after adjusting for theeffects of the capital lease conversion discussed above) are as follows(amounts in thousands):

 
|                           |   |      |    | **Payments Due by Period** |   |
|--------------------------------|--------|-----------|---------|----------------------------|--------|
|                           |   | **Total** |    | **Less than  1 Year**      |   | **1-3****Years** |   | **4-5  Years** |   | **After  5 Years** |   |
| Notes payable                  |   | $         | 373,875 |                       | $      | 1,500 |   | $ | 3,000 |   | $ | 3,000 |   | $ | 366,375 |   |
| Capital lease obligations      |   | 27,860    |    | 5,473                      |   | 10,103 |   | 9,718 |   | 2,566 |   |
| Operating lease obligations    |   | 6,778     |    | 1,506                      |   | 2,686 |   | 1,912 |   | 674 |   |
| Total contractual  obligations |   | $         | 408,513 |                       | $      | 8,479 |   | $ | 15,789 |   | $ | 14,630 |   | $ | 369,615 |   |

 

In addition, in connection with the implementation of the electronictransaction, security and privacy standards mandated by HIPAA, the Companyexpects to spend approximately $1.5 million to make necessary software upgradesto its radiology information system to make the system compliant with the HIPAAtransaction standards by April 2003 and with the privacy standards by October2003 (of which approximately $0.3 million had been spent as of June 30, 2002).

 

The Company believes that, based on current levels of operations andanticipated growth, its cash from operations, together with other availablesources of liquidity, will be sufficient through June 30, 2003 to fundanticipated capital expenditures and make required payments of principal andinterest on its debt, including payments due on the Notes and obligations underthe Credit Facilities.  In addition, theCompany continually evaluates potential acquisitions and expects to fund suchacquisitions from its available sources of liquidity, as discussed above.  The Company’s acquisition strategy mayrequire sources of capital in addition to that currently available to theCompany.   No assurance can be giventhat such necessary additional funds will be available to the Company on termsacceptable to the Company or at all.

 

**RESULTSOF OPERATIONS**

 

The results of operations and cash flows ofthe Company for the year ended June 30, 2002 have been derived by combining theresults of operations and cash flows of the Company for the year ended June 30,2002 with the results of operations and cash flows of InSight from July 1, 2001to October 17, 2001, the date of the Acquisition.  The Company has no operations other than its investment inInSight.  The results of operations andcash flows of InSight

 

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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.

 

Set forth below are the results for the yearsended June 30, 2002, 2001 and 2000.  Theyear ended June 30, 2002 results of operations combine the results ofoperations of the Company for the year ended June 30, 2002 with the results ofoperations of the Predecessor for the period from July 1, 2001 to October 17,2001.  The years ended June 30, 2001 and2000 represent the results of operations of the Predecessor.  These combined results of operations havebeen prepared for comparative purposes only and do not purport to be indicativeof what operating results of operations would have been, and may not beindicative of future operating results (amounts in thousands):

 
|                                              |   | **Year Ended June 30,** |    |
|---------------------------------------------------|--------|-------------------------|---------|
|                                              |   | **2002**                |    | **2001** |   | **2000** |   |
|                                              |   | **(unaudited)**         |    |
| Revenues                                          |   | $                       | 219,085 |   | $ | 211,503 |   | $ | 188,574 |   |
| Costs of operations                               |   | 161,271                 |    | 161,872 |   | 151,429 |   |
| Gross profit                                      |   | 57,814                  |    | 49,631 |   | 37,145 |   |
| Corporate operating expenses                      |   | 10,889                  |    | 10,783 |   | 10,946 |   |
| Income from company operations                    |   | 46,925                  |    | 38,848 |   | 26,199 |   |
| Equity in earnings of unconsolidated partnerships |   | 819                     |    | 971 |   | 817 |   |
| Acquisition related compensation charge           |   | (15,616                 | )       | — |   | — |   |
| Operating income                                  |   | 32,128                  |    | 39,819 |   | 27,016 |   |
| Interest expense                                  |   | 31,489                  |    | 23,394 |   | 18,696 |   |
| Income before income taxes                        |   | 639                     |    | 16,425 |   | 8,320 |   |
| Provision for income taxes                        |   | 855                     |    | 2,624 |   | 1,131 |   |
| Income (loss) before extraordinary item           |   | (216                    | )       | 13,801 |   | 7,189 |   |
| Extraordinary item                                |   | (4,423                  | )       | — |   | — |   |
| Net income (loss)                                 |   | $                       | (4,639  | ) | $ | 13,801 |   | $ | 7,189 |   |

 

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.   Prior period information has been restatedto reflect the change in segments.

 

**YEARSENDED JUNE 30, 2002 AND 2001**

 

REVENUES:  Revenues increased approximately 3.6% from approximately $211.5million for the year ended June 30, 2001, to approximately $219.1 million forthe year ended June 30, 2002.  Thisincrease was due primarily to the opened Fixed Facilities discussed above(approximately $1.0 million) and an increase in contract services, patientservices and other revenues (approximately $6.6 million) at existingfacilities, resulting from sales efforts and incentive initiatives implementedat existing facilities.  Revenues forthe Mobile and Fixed-Site Division represented

 

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approximately 42% and 58%, respectively, of total revenues for the yearended June 30, 2002.  However, thepercentages will be affected by future acquisitions and the establishment ofCenters, Fixed and Mobile Facilities.

 

Contract services revenues increased approximately 1.6% fromapproximately $103.4 million for the year ended June 30, 2001, to approximately$105.1 million for the year ended June 30, 2002.  The increase was due to a combination of higher utilization andmore fixed monthly fee contracts at the Company’s existing mobile customerbase, partially offset by the loss of several high volume customers which werereplaced by contracts which initially have lower volumes.  Contract services revenues for the Mobileand Fixed-Site Division represented approximately 85% and 15%, respectively, ofcontract services revenues for the year ended June 30, 2002.  However, the percentages will be affected byfuture acquisitions and the establishment of Centers, Fixed and MobileFacilities.

 

Contract services revenues, primarily earned by the Company’s MobileFacilities, represented approximately 48% of total revenues for the year endedJune 30, 2002.  Each year approximatelyone-third of the contract services agreements are subject to renewal.  It is expected that some high volumecustomer accounts will elect not to renew their contracts and instead willpurchase or lease their own diagnostic imaging equipment and some customers maychoose an alternative services provider. In the past, where agreements have not been renewed, the Company hasbeen able to obtain replacement contracts. While some replacement accounts have initially been smaller than thelost accounts, such replacement accounts’ revenues have generally increasedover the term of the agreement.  Thenonrenewal of a single customer agreement would not have a material impact onthe Company’s contract services revenues; however, non-renewal of severalcontracts could have a material impact on contract services revenues.  See “Item 1. Business 3⁄4Customers and Contracts.”

 

As a result of the implementation of the new OPPS for outpatientservices, effective August 1, 2000 Medicare began paying hospitals foroutpatient services based on ambulatory payment classification APC groupsrather than on a hospital’s costs. Because the new OPPS appeared to have a severe adverse economic effecton hospitals, Congress enacted additional legislation in the BBA to soften thenegative financial effects for a specific period of time (through 2003).  Under the BBA, hospitals may receiveadditional payments for new technologies, transitional pass-through forinnovative medical devices, drugs and biologics, outlier adjustments andtransitional payment corridors.  Inaddition, the Benefits Improvement and Protection Act of 2000 included certainprovisions requiring CMS to revise the APCs to separate contrast-enhanceddiagnostic imaging procedures from those that are not contrast-enhanced.   Effective January 1, 2002, CMS reduced thepayment for unenhanced diagnostic procedures and increased payment forcontrast-enhanced diagnostic procedures. The extent to which this disparity in reimbursement will continue isunclear.  Effective on January 1, 2002,CMS also reduced 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 willreceive from Medicare and other third-party payors.  The reduction of contractual rates for a single customer or lossof a single customer to a competitor prepared to reduce contractual rates wouldnot have 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 theyear ended June 30, 2002.  Patient servicesrevenues increased approximately 5.5% from approximately $107.5 million for theyear ended June 30, 2001, to approximately $113.4 million for the year endedJune 30, 2002.  This increase was dueprimarily to the opened Fixed Facilities discussed above (approximately $1.0million) and an increase in revenues at existing facilities (approximately $4.9million). The increase at existing facilities was due to higher utilization(approximately 7%), and a nominal increase in

 

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reimbursement from third-party payors. Patient services revenues for the Mobile and Fixed-Site Divisionrepresented approximately 2% and 98%, respectively, of patient servicesrevenues for the year ended June 30, 2002. However, the percentages will be affected by future acquisitions and theestablishment of Centers, Fixed and Mobile Facilities.  The Company believes its patient servicesrevenues received from Medicare will not be materially impacted by the new OPPSbecause it primarily operates freestanding Fixed Facilities and Centers whichare unaffected thereby.  However,regulations were recently adopted by the Medicare program which, effectiveJanuary 1, 2002, reduced Medicare payment for diagnostic imaging services,including MRI and other services the Company provides in non-hospital settings,by approximately 7% to 9%.  Theseregulations are expected to negatively impact patient services revenues in theannual amount of approximately $2.0 million based on current revenue amounts.  Patient services revenues for the year endedJune 30, 2002 were negatively impacted by approximately $0.9 million.

 

Management believes that any future increases in revenues at existingfacilities can only be achieved by higher utilization and not by increases inprocedure prices; however, slower start-ups of new operations, excess capacityof diagnostic imaging equipment, competition, and the expansion of managed caremay impact utilization and make it difficult for the Company to achieve revenueincreases in the future, absent the execution of provider agreements withmanaged care companies and other payors, and the execution of the Company’sbusiness strategy, particularly acquisitions.

 

COSTS OF OPERATIONS:  Costs of operations decreased approximately0.4% from approximately $161.9 million for the year ended June 30, 2001, toapproximately $161.3 million for the year ended June 30, 2002.  This decrease was due primarily to theelimination of goodwill amortization as a result of the adoption of SFAS 142discussed below, net of amortization as a result of the Acquisition(approximately $4.4 million), substantially offset by costs related to theopened Fixed Facilities discussed above (approximately $1.1 million) andincreased costs at existing facilities (approximately $2.7 million).  The increase at existing facilities was dueprimarily to higher salaries, benefits, and insurance partially offset by lowerdepreciation, equipment maintenance and supply expenses.

 

Costs of operations, as a percentage of total revenues, decreased toapproximately 73.6% for the year ended June 30, 2002 from approximately 76.5%for the year ended June 30, 2001.  Thepercentage decrease is primarily due to the elimination of goodwill amortizationand reduced costs in depreciation, equipment maintenance and supply costs,partially offset by higher salary and benefit costs.  The Company is continuing its effort to improve operatingefficiencies through cost reduction initiatives.  The cost reduction initiatives are focused primarily on costs fordiagnostic imaging equipment, including lease, depreciation and maintenance,occupancy, marketing and salary and benefits.

 

CORPORATE OPERATING EXPENSES:  Corporate operating expenses increasedapproximately 0.9% from approximately $10.8 million for the year ended June 30,2001, to approximately $10.9 million for the year ended June 30, 2002. Theincrease was due primarily to higher occupancy, legal and business developmentcosts, partially offset by reduced information systems costs.   Corporate operating expenses, as apercentage of total revenues, decreased from approximately 5.1% for the yearended June 30, 2001, to approximately 5.0% for the year ended June 30, 2002.

 

ACQUISITION RELATED COMPENSATION CHARGE:  Holdersof options and warrants, which prior to the Acquisition were exercisable forInSight common stock, received the difference between $18.00 and the exerciseprice of each share of common stock the holder could have acquired pursuant tothe terms of the options and warrants, and the options and warrants wereterminated.  This resulted in a chargeof approximately $15.6 million, which is reflected in the accompanyingstatement of operations of InSight for the period from July 1, 2001 to October17, 2001.

 

INTEREST EXPENSE, NET:  Interest expense, net increasedapproximately 34.6% from approximately $23.4 million for the year ended June30, 2001, to approximately $31.5 million for the year ended June 30, 2002.  This increase was due primarily toadditional debt related to the Acquisition and related financing activitiesdiscussed above and the unused facility fee payments discussed above, partiallyoffset by reduced interest as a result of principal payments of long-term debt.

 

PROVISION FOR INCOME TAXES: Provision for income taxes decreased from approximately $2.6 million forthe year ended June 30, 2001, to approximately $0.9 million for the year endedJune 30, 2002.  For the year ended June30, 2002, the provision is due to the Company recording a tax provision at thestatutory rate of 40% plus the

 

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effect of the limitation on the benefitsrecorded for the pre-tax loss of the Predecessor prior to the Acquisition andthe effect of permanent differences such as the amortization of goodwill.  For the year ended June 30, 2001, theprovision is due to the Predecessor recording a tax provision at the statutoryrate of 40%, partially offset by a reduction in the valuation allowanceattributed to the utilization of net operating loss carryforwards and theeffect of ** **permanent differences.  ** **Atthe beginning of each fiscal year, the Company estimates its effective tax ratefor the fiscal year.  In addition, theCompany periodically reviews the effective tax rate in light of certainfactors, including actual operating income, acquisitions completed and newfacilities opened, and the effects of benefits from the Company’s net operatingloss carry forwards.  This review mayresult in an increase or decrease in the effective tax rate during the fiscalyear.  The Company expects its effectivetax rate will be approximately 40% in the future as previously unused netoperating loss carryforwards are used.

 

EBITDA:  Earnings before interest, taxes, depreciation and amortizationincluding the acquisition related compensation charge (“EBITDA”) increasedapproximately 3.7% from approximately $81.0 million for the year ended June 30,2001, to approximately $84.0 million for the year ended June 30, 2002.  This increase was primarily due to higherrevenues at existing facilities partially offset by higher costs ofservices.   EBITDA for the Fixed-SiteDivision increased approximately 5.9% from approximately $50.6 million for theyear ended June 30, 2001, to approximately $53.6 million for the year endedJune 30, 2002.  EBITDA for the MobileDivision decreased approximately 6.1% from approximately $47.3 million for theyear ended June 30, 2001, to approximately $44.4 million for the year endedJune 30, 2002.  The reduction in EBITDAin the Mobile Division is due primarily to higher costs of services and tostart-up costs relating to certain Mobile PET Facilities.  EBITDA has been included because managementbelieves that it is a useful tool for measuring the Company’s ability to meetdebt service, capital expenditure and working capital requirements.  EBITDA should not be considered analternative to, or more meaningful than, income from company operations orother traditional indicators of operating performance and cash flow fromoperating activities determined in accordance with accounting principlesgenerally accepted in the United States.

 

EXTRAORDINARY ITEM:  The Company recorded an extraordinary lossof approximately $4.4 million related to the write-off of associated debtissuance costs following the refinancing of the senior subordinated bridge loanas a result of the Acquisition and related financing transactions, net ofanticipated tax benefits (approximately $2.9 million).

 

**YEARSENDED JUNE 30, 2001 AND 2000**

 

REVENUES:  Revenues increased approximately 12.1% from approximately $188.6million for the year ended June 30, 2000, to approximately $211.5 million forthe year ended June 30, 2001.  Thisincrease was due primarily to the acquisitions and opened Fixed Facilitiesdiscussed above (approximately $10.9 million) and an increase in contractservices, patient services and other revenues (approximately $16.4 million) atexisting facilities, resulting from sales efforts and incentive initiativesimplemented at existing facilities, partially offset by the assignment infiscal 2000 of certain managed care contracts to an outside third party(approximately $4.4 million).  Revenuesfor the Mobile and Fixed-Site Division represented approximately 44% and 56%,respectively, of total revenues for the year ended June 30, 2001.

 

Contract services revenues increased approximately 3.3% fromapproximately $100.1 million for the year ended June 30, 2000, to approximately$103.4 million for the year ended June 30, 2001.  The increase was due to the addition of five Mobile Facilitiesand a combination of higher utilization and more fixed monthly fee contracts atthe Company’s existing mobile customer base (approximately $7.7 million),partially offset by the assignment in fiscal 2000 of certain managed carecontracts to an outside third party (approximately $4.4 million).  Contract services revenues for the Mobileand Fixed-Site Division represented approximately 87% and 13%, respectively, ofcontract services revenues for the year ended June 30, 2001.

 

Patient services revenues, primarily earned by the Company’s FixedFacilities and Centers, represented approximately 51% of total revenues for theyear ended June 30, 2001.  Patientservices revenues increased approximately 23.8% from approximately $86.8million for the year ended June 30, 2000, to approximately $107.5 million forthe year ended June 30, 2001.  Thisincrease was due primarily to the acquisitions and opened Fixed Facilitiesdiscussed above (approximately $10.9 million) and an increase in revenues atexisting facilities (approximately $9.8 million). The increase at existingfacilities was due to higher utilization (approximately 9%), and a nominalincrease in reimbursement from third-party payors.  Patient services revenues for the Mobile and

 

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Fixed-Site Division represented approximately 2% and 98%, respectively,of patient services revenues for the year ended June 30, 2001.

 

COSTS OF OPERATIONS:  Costs of operations increased approximately6.9% from approximately $151.4 million for the year ended June 30, 2000, toapproximately $161.9 million for the year ended June 30, 2001.  This increase was due primarily toadditional costs related to the acquisitions and opened Fixed Facilitiesdiscussed above (approximately $7.1 million) and at existing facilities(approximately $8.0 million), primarily salary and benefits and depreciation,partially offset by reduced equipment lease, supply, consulting and marketingcosts, and the elimination of costs resulting from the assignment in fiscal2000 of certain managed care contracts to an outside third party (approximately$4.6 million).  The decrease inequipment lease costs and the increase in depreciation is primarily the resultof the conversion of operating leases to capital leases discussed above and theCompany purchasing new diagnostic imaging equipment rather than entering intooperating leases.

 

Costs of operations, as a percentage of total revenues, decreased toapproximately 76.5% for the year ended June 30, 2001 from approximately 80.3%for the year ended June 30, 2000.  Thepercentage decrease is primarily due to reduced costs in equipment lease,equipment maintenance, occupancy, consulting and communications costs,partially offset by higher depreciation and salary and benefit costs.

 

CORPORATE OPERATING EXPENSES:  Corporate operating expenses decreasedapproximately 0.9% from approximately $10.9 million for the year ended June 30,2000, to approximately $10.8 million for the year ended June 30, 2001. Thedecrease was due primarily to reduced salary and benefits associated with theCompany’s acquisition and development activities, consulting and travel costs,partially offset by additional information systems costs.   Corporate operating expenses, as apercentage of total revenues, decreased from approximately 5.8% for the yearended June 30, 2000, to approximately 5.1% for the year ended June 30, 2001.

 

INTEREST EXPENSE, NET:  Interest expense, net increasedapproximately 25.1% from approximately $18.7 million for the year ended June30, 2000, to approximately $23.4 million for the year ended June 30, 2001.  This increase was due primarily toadditional debt related to: (i) the acquisitions discussed above, (ii) theconversion of operating leases to capital leases, (iii) the Company upgradingits existing diagnostic imaging equipment, and (iv) a charge of approximately$0.7 million related to the Company’s interest rate swap discussed below,partially offset by reduced interest as a result of principal payments of long-termdebt.

 

PROVISION FOR INCOME TAXES: For theyear ended June 30, 2001, the effective tax rate increased to approximately 16%from approximately 14% for the year ended June 30, 2000, primarily as a resultof recognizing in fiscal 2000 the benefits from previously unused net operatingloss carry forwards.

 

EBITDA:  EBITDA (excluding the acquisition related compensation charge)increased approximately 33.7% from approximately $60.6 million for the yearended June 30, 2000, to approximately $81.0 million for the year ended June 30,2001.  This increase was primarily dueto higher revenues at existing facilities as a result of the revenue enhancingefforts described above, lower costs of services as a result of the costreduction initiatives described above, and decreased equipment lease expense asa result of the conversion of operating leases to capital leases.  EBITDA (excluding the acquisition relatedcompensation charge) for the Mobile Division increased approximately 19.1% fromapproximately $39.7 million for the year ended June 30, 2000, to approximately$47.3 million for the year ended June 30, 2001.  EBITDA (excluding the acquisition related compensation charge)for the Fixed-Site Division increased approximately 37.1% from approximately$36.9 million for the year ended June 30, 2000, to approximately $50.6 millionfor the year ended June 30, 2001.

 

**NEWPRONOUNCEMENTS**

 

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 combinations with a closing dateafter June 30, 2001.  SFAS 141eliminates the pooling-of-interests method of accounting and further clarifiesthe criteria for recognition of intangible assets separately fromgoodwill.  The Company and InSightadopted SFAS 141, effective July 1, 2001.

 

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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 anallocation of values to these identifiable intangible assets based on the thirdparty valuation.

 

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.  The Company and InSight adopted SFAS 142effective July 1, 2001, which required the Company and InSight to ceaseamortization of its remaining net goodwill balance and to perform atransitional goodwill impairment test as of July 1, 2001, and thereafter animpairment test at least annually. Impairment results when the fair value of the Company’s reportingsegments, including goodwill, is less than its carrying value.  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 AssetRetirement Obligations.”  SFAS 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. It applies to legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset, except forcertain obligations of lessees.  SFAS143 requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it is incurred if a reasonableestimate of fair value can be made.  Theassociated asset retirement costs are capitalized as part of the carrying amountof the long-lived asset. SFAS 143 is effective for financial statements issuedfor fiscal 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 theImpairment or Disposal of Long-Lived Assets.” SFAS 144 addresses financial accounting and reporting for the impairmentor disposal of long-lived assets.  SFAS144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of,” and the accounting andreporting provisions of APB Opinion No. 30, “Reporting the Results ofOperations – Reporting the Effects and Transactions,” for the disposal of asegment of a business (as previously defined in that Opinion).  The provisions of SFAS 144 are effective forfinancial statements issued for fiscal years beginning after December 15, 2001(with earlier application being encouraged) and generally are to be appliedprospectively.  The Company does notexpect the adoption of SFAS 144 to have a material impact on the Company’sfinancial condition and results of operations.

 

In April 2002, the FASB issued SFAS No. 145, “Revision of SFAS Nos. 4,44, and 64, Amendment of FASB No. 13 and Technical Corrections”.  SFAS 145 rescinds, amends or makes varioustechnical corrections of certain existing authoritative pronouncements.  In fiscal 2003, the Company adopted SFAS145.  As a result, the net extraordinaryloss from the extinguishment of debt of approximately $4.4 million for the yearended June 30, 2002 will no longer be considered extraordinary, and will beclassified within the statement of operations as a corporate operating expense.  Other than the reclassification of the debtextinguishment, the Company does not expect the adoption of SFAS 145 to have amaterial effect on its financial condition and results of operations.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities. SFAS 146 is effective for exit or disposal activities initiated afterDecember 31, 2002.  The Company does notexpect the adoption of SFAS 146 to have a material effect on its financialcondition and results 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 on Form10-K are based upon the Company’s consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these consolidated financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues, expenses and related disclosure ofcontingencies. The Company believes the critical accounting policies that mostimpact the consolidated financial statements are described below.  A summary of the significant accountingpolicies of the Company can be found in Note 3 to the Consolidated Financial Statementswhich is included in Item 8 of this Form 10-K.

 

34

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TRADE ACCOUNTS RECEIVABLES:   The Company reviews its trade accountsreceivables and its estimates of the allowance for doubtful accounts andcontractual adjustments each period. The amount of the allowance includes management’s estimate of theamounts expected to be written off on specific accounts and for write-offs onother unidentified accounts.  Inestimating the write-offs and adjustments on specific accounts, managementrelies on a combination of in-house analysis and a review of contractualpayment rates from private health insurance programs or under the federalMedicare program.  In estimating theallowance for unidentified write-offs and adjustments, management relies onhistorical experience. Estimates of uncollectible amounts are revised eachperiod, and changes are recorded in the period they become known. The amountsthe Company will ultimately realize could differ materially from the amountsassumed in arriving at the allowance for doubtful accounts and contractualadjustments in the condensed consolidated financial statements at June 30,2002.

 

GOODWILL:   The Company evaluates the carrying value of goodwill andidentified intangibles not subject to amortization in the second quarter ofeach fiscal year.  As part of theevaluation, the Company compares the carrying value of each intangible assetwith its fair value to determine whether there has been impairment.  The Company assesses the ongoingrecoverability of its intangible assets subject to amortization by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows. Ifprojected future cash flows indicate that the unamortized intangible assetbalances will not be recovered, an adjustment is made to reduce the netintangible asset to an amount consistent with projected future cash flowsdiscounted at the Company’s incremental borrowing rate. Cash flow projections,although subject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and economic conditions.

 

35

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**ITEM 7A.****                    QUANTITATIVEAND QUALITATIVE DISCLOSURES 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 Credit Facilities.  The Company does not engage in activitiesusing complex or highly leveraged instruments.

 

At June 30, 2002, the Company had outstanding long-term debt ofapproximately $148.9 million, which has floating rate terms.  The Company had outstanding an interest rateswap, converting $35.3 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.

 

36

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**ITEM 8. ****                       FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**Index to Consolidated Financial Statementsfor the Year Ended June 30, 2002, the Period from July 1, 2001 to October 17,2001and for the Years Ended June 30, 2001 and 2000

 
| REPORT OF INDEPENDENT  ACCOUNTANTS                                  |
|---------------------------------------------------------------------|
|                                                                |
| REPORT OF  INDEPENDENT PUBLIC ACCOUNTANTS                           |
|                                                                |
| CONSOLIDATED BALANCE  SHEETS                                        |
|                                                                |
| CONSOLIDATED  STATEMENTS OF OPERATIONS                              |
|                                                                |
| CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY               |
|                                                                |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS                              |
|                                                                |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                         |
|                                                                |
| REPORT  OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES |
|                                                                |
| REPORT OF INDEPENDENT PUBLIC  ACCOUNTANTS                           |
|                                                                |
| SCHEDULE II - VALUATION AND QUALIFYING  ACCOUNTS                    |

 

In accordance with****SECRule 3-10 of Regulation S-X, the consolidated financial statements of InSightHealth Services Holdings Corp. (Company) are included herein andseparate financial statements of InSight Health Services Corp. (InSight), theCompany’s wholly owned subsidiary, and InSight’s subsidiary guarantors are notincluded.  Condensed financial data forInSight and its subsidiary guarantors is included in Note 20 to theConsolidated Financial Statements.

 

37

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**REPORT OF INDEPENDENT ACCOUNTANTS**

 

To the Stockholders of InSight Health Services Holdings Corp.:

 

In our opinion, the accompanying consolidated balance sheet as of June30, 2002 and the related consolidated statements of operations, ofstockholders’ equity and of cash flows present fairly, in all materialrespects, the financial position of InSight Health Services Holdings Corp. andits subsidiaries at June 30, 2002, and the results of their operations andtheir cash flows for the year then ended****in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the accompanying consolidated statements ofoperations, of stockholders’ equity and of cash flows present fairly, in allmaterial respects, the results of operations and cash flows for InSight HealthServices Corp. (Predecessor) for the period from July 1, 2001 through October17, 2001 in conformity with accounting principles generally accepted in theUnited States of America.  Thesefinancial statements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.  The financial statements of the Predecessoras of June 30, 2001 and for each of the two years then ended were audited byother independent accountants who have ceased operations.  Those independent accountants expressed anunqualified opinion on those statements, before the revision described in Note18, in their report dated August 29, 2001.

 

As discussed above, the financial statements of the Predecessor as ofJune 30, 2001 and for each of the two years in the period ended June 30, 2001,were audited by other independent accountants who have ceased operations.  As described in Note 18, the Company changedthe composition of its reportable segments in 2002, and the amounts in the 2001and 2000 financial statements relating to the reportable segments have beenrestated to conform to the 2002 composition of reportable segments.  We audited the adjustments that were appliedto restate the disclosure for reportable segments reflected in the 2001 and2000 financial statements.  In ouropinion, such adjustments are appropriate and have been properly applied.  However, we were not engaged to audit, reviewor apply any procedures to the 2001 and 2000 financial statements of the Predecessorother than with respect to such adjustments and, accordingly, we do not expressan opinion or any other form of assurance on the 2001 and 2000 financialstatements taken as a whole.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
| Orange County, California      |
| September 18, 2002             |

 

38

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**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

**The following report is a copy of areport previously issued by Arthur Andersen LLP and has not been reissued byArthur Andersen LLP.**

 

To the Stockholders of InSight Health Services Corp.:

 

We have audited the accompanying consolidated balance sheet of InSightHealth Services Corp. (a Delaware corporation) and subsidiaries as of June 30,2001 and 2000, and the related consolidated statements of income, stockholders’equity and cash flows for each of the three years in the period ended June 30,2001.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of InSightHealth Services Corp. and subsidiaries as of June 30, 2001, and the results oftheir operations and their cash flows for each of the three years in the periodended June 30, 2001, in conformity with accounting principles generallyaccepted in the United States.

 

ARTHUR ANDERSEN LLP

Orange County, California

August 29, 2001

 

39

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF JUNE 30, 2002 AND 2001**

(Amounts in thousands, except share data)

 
|                                                                                                                    |   | **Company** |    | **Predecessor** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------|---------|-----------------|--------|
|                                                                                                                    |   | **2002**    |    | **2001**        |   |
| ASSETS                                                                                                                  |   |        |    |            |   |
| CURRENT ASSETS:                                                                                                         |   |        |    |            |   |
| Cash and cash  equivalents                                                                                              |   | $           | 17,783  |            | $      | 23,254 |   |
| Trade accounts receivables, net                                                                                         |   | 43,859      |    | 43,355          |   |
| Other current assets                                                                                                    |   | 8,056       |    | 5,029           |   |
| Deferred income taxes                                                                                                   |   | —      |    | 3,350           |   |
| Total current assets                                                                                                    |   | 69,698      |    | 74,988          |   |
|                                                                                                                    |   |        |    |            |   |
| PROPERTY AND EQUIPMENT, net                                                                                             |   | 172,056     |    | 148,255         |   |
| INVESTMENTS IN PARTNERSHIPS                                                                                             |   | 1,886       |    | 1,783           |   |
| OTHER ASSETS                                                                                                            |   | 20,640      |    | 6,828           |   |
| OTHER INTANGIBLE ASSETS, net                                                                                            |   | 36,270      |    | —          |   |
| GOODWILL, net                                                                                                           |   | 198,851     |    | 89,202          |   |
|                                                                                                                    |   | $           | 499,401 |            | $      | 321,056 |   |
|                                                                                                                    |   |        |    |            |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                              |   |        |    |            |   |
| CURRENT LIABILITIES:                                                                                                    |   |        |    |            |   |
| Current portion of notes payable                                                                                        |   | $           | 1,500   |            | $      | 21,259 |   |
| Current portion of capital lease  obligations                                                                           |   | 1,775       |    | 12,603          |   |
| Accounts payable and other accrued  expenses                                                                            |   | 30,516      |    | 24,335          |   |
| Total current liabilities                                                                                               |   | 33,791      |    | 58,197          |   |
|                                                                                                                    |   |        |    |            |   |
| LONG-TERM LIABILITIES:                                                                                                  |   |        |    |            |   |
| Notes payable, less current portion                                                                                     |   | 372,375     |    | 150,696         |   |
| Capital lease obligations, less current  portion                                                                        |   | 2,514       |    | 43,695          |   |
| Other long-term liabilities                                                                                             |   | 3,345       |    | 2,997           |   |
| Total long-term liabilities                                                                                             |   | 378,234     |    | 197,388         |   |
|                                                                                                                    |   |        |    |            |   |
| COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                 |   |        |    |            |   |
|                                                                                                                    |   |        |    |            |   |
| 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 June  30, 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 loss                                                                                    |   | (224        | )       | —          |   |
| Retained earnings                                                                                                       |   | 9           |    | 4,446           |   |
| Total stockholders’ equity                                                                                         |   | 87,376      |    | 65,471          |   |
|                                                                                                                    |   | $           | 499,401 |            | $      | 321,056 |   |

 

The accompanyingnotes are an integral part of these consolidated balance sheets.

 

40

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEAR ENDED JUNE30, 2002, THE PERIOD FROM JULY 1 TO OCTOBER 17, 2001 ANDFOR THE YEARS ENDED JUNE 30, 2001 AND 2000**

(Amounts in thousands)

 
|                                                            |   | **Company**              |   | **Predecessor**                          |   |
|-----------------------------------------------------------------|--------|--------------------------|--------|------------------------------------------|--------|
|                                                            |   | **Year Ended  June 30,** |   | **Period  from  July 1 to  October 17,** |   | **Years  Ended June 30,** |   |
|                                                            |   | **2002**                 |   | **2001**                                 |   | **2001** |   | **2000** |   |
| REVENUES:                                                       |   |                     |   |                                     |   |   |   |   |   |
| Contract services                                               |   | $                        | 75,327 |                                     | $      | 29,767 |   | $ | 103,421 |   | $ | 100,135 |   |
| Patient  services                                               |   | 79,730                   |   | 33,693                                   |   | 107,468 |   | 86,838 |   |
| Other                                                           |   | 350                      |   | 218                                      |   | 614 |   | 1,601 |   |
| Total revenues                                                  |   | 155,407                  |   | 63,678                                   |   | 211,503 |   | 188,574 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| COSTS OF  OPERATIONS:                                           |   |                     |   |                                     |   |   |   |   |   |
| Costs of  services                                              |   | 80,868                   |   | 32,197                                   |   | 109,216 |   | 101,323 |   |
| Provision for  doubtful accounts                                |   | 2,785                    |   | 1,110                                    |   | 3,594 |   | 2,907 |   |
| Equipment  leases                                               |   | 5,469                    |   | 2,557                                    |   | 7,928 |   | 13,569 |   |
| Depreciation  and amortization                                  |   | 26,462                   |   | 9,823                                    |   | 41,134 |   | 33,630 |   |
| Total costs of  operations                                      |   | 115,584                  |   | 45,687                                   |   | 161,872 |   | 151,429 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| Gross profit                                                    |   | 39,823                   |   | 17,991                                   |   | 49,631 |   | 37,145 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                                   |   | 7,705                    |   | 3,184                                    |   | 10,783 |   | 10,946 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| Income from  company operations                                 |   | 32,118                   |   | 14,807                                   |   | 38,848 |   | 26,199 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS              |   | 437                      |   | 382                                      |   | 971 |   | 817 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| ACQUISITION  RELATED COMPENSATION CHARGE                        |   | —                   |   | (15,616                                  | )      | — |   | — |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| Operating  income (loss)                                        |   | 32,555                   |   | (427                                     | )      | 39,819 |   | 27,016 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| INTEREST  EXPENSE, net                                          |   | 25,168                   |   | 6,321                                    |   | 23,394 |   | 18,696 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| Income (loss)  before income taxes and extraordinary item       |   | 7,387                    |   | (6,748                                   | )      | 16,425 |   | 8,320 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES                           |   | 2,955                    |   | (2,100                                   | )      | 2,624 |   | 1,131 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| Income (loss)  before extraordinary item                        |   | 4,432                    |   | (4,648                                   | )      | 13,801 |   | 7,189 |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| EXTRAORDINARY  ITEM - Loss on debt extinguishment, net of taxes |   | (4,423                   | )      | —                                   |   | — |   | — |   |
|                                                            |   |                     |   |                                     |   |   |   |   |   |
| Net income  (loss)                                              |   | $                        | 9      |                                     | $      | (4,648 | ) | $ | 13,801 |   | $ | 7,189 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

41

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**INSIGHT HEALTH SERVICESHOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

**FOR THE YEAR ENDED JUNE30, 2002**

(Amounts in thousands, except share data)

 
| **Company**                                                         |   |       |   |   |   | **Additional  Paid-In  Capital** |   | **Accumulated  Other  Comprehensive  (Loss)** |   | **Retained  Earnings** |   | **Total** |   |
|---------------------------------------------------------------------|--------|------------|--------|--------|--------|----------------------------------|--------|-----------------------------------------------|--------|------------------------|--------|-----------|--------|
| **Common Stock**                                                    |
| **Shares**                                                          |   | **Amount** |
| 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     |   |
|                                                                |   |       |   |   |   |                             |   |                                          |   |                   |   |      |   |
| Net income                                                          |   | —     |   | — |   | —                           |   | —                                        |   | 9                      |   | 9         |   |
|                                                                |   |       |   |   |   |                             |   |                                          |   |                   |   |      |   |
| Other  comprehensive loss:                                          |   |       |   |   |   |                             |   |                                          |   |                   |   |      |   |
| Unrealized loss  attributable to change in fair value of derivative |   | —     |   | — |   | —                           |   | (224                                          | )      | —                 |   | (224      | )      |
| Comprehensive  loss                                                 |   |       |   |   |   |                             |   |                                          |   |                   |   | (215      | )      |
| BALANCE AT JUNE  30, 2002                                           |   | 5,468,764  |   | 5      |   | $                                | 87,586 |                                          | $      | (224                   | )      | $         | 9      |   | $ | 87,376 |   |
|                                                                     |        |            |        |        |        |                                  |        |                                               |        |                        |        |           |        |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

42

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITY**

**FOR THEPERIOD FROM JULY 1 TO OCTOBER 17, 2001 AND FOR THE YEARS ENDED JUNE 30, 2001AND 2000**

(Amounts in thousands,except share data)

 
|                                                             |   |         |   | **Additional  Paid-In  Capital** |             | **Accumulated  Other  Comprehensive  (Loss)** |   | **Retained  Earnings  (Deficit)** |   | **Total**    |         |
|------------------------------------------------------------------|--------|--------------|--------|----------------------------------|------------------|-----------------------------------------------|--------|-----------------------------------|--------|--------------|--------------|
| **Preferred  Stock**                                             |   |         |   |                             |
| **Series B**                                                     |   | **Series C** |   | **Series D**                     | **Common Stock** |
| **Shares**                                                       |   | **Amount**   |   | **Shares**                       |             | **Amount**                                    |   | **Shares**                        |   | **Amount**   | **Shares**   |   | **Amount** |
| **Predecessor**                                                  |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JUNE 30, 1999                                         |   | 25,000       |   | $                                |  23,923     |                                          | 27,953 |                              | $      |  13,173 |         | — |   | $ |  — |   | 2,879,071 |   | $ |  3 |   | $ |  23,551 |   | $ | — |   | $ |  (16,544 | ) | $ |  44,106 |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options  exercised                                         |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | 100,222 |   | — |   | 192 |   | — |   | — |   | 192 |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                       |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | — |   | — |   | — |   | — |   | 7,189 |   | 7,189 |   |
| BALANCE AT JUNE  30, 2000                                        |   | 25,000       |   | 23,923                           |             | 27,953                                        |   | 13,173                            |   | —       |         | — |   | 2,979,293 |   | 3 |   | 23,743 |   | — |   | (9,355 | ) | 51,487 |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options  and warrants exercised                            |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | 32,375 |   | — |   | 183 |   | — |   | — |   | 183 |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment for  fractional shares on the 1996 merger exchange    |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | (12 | ) | — |   | — |   | — |   | — |   | — |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                       |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | — |   | — |   | — |   | — |   | 13,801 |   | 13,801 |   |
| BALANCE AT JUNE  30, 2001                                        |   | 25,000       |   | 23,923                           |             | 27,953                                        |   | 13,173                            |   | —       |         | — |   | 3,011,656 |   | 3 |   | 23,926 |   | — |   | 4,446 |   | 65,471 |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   | 6 |   | 37,090 |   | — |   | — |   | — |   |
| Acquisition  related compensation charge                         |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | — |   | — |   | 15,616 |   | — |   | — |   | 15,616 |   |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                         |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | — |   | — |   | — |   | — |   | (4,648 | ) | (4,648 | ) |
|                                                             |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive loss                                        |   | —       |   | —                           |             | —                                        |   | —                            |   | —       |         | — |   | — |   | — |   | — |   | (682 | ) | — |   | (682 | ) |
| Comprehensive  loss                                              |   |         |   |                             |             |                                          |   |                              |   |         |         |   |   |   |   |   |   |   |   |   |   |   |   | (5,330 | ) |
| BALANCE AT  OCTOBER 17, 2001                                     |   | —       |   | $                                |  —     |                                          | $      |  —                      |   | $            |  — |   | — |   | $ |  — |   | 9,349,227 |   | $ |  9 |   | $ |  76,777 |   | $ |  (682 | ) | $ |  (202 | ) | $ |  75,902 |   |
|                                                                  |        |              |        |                                  |                  |                                               |        |                                   |        |              |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integralpart of these consolidated financial statements

 

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FORTHE YEAR ENDED JUNE 30, 2002, THE PERIOD FROM JULY 1 TO OCTOBER 17, 2001 AND**

**FORTHE YEARS ENDED JUNE 30, 2001 AND 2000**

(Amounts inthousands)

 
|                                                                                      |   | **Company** |   | **Predecessor**                          |   |
|-------------------------------------------------------------------------------------------|--------|-------------|--------|------------------------------------------|--------|
|                                                                                      |   |        |   | **Period  from  July 1 to  October 17,** |   | **Years Ended June 30,** |   |
| **Year Ended  June 30,**                                                                  |
|                                                                                      |   | **2002**    |   | **2001**                                 |   | **2001** |   | **2000** |   |
| OPERATING  ACTIVITIES:                                                                    |   |        |   |                                     |   |   |   |   |   |
| Net income  (loss)                                                                        |   | $           | 9      |                                     | $      | (4,648 | ) | $ | 13,801 |   | $ | 7,189 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |        |   |                                     |   |   |   |   |   |
| Extraordinary  loss on debt extinguishment                                                |   | 4,423       |   | —                                   |   | — |   | — |   |
| Depreciation  and amortization                                                            |   | 26,462      |   | 9,823                                    |   | 41,134 |   | 33,630 |   |
| Acquisition  related compensation charge                                                  |   | —      |   | 15,616                                   |   | — |   | — |   |
| Cash provided  by (used in) changes in operating assets and liabilites:                   |   |        |   |                                     |   |   |   |   |   |
| Trade accounts  receivables, net                                                          |   | 1,874       |   | (2,378                                   | )      | (2,757 | ) | (4,611 | ) |
| Other current  assets                                                                     |   | 590         |   | (3,616                                   | )      | 782 |   | (1,803 | ) |
| Accounts  payable and other accrued expenses                                              |   | 6,243       |   | 23                                       |   | (2,278 | ) | 6,119 |   |
| Net cash  provided by operating activities                                                |   | 39,601      |   | 14,820                                   |   | 50,682 |   | 40,524 |   |
|                                                                                      |   |        |   |                                     |   |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                    |   |        |   |                                     |   |   |   |   |   |
| Purchase of  InSight common stock                                                         |   | (187,722    | )      | —                                   |   | — |   | — |   |
| Cash acquired  in the Acquisition                                                         |   | 8,429       |   | —                                   |   | — |   | — |   |
| Acquisition of  Centers and Fixed Facilities                                              |   | —      |   | —                                   |   | — |   | (25,346 | ) |
| Additions to  property and equipment                                                      |   | (43,655     | )      | (20,852                                  | )      | (22,911 | ) | (23,170 | ) |
| Other                                                                                     |   | 1,385       |   | (740                                     | )      | (531 | ) | (554 | ) |
| Net cash used  in investing activities                                                    |   | (221,563    | )      | (21,592                                  | )      | (23,442 | ) | (49,070 | ) |
|                                                                                      |   |        |   |                                     |   |   |   |   |   |
| FINANCING ACTIVITIES:                                                                     |   |        |   |                                     |   |   |   |   |   |
| Proceeds from  stock options and warrants exercised                                       |   | —      |   | 145                                      |   | 183 |   | 192 |   |
| 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 notes payable and capital lease obligations                        |   | (416,510    | )      | (8,579                                   | )      | (31,759 | ) | (25,468 | ) |
| Proceeds from  issuance of debt                                                           |   | 575,000     |   | —                                   |   | — |   | 45,200 |   |
| Payments made  in connection with refinancing of notes payable                            |   | (15,109     | )      | —                                   |   | — |   | — |   |
| Other                                                                                     |   | (33         | )      | 381                                      |   | 457 |   | 1,461 |   |
| Net cash  provided by (used in) financing activities                                      |   | 199,745     |   | (8,053                                   | )      | (31,119 | ) | 21,385 |   |
|                                                                                      |   |        |   |                                     |   |   |   |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS:                                        |   | 17,783      |   | (14,825                                  | )      | (3,879 | ) | 12,839 |   |
| Cash, beginning  of period                                                                |   | —      |   | 23,254                                   |   | 27,133 |   | 14,294 |   |
| Cash, end of  period                                                                      |   | $           | 17,783 |                                     | $      | 8,429 |   | $ | 23,254 |   | $ | 27,133 |   |
|                                                                                      |   |        |   |                                     |   |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |   |        |   |                                     |   |   |   |   |   |
| Interest paid                                                                             |   | $           | 20,173 |                                     | $      | 6,799 |   | $ | 22,947 |   | $ | 18,086 |   |
| Income taxes  paid                                                                        |   | 4           |   | 943                                      |   | 2,582 |   | 452 |   |
| Equipment  additions under capital leases                                                 |   | —      |   | —                                   |   | 11,780 |   | 55,290 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30,2002**

 

**1.   ORGANIZATIONAND ACQUISITION**

 

InSight HealthServices Holdings Corp. (Company), a Delaware corporation, was incorporated onJune 13, 2001 under the name JWC/Halifax Holdings Corp.   The Company was funded through an equitycontribution from J.W. Childs Equity Partners II, L.P., Halifax CapitalPartners, L.P. and certain of their affiliates.  On June 29, 2001, the Company’s name was changed to InSightHealth Services Holdings Corp.  TheCompany and its former wholly owned subsidiary, InSight Health ServicesAcquisition Corp. (Acquisition Corp.) were created to acquire all theoutstanding shares of InSight Health Services Corp. (InSight).

 

On October 17,2001, the Company acquired InSight pursuant to an agreement and plan of mergerdated June 29, 2001, as amended, among the Company, Acquisition Corp. andInSight (the Acquisition).  AcquisitionCorp. was merged with and into InSight, with InSight being the survivingcorporation and becoming a wholly owned subsidiary of the Company.  The consolidated operations of the Companyafter the Acquisition are substantially consistent with the operations of InSightprior to the Acquisition.  In addition,the Company has no operations other than its investment in InSight.  As such, prior to October 17, 2001, InSightis considered the predecessor to the Company in accordance with Regulation S-X.

 

Pursuant to theterms of the merger agreement, each of InSight’s stockholders received $18.00in 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 aggregate principalamount of $100 million; (ii) repaid its then outstanding senior creditfacilities and certain other indebtedness; and (iii) paid fees and expensesrelating to the Acquisition and related financing transactions.

 

These transactions were financed through:

 

•                  Borrowings of $150 million under $275 millionof new credit facilities;

 

•                  A $200 million senior subordinated bridgefinancing; and

 

•                  The investment by the Company, before equityissuance costs, of approximately $98.1 million; management options and commonstock rollover with a total net value of approximately $1.9 million.

 

**2.**   **BASIS OF****PREPARATION**

 

The accompanying consolidated balance sheet as of June 30, 2002, theconsolidated statement of operations for the year ended June 30, 2002, and theconsolidated statement of cash flows for the year ended June 30, 2002, reflectthe consolidated financial position, results of operations and cash flows ofthe Company and also include the consolidated financial position, statements ofoperations and cash flows of InSight from the date of the Acquisition andinclude all material adjustments required under purchase accounting.  InSight is considered the predecessor to theCompany in accordance with Regulation S-X. As such, the historical financial statements of InSight prior to theAcquisition are included in the accompanying consolidated financial statements,including the consolidated balance sheet as of June 30, 2001, the consolidatedstatements of operations for the period from July 1, 2001 to October 17,

 

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2001 and for the years ended June 30, 2001 and 2000, and the consolidatedstatements of cash flows for the period from July 1, 2001 to October 17, 2001and for the years ended June 30, 2001 and 2000 (collectively Predecessorfinancial statements).  The Predecessorfinancial statements have not been adjusted to reflect the acquisition ofInSight by the Company.  As such, the consolidatedfinancial statements of the Company after the Acquisition are not directlycomparable to the Predecessor financial statements prior to the Acquisition.

 

Unaudited pro-forma combined results of operations of the Company,assuming the Acquisition had occurred as of July 1, 2000, are presentedbelow.  The pro-forma combined resultsof operations of the Company include the combined results of operations of theCompany and InSight for the year ended June 30, 2002.  The pro-forma combined results of operations for the years endedJune 20, 2002 and 2001 also include adjustments to interest expense andamortization of identified intangibles assuming the changes in debt andallocation of the purchase price in connection with the Acquisition hadoccurred as of July 1, 2000.  Inaddition, the amortization of goodwill of approximately $5.5 million for theyear ended June 30, 2001 has been eliminated, assuming the provisions ofStatement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets” had been adopted on July 1, 2000.  These combined results have been preparedfor comparative purposes only and do not purport to be indicative of whatoperating results would have been, and may not be indicative of futureoperating results (amounts in thousands):

 

|                                               |   | **Year Ended  June 30,** |    |
|----------------------------------------------------|--------|--------------------------|---------|
|                                               |   | **2002**                 |    | **2001** |   |
|                                               |   | **(unaudited)**          |    |
| Revenues                                           |   | $                        | 219,085 |   | $ | 211,503 |   |
| Costs of operations                                |   | 162,071                  |    | 158,742 |   |
| Gross profit                                       |   | 57,014                   |    | 52,761 |   |
| Corporate operating expenses                       |   | 10,889                   |    | 10,783 |   |
| Income from company operations                     |   | 46,125                   |    | 41,978 |   |
| Equity in earnings of unconsolidated  partnerships |   | 819                      |    | 971 |   |
| Operating income                                   |   | 46,944                   |    | 42,949 |   |
| Interest expense                                   |   | 35,984                   |    | 36,678 |   |
| Income before income taxes                         |   | 10,960                   |    | 6,271 |   |
| Provision for income taxes                         |   | 1,433                    |    | 2,508 |   |
| Income before extraordinary item                   |   | 9,527                    |    | 3,763 |   |
| Extraordinary item                                 |   | (4,423                   | )       | — |   |
| Net income                                         |   | $                        | 5,104   |   | $ | 3,763 |   |

 

**3.   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

a.         NATURE OF BUSINESS

 

The Company, through InSight and its consolidatedsubsidiaries, provides diagnostic imaging, treatment and related managementservices in 29 states throughout the United States.  The Company has two reportable segments:  Mobile Division and Fixed-SiteDivision.  The Company’s services areprovided through a network of 88 mobile magnetic resonance imaging (MRI)facilities, eight mobile positron emission tomography (PET) facilities, fourmobile lithotripsy facilities (collectively, Mobile Facilities), 41 fixed-siteMRI facilities (Fixed Facilities), 28 multi-modality imaging fixed-site centers(Centers), one Leksell Stereotactic Gamma Knife treatment fixed-site center,one PET fixed-site center, and one radiation oncology fixed-site center.  An additional radiation oncology fixed-sitecenter is operated by the Company as part of one of its Centers.  The Company has a substantial presence inCalifornia, Texas, New England, the Carolinas, Florida and the Midwest (Indianaand Ohio).

 

At its Centers, the Company typically offers otherservices in addition to MRI, including computed tomography (CT), diagnostic andfluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear medicine, bonedensitometry, nuclear cardiology, and cardiovascular services.

 

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b.        CONSOLIDATED FINANCIAL STATEMENTS

 

The 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 when the Company’s ownership is 50percent or less.  The Company’sinvestment interests in Partnerships are consolidated for ownership of 50percent or greater owned entities when the Company exercises significantcontrol over the operations and is primarily responsible for the associatedlong-term debt (Note 14).

 

Significant intercompany balances have been eliminatedin consolidation.

 

c.         USE OF ESTIMATES

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make certain estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

d.        REVENUE RECOGNITION

 

Revenues from contract services (primarily MobileFacilities) and from patient services (primarily Fixed Facilities and Centers)are recognized when services are provided. Patient services revenues are presented net of related contractualadjustments.  Equipment rental revenues,management fees and other revenues are recognized over the applicable contractperiod.  Revenues collected in advanceare recorded as unearned revenue.

 

e.       CASHEQUIVALENTS

 

Cash equivalents are generally composed of liquidinvestments with original maturities of three months or less, such ascertificates of deposit and commercial paper.

 

f.         PROPERTY AND EQUIPMENT

 

Property and equipment are depreciated and amortizedon the straight-line method using the following estimated useful lives:

 

| Vehicles                                    |   | 3 to 8 years                               |
|---------------------------------------------|--------|--------------------------------------------|
| Buildings                                   |   | 7 to 20 years                              |
| Leasehold improvements                      |   | Lesser of the useful life or term of lease |
| Computer and office equipment               |   | 3 to 5 years                               |
| Diagnostic and related equipment            |   | 5 to 8 years                               |
| Equipment and vehicles under capital leases |   | Lesser of the useful life or term of lease |

 

The Company capitalizes expenditures for improvementsand major renewals. Maintenance, repairs and minor replacements are charged tooperations as incurred. When assets are sold or otherwise disposed of, the costand related accumulated depreciation are removed from the accounts and anyresulting gain or loss is included in the results of operations.

 

g.                   DEFERREDFINANCING COSTS

 

Costs incurred in connection with the financing activitiesrelated to the Acquisition are deferred and amortized using the effectiveinterest method over the terms of the related debt agreements ranging fromseven to ten years.  Amortization ofthese costs is charged to interest expense in the accompanying consolidatedstatements of operations.  Total costsdeferred and included in other assets in the accompanying consolidated balancesheet at June 30, 2002 were approximately $20.5 million.

 

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h.      GOODWILL ANDOTHER INTANGIBLE ASSETS

 

Goodwill represents the excess purchase price paid bythe Company over the fair value of the tangible and intangible assets andliabilities of InSight at October 17, 2001, the date of the Acquisition.  In accordance with SFAS 142, the goodwilland indefinite-lived intangibles balances are not being amortized, but insteadwill be subject to an annual assessment of impairment by applying a fair-valuebased test.  Net other intangible assetsare amortized on a straight-line basis over the estimated lives of the assetsranging from three to thirty years.

 

The Company evaluates the carrying value of goodwilland identified intangibles not subject to amortization in the second quarter ofeach fiscal year.  As part of theevaluation, the Company compares the carrying value of each intangible assetwith its fair value to determine whether there has been impairment.  The Company assesses the ongoingrecoverability of its intangible assets subject to amortization by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows. Ifprojected future cash flows indicate that the unamortized intangible assetbalances will not be recovered, an adjustment is made to reduce the netintangible asset to an amount consistent with projected future cash flowsdiscounted at the Company’s incremental borrowing rate. Cash flow projections,although subject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and economicconditions.  As of June 30, 2002, theCompany does not believe any impairment of goodwill or other intangible assetshas occurred.

 

i.        INCOMETAXES

 

The Company accounts for income taxes using the assetand liability method.  Deferred taxassets and liabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using the enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.  Avaluation allowance is recognized if, based on the weight of availableevidence, it is more likely than not that some portion or all of the deferredtax asset will not be realized.

 

j.        FAIRVALUE OF FINANCIAL INSTRUMENTS

 

The fair value of financial instruments is estimatedusing available market information and other valuation methodologies. The fairvalue of the Company’s financial instruments is estimated to approximate therelated book value, unless otherwise indicated.

 

k.       NEWPRONOUNCEMENTS

 

In June 2001, the FASB issued two newpronouncements:  SFAS No. 141, “BusinessCombinations,” and SFAS No. 142.   SFAS141 applies to all business combinations with a closing date after June 30,2001.  SFAS 141 eliminates thepooling-of-interests method of accounting and further clarifies the criteriafor recognition of intangible assets separately from goodwill.  The Company and InSight adopted SFAS 141,effective July 1, 2001.

 

In accordance with SFAS 141, the Company engaged avaluation specialist to assist the Company in identifying acquired intangibleassets, their respective fair values and amortization periods related to theAcquisition.  The Company has made anallocation of values to these identifiable intangible assets based on a thirdparty valuation.

 

SFAS 142 eliminates the amortization of goodwill,permits indefinite-lived intangible assets and initiates an annual review forimpairment.  Identifiable intangibleassets with a determinable useful life will continue to be amortized.  The Company and InSight adopted SFAS 142effective July 1, 2001, which required the Company and InSight to cease amortizationof its remaining net goodwill balance and to perform a transitional goodwillimpairment test as of July 1, 2001, and thereafter an impairment test at leastannually.  Impairment results when

 

48

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the fair value of the Company’s reporting segments,including goodwill, is less than its carrying value.  InSight concluded that the book value of goodwill was notimpaired as of July 1, 2001.

 

Also in June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” SFAS 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. It applies to legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset, except forcertain obligations of lessees.  SFAS143 requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it is incurred if a reasonableestimate of fair value can be made.  Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. SFAS 143 is effective for financial statementsissued for fiscal years beginning after June 15, 2002 (with earlier applicationbeing encouraged).  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 of long-lived Assets.”  SFAS 144 addresses financial accounting andreporting for the impairment or disposal of long-lived assets.  SFAS 144 supersedes SFAS No. 121,“Accounting for the Impairment of long-lived Assets and for long-lived 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.

 

In April 2002, the FASB issued SFAS No. 145, “Revisionof SFAS Nos. 4, 44, and 64, Amendment of FASB No. 13 and TechnicalCorrections.” SFAS 145 rescinds, amends or makes various technical correctionsof certain existing authoritative pronouncements.  The Company will be required to adopt SFAS 145 on July 1,2002.  Upon adoption, the netextraordinary loss from the extinguishment of debt of approximately $4.4million for the year ended June 30, 2002 will no longer be consideredextraordinary, and will be classified within the statement of operations as acorporate operating expense.  Other thanthe reclassification of the debt extinguishment, the Company does not expectthe adoption of SFAS 145 to have a material effect on its financial conditionand results of operations.

 

In June 2002, the FASB issued SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities.”  SFAS 146 addresses financial accounting andreporting for costs associated with exit or disposal activities.  SFAS 146 is effective for exit or disposalactivities initiated after December 31, 2002. The Company does not expect the adoption of SFAS 146 to have a materialeffect on its financial condition and results of operations.

 

**4.   PURCHASEACCOUNTING**

 

The Acquisition was accounted for as a purchase by the Company.  The purchase accounting adjustments of theCompany have been recorded in the accompanying consolidated financialstatements as of and for any periods subsequent to October 17, 2001.  The excess purchase price paid by theCompany over its estimates of the fair market value of the tangible assets andliabilities of InSight as of the date of the Acquisition was approximately$234.2 million and is reflected as Goodwill and Other Intangible Assets, net inthe accompanying consolidated balance sheet as of June 30, 2002.  In accordance with SFAS 142, the newintangible asset balance has been allocated between identifiable intangibleassets and remaining goodwill.  Goodwillwill not be amortized but is

 

49

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subject to an ongoing assessment for impairment.  A summary of the assets acquired andliabilities assumed in the Acquisition follows (amounts in thousands):

 
| Cash purchase  price    |   | $        | 187,722 |   |
|-------------------------|--------|----------|---------|--------|
| Estimated fair  values  |   |     |    |
| Assets acquired:        |   |     |    |
| Tangible                |   | 357,877  |    |
| Other Intangible Assets |   | 37,870   |    |
| Liabilities assumed     |   | (385,770 | )       |
| Goodwill                |   | $        | 197,699 |   |

 

The Company hasallocated approximately $79.1 million and $118.6 million of the goodwill to itsMobile Division and Fixed-site Division, respectively.  At June 30, 2002, the carrying amount ofgoodwill at these divisions remained unchanged.  Substantially all the goodwill will be deductible for taxpurposes.  The net book value of otherintangible assets and their estimated useful lives are as follows (amounts inthousands):

 
| Trademark               |   | $      | 8,680  |     | Indefinite Life |   |
|-------------------------|--------|--------|--------|----------|-----------------|--------|
| Managed care agreements |   | 18,010 |   | 30 Years |            |
| Contracts               |   | 11,180 |   | 5 Years  |            |

 

**5.   TRADEACCOUNTS RECEIVABLES**

 

Trade accounts receivables, net are comprised of the following (amountsin thousands):

 
|                                                                |   | **Company**  |   | **Predecessor** |   |
|---------------------------------------------------------------------|--------|--------------|--------|-----------------|--------|
|                                                                |   | **June 30,** |   |
|                                                                |   | **2002**     |   | **2001**        |   |
| Trade accounts  receivables                                         |   | $            | 80,581 |            | $      | 79,607 |   |
| Less:  Allowances for doubtful accounts and contractual adjustments |   | 26,490       |   | 26,611          |   |
|  Allowances for professional fees                              |   | 10,232       |   | 9,641           |   |
| Trade accounts  receivables, net                                    |   | $            | 43,859 |            | $      | 43,355 |   |

 

The allowance for doubtful accounts and contractual adjustmentsincludes management’s estimate of the amounts expected to be written off onspecific accounts and for write-offs on other unidentified accounts included inaccounts receivables. In estimating the write-offs and adjustments on specificaccounts, management relies on a combination of in-house analysis and a reviewof contractual payment rates from private health insurance programs or underthe federal Medicare program.  Inestimating the allowance for unidentified write-offs and adjustments,management relies on historical experience. The amounts the Company will ultimately realize could differ materiallyin the near term from the amounts assumed in arriving at the allowance fordoubtful accounts and contractual adjustments in the financial statements atJune 30, 2002.

 

The Company reserves a contractually agreed upon percentage at severalof its Centers and Fixed Facilities, averaging 20 percent of the accountsreceivables balance from patients, for payments to radiologists forinterpreting the results of the diagnostic imaging procedures.  Payments to radiologists are only due whenamounts are received.  At that time, thebalance is transferred from the allowance account to a professional feespayable account.

 

50

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**6.   PROPERTYAND EQUIPMENT**

 

Property and equipment, net are stated at cost and are comprised of thefollowing (amounts in thousands):

 
|                                             |   | **Company**  |    | **Predecessor** |   |
|--------------------------------------------------|--------|--------------|---------|-----------------|--------|
|                                             |   | **June 30,** |    |
|                                             |   | **2002**     |    | **2001**        |   |
| Vehicles                                         |   | $            | 3,135   |            | $      | 2,964 |   |
| Land, building  and leasehold improvements       |   | 19,635       |    | 26,409          |   |
| Computer and  office equipment                   |   | 14,676       |    | 20,161          |   |
| Diagnostic and  related equipment                |   | 108,794      |    | 118,112         |   |
| Equipment and  vehicles under capital leases     |   | 47,997       |    | 68,573          |   |
|                                             |   | 194,237      |    | 236,219         |   |
| Less:  Accumulated depreciation and amortization |   | 22,181       |    | 87,964          |   |
| Property and  equipment, net                     |   | $            | 172,056 |            | $      | 148,255 |   |

 

**7.   OTHERINTANGIBLE ASSETS**

 

The following reconciliation of other intangible assets is as follows(amounts in thousands):

 
|                            |   | **Gross  Carrying  Value** |   | **Accumulated  Amortization** |   |
|---------------------------------|--------|----------------------------|--------|-------------------------------|--------|
| Amortized  intangible assets:   |   |                       |   |                          |   |
| Managed care  agreements        |   | $                          | 18,010 |                          | $      | 150 |   |
| Contracts                       |   | 11,180                     |   | 1,450                         |   |
|                            |   | 29,190                     |   | 1,600                         |   |
|                            |   |                       |   |                          |   |
| Unamortized  intangible assets: |   |                       |   |                          |   |
| Trademark                       |   | 8,680                      |   | —                        |   |
| Other  intangible assets        |   | $                          | 37,870 |                          | $      | 1,600 |   |

 

Amortization of intangible assets was approximately $1.6 million, $0.1million, $6.2 million and $5.3 million, for the year ended June 30, 2002, theperiod from July 1, 2001 to October 17, 2001, and for the years ended June 30,2001 and 2000, respectively.

 

Estimated amortization expense for the years ending June 30 is asfollows:

 
| 2003 |   | $     | 2,836  |   |
|------|--------|-------|--------|--------|
| 2004 |   | 2,836 |   |
| 2005 |   | 2,836 |   |
| 2006 |   | 2,836 |   |
| 2007 |   | 1,236 |   |

 

**8.   ACCOUNTSPAYABLE AND OTHER ACCRUED EXPENSES**

 

Accounts payable and other accrued expenses are comprised of thefollowing (amounts in thousands):

 
|                               |   | **Company**  |         | **Predecessor** |   |
|------------------------------------|--------|--------------|--------------|-----------------|--------|
|                               |   | **June 30,** |         |
|                               |   | **2002**     |         | **2001**        |   |
| Accounts  payable                  |   | $            | 1,660        |            | $      | 2,202 |   |
| Accrued  equipment related costs   |   | 7,663        |         | 3,030           |   |
| Accrued payroll  and related costs |   | 6,985        |         | 7,351           |   |
| Accrued  interest expense          |   | 5,114        |         | 1,604           |   |
| Accrued  professional fees         |   | 2,047        |         | 1,999           |   |
| Other accrued  expenses            |   | 7,047        |         | 8,149           |   |
|                               |   | $            |  30,516 |            | $      | 24,335 |   |

 

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**9.**   **NOTES****PAYABLE**

 

Notes payable are comprised of the following (amounts in thousands):

 
|                                                                                                                                                                                                                                                   |   | **Company**  |    | **Predecessor** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|---------|-----------------|--------|
|                                                                                                                                                                                                                                                   |   | **June 30,** |    |
|                                                                                                                                                                                                                                                   |   | **2002**     |    | **2001**        |   |
| Notes payable  to bank (Bank Financing), bearing interest at LIBOR plus 3.5 percent (5.55 at  June 30, 2002), principal and interest payable quarterly, maturing in October  2008. The notes are secured by substantially all of the Company's assets. |   | $            | 148,875 |            | $      | — |   |
|                                                                                                                                                                                                                                                   |   |         |    |            |   |
| Notes payable  to bank, bearing interest at LIBOR plus 1.75 percent (5.46 at June 30, 2001),  repaid in October 2001.                                                                                                                                  |   | —       |    | 70,663          |   |
|                                                                                                                                                                                                                                                   |   |         |    |            |   |
| Unsecured  senior subordinated notes payable (Notes), bearing interest at 9.875 percent,  interest payable semi-annually, principal due in October 2011. At June 30,  2002, the fair value of the notes was approximately $231.8 million.              |   | 225,000      |    | —          |   |
|                                                                                                                                                                                                                                                   |   |         |    |            |   |
| Unsecured  senior subordinated notes payable, bearing interest at 9.625 percent, repaid  in October 2001.                                                                                                                                              |   | —       |    | 100,000         |   |
|                                                                                                                                                                                                                                                   |   |         |    |            |   |
| Other notes  payable, repaid in October 2001.                                                                                                                                                                                                          |   | —       |    | 1,292           |   |
|                                                                                                                                                                                                                                                   |   |         |    |            |   |
| Total notes  payable                                                                                                                                                                                                                                   |   | 373,875      |    | 171,955         |   |
| Less:  Current portion                                                                                                                                                                                                                            |   | 1,500        |    | 21,259          |   |
| Long-term notes  payable                                                                                                                                                                                                                               |   | $            | 372,375 |            | $      | 150,696 |   |
|                                                                                                                                                                                                                                                        |        |              |         |                 |        |  |  |  |  |  |  |

 

Scheduled maturities of notes payable at June 30, 2002. are as follows(amounts in thousands):

 
| 2003       |   | $       | 1,500   |   |
|------------|--------|---------|---------|--------|
| 2004       |   | 1,500   |    |
| 2005       |   | 1,500   |    |
| 2006       |   | 1,500   |    |
| 2007       |   | 1,500   |    |
| Thereafter |   | 366,375 |    |
|       |   | $       | 373,875 |   |

 

In connection with the Acquisition, InSight entered into new creditfacilities with a bank and a syndication of other lenders consisting of (i) a$150 million seven year term loan B, (ii) a $75 million seven year delayed-drawterm loan facility, and (iii) a $50 million nine year revolving creditfacility.  The entire $150 million termloan B was used to consummate the Acquisition. Borrowings under the Bank Financing bear interest at LIBOR plus3.5%.  The Company is required to pay anannual unused facility fee of between 0.5% and 2.0%, payable quarterly, onunborrowed amounts under both facilities. The Company expects to use the delayed-draw facility, which is availablethrough October 17, 2003, to fund future acquisitions and capitalexpenditures.  The Company expects touse the revolving credit facility primarily to fund its future working capitalneeds.  As of June 30, 2002, there wereno borrowings under either credit facility.

 

The credit agreement related to the Bank Financing and the indenturerelated to the Notes contain limitations on additional borrowings, capitalexpenditures, dividend payments and certain financial covenants.  As of June 30, 2002, the Company was incompliance with these covenants.

 

During 1998, InSight entered into an interest rate swap agreement witha bank to hedge against the effects of increases in the interest ratesassociated with floating rate debt on its Bank Financing.  The swap agreement initially had a notionalamount of $40.0 million and expires in 2004 (Note 15).

 

52

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**10.**    **LEASEOBLIGATIONS, COMMITMENTS AND CONTINGENCIES**

 

The Company leases diagnostic equipment, certain other equipment andits office, imaging and treatment facilities under various capital andoperating leases.  Future minimumscheduled rental payments required under these noncancelable leases at June 30,2002 are as follows (amounts in thousands):

 
|                                        |   | **Capital** |   | **Operating** |   |
|---------------------------------------------|--------|-------------|--------|---------------|--------|
| 2003                                        |   | $           | 2,099  |          | $      | 9,964 |   |
| 2004                                        |   | 1,956       |   | 8,995         |   |
| 2005                                        |   | 381         |   | 8,069         |   |
| 2006                                        |   | 381         |   | 7,537         |   |
| 2007                                        |   | 31          |   | 6,311         |   |
| Thereafter                                  |   | —      |   | 8,712         |   |
| Total minimum  lease payments               |   | 4,848       |   | $             | 49,588 |   |
| Less: Amounts  representing interest        |   | 559         |   |          |   |
| Present value  of capital lease obligations |   | 4,289       |   |          |   |
| Less: Current  portion                      |   | 1,775       |   |          |   |
| Long-term  capital lease obligations        |   | $           | 2,514  |          |   |   |

 

Rental expense for diagnostic equipment and otherequipment for the year ended June 30, 2002, the period from July 1, 2001 toOctober 17, 2001 and the years ended June 30, 2001 and 2000 was $5.5 million,$2.6 million, $7.9 million and $13.6 million, respectively.

 

The Company occupies facilities under lease agreements expiring through2016.  Rental expense for thesefacilities for the year ended June 30, 2002, the period from July 1, 2001 toOctober 17, 2001 and the years ended June 30, 2001 and 2000, was $3.9 million,$1.5 million, $5.4 million and $5.1 million, respectively.

 

The Company is engaged from time to time in the defense of lawsuitsarising out of the ordinary course and conduct of its business, includingclaims for malpractice, and has insurance policies covering such potentialinsurable losses where such coverage is cost-effective.  Management believes that the outcome of anysuch lawsuits will not have a material adverse impact on the Company’sbusiness, financial condition and results of operations.

 

**11.**    **CAPITALSTOCK**

 

WARRANTS:   The Company does not have a formal warrant plan.  All warrants, which had been granted byInSight in connection with previous financing transactions, had been issuedwith an exercise price of at least the fair market value of its common stock onthe issuance date.   All holders ofwarrants that at the time of 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 warrants, and the warrants were terminated.  A summary of the status of the InSight warrants at October 17,2001, June 30, 2001 and 2000 and changes during the periods is presented below:

 
|                           |   | **Shares** | ** ** | **Weighted  Average  Exercise Price** |   |
|--------------------------------|--------|------------|------------|---------------------------------------|--------|
| Predecessor                    |   |       |       |                                  |   |
| Outstanding,  June 30, 2000    |   | 642,183    |       | $                                     | 9.12   |   |
| Granted                        |   | 15,000     |       | 7.96                                  |   |
| Exercised                      |   | (15,000    | )          | 5.50                                  |   |
| Outstanding,  June 30, 2001    |   | 642,183    |       | 9.17                                  |   |
| Exercised                      |   | (7,183     | )          | 5.64                                  |   |
| Cancelled at  the Acquisition  |   | (635,000   | )          | 9.21                                  |   |
| Outstanding,  October 17, 2001 |   | —     |       | $                                     | — |   |

 

STOCK OPTIONS:  The Company has two stock option plans,which provide for the granting of nonstatutory stock options to key employeesand non-employee directors.  Options areissued with an exercise price of at least the fair market value, as determinedby the board of directors, of its common stock on the grant date.  A portion of the options vest cumulativelyover various periods up to eight years from the grant date, and a portion areperformance based and vest cumulatively upon the achievement of certainperformance targets.  The options areexercisable in whole or in

 

53

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installments, and expire ten years from the grant date.  In addition, InSight had five stock optionplans.  All holders of options that atthe time of the Acquisition were exercisable for InSight common stock, receivedthe difference between $18.00 and the exercise price of each share of commonstock the holder could have acquired pursuant to the terms of the options, andthe options were terminated.  As aresult of the cancellation of the InSight options and warrants, InSightrecorded an acquisition related compensation charge of $15.6 million.  Holders of options for 175,990 shares ofInSight common stock rolled over their options and received options for theCompany’s common stock with the same terms.

 

As of June 30, 2002, the Company had 29,000 shares available forissuance under its option plans.  Asummary of the status of the Company’s and InSight’s stock option plans at June30, 2002, 2001 and 2000 and changes during the periods is presented below:

 
|                           |   | **Shares** |   | **Weighted  Average  Exercise Price** |   |
|--------------------------------|--------|------------|--------|---------------------------------------|--------|
|                           |   |       |   |                                  |   |
| Company                        |   |       |   |                                  |   |
| Outstanding, June 30, 2001     |   | —     |   | $                                     | — |   |
| Granted                        |   | 777,990    |   | 15.82                                 |   |
| Forfeited                      |   | (5,000     | )      | 18.00                                 |   |
| Outstanding, June 30, 2002     |   | 772,990    |   | $                                     | 15.81  |   |
|                           |   |       |   |                                  |   |
| Predecessor                    |   |       |   |                                  |   |
| Outstanding, June 30, 1999     |   | 1,552,078  |   | $                                     | 7.56   |   |
| Granted                        |   | 190,000    |   | 8.15                                  |   |
| Exercised                      |   | (92,970    | )      | 2.07                                  |   |
| Forfeited                      |   | (340,368   | )      | 8.08                                  |   |
| Outstanding, June 30, 2000     |   | 1,308,740  |   | 7.90                                  |   |
| Granted                        |   | 370,000    |   | 8.71                                  |   |
| Exercised                      |   | (17,375    | )      | 5.79                                  |   |
| Forfeited                      |   | (105,667   | )      | 11.33                                 |   |
| Outstanding, June 30, 2001     |   | 1,555,698  |   | 7.88                                  |   |
| Granted                        |   | 5,000      |   | 16.51                                 |   |
| Exercised                      |   | (6,728     | )      | 15.64                                 |   |
| Cancelled at the Acquisition   |   | (1,377,980 | )      | 7.81                                  |   |
| Rolled over to Company options |   | (175,990   | )      | 8.37                                  |   |
| Outstanding, October 17, 2001  |   | —     |   | $                                     | — |   |
|                           |   |       |   |                                  |   |
| Exercisable at:                |   |       |   |                                  |   |
| June 30, 2000                  |   | 751,887    |   | $                                     | 7.61   |   |
| June 30, 2001                  |   | 867,239    |   | $                                     | 7.41   |   |
| June 30, 2002                  |   | 175,990    |   | $                                     | 8.37   |   |

 

Of the 772,990 options outstanding at June 30, 2002, thecharacteristics are as follows:

 
| **Exercise  Price  Range** |   | **Weighted Average  Exercise Price** |   | **Options  Exercisable** |   | **Total Options  Outstanding** |   | **Remaining Contractual  Life** | ** ** |
|----------------------------|--------|--------------------------------------|--------|--------------------------|--------|--------------------------------|--------|---------------------------------|------------|
| $                          | 8.37   |                                 | $      | 8.37                     |   | 175,990                        |   | 175,990                         |       | 9.33 years |   |
| 18.00                      |   | 18.00                                |   | —                   |   | 597,000                        |   | 9.37 years                      |       |
|                       |   |                                 |   | 175,990                  |   | 772,990                        |   |                            |       |
|                            |        |                                      |        |                          |        |                                |        |                                 |            |  |  |

 

54

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As permitted under SFAS No. 123, “Accounting for Stock BasedCompensation”, the Company accounts for the options and warrants issued toemployees and non-employee directors in accordance with APB Opinion No.25.  SFAS 123 requires that the Companypresent pro forma disclosures of net income as if the Company had recognizedcompensation expense equal to the fair value of options granted, as determinedat the date of grant.  The Company’s orthe Predecessor’s net income would have reflected the following pro formaamounts (amounts in thousands):

 
|                      |   |         |       | **Company** |       | **Predecessor**                          |       |
|---------------------------|--------|--------------|------------|-------------|------------|------------------------------------------|------------|
|                      |   |         | ** ** |        | ** ** | **Period  from  July 1 to  October 17,** | ** ** | **Years  Ended June 30,** | ** ** |
| **Year  Ended  June 30,** |
|                      |   |         |       | **2002**    |       | **2001**                                 |       | **2001** |   | **2000** | ** ** |
| Net  income (loss):       |   | As  Reported |       | $           | 9          |                                     | $          | (4,648 | ) | $ | 13,801 |   | $ | 7,189 |   |
|                      |   | Pro  Forma   |       | (1,079      | )          | (4,648                                   | )          | 12,458 |   | 5,469 |   |
|                           |        |              |            |             |            |                                          |            |  |  |  |  |  |  |  |  |

 

The fair value of each option grant and warrant issued is estimated onthe date of grant or issuance using the Black-Scholes pricing model with thefollowing assumptions used for the grants and issuances in the years ended June30, 2002, 2001 and 2000, respectively:

 

|                       |   | **Company**              |       | **Predecessor** |       |
|----------------------------|--------|--------------------------|------------|-----------------|------------|
|                       |   | **Year Ended  June 30,** | ** ** |            | ** ** |
| **Years Ended June 30,**   |
| **Assumptions**            |   | **2002**                 |       | **2001**        |       | **2000** |   |
| Risk-free interest rate    |   | 4.60                     | %          | 5.87            | %          | 6.22 | % |
| Volatility                 |   | 0.00                     | %          | 71.27           | %          | 71.23 | % |
| Expected dividend yield    |   | 0.00                     | %          | 0.00            | %          | 0.00 | % |
| Estimated contractual life |   | 9.30 years               |       | 9.19 years      |       | 9.38 years |   |

 

**12.          INCOME TAXES**

 

The provision (benefit) for income taxes for the year ended June 30,2002, the period from July 1, 2001 to October 17, 2001, and the years endedJune 30, 2001 and 2000 was computed using effective tax rates calculated asfollows:

 
|                                                                 |   | **Company** |       | **Predecessor**                         |       |
|----------------------------------------------------------------------|--------|-------------|------------|-----------------------------------------|------------|
|                                                                 |   |        | ** ** | **Period from  July 1 to  October 17,** | ** ** | **Years Ended June 30,** | ** ** |
| **Year Ended  June 30,**                                             |
|                                                                 |   | **2002**    |       | **2001**                                |       | **2001** |   | **2000** | ** ** |
| Federal statutory tax rate                                           |   | 34.0        | %          | 34.0                                    | %          | 34.0 | % | 34.0 | % |
| State income taxes, net of  federal benefit                          |   | 6.0         |       | 6.0                                     |       | 6.0 |   | 6.0 |   |
| Permanent items, including  goodwill and non-deductible merger costs |   | 1.0         |       | 115.0                                   |       | 5.0 |   | 3.7 |   |
| Changes in valuation  allowance                                      |   | (1.0        | )          | (186.0                                  | )          | (29.1 | ) | (30.1 | ) |
| Net effective tax rate                                               |   | 40.0        | %          | (31.0                                   | )%         | 15.9 | % | 13.6 | % |

 

55

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The provision (benefit) for income taxes includes income taxescurrently payable and those deferred because of temporary differences betweenthe financial statements and tax bases of assets and liabilities.  The provision (benefit) for income taxes forthe year June 30, 2002, the period from July 1, 2001 to October 17, 2001, andthe years ended June 30, 2001 and 2000 consisted of the following (amounts inthousands):

 
|                                                         |   | **Company**               |   | **Predecessor**                          |    |
|--------------------------------------------------------------|--------|---------------------------|--------|------------------------------------------|---------|
|                                                         |   | **Year  Ended  June 30,** |   | **Period  from  July 1 to  October 17,** |    | **Years  Ended June 30,** |   |
|                                                         |   | **2002**                  |   | **2001**                                 |    | **2001** |   | **2000** |   |
| Current provision:                                           |   |                      |   |                                     |    |   |   |   |   |
| Federal                                                      |   | $                         | 2,455  |                                     | $       | (2,100 | ) | $ | 2,931 |   | $ | 548 |   |
| State                                                        |   | 500                       |   | —                                   |    | 1,173 |   | 283 |   |
|                                                         |   | 2,955                     |   | (2,100                                   | )  | 4,104 |   | 831 |   |
| Deferred taxes arising from  temporary differences:          |   |                      |   |                                     |    |   |   |   |   |
| State income taxes                                           |   | —                    |   | —                                   |    | (480 | ) | (186 | ) |
| Accrued expenses (not  currently deductible)                 |   | (138                      | )      | (116                                     | )       | (198 | ) | 769 |   |
| Reserves                                                     |   | (313                      | )      | (535                                     | )       | (1,790 | ) | (1,110 | ) |
| Depreciation and  amortization                               |   | 3,168                     |   | 2,474                                    |    | 7,920 |   | 1,004 |   |
| (Creation) utilization of  net operating losses              |   | (2,761                    | )      | (14,145                                  | )       | 836 |   | 75 |   |
| Net operating losses  reduced due to prior ownership changes |   | —                    |   | —                                   |    | — |   | 5,111 |   |
| Changes in valuation  allowance reducing goodwill            |   | —                    |   | (10                                      | )       | — |   | 400 |   |
| Changes in valuation  allowance                              |   | 50                        |   | 12,336                                   |    | (4,044 | ) | (5,795 | ) |
| Alternative minimum tax  credit carryforwards                |   | —                    |   | —                                   |    | (3,038 | ) | — |   |
| Other                                                        |   | (6                        | )      | (4                                       | )       | (686 | ) | 32 |   |
|                                                         |   | —                    |   | —                                   |    | (1,480 | ) | 300 |   |
| Total provision (benefit)  for income taxes                  |   | $                         | 2,955  |                                     | $       | (2,100 | ) | $ | 2,624 |   | $ | 1,131 |   |

 

The components of the Company’s net deferred tax asset (includingcurrent and non-current portions) as of June 30, 2002 and 2001, respectively,which arise due to timing differences between financial and tax reporting andnet operating loss (NOL) carryforwards are as follows (amounts in thousands):

 
|                                         |   | **Company**  |   | **Predecessor** |       |
|----------------------------------------------|--------|--------------|--------|-----------------|------------|
|                                         |   | **June 30,** |   |
|                                         |   | **2002**     |   | **2001**        | ** ** |
| Reserves                                     |   | $            | 6,603  |            | $          | 5,754 |   |
| Accrued expenses (not currently deductible)  |   | 1,469        |   | 1,214           |       |
| Depreciation and amortization                |   | (16,890      | )      | (11,248         | )          |
| NOL carryforwards                            |   | 26,661       |   | 9,784           |       |
| Valuation allowance                          |   | (17,993      | )      | (3,683          | )          |
| Alternative minimum tax credit carryforwards |   | —       |   | 3,038           |       |
| Other                                        |   | 150          |   | 141             |       |
|                                         |   | $            | — |            | $          | 5,000 |   |

 

As of June 30, 2002, the Company had NOL carryforwards of approximately$62.0 million, expiring on various dates through 2019.  The NOLs and related deferred tax componentshave been reduced to reflect limitations from prior changes in ownership.  A valuation allowance is provided againstthe net deferred tax asset when it is more likely than not that the netdeferred tax asset will not be realized. The Company established approximately $18.0 million of valuationallowance in the purchase accounting in connection with the Acquisition.  As a result, as the underlying taxattributes are utilized, the reduction in valuation allowance will be recordedas a reduction of goodwill.  None ofthese tax attributes had been utilized at June 30, 2002.

 

**13.          RETIREMENT SAVINGS PLANS**

 

InSight has a 401(k) profit sharing plan (Plan), which is available toall eligible employees, pursuant to which InSight may match a percentage ofemployee contributions to the Plan. InSight contributions of approximately $0.4

 

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million, $0.2 million, $0.7 million and $0.7 million were made for theyear ended June 30, 2002, the period from July 1, 2001 to October 17, 2001, andfor the years ended June 30, 2001 and 2000, respectively.

 

**14.          INVESTMENTS IN AND TRANSACTIONSWITH PARTNERSHIPS**

 

The Company has direct ownership in six Partnerships at June 30, 2002,two of which operate Fixed Facilities, three of which operate Centers and oneoperates a Mobile PET Facility.  TheCompany owns between 25 percent and 50 percent of these Partnerships, serves asthe managing general partner and provides certain management services underagreements expiring in 2010.  ThesePartnerships are accounted for under the equity method since the Company doesnot exercise significant control over the operations of these Partnerships ordoes not have primary responsibility for the Partnerships’ long-term debt.

 

Set forth below is certain financial data of these Partnerships(amounts in thousands):

 
|                            |   | **Company**  |       | **Predecessor** |       |
|---------------------------------|--------|--------------|------------|-----------------|------------|
|                            |   | **June 30,** | ** ** |
|                            |   | **2002**     |       | **2001**        | ** ** |
| Combined Financial Position:    |   |         |       |            |       |
| Current assets:                 |   |         |       |            |       |
| Cash                            |   | $            | 2,383      |            | $          | 1,281 |   |
| Trade accounts receivables, net |   | 3,224        |       | 3,250           |       |
| Other                           |   | 429          |       | 19              |       |
| Property and equipment, net     |   | 9,127        |       | 7,134           |       |
| Intangible assets, net          |   | 990          |       | 543             |       |
| Total assets                    |   | 16,153       |       | 12,227          |       |
| Current liabilities             |   | (4,576       | )          | (2,077          | )          |
| Due to the Company              |   | (3,108       | )          | (1,830          | )          |
| Long-term liabilities           |   | (4,324       | )          | (4,278          | )          |
| Net assets                      |   | $            | 4,145      |            | $          | 4,042 |   |

 

Set forth below are the combined operating results of the Partnershipsand the Company’s equity in earnings of the Partnerships (amounts inthousands):

 
|                                |   | **Company** |       | **Predecessor**                         |       |
|-------------------------------------|--------|-------------|------------|-----------------------------------------|------------|
|                                |   |        | ** ** | **Period from  July 1 to  October 17,** | ** ** | **Years Ended June 30,** | ** ** |
| **Year Ended  June 30,**            |
|                                |   | **2002**    |       | **2001**                                |       | **2001** |   | **2000** | ** ** |
| Operating Results:                  |   |        |       |                                    |       |   |   |   |   |
| Net revenues                        |   | $           | 10,604     |                                    | $          | 6,073 |   | $ | 11,344 |   | $ | 7,493 |   |
| Expenses                            |   | 10,382      |       | 4,987                                   |       | 9,211 |   | 5,717 |   |
| Net income                          |   | $           | 222        |                                    | $          | 1,086 |   | $ | 2,133 |   | $ | 1,776 |   |
|                                |   |        |       |                                    |       |   |   |   |   |
| Equity in earnings of  partnerships |   | $           | 437        |                                    | $          | 382 |   | $ | 971 |   | $ | 817 |   |

 

57

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The Company has direct ownership in 50 percent of an additionalPartnership, which operates a Center. Since the Company controls the operations and is primarily responsiblefor the associated long-term debt, the Partnership has been included in theCompany’s consolidated financial statements. Total assets and revenues as of and for the year ended June 30, 2002 forthe Company’s 50 percent controlled entity which is consolidated wereapproximately $2.4 million and $6.0 million, respectively.

 

**15.          HEDGINGACTIVITIES**

 

In the first quarter of fiscal 2001, InSight adopted SFAS  No. 133, “Accounting for DerivativeInstruments and Hedging Activities” as amended by SFAS No. 137 and SFAS No. 138(collectively SFAS 133).  SFAS 133requires that entities recognize all derivatives as either assets orliabilities in the statement of financial condition and measure thoseinstruments at fair value.  Under SFAS133 an entity may designate a derivative as a hedge of exposure to eitherchanges in:  (i) the fair value of arecognized asset or liability or firm commitment, (ii) cash flows of arecognized or forecasted transaction, or (iii) foreign currencies of a netinvestment in foreign operations, firm commitments, available-for-salesecurities or a forecasted transaction. Additionally, any ineffective portion of the hedging transaction isrecorded currently in net income with the remainder deferred in accumulatedother 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 theBank Financing.  At June 30, 2002, thenotional amount of this swap was $35.3 million with a fair value loss ofapproximately $1.4 million.  The fairvalue 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 $0.5 million of hedge ineffectiveness was recognized as areduction to interest expense for the year ended June 30, 2002.

 

**16.          COMPREHENSIVEINCOME (LOSS)**

 

Components of comprehensive income are changes in equity other thanthose resulting from investments by owners and distributions to owners. Netincome (loss) is the primary component of comprehensive income. For theCompany, the only component of comprehensive income other than net income(loss) is the change in unrealized gain or loss on derivatives qualifying forhedge accounting, net of tax. The aggregate amount of such changes to equitythat have not yet been recognized in net income are reported in the equityportion of the consolidated balance sheets as accumulated other comprehensiveincome (loss).

 

**17.          RELATED PARTY TRANSACTIONS**

 

Upon the completion of the Acquisition, theCompany entered into a management agreement with J.W. Childs Advisors II, L.P.,the general partner of J.W. Childs Equity Partners II, L.P., and HalifaxGenpar, L.P., the general partner of Halifax Capital Partners, L.P.  Under the agreement, InSight paid J.W.Childs Advisors II, L.P. andHalifax Genpar, L.P. atransaction fee of $4,500,000 and $1,125,000 respectively, for servicesrendered in connection with the Acquisition, which was recorded as a reductionof additional paid-in capital. Additionally, J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. will provide business, management andfinancial advisory services to InSight and the Company in consideration of (i)an annual fee of $240,000 to be paid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of $60,000 to be paidto Halifax Genpar, L.P.

 

58

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#### **18.         **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 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.  The Company does notallocate income taxes to the two Divisions. The Company manages cash flows and assets on a consolidated basis, andnot by segment, and does not allocate or report assets and capital expendituresby segment.  Prior period informationhas been restated to reflect the change in segments.

 

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

 

Company

Year ended June 30,2002:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** | ** ** |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|------------|
| Contract services revenues                         |   | $          | 64,166 |           | $      | 11,161    |   | $                | —     |   | $ | 75,327 |   |
| Patient services revenues                          |   | 1,340      |   | 78,390         |   | —    |   | 79,730           |       |
| Other revenues                                     |   | 124        |   | 444            |   | (218      | )      | 350              |       |
| Total revenues                                     |   | 65,630     |   | 89,995         |   | (218      | )      | 155,407          |       |
|                                               |   |       |   |           |   |      |   |             |       |
| Depreciation and amortization                      |   | 11,388     |   | 11,096         |   | 3,978     |   | 26,462           |       |
| Total costs of operations                          |   | 45,683     |   | 64,316         |   | 5,585     |   | 115,584          |       |
| Equity in earnings of  unconsolidated partnerships |   | (109       | )      | 546            |   | —    |   | 437              |       |
| Operating income (loss)                            |   | 19,838     |   | 26,225         |   | (13,508   | )      | 32,555           |       |
| Interest expense, net                              |   | 5,964      |   | 6,361          |   | 12,843    |   | 25,168           |       |
| Income (loss) before income  taxes                 |   | 13,874     |   | 19,864         |   | (26,351   | )      | 7,387            |       |
|                                                    |        |            |        |                |        |           |        |                  |            |  |  |  |  |

 

Predecessor

Period from July 1, 2001 through October 17,2001:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Contract services revenues                         |   | $          | 25,595 |           | $      | 4,172     |   | $                | — |   | $ | 29,767 |   |
| Patient services revenues                          |   | 680        |   | 33,013         |   | —    |   | 33,693           |   |
| Other revenues                                     |   | 58         |   | 128            |   | 32        |   | 218              |   |
| Total revenues                                     |   | 26,333     |   | 37,313         |   | 32        |   | 63,678           |   |
|                                               |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                     |   | 4,621      |   | 4,187          |   | 1,015     |   | 9,823            |   |
| Total costs of operations                          |   | 17,828     |   | 25,600         |   | 2,259     |   | 45,687           |   |
| Equity in earnings of  unconsolidated partnerships |   | 41         |   | 341            |   | —    |   | 382              |   |
| Acquisition related  compensation charge           |   | —     |   | —         |   | (15,616   | )      | (15,616          | )      |
| Operating income (loss)                            |   | 8,546      |   | 12,054         |   | (21,027   | )      | (427             | )      |
| Interest expense, net                              |   | 2,543      |   | 2,538          |   | 1,240     |   | 6,321            |   |
| Income (loss) before income  taxes                 |   | 6,003      |   | 9,516          |   | (22,267   | )      | (6,748           | )      |
|                                                    |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

Predecessor

Year ended June 30, 2001:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Contract services revenues                         |   | $          | 90,178 |           | $      | 13,283    |   | $                | (40    | ) | $ | 103,421 |   |
| Patient services revenues                          |   | 1,958      |   | 105,715        |   | (205      | )      | 107,468          |   |
| Other revenues                                     |   | 272        |   | 221            |   | 121       |   | 614              |   |
| Total revenues                                     |   | 92,408     |   | 119,219        |   | (124      | )      | 211,503          |   |
|                                               |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                     |   | 19,366     |   | 17,113         |   | 4,655     |   | 41,134           |   |
| Total costs of operations                          |   | 64,486     |   | 86,684         |   | 10,702    |   | 161,872          |   |
| Equity in earnings of  unconsolidated partnerships |   | 8          |   | 963            |   | —    |   | 971              |   |
| Operating income (loss)                            |   | 27,930     |   | 33,498         |   | (21,609   | )      | 39,819           |   |
| Interest expense, net                              |   | 9,757      |   | 9,288          |   | 4,349     |   | 23,394           |   |
| Income (loss) before income  taxes                 |   | 18,173     |   | 24,210         |   | (25,958   | )      | 16,425           |   |
|                                                    |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

59

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Predecessor

Year ended June 30,2000:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Contract services revenues                         |   | $          | 84,400 |           | $      | 11,921    |   | $                | 3,814  |   | $ | 100,135 |   |
| Patient services revenues                          |   | 2,436      |   | 84,402         |   | —    |   | 86,838           |   |
| Other revenues                                     |   | 656        |   | 626            |   | 319       |   | 1,601            |   |
| Total revenues                                     |   | 87,492     |   | 96,949         |   | 4,133     |   | 188,574          |   |
|                                               |   |       |   |           |   |      |   |             |   |
| Depreciation and  amortization                     |   | 16,043     |   | 14,497         |   | 3,090     |   | 33,630           |   |
| Total costs of operations                          |   | 63,839     |   | 75,324         |   | 12,266    |   | 151,429          |   |
| Equity in earnings of  unconsolidated partnerships |   | —     |   | 817            |   | —    |   | 817              |   |
| Operating income (loss)                            |   | 23,653     |   | 22,442         |   | (19,079   | )      | 27,016           |   |
| Interest expense, net                              |   | 7,959      |   | 7,558          |   | 3,179     |   | 18,696           |   |
| Income (loss) before income  taxes                 |   | 15,694     |   | 14,884         |   | (22,258   | )      | 8,320            |   |
|                                                    |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

**19.          RESULTS OF QUARTERLY OPERATIONS(unaudited)**

 
|              |   | **First  Quarter**         |       | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|-------------------|--------|----------------------------|------------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|              |   | **(amounts in thousands)** | ** ** |
| 2002:             |   |                       |       |                |   |               |   |                |   |      |   |
| Revenues          |   | $                          | 53,117     |                | $      | 53,672             |   | $                   | 55,526 |      | $      | 56,770 |   | $ | 219,085 |   |
|              |   |                       |       |                |   |               |   |                |   |      |   |
| Gross profit      |   | 15,046                     |       | 12,853              |   | 14,351             |   | 15,564              |   | 57,814    |   |
|              |   |                       |       |                |   |               |   |                |   |      |   |
| Net income (loss) |   | 4,967                      |       | (16,794             | )      | 3,127              |   | 4,061               |   | (4,639    | )      |
|              |   |                       |       |                |   |               |   |                |   |      |   |
| 2001:             |   |                       |       |                |   |               |   |                |   |      |   |
| Revenues          |   | $                          | 52,220     |                | $      | 51,794             |   | $                   | 53,815 |      | $      | 53,674 |   | $ | 211,503 |   |
|              |   |                       |       |                |   |               |   |                |   |      |   |
| Gross profit      |   | 11,671                     |       | 11,452              |   | 12,694             |   | 13,814              |   | 49,631    |   |
|              |   |                       |       |                |   |               |   |                |   |      |   |
| Net income        |   | 2,757                      |       | 2,971               |   | 3,768              |   | 4,305               |   | 13,801    |   |

 

**20.          SUPPLEMENTAL CONDENSED CONSOLIDATEDFINANCIAL INFORMATION**

 

InSight’s payment obligations under the Notes (Note 9) are guaranteedby the Company (Parent Company) and all of InSight’s wholly owned subsidiaries(the Guarantor Subsidiaries).  Theseguarantees are full, unconditional and 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.”  The Company accounts for its investment inInSight and its subsidiaries under the equity method of accounting.  Dividends from InSight to the Company arerestricted under the Bank Financing. This information is not intended to present the financial position,results of operations and cash flows of the individual companies or groups ofcompanies in accordance with accounting principles generally accepted in theUnited States.

 

60

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2002**

**(Amounts in thousands)**

**(Company)**

 
|                                                               |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATIONS** |   | **CONSOLIDATED** | ** ** |
|--------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|------------------|--------|------------------|------------|
| ASSETS                                                             |   |                      |   |        |   |                        |   |                            |    |             |   |             |       |
| Current assets:                                                    |   |                      |   |        |   |                        |   |                            |    |             |   |             |       |
| Cash and cash equivalents                                          |   | $                         | — |        | $      | —                      |   | $                               | 14,451  |             | $      | 3,332            |       | $ | — |   | $ | 17,783 |   |
| Trade accounts receivables,  net                                   |   | —                    |   | —      |   | 35,190                      |   | 8,669                           |    | —           |   | 43,859           |       |
| Other current assets                                               |   | —                    |   | —      |   | 7,828                       |   | 228                             |    | —           |   | 8,056            |       |
| Intercompany accounts  receivable                                  |   | 87,367                    |   | 373,875     |   | 23,540                      |   | —                          |    | (484,782         | )      | —           |       |
| Total current assets                                               |   | 87,367                    |   | 373,875     |   | 81,009                      |   | 12,229                          |    | (484,782         | )      | 69,698           |       |
| Property and equipment, net                                        |   | —                    |   | —      |   | 150,857                     |   | 21,199                          |    | —           |   | 172,056          |       |
| Investments in partnerships                                        |   | —                    |   | —      |   | 1,886                       |   | —                          |    | —           |   | 1,886            |       |
| Investments in consolidated  subsidiaries                          |   | 9                         |   | 9           |   | 9,156                       |   | —                          |    | (9,174           | )      | —           |       |
| Other assets                                                       |   | —                    |   | —      |   | 20,640                      |   | —                          |    | —           |   | 20,640           |       |
| Goodwill and other  intangible assets, net                         |   | —                    |   | —      |   | 230,363                     |   | 4,758                           |    | —           |   | 235,121          |       |
|                                                               |   | $                         | 87,376 |        | $      | 373,884                     |   | $                               | 493,911 |             | $      | 38,186           |       | $ | (493,956 | ) | $ | 499,401 |   |
|                                                               |   |                      |   |        |   |                        |   |                            |    |             |   |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                         |   |                      |   |        |   |                        |   |                            |    |             |   |             |       |
| Current liabilities:                                               |   |                      |   |        |   |                        |   |                            |    |             |   |             |       |
| Current portion of notes  payable and capital lease obligations    |   | $                         | — |        | $      | 1,500                       |   | $                               | 1,509   |             | $      | 266              |       | $ | — |   | $ | 3,275 |   |
| Accounts payable and other  accrued expenses                       |   | —                    |   | —      |   | 29,408                      |   | 1,108                           |    | —           |   | 30,516           |       |
| Intercompany accounts  payable                                     |   | —                    |   | —      |   | 461,243                     |   | 23,539                          |    | (484,782         | )      | —           |       |
| Total current liabilities                                          |   | —                    |   | 1,500       |   | 492,160                     |   | 24,913                          |    | (484,782         | )      | 33,791           |       |
| Notes payable and capital  lease obligations, less current portion |   | —                    |   | 372,375     |   | 1,506                       |   | 1,008                           |    | —           |   | 374,889          |       |
| Other long-term liabilities                                        |   | —                    |   | —      |   | 236                         |   | 3,109                           |    | —           |   | 3,345            |       |
| Stockholders’ equity                                          |   | 87,376                    |   | 9           |   | 9                           |   | 9,156                           |    | (9,174           | )      | 87,376           |       |
|                                                               |   | $                         | 87,376 |        | $      | 373,884                     |   | $                               | 493,911 |             | $      | 38,186           |       | $ | (493,956 | ) | $ | 499,401 |   |

 

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**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                               |   | **INSIGHT** |    | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  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 notes  payable and capital lease obligations    |   | $           | 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           |       |
| Notes payable and capital  lease obligations, 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 |   |

 

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**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEAR ENDED JUNE 30, 2002**

**(Amounts in thousands)**

**(Company)**

 
|                                                         |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATION** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|-----------------|--------|------------------|--------|
| Revenues                                                     |   | $                         | — |        | $      | —                      |   | $                               | 128,442 |            | $      | 26,965           |   | $ | — |   | $ | 155,407 |   |
| Costs of operations                                          |   | —                    |   | —      |   | 93,515                      |   | 22,069                          |    | —          |   | 115,584          |   |
| Gross profit                                                 |   | —                    |   | —      |   | 34,927                      |   | 4,896                           |    | —          |   | 39,823           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Corporate operating  expenses                                |   | —                    |   | —      |   | 7,705                       |   | —                          |    | —          |   | 7,705            |   |
| Income from company  operations                              |   | —                    |   | —      |   | 27,222                      |   | 4,896                           |    | —          |   | 32,118           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity in earnings of  unconsolidated partnerships           |   | —                    |   | —      |   | 437                         |   | —                          |    | —          |   | 437              |   |
| Operating income                                             |   | —                    |   | —      |   | 27,659                      |   | 4,896                           |    | —          |   | 32,555           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Interest expense, net                                        |   | —                    |   | —      |   | 23,774                      |   | 1,394                           |    | —          |   | 25,168           |   |
| Income before income taxes                                   |   | —                    |   | —      |   | 3,885                       |   | 3,502                           |    | —          |   | 7,387            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Provision for income taxes                                   |   | —                    |   | —      |   | 2,955                       |   | —                          |    | —          |   | 2,955            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Income before equity in  income of consolidated subsidiaries |   | —                    |   | —      |   | 930                         |   | 3,502                           |    | —          |   | 4,432            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity in income of  consolidated subsidiaries               |   | 9                         |   | 9           |   | 3,502                       |   | —                          |    | (3,520          | )      | —           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Income before extraordinary  item                            |   | 9                         |   | 9           |   | 4,432                       |   | 3,502                           |    | (3,520          | )      | 4,432            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Extraordinary item - loss  on debt extinguishment            |   | —                    |   | —      |   | (4,423                      | )      | —                          |    | —          |   | (4,423           | )      |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Net income                                                   |   | $                         | 9      |        | $      | 9                           |   | $                               | 9       |            | $      | 3,502            |   | $ | (3,520 | ) | $ | 9 |   |

 

63

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE PERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                                |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  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 | ) |

 

64

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEAR ENDED JUNE 30, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                         |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------|--------|------------------|--------|
| Revenues                                                     |   | $           | — |                        | $      | 175,201                         |   | $               | 36,302 |             | $      | — |   | $ | 211,503 |   |
| Costs of operations                                          |   | —      |   | 132,838                     |   | 29,034                          |   | —          |   | 161,872          |   |
| Gross profit                                                 |   | —      |   | 42,363                      |   | 7,268                           |   | —          |   | 49,631           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Corporate operating  expenses                                |   | —      |   | 10,783                      |   | —                          |   | —          |   | 10,783           |   |
| Income from company  operations                              |   | —      |   | 31,580                      |   | 7,268                           |   | —          |   | 38,848           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity in earnings of  unconsolidated partnerships           |   | —      |   | 971                         |   | —                          |   | —          |   | 971              |   |
| Operating income                                             |   | —      |   | 32,551                      |   | 7,268                           |   | —          |   | 39,819           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Interest expense, net                                        |   | —      |   | 21,248                      |   | 2,146                           |   | —          |   | 23,394           |   |
| Income before income taxes                                   |   | —      |   | 11,303                      |   | 5,122                           |   | —          |   | 16,425           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Provision for income taxes                                   |   | —      |   | 2,624                       |   | —                          |   | —          |   | 2,624            |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Income before equity in  income of consolidated subsidiaries |   | —      |   | 8,679                       |   | 5,122                           |   | —          |   | 13,801           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity in income of consolidated  subsidiaries               |   | 13,801      |   | 5,122                       |   | —                          |   | (18,923         | )      | —           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Net income                                                   |   | $           | 13,801 |                        | $      | 13,801                          |   | $               | 5,122  |             | $      | (18,923 | ) | $ | 13,801 |   |

 

65

----

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEARENDED JUNE 30, 2000**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                         |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------|--------|------------------|--------|
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Revenues                                                     |   | $           | — |                        | $      | 168,884                         |   | $               | 19,690 |             | $      | — |   | $ | 188,574 |   |
| Costs of operations                                          |   | —      |   | 134,784                     |   | 16,645                          |   | —          |   | 151,429          |   |
| Gross profit                                                 |   | —      |   | 34,100                      |   | 3,045                           |   | —          |   | 37,145           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Corporate operating  expenses                                |   | —      |   | 10,946                      |   | —                          |   | —          |   | 10,946           |   |
| Income from company  operations                              |   | —      |   | 23,154                      |   | 3,045                           |   | —          |   | 26,199           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity in earnings of  unconsolidated partnerships           |   | —      |   | 817                         |   | —                          |   | —          |   | 817              |   |
| Operating income                                             |   | —      |   | 23,971                      |   | 3,045                           |   | —          |   | 27,016           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Interest expense, net                                        |   | —      |   | 17,730                      |   | 966                             |   | —          |   | 18,696           |   |
| Income before income taxes                                   |   | —      |   | 6,241                       |   | 2,079                           |   | —          |   | 8,320            |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Provision for income taxes                                   |   | —      |   | 1,131                       |   | —                          |   | —          |   | 1,131            |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Income before equity in  income of consolidated subsidiaries |   | —      |   | 5,110                       |   | 2,079                           |   | —          |   | 7,189            |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity in income of  consolidated subsidiaries               |   | 7,189       |   | 2,079                       |   | —                          |   | (9,268          | )      | —           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Net income                                                   |   | $           | 7,189  |                        | $      | 7,189                           |   | $               | 2,079  |             | $      | (9,268 | ) | $ | 7,189 |   |

 

66

----

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEARENDED JUNE 30, 2002**

**(Amounts inthousands)**

**(Company)**

 
|                                                                                         |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                         |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Net income                                                                                   |   | $                         | 9      |        | $      | 9                           |   | $                               | 9      |             | $      | 3,502            |   | $ | (3,520 | ) | $ | 9 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Extraordinary loss on debt  extinguishment                                                   |   | —                    |   | —      |   | 4,423                       |   | —                          |   | —           |   | 4,423            |   |
| Depreciation and  amortization                                                               |   | —                    |   | —      |   | 23,066                      |   | 3,396                           |   | —           |   | 26,462           |   |
| Equity in income of  consolidated subsidiaries                                               |   | (9                        | )      | (9          | )      | (3,502                      | )      | —                          |   | 3,520            |   | —           |   |
| Cash provided by (used in)  changes in operating assets and liabilities:                     |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade accounts receivables  , net                                                            |   | —                    |   | —      |   | 1,615                       |   | 259                             |   | —           |   | 1,874            |   |
| Intercompany receivables,  net                                                               |   | 101,826                   |   | (203,212    | )      | 104,806                     |   | (3,420                          | )      | —           |   | —           |   |
| Other current assets                                                                         |   | —                    |   | —      |   | 676                         |   | (86                             | )      | —           |   | 590              |   |
| Accounts payable and other  accrued expenses                                                 |   | —                    |   | —      |   | 6,199                       |   | 44                              |   | —           |   | 6,243            |   |
| Net cash provided by (used  in) operating activities                                         |   | 101,826                   |   | (203,212    | )      | 137,292                     |   | 3,695                           |   | —           |   | 39,601           |   |
|                                                                                         |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| 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                                                         |   | —                    |   | —      |   | (39,493                     | )      | (4,162                          | )      | —           |   | (43,655          | )      |
| Other                                                                                        |   | —                    |   | —      |   | 1,385                       |   | —                          |   | —           |   | 1,385            |   |
| Net cash used in investing  activities                                                       |   | (187,722                  | )      | —      |   | (33,335                     | )      | (506                            | )      | —           |   | (221,563         | )      |
|                                                                                         |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| 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 notes  payable and capital lease obligations                           |   | —                    |   | (371,788    | )      | (44,559                     | )      | (163                            | )      | —           |   | (416,510         | )      |
| Proceeds from issuance of  debt                                                              |   | —                    |   | 575,000     |   | —                      |   | —                          |   | —           |   | 575,000          |   |
| Payments made in connection  with refinancing of notes payable                               |   | —                    |   | —      |   | (15,109                     | )      | —                          |   | —           |   | (15,109          | )      |
| Other                                                                                        |   | —                    |   | —      |   | (339                        | )      | 306                             |   | —           |   | (33              | )      |
| Net cash provided by (used  in) financing activities                                         |   | 85,896                    |   | 203,212     |   | (89,506                     | )      | 143                             |   | —           |   | 199,745          |   |
|                                                                                         |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| DECREASE IN CASH AND CASH  EQUIVALENTS                                                       |   | —                    |   | —      |   | 14,451                      |   | 3,332                           |   | —           |   | 17,783           |   |
|                                                                                         |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Cash, beginning of period                                                                    |   | —                    |   | —      |   | —                      |   | —                          |   | —           |   | —           |   |
| Cash, end of period                                                                          |   | $                         | — |        | $      | —                      |   | $                               | 14,451 |             | $      | 3,332            |   | $ | — |   | $ | 17,783 |   |
|                                                                                              |        |                           |        |             |        |                             |        |                                 |        |                  |        |                  |        |  |  |  |  |  |  |  |

 

67

----

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

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

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                                                      |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  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 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 notes  payble 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 |   |

 

68

----

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEARENDED JUNE 30, 2001**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                                               |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|------------------------------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING ACTIVITIES:                                                              |   |        |   |                        |   |                            |   |             |   |             |   |
| Net income                                                                         |   | $           | 13,801 |                        | $      | 13,801                          |   | $                | 5,122  |             | $      | (18,923 | ) | $ | 13,801 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |   |        |   |                        |   |                            |   |             |   |             |   |
| Depreciation and  amortization                                                     |   | —      |   | 34,882                      |   | 6,252                           |   | —           |   | 41,134           |   |
| Equity in income of  consolidated subsidiaries                                     |   | (13,801     | )      | (5,122                      | )      | —                          |   | 18,923           |   | —           |   |
| Cash provided by (used in)  changes in operating assets and liabilities:           |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade accounts receivables  , net                                                  |   | —      |   | (1,274                      | )      | (1,483                          | )      | —           |   | (2,757           | )      |
| Intercompany receivables,  net                                                     |   | 18,209      |   | (21,218                     | )      | 3,009                           |   | —           |   | —           |   |
| Other current assets                                                               |   | —      |   | 672                         |   | 110                             |   | —           |   | 782              |   |
| Accounts payable and other  accrued expenses                                       |   | —      |   | (2,606                      | )      | 328                             |   | —           |   | (2,278           | )      |
| Net cash provided by  operating activities                                         |   | 18,209      |   | 19,135                      |   | 13,338                          |   | —           |   | 50,682           |   |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING ACTIVITIES:                                                              |   |        |   |                        |   |                            |   |             |   |             |   |
| Additions to property and  equipment                                               |   | —      |   | (12,494                     | )      | (10,417                         | )      | —           |   | (22,911          | )      |
| Other                                                                              |   | —      |   | 3,459                       |   | (3,990                          | )      | —           |   | (531             | )      |
| Net cash used in investing  activities                                             |   | —      |   | (9,035                      | )      | (14,407                         | )      | —           |   | (23,442          | )      |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING ACTIVITIES:                                                              |   |        |   |                        |   |                            |   |             |   |             |   |
| Proceeds from stock options  and warrants exercised                                |   | 183         |   | —                      |   | —                          |   | —           |   | 183              |   |
| Principal payments of notes  payable and capital lease obligations                 |   | (18,392     | )      | (13,552                     | )      | 185                             |   | —           |   | (31,759          | )      |
| Other                                                                              |   | —      |   | (1,896                      | )      | 2,353                           |   | —           |   | 457              |   |
| Net cash provided by (used  in) financing activities                               |   | (18,209     | )      | (15,448                     | )      | 2,538                           |   | —           |   | (31,119          | )      |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                                  |   | —      |   | (5,348                      | )      | 1,469                           |   | —           |   | (3,879           | )      |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| Cash, beginning of year                                                            |   | —      |   | 25,375                      |   | 1,758                           |   | —           |   | 27,133           |   |
| Cash, end of year                                                                  |   | $           | — |                        | $      | 20,027                          |   | $                | 3,227  |             | $      | — |   | $ | 23,254 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEARENDED JUNE 30, 2000**

**(Amounts inthousands)**

**(Predecessor)**

 
|                                                                                         |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|----------------------------------------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                         |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING ACTIVITIES:                                                                        |   |        |   |                        |   |                            |   |             |   |             |   |
| Net income                                                                                   |   | $           | 7,189  |                        | $      | 7,189                           |   | $                | 2,079  |             | $      | (9,268 | ) | $ | 7,189 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |   |        |   |                        |   |                            |   |             |   |             |   |
| Depreciation and  amortization                                                               |   | —      |   | 31,343                      |   | 2,287                           |   | —           |   | 33,630           |   |
| Equity in income of  consolidated subsidiaries                                               |   | (7,189      | )      | (2,079                      | )      | —                          |   | 9,268            |   | —           |   |
| Cash provided by (used in)  changes in operating assets and liabilities:                     |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade accounts receivables  , net                                                            |   | —      |   | (3,907                      | )      | (704                            | )      | —           |   | (4,611           | )      |
| Intercompany receivables,  net                                                               |   | (27,447     | )      | 30,180                      |   | (2,733                          | )      | —           |   | —           |   |
| Other current assets                                                                         |   | —      |   | (1,849                      | )      | 46                              |   | —           |   | (1,803           | )      |
| Accounts payable and other  accrued expenses                                                 |   | —      |   | 5,853                       |   | 266                             |   | —           |   | 6,119            |   |
| Net cash provided by (used  in) operating activities                                         |   | (27,447     | )      | 66,730                      |   | 1,241                           |   | —           |   | 40,524           |   |
|                                                                                         |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING ACTIVITIES:                                                                        |   |        |   |                        |   |                            |   |             |   |             |   |
| Acquisitions of Centers and  Fixed Facilities                                                |   | —      |   | (25,346                     | )      | —                          |   | —           |   | (25,346          | )      |
| Additions to property and  equipment                                                         |   | —      |   | (22,635                     | )      | (535                            | )      | —           |   | (23,170          | )      |
| Other                                                                                        |   | —      |   | (554                        | )      | —                          |   | —           |   | (554             | )      |
| Net cash used in investing  activities                                                       |   | —      |   | (48,535                     | )      | (535                            | )      | —           |   | (49,070          | )      |
|                                                                                         |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING ACTIVITIES:                                                                        |   |        |   |                        |   |                            |   |             |   |             |   |
| Proceeds from stock options  and warrants exercised                                          |   | 192         |   | —                      |   | —                          |   | —           |   | 192              |   |
| Principal payments of notes  payable and capital lease obligations                           |   | (17,945     | )      | (7,326                      | )      | (197                            | )      | —           |   | (25,468          | )      |
| Proceeds from issuance of  debt                                                              |   | 45,200      |   | —                      |   | —                          |   | —           |   | 45,200           |   |
| Other                                                                                        |   | —      |   | 1,797                       |   | (336                            | )      | —           |   | 1,461            |   |
| Net cash provided by (used  in) financing activities                                         |   | 27,447      |   | (5,529                      | )      | (533                            | )      | —           |   | 21,385           |   |
|                                                                                         |   |        |   |                        |   |                            |   |             |   |             |   |
| INCREASE IN CASH AND CASH  EQUIVALENTS                                                       |   | —      |   | 12,666                      |   | 173                             |   | —           |   | 12,839           |   |
|                                                                                         |   |        |   |                        |   |                            |   |             |   |             |   |
| Cash, beginning of year                                                                      |   | —      |   | 12,709                      |   | 1,585                           |   | —           |   | 14,294           |   |
| Cash, end of year                                                                            |   | $           | — |                        | $      | 25,375                          |   | $                | 1,758  |             | $      | — |   | $ | 27,133 |   |

 

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| **ITEM  9.** |   | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|--------------|--------|-------------------------------------------------------------------------------------------|

 

On August 7, 2002, the Company terminated theengagement of Arthur Andersen LLP as its independent auditor and engagedPricewaterhouseCoopers LLP as its independent accountant for performing thefiscal year ended June 30, 2002 audit. A current report on Form 8-K with respect to these events was filed withthe SEC on August 8, 2002.

 

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**PART III**

 

**ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

The stockholders agreement among the Company, J.W. Childs EquityPartners II, L.P., JWC-InSight Co-invest LLC, Halifax Capital Partners, L.P.,David W. Dupree, management of InSight and all other holders of capital stockor stock options of the Company obligates the Company’s stockholders to appointup to eight directors nominated by J.W. Childs Equity Partners II, L.P. (aswould constitute a majority of the board of directors) and two nomineesdesignated by Halifax Capital Partners. Pursuant to the terms of the Acquisition, there are currently sevendirectors comprising the board of directors, five of whom have been nominatedby J.W. Childs Equity Partners II, L.P. and two of whom have been nominated byHalifax Capital Partners.  The directorsare elected annually by, and serve at the discretion of, the Company’sstockholders.  The Company’s executiveofficers are elected annually by, and serve at the discretion of the board ofdirectors.

 

The following table sets forth the name, age, position and the years inwhich they were appointed to their current positions, of the Company’s directorsand executive officers, including the executive officers of InSight who aredeemed executive officers (as defined under Rule 3b-7 of the Exchange Act) ofthe Company, as of August 30, 2002:

 
| **Name**                   |   | **Age** |   | **Current  Position**                                              |   | **Years** |   |
|----------------------------|--------|---------|--------|--------------------------------------------------------------------|--------|-----------|--------|
| Steven T.  Plochocki       |   | 51      |   | Director, President and Chief Executive Officer                    |   | 1999      |   |
| Patricia R.  Blank         |   | 52      |   | Executive Vice President and Chief Information  Officer of InSight |   | 1998      |   |
| Michael A.  Boylan         |   | 46      |   | Executive Vice President and Chief Development  Officer of InSight |   | 2002      |   |
| Thomas V. Croal            |   | 42      |   | Executive Vice President and Chief Financial Officer               |   | 1996      |   |
| Brian G. Drazba            |   | 40      |   | Senior Vice President-Finance and Corporate  Controller            |   | 1997      |   |
| Cecilia A.  Guastaferro    |   | 42      |   | Senior Vice President-Human Resources of InSight                   |   | 2000      |   |
| Marilyn U.  MacNiven-Young |   | 51      |   | Executive Vice President, General Counsel and  Secretary           |   | 1998      |   |
| Michael S.  Madler         |   | 43      |   | Executive Vice President and Chief Operating Officer  of InSight   |   | 2002      |   |
| Michael N.  Cannizzaro     |   | 52      |   | Director and Chairman of the Board                                 |   | 2001      |   |
| Kenneth M. Doyle           |   | 37      |   | Director                                                           |   | 2001      |   |
| David W. Dupree            |   | 49      |   | Director                                                           |   | 2001      |   |
| Steven G. Segal            |   | 42      |   | Director                                                           |   | 2001      |   |
| Mark J. Tricolli           |   | 31      |   | Director                                                           |   | 2001      |   |
| Edward D. Yun              |   | 35      |   | Director                                                           |   | 2001      |   |

 

Steven T. Plochocki has been President and Chief Executive Officer anda director of the Company since February 11, 2002.  He has been President and Chief Executive Officer and a directorof InSight since November 22, 1999. From January 1998 through November 19, 1999, Mr. Plochocki was Presidentand Chief Executive Officer of Centratex Support Services, Inc., a supportservices company for the health care industry. Mr. Plochocki was President and Chief Operating Officer of ApriaHealthcare Group Inc., a home health care company, from July 1995 throughOctober 1997.

 

Patricia R. Blank has been InSight’s Executive Vice President and ChiefInformation Officer since September 1, 1999. Prior to joining InSight, Ms. Blank was the principal of Blank &Company, a consulting firm specializing in health care consulting.  From 1995 to 1998, Ms. Blank served asExecutive Vice President and Chief Operating Officer of HealthHelp, Inc., aHouston, Texas-based radiology services organization managing radiologyprovider networks in multiple states. From 1988 to 1995, she was corporatedirector of radiology of FHP, a California insurance company.

 

Michael A. Boylan has been InSight’s Executive Vice President and ChiefDevelopment Officer since February 7, 2002. He was Executive Vice President, Operations, Eastern Division of InSightfrom July 1, 2000 to February 7, 2002. From April 1998 to July 1, 2000, he was Executive Vice President andChief Development Officer.  FromFebruary 1996 to April 1998, he was Senior Vice President-Operations of InSight.  Mr. Boylan has served as Executive VicePresident of Maxum Health Corp. (“MHC”), a wholly owned subsidiary of InSight,since March

 

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1994.  From 1992 to 1994, heserved as a regional Vice President of MHC’s principal operating subsidiary,Maxum Health Services Corp.  From 1991to 1992, he served as an Executive Director of certain of MHC’soperations.  From 1986 to 1991, Mr.Boylan served in various capacities as an officer or employee, including Presidentand Chief Operating Officer, with American Medical Imaging Corporation.

 

Thomas V. Croal has been Executive Vice President and Chief FinancialOfficer of the Company since February 11, 2002 and Executive Vice President andChief Financial Officer of InSight since February 1996.  From July 1998 to June 1999, Mr. Croal alsoserved as Chief Operating Officer of InSight. Mr. Croal served as a director of American Health Services Corp.(“AHS”), a wholly owned subsidiary of InSight, from March 1991 until June1996.  He served as Vice President andChief Financial Officer of AHS from April 1991.  He was Controller of AHS from 1989 until April 1991.  From 1981 to 1989, Mr. Croal was employed byArthur Andersen & Co., an independent public accountant.

 

Brian G. Drazba has been Senior Vice President-Finance and Controllerof the Company since February 11, 2002 and Senior Vice President-Finance andController of InSight since July 1997. From March 1996 to July 1997, he served as Vice President-Finance ofInSight.  From June 1995, he served asVice President-Finance of AHS.  Mr.Drazba served as corporate controller for AHS from 1992 to 1995.  From 1985 to 1992, Mr. Drazba was employedby Arthur Andersen & Co.

 

Cecilia A. Guastaferro has been InSight’s Senior Vice President-HumanResources since July 1, 2000.  From July1997 to June 30, 2000, she was Vice President-Human Resources of InSight.  Ms. Guastaferro served as Director of HumanResources of AHS from May 1994 through June 1996, when she became Director of HumanResources of InSight.

 

Marilyn U. MacNiven-Young has been Executive Vice President, GeneralCounsel and Corporate Secretary of the Company since February 11, 2002 andExecutive Vice President, General Counsel and Corporate Secretary of InSightsince August 1998.  From February 1996through July 1998, she was an independent consultant to InSight.  From September 1994 through June 1995, shewas Senior Vice President and General Counsel of Abbey Healthcare Group, Inc.,a home health care company.  From 1991through 1994, Ms. MacNiven-Young served as General Counsel of AHS.

 

Michael S. Madler has been InSight’s Executive Vice President and ChiefOperating Officer since February 7, 2002. He joined InSight as a Senior Vice President in October 1998 and servedas such until June 8, 1999 when he was appointed Executive Vice President,Operations, Western Division.  From 1993through October 1998, Mr. Madler was Chief Operating Officer of Prime MedicalServices, Inc. an Austin, Texas-based lithotripsy services management company.

 

Michael N. Cannizzaro became a member of the Company’s board ofdirectors on October 17, 2001 and was elected chairman of the board on May 30,2002.  He is an Operating Partner ofJ.W. Childs Associates, L.P.  Prior tothat, he was President and Chief Executive Officer of Beltone ElectronicsCorporation from 1998 to 2000.  Prior tothat, he was President of Caremark International’s Prescription ServiceDivision from 1994 to 1997; Vice President, Business Development of Caremark’sNephrology Service Division from April 1994 to September 1994; and President ofLeica North America from 1993 to 1994. He held numerous positions in general management at Baxter HealthcareCorporation from 1976 to 1993, including the position of President of fourdifferent divisions.  He is also adirector of National Nephrology Associates, Inc. and Universal HospitalServices, Inc.

 

Kenneth M. Doyle has been a director and Vice President of the Companysince June 13, 2001.  Mr. Doyle is aPrincipal of The Halifax Group, L.L.C. Mr. Doyle joined The Halifax Group, L.L.C. in January 2000.  Prior to joining The Halifax Group, L.L.C.,Mr. Doyle was an Industry Leader and Vice President at GE Equity, the privateequity subsidiary of GE Capital.  Priorto joining GE Equity, Mr. Doyle spent four years in investment banking as aSenior Associate for the Telecommunications Corporate Finance Group at MerrillLynch and as an Associate with Chase Manhattan Bank in the Media andTelecommunications Group.  Mr. Doylealso spent three years with Ernst & Young in the Entrepreneurial ServicesGroup.  Mr. Doyle currently serves onthe board of directors of National Packaging Solutions Group, Inc.

 

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David W. Dupree became a member of the Company’s board of directors onOctober 17, 2001.  Mr. Dupree is aManaging Director of The Halifax Group, L.L.C. which he founded in January1999.  Prior to joining The HalifaxGroup, L.L.C., Mr. Dupree was a Managing Director and Partner with The CarlyleGroup, a global investment firm located in Washington, D.C., where he wasprimarily responsible for investments in health care and related sectors.  Prior to joining The Carlyle Group in 1992,Mr. Dupree was a Principal in Corporate Finance with Montgomery Securities andprior to that, he was Co-Head of Equity Private Placements at Alex, Brown &Sons Incorporated.  Mr. Dupree currentlyserves on the board of directors of Whole Foods Markets, Inc. and NationalPackaging Solutions Group, Inc. and previously served on InSight’s board ofdirectors, as a designee of The Carlyle Group, from October 1997 to December1999.

 

Steven G. Segal became a member of the Company’s board of directors onOctober 17, 2001.  He is a Partner ofJ.W. Childs Associates, L.P. and has been at J.W. Childs Associates, L.P. since1995.  Prior to that time, he was anexecutive at Thomas H. Lee Company from 1987, most recently holding theposition of Managing Director.  He isalso a director of Quality Stores Inc., Jillian’s Entertainment Corp., NationalNephrology Associates, Inc., Big V Supermarkets, Inc., The NutraSweet Company,Universal Hospital Services, Inc. and is Co-Chairman of the Board of EmpireKosher Poultry, Inc.

 

Mark J. Tricolli has been a director and Vice President of the Companysince June 13, 2001.  Mr. Tricolli is aSenior Associate at J.W. Childs Associates, L.P., which he joined in 2000.  Prior to that Mr. Tricolli was an Associatein the Merchant Banking Division of Goldman Sachs from 1999 to 2000, an Analystat William Blair Capital Partners, a private equity firm based in Chicago,Illinois from 1995 to 1997 and an Analyst at Chemical Securities, Inc. from1993 to 1995.

 

Edward D. Yun became a director and President of the Company on June13, 2001.  He became a Vice President ofthe Company on February 11, 2002.  He isa Partner of J.W. Childs Associates, L.P. and has been at J.W. ChildsAssociates, L.P. since 1996.  From 1994until 1996, he was as Associate at DLJ Merchant Banking, Inc.  He is also a director of Jillian’sEntertainment Corp., Pan Am International Flight Academy, Inc., NationalNephrology Associates, Inc., Equinox Holdings, Inc., Chevys, Inc., UniversalHospital Services, Inc. and Hartz Mountain Corporation.

 

In fiscal 2002, the Company’s board of directors took action byunanimous written consent seven times.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.  The board of directors of the Company hasnot established committees.  Instead,upon consummation of the Acquisition, the InSight board of directors, which isidentical to the board of directors of the Company, established the followingcommittees to act with regard to compensation and other matters for theCompany:

 

COMPENSATION COMMITTEE.  TheCompensation Committee currently consists of Messrs. Cannizzaro, Dupree,Plochocki and Segal.  The CompensationCommittee is responsible for determining the specific forms and levels ofcompensation of the executive officers of InSight and its subsidiaries, sincethere are no employees of the Company, and administering or assisting the boardof directors in administering the Company’s 2001 Stock Option Plan, and otherstock options granted by the Company. The Compensation Committee met once in fiscal 2002.

 

One of the members of the Compensation Committee, Mr. Plochocki, is theCompany’s President and Chief Executive Officer.  Mr. Plochocki did not participate in decisions relating to hisown compensation.  In connection withthe Acquisition, as a holder of options to purchase InSight common stock, Mr.Plochocki received in consideration for the cancellation of options to purchase122,500 shares of InSight common stock, $1,179,675, representing the differencebetween $18.00 and the exercise price of the options, and he rolled overoptions to purchase 52,500 shares of InSight common stock, with an exerciseprice of $8.37, into options to purchase 52,500 shares of the Company’s commonstock at the same price.  See “Item 13.Certain Relationships and Related Transactions.” 

 

ACQUISITION COMMITTEE.  TheAcquisition Committee currently consists of Messrs. Doyle, Tricolli andYun.  Its principal function is toreview de novo and acquisition opportunities of the Company.  The Acquisition Committee met five times andtook action by unanimous written consent once in fiscal 2002.

 

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AUDIT COMMITTEE.  The AuditCommittee consists of Messrs. Doyle, Tricolli and Yun.  Its principal functions are to review theresults of the Company’s annual audit with the Company’s independent auditorsand review the performance of the Company’s independent auditors.    The Audit Committee met four times infiscal 2002.

 

EXECUTIVE COMMITTEE.  TheExecutive Committee currently consists of Messrs. Cannizzaro, Dupree, Plochockiand Segal.  It is authorized to exerciseall the power and authority of the board of directors in the management of thebusiness of the Company but its authority does not extend to certainfundamental corporate transactions.  TheExecutive Committee did not meet in fiscal 2002.

 

REGULATORY COMPLIANCE COMMITTEE. The Regulatory Compliance Committee consisting of Messrs. Doyle,Tricolli and Yun is responsible for monitoring regulatory compliance of theCompany’s business.  The RegulatoryCompliance Committee did not meet in fiscal 2002.

 

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**ITEM 11.       EXECUTIVE COMPENSATION**

 

SUMMARY COMPENSATION TABLE.  Thefollowing table sets forth information concerning the annual, long-term and allother compensation for services rendered in all capacities to the Company andits subsidiaries for the years ended June 30, 2002, 2001, and 2000 of (i) eachof the persons who served as the Company’s chief executive officer during theyear ended June 30, 2002, and (ii) the four most highly compensated executiveofficers (as such term is defined in Rule 3b-7) (other than the chief executiveofficer) of the Company serving as executive officers at June 30, 2002 (“OtherExecutive Officers”), and whose aggregate cash compensation exceeded $100,000for the year ended June 30, 2002 (collectively, “Named Executive Officers”):

 

SUMMARY COMPENSATIONTABLE

 
| **Name and Principal Position**                                                      |   | **Annual  Compensation** |   | **LongTerm  Compensation  Awards  Stock Options  (Shares)** |                   | **All Other  Comp(2)**         |   |
|--------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------------------------------------------|------------------------|--------------------------------|--------|
| **Fiscal  Year  Ended**                                                              |   | **Salary**               |   | **Bonus(1)**                                                |                   | **Other(2)**                   |
| Edward D. Yun  President(3)                                                          |   | 2002  2001  2000         |   | $                                                           | —  —  — |                           | $      | —  —  — |   | $ | —  —  — |   | —  —  — |   | $ | —  —  — |   |
|                                                                                 |   |                     |   |                                                        |                   |                           |   |   |   |   |   |   |   |
| Steven T. Plochocki  President and Chief Executive  Officer                          |   | 2002  2001  2000         |   | 300,000   280,000   158,750                                 |                   | 75,000   238,000   125,000     |   | 9,000  9,000  5,625 |   | 147,500  50,000  125,000 |   | 1,194,779   3,324  1,655 |   |
|                                                                                 |   |                     |   |                                                        |                   |                           |   |   |   |   |   |   |   |
| Marilyn U.  MacNiven-Young  Executive Vice President,  General Counsel and Secretary |   | 2002  2001  2000         |   | 260,300   243,300   236,250                                 |                   | 30,000   103,400  59,100       |   | 9,000   9,000  9,000 |   | 30,000  10,000  — |   | 530,431   3,850  3,964 |   |
|                                                                                 |   |                     |   |                                                        |                   |                           |   |   |   |   |   |   |   |
| Thomas V. Croal  Executive Vice President and  Chief Financial Officer               |   | 2002  2001  2000         |   | 252,500   236,000   225,500                                 |                   | 40,000   140,420   75,250      |   | 9,000  9,000  9,000 |   | 122,500  5,000  — |   | 1,528,916   1,409  8,319 |   |
|                                                                                 |   |                     |   |                                                        |                   |                           |   |   |   |   |   |   |   |
| Michael A. Boylan  Executive Vice President and  Chief Development Officer(4)        |   | 2002  2001  2000         |   | 225,000   210,000   195,000                                 |                   | 50,000   124,950  68,250       |   | 9,000  9,000   14,000 |   | 116,990  10,000— |   | 1,063,204   4,365  4,819 |   |
|                                                                                 |   |                     |   |                                                        |                   |                           |   |   |   |   |   |   |   |
| Michael S. Madler  Executive Vice President and  Chief Operating Officer(5)          |   | 2002  2001  2000         |   | 221,100   200,000   175,000                                 |                   | 60,000    119,000  61,250 |   | 9,000  9,000   16,350 |   | 94,000  50,000— |   | 545,627  6,618  4,090 |   |
|                                                                                      |        |                          |        |                                                             |                        |                                |        |  |  |  |  |  |  |  |  |  |  |

 

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(1)         Annual bonuses are earnedand accrued during the fiscal years indicated, and paid subsequent to the endof each fiscal year.

 

(2)         Amounts of Other AnnualCompensation include perquisites (auto allowances and commissions for contractawards and renewals) and amounts of All Other Compensation include (i) amountscontributed to the Company’s 401(k) profit sharing plan, (ii) specifiedpremiums on executive insurance arrangements, (iii) specified premiums on executive health insurance arrangements and(iv) cash proceeds received from cancelled options in connection with theAcquisition (see “Item 13. Certain Relationships and Related Transactions”) forthe Named Executive Officers.

 

(3)         On November 12, 2001, Mr.Plochocki was elected as president and chief executive officer of the Companyin place of Mr. Yun.

 

(4)         On February 7,2002, Mr. Boylan became executive vice president and chief development officer.

 

(5)         On February 7,2002, Mr. Madler became executive vice president and chief operating officer.

 

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COMPENSATION OF DIRECTORS.  TheCompany reimburses its non-employee directors for all out-of-pocket expensesincurred in the performance of their duties as directors.  The Company does not pay fees to directorsfor attendance at meetings or for their services as members of the board ofdirectors.

 

OPTION GRANTS.  For the yearended June 30, 2002, certain InSight stock options were rolled over intooptions of the Company under the Company’s 2001 Stock Option Plan and stockoptions were granted by the Company pursuant to stock option agreements to theNamed Executive Officers, as follows:

 
|                      |   | **Individual  Grants**                                   |   |                                                                  |   |
|---------------------------|--------|----------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| **Name**                  |   | **Number  of  Securities  Underlying  Options  Granted** |   | **Percent  of  Total Options  Granted to  Employees in  Fiscal Year** |   | **Exercise  Price  Per Share(1)** |   | **Market  Price on  Grant Date** |   | **Expiration  Date(3)** |   | **Potential  Realizable Value  at Assumed Annual Rates  of Stock Price Appreciation  for Option Term(2)** |   |
|                      |   |                                                     |   |                                                                  |   |   |   |   |   |   |   | **5%** |   | **10%** |   |
| Edward D. Yun             |   | —                                                   |   | —                                                                |   | $ | — |   | $ | — |   | — |   | $ | — |   | $ | — |   |
|                      |   |                                                     |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Steven T. Plochocki       |   | 52,500                                                   |   | 7                                                                     | %      | 8.37 |   | 18.00 |   | 10/17/11 |   | 276,352 |   | 700,333 |   |
|                      |   | 95,000                                                   |   | 12                                                                    | %      | 18.00 |   |   |   | 10/17/11 |   | 1,075,410 |   | 2,725,300 |   |
|                      |   |                                                     |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Marilyn U. MacNiven-Young |   | 30,000                                                   |   | 4                                                                     | %      | 18.00 |   |   |   | 10/17/11 |   | 339,605 |   | 860,621 |   |
|                      |   |                                                     |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Thomas V. Croal           |   | 52,500                                                   |   | 7                                                                     | %      | 8.37 |   | 18.00 |   | 10/17/11 |   | 276,352 |   | 700,333 |   |
|                      |   | 70,000                                                   |   | 9                                                                     | %      | 18.00 |   |   |   | 10/17/11 |   | 792,408 |   | 2,008,115 |   |
|                      |   |                                                     |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Michael A. Boylan         |   | 46,990                                                   |   | 6                                                                     | %      | 8.37 |   | 18.00 |   | 10/17/11 |   | 247,347 |   | 626,830 |   |
|                      |   | 70,000                                                   |   | 9                                                                     | %      | 18.00 |   |   |   | 10/17/11 |   | 792,408 |   | 2,008,115 |   |
|                      |   |                                                     |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Michael S. Madler         |   | 24,000                                                   |   | 3                                                                     | %      | 8.37 |   | 18.00 |   | 10/17/11 |   | 126,334 |   | 320,153 |   |
|                      |   | 70,000                                                   |   | 9                                                                     | %      | 18.00 |   |   |   | 10/17/11 |   | 792,408 |   | 2,008,115 |   |
|                           |        |                                                          |        |                                                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)         The rolled over stockoptions retained their original exercise price of $8.37.  The other options were granted at anexercise price of $18.00 per share, the price per share that subscribingstockholders paid to the Company on the consummation of the Acquisition inconnection with their subscription for the common stock of the Company.

 

(2)         Potential realizablevalue is determined by taking the exercise price per share and applying thestated annual appreciation rate compounded annually for the remaining term ofthe option (ten years), subtracting the exercise price per share at the end ofthe period and multiplying the remaining number by the number of optionsgranted.  Actual gains, if any, on stockoption exercises and the Company’s common stock holdings are dependent on thefuture performance of the common stock.

 

(3)         The rolled overoptions are fully vested and exercisable. The other options are exercisable starting twelve months after the dateof grant with 20% of the shares vesting annually on the following schedule:  (i) 25% of the shares becoming exercisableupon the anniversary of the consummation of the Acquisition in each of thefiscal years ending on June 30 in the years 2003-2007 and (ii) 75% of theshares becoming exercisable for each fiscal year ending on June 30 in the years2002-2006 upon the attainment of certain predetermined performance-basedtargets.  The options were granted for aterm of ten years, subject to earlier termination in certain events related totermination of employment.

 

77

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OPTION EXERCISES AND FISCAL YEAR-END VALUES.  During the year ended June 30, 2002, none of the Named ExecutiveOfficers exercised any stock options. The following table sets forth information with respect to the unexercisedoptions to purchase common stock granted under the Company’s 2001 Stock OptionPlan and pursuant to stock option agreements, for the Named Executive Officersas of June 30, 2002:

 
|                      |   | **Number  of  Shares  Acquired on  Exercise** |   | **Value  Realized**                                       |   |              |   |            |   | **Value  of Unexercised  In-The-Money Options  at June 30, 2002(1)** |   |
|---------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------------------|--------|-------------------|--------|-----------------|--------|----------------------------------------------------------------------|--------|
|                      |   |                                          |   | **Number  of Unexercised Options  Held at June 30, 2002** |   |              |
|                      |   |                                          |   |                                                      |   |
| **Name**                  |   |                                          |   | **Exercisable**                                           |   | **Unexercisable** |   | **Exercisable** |   | **Unexercisable**                                                    |   |
| Edward D. Yun             |   | —                                        |   | $                                                         | — |              | — |            | — |                                                                 | $      | — |   | $ | — |   |
|                      |   |                                          |   |                                                      |   |              |   |            |   |                                                                 |   |   |   |
| Steven T. Plochocki       |   | —                                        |   | —                                                    |   | 52,500            |   | 95,000          |   | 505,575                                                              |   | — |   |
|                      |   |                                          |   |                                                      |   |              |   |            |   |                                                                 |   |   |   |
| Marilyn U. MacNiven-Young |   | —                                        |   | —                                                    |   | —            |   | 30,000          |   | —                                                               |   | — |   |
|                      |   |                                          |   |                                                      |   |              |   |            |   |                                                                 |   |   |   |
| Thomas V. Croal           |   | —                                        |   | —                                                    |   | 52,500            |   | 70,000          |   | 505,575                                                              |   | — |   |
|                      |   |                                          |   |                                                      |   |              |   |            |   |                                                                 |   |   |   |
| Michael A. Boylan         |   | —                                        |   | —                                                    |   | 46,990            |   | 70,000          |   | 452,514                                                              |   | — |   |
|                      |   |                                          |   |                                                      |   |              |   |            |   |                                                                 |   |   |   |
| Michael S. Madler         |   | —                                        |   | —                                                    |   | 24,000            |   | 70,000          |   | 231,120                                                              |   | — |   |
|                           |        |                                               |        |                                                           |        |                   |        |                 |        |                                                                      |        |  |  |  |  |  |

 

----

(1) Based on the price at which the common stock was valued on thatdate of $18.00 per share.

 

CANCELLATION OF OPTIONS IN THE ACQUISITION.  On the consummation of the Acquisition, each holder of an optionto purchase shares of common stock of InSight outstanding under any ofInSight’s stock option plans, whether or not vested, received the differencebetween $18.00 and the exercise price of each share of common stock the holdercould have acquired pursuant to the terms of the stock option agreements (lessapplicable tax withholding), and the options were terminated; except thatMessrs. Plochocki, Croal, Boylan and Madler rolled over certain of theirInSight stock options into fully vested options to purchase the Company’scommon stock under the Company’s 2001 Stock Option Plan.

 

INDEMNIFICATION AGREEMENTS. InSight has entered into separate indemnification agreements with each ofits directors and executive officers that could require InSight, among otherthings, to indemnify them against certain liabilities that may arise by reasonof their status or service as directors and executive officers of InSight andits affiliates and to advance expenses incurred by them as a result of anyproceedings against them as to which they could be indemnified.

 

EMPLOYMENT AGREEMENTS.  Inconnection with the Acquisition, the Named Executive Officers (except for Mr.Yun) entered into new employment agreements. The employment agreement with Mr. Plochocki is for a term of threeyears, subject to certain termination rights. Mr. Plochocki will receive an annual base salary as well as adiscretionary bonus of up to 75% of his annual base salary if InSight achievesits budgetary goals and a discretionary bonus of an additional 25% of hisannual base salary upon the achievement of other goals mutually agreed upon byMr. Plochocki and InSight’s board of directors.  Mr. Plochocki’s employment agreement also provides for a lifeinsurance policy of three times the amount of his annual base salary andentitles him to participate during the term of his employment in InSight’s lifeinsurance, medical, health and accident and disability plan or program, pensionplan or other similar benefit plan and the Company’s stock option plans.  Mr. Plochocki will be subject to anoncompetition covenant and nonsolicitation provisions (relating to InSight’semployees and customers) during the term of his employment agreement andcontinuing for a period of 24 months after the termination of hisemployment.  Mr. Plochocki’s employmentagreement will terminate and he will be entitled to all accrued and unpaidcompensation, as well as 24 months of compensation at the annual salary then ineffect (i) upon his permanent and total disability (as defined in hisemployment agreement); (ii) upon InSight’s 30 days’ written notice to him ofthe termination of his employment without cause (as defined in his employmentagreement); (iii) if he terminates his employment with InSight for good reason(as defined in his employment agreement); and (iv) if his employment isterminated by InSight without cause or he terminates his employment for goodreason within 12 months of a change in control (as defined in his employmentagreement), which occurs after the consummation of the Acquisition.  In addition, InSight will maintain at itsexpense until the earlier of 24 months after the date of termination or commencementof Mr. Plochocki’s benefits pursuant to full time employment with a newemployer under such employer’s standard benefits program, all life insurance,medical, health and accident and disability plans or programs in which Mr.Plochocki was entitled to participate 

 

78

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immediately prior to the date of termination.  Mr. Plochocki’s employment will terminate upon his death and theexecutors or administrators of his estate or his heirs or legatees (as the casemay be) will be entitled to all accrued and unpaid compensation up to the dateof his death.  Mr. Plochocki’semployment will immediately terminate and he will not be entitled to receiveany monetary compensation or benefit upon (i) the termination of his employmentby InSight for cause, or (ii) his voluntary termination of his employment withInSight without good reason.

 

The employment agreement with each of the other four Named ExecutiveOfficers (except for Mr. Yun) provides for a term of 12 months on a continuingbasis, subject to certain termination rights. The executive’s employment agreements provide for an annual salary aswell as a discretionary bonus of up to 75% of the executive’s annual basesalary if InSight achieves its budgetary goals and a discretionary bonus of anadditional 25% of the executive’s annual base salary upon the achievement ofother goals mutually agreed upon by each executive and InSight’s President andChief Executive Officer and approved by InSight’s board of directors.  Each executive is provided with a lifeinsurance policy of three times the amount of his or her annual base salary andis entitled to participate in InSight’s life insurance, medical, health andaccident and disability plan or program, pension plan or other similar benefitplan and the Company’s stock option plans. Each executive will be subject to a noncompetition covenant andnonsolicitation provisions (relating to InSight’s employees and customers)during the term of his or her respective employment agreement and continuingfor a period of 12 months after the termination of his or her respectiveemployment.  Each executive’s employmentagreement will terminate and each of them will be entitled to all accrued andunpaid compensation, as well as 12 months of compensation at the annual salaryrate then in effect (i) upon the executive’s permanent and total disability (asdefined in the respective employment agreement); (ii) upon InSight’s 30 days’written notice to the executive of the termination of the executive’semployment without cause (as defined in the respective employmentagreement);  (iii) if the executiveterminates his or her employment with InSight for good reason (as defined inthe respective employment agreement); and (iv) if the executive’s employment isterminated by InSight without cause or he or she terminates his or heremployment for good reason within 12 months of a change in control (as definedin the respective employment agreement), which occurs after the consummation ofthe Acquisition.  In addition, InSightwill maintain at its expense until the earlier of 12 months after the date oftermination or commencement of the executive’s benefits pursuant to full timeemployment with a new employer under such employer’s standard benefits program,all life insurance, medical, health and accident and disability plans orprograms, in which the executive was entitled to participate immediately priorto the date of termination.  Eachexecutive’s employment will immediately terminate upon his or her death and theexecutors or administrators of his or her estate or his or her heirs orlegatees (as the case may be) will be entitled to all accrued and unpaidcompensation up to the date of his or her death.  The executive’s employment will terminate and the executive willnot be entitled to receive any monetary compensation or benefit upon (i) thetermination of his or her respective employment by InSight for cause, or (ii)his or her voluntary termination of his or her respective employment withInSight without good reason.

 

79

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| **ITEM  12.** |   | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
|---------------|--------|------------------------------------------------------------------------------------------------------|

 

The following table sets forth certain information regarding beneficialownership of the Company’scommon stock as of August 30, 2002, by: (i) each person or entity known to the Company owning beneficially 5% ormore of the Company’s commonstock; (ii) each director of the Company; (iii) each of the Company’s Named Executive Officers; and (iv) alldirectors and executive officers (as defined by Rule 3b-7), as a group.  At August 30, 2002, the Company’s outstanding securities consists ofapproximately 5,468,764 shares of common stock and options to purchase 175,990shares of common stock which are immediately exercisable.  Beneficial ownership of the securitieslisted in the table has been determined in accordance with the applicable rulesand regulation promulgated under the Exchange Act.

 
| **Names and  Addresses of Beneficial Owners**                                                           |   | **Amount and Nature  of Beneficial  Ownership of  Common Stock(1)** |   | **Percent of  Common Stock  Beneficially  Owned(1)** |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                                                                    |   |                                                                |   |                                                 |   |
| J.W. Childs Equity Partners II, L.P.(2)  111 Huntington Avenue, Suite 2900  Boston, Massachusetts 02199 |   | 4,350,290                                                           |   | 79.5                                                 | %      |
|                                                                                                    |   |                                                                |   |                                                 |   |
| JWC-InSight Co-invest LLC(3)  111 Huntington Avenue, Suite 2900  Boston, Massachusetts 02199            |   | 338,532                                                             |   | 6.2                                                  | %      |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Halifax Capital Partners, L.P.(4)  1133 Connecticut Avenue, N.W.  Washington, D.C.  20036          |   | 1,111,112                                                           |   | 20.3                                                 | %      |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Steven G. Segal(5)  111 Huntington Avenue, Suite 2900  Boston, Massachusetts 02199                      |   | —                                                              |   | —                                               |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Edward D. Yun(6)  111 Huntington Avenue, Suite 2900  Boston, Massachusetts 02199                        |   | —                                                              |   | —                                               |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Michael N. Cannizzaro(7)  111 Huntington Avenue, Suite 2900  Boston, Massachusetts 02199                |   | —                                                              |   | —                                               |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Mark J. Tricolli(8)  111 Huntington Avenue, Suite 2900  Boston, Massachusetts 02199                     |   | —                                                              |   | —                                               |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| David W. Dupree(9)  1133 Connecticut Avenue, N.W.  Washington, D.C.  20036                         |   | 4,092                                                               |   | *                                                    |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Kenneth M. Doyle(10)  1133 Connecticut Avenue, N.W.  Washington, D.C.  20036                       |   | —                                                              |   | —                                               |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Steven T. Plochocki(11)  4400 MacArthur Blvd., Suite 800  Newport Beach, CA 92660                       |   | 57,250                                                              |   | *                                                    |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Michael A. Boylan(12)  110 Gibraltar Road  Horsham, PA 18901                                            |   | 50,490                                                              |   | *                                                    |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Thomas V. Croal(13)  4400 MacArthur Blvd., Suite 800  Newport Beach, CA 92660                           |   | 56,000                                                              |   | *                                                    |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Michael S. Madler(14)  4400 MacArthur Blvd., Suite 800  Newport Beach, CA 92660                         |   | 27,500                                                              |   | *                                                    |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| Marilyn U. MacNiven-Young(15)  4400 MacArthur Blvd., Suite 800  Newport Beach, CA 92660                 |   | 1,500                                                               |   | *                                                    |   |
|                                                                                                    |   |                                                                |   |                                                 |   |
| All directors and executive officers, as a group (14  persons)                                          |   | 200,357                                                             |   | 3.5                                                  | %      |

 

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| *      |   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (1)    |   | For purposes of  this table, a person is deemed to have “beneficial ownership” of any security  that such person has the right to acquire within 60 days after August 30,  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | Includes  4,011,758 shares of the Company’s common stock owned directly by J.W. Childs  Equity Partners II, L.P. and 338,532 shares of the Company’s common stock  owned directly by JWC-InSight Co-invest LLC, an affiliate of J.W. Childs  Equity Partners II, L.P.  The general  partner of J.W. Childs Equity Partners II, L.P. is J.W. Childs Advisors II,  L.P., a Delaware limited partnership.   The general partner of J.W. Childs Advisors II, L.P. is J.W. Childs  Associates, L.P., a Delaware limited partnership.  The general partner of J.W. Childs Associates, L.P. is J.W.  Childs Associates, Inc., a Delaware corporation. J.W. Childs Advisors II,  L.P., J.W. Childs Associates, L.P. and J.W. Childs Associates, Inc. may be  deemed to beneficially own the 4,350,290 shares of the Company’s common stock  held by J.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | JWC-InSight  Co-invest LLC is a Delaware limited liability company and affiliate of J.W.  Childs Equity Partners II, L.P.  J.W.  Childs Associates Inc. is the managing member of JWC-InSight Co-invest  LLC.  As the managing member, J.W.  Childs Associates Inc. owns the 338,532 shares of the Company’s common stock  to be held directly by JWC-InSight Co-invest LLC.  Messrs. Segal, Yun, Cannizzaro and Tricolli are each members of  JWC-InSight Co-invest LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4)    |   | Includes  1,107,020 shares of the Company’s common stock owned directly by Halifax  Capital Partners, L.P. and 4,092 shares of the Company’s common stock owned  directly by Mr. Dupree, a Managing Director of The Halifax Group, L.L.C.  The general partner of Halifax Capital  Partners, L.P. is Halifax Genpar, L.P., a Delaware limited partnership.  The general partner of Halifax Genpar,  L.P. is The Halifax Group, L.L.C. a Delaware limited liability company.  Halifax Genpar, L.P. and The Halifax  Group, L.L.C. may be deemed to beneficially own the 1,111,112 shares of the  Company’s common stock held by Halifax Capital Partners, L.P. and its  affiliate, Mr. Dupree.  Halifax  Capital Partners, L.P., Halifax Genpar, L.P. and The Halifax Group, L.L.C.  disclaim beneficial ownership of the 4,092 shares of the Company’s common  stock owned directly by Mr. Dupree.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5)    |   | As a Partner of  J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II,  L.P., and a member of JWC-InSight Co-invest LLC, Mr. Segal may be deemed to  beneficially own the 4,011,758 shares of the Company’s common stock owned by  J.W. Childs Equity Partners II, L.P. and the 338,532 shares of the Company’s  common stock held directly by JWC-InSight Co-invest LLC.  Mr. Segal disclaims beneficial ownership  of such shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (6)    |   | As a Partner of  J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II,  L.P. and a member of JWC-InSight Co-invest LLC, Mr. Yun may be deemed to  beneficially own the 4,011,758 shares of the Company’s common stock owned by  J.W. Childs Equity Partners II, L.P., and the 338,532 shares of the Company’s  common stock held directly by JWC-InSight Co-invest LLC.  Mr. Yun disclaims beneficial ownership of  such shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (7)    |   | As an Operating  Partner of J.W. Childs Associates, L.P., which manages J.W. Childs Equity  Partners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr. Cannizzaro  may be deemed to beneficially own the 4,011,758 shares of  the Company’s common stock owned by J.W.  Childs Equity Partners II, L.P. and the 338,532 shares of the Company’s  common stock held directly by JWC-InSight Co-invest LLC.  Mr. Cannizzaro disclaims beneficial  ownership of such shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (8)    |   | As a Senior  Associate at J.W. Childs Associates, L.P., which manages J.W. Childs Equity  Partners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr. Tricolli may  be deemed to beneficially own the 4,011,758 shares of the Company’s common  stock owned by J.W. Childs Equity Partners II, L.P. and the 338,532 shares of  the Company’s common stock held directly by JWC-InSight Co-invest LLC.  Mr. Tricolli disclaims beneficial  ownership of such shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (9)    |   | As a Managing  Director of The Halifax Group, L.L.C., which manages Halifax Capital  Partners, L.P., Mr. Dupree may also be deemed to beneficially own the  1,107,020 shares of the Company’s common stock owned by Halifax Capital  Partners, L.P. and its affiliates. Mr. Dupree disclaims beneficial ownership  of such shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (10)   |   | As a Principal  of The Halifax Group, L.L.C., which manages Halifax Capital Partners, L.P.,  Mr. Doyle may be deemed to beneficially own the 1,111,112 shares of the  Company’s common stock owned by Halifax Capital Partners, L.P. and its  affiliates.  Mr. Doyle disclaims  beneficial ownership of the shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (11)   |   | Includes (i) an  option to purchase 52,500 shares of the Company’s common stock at an exercise  price of $8.37 share which option was granted upon the consummation of the  Acquisition and is fully vested and immediately exercisable and (ii) an  option to purchase 4,750 shares of the Company’s common stock at an exercise  price of $18.00 per share.  Does not  include an option to purchase 90,250 shares of the Company’s common stock at  an exercise price of $18.00 per share, which is not currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (12)   |   | Includes (i) an  option to purchase 46,990 shares of the Company’s common stock at an exercise  price of $8.37 per share which option was granted upon the consummation of  the Acquisition and is fully vested and immediately exercisable and (ii) an  option to purchase 3,500 shares of the Company’s common stock at an exercise  price of $18.00 per share.  Does not  include an option to purchase 66,500 shares of the Company’s common stock at  an exercise price of $18.00 per share, which is not currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (13)   |   | Includes (i) an  option to purchase 52,500 shares of the Company’s common stock at an exercise  price of $8.37 per share which option was granted upon the consummation of  the Acquisition and is fully vested and immediately exercisable and (ii) an  option to purchase 3,500 shares of the Company’s common stock at an exercise  price of $18.00 per share.  Does not  include an option to purchase 66,500 shares of the Company’s common stock at  an exercise price of $18.00 per share, which is not currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (14)   |   | Includes (i) an  option to purchase 24,000 shares of   the Company’s common stock at an exercise price of $8.37 per share  which option was granted upon the consummation of the Acquisition and is  fully vested and immediately exercisable and (ii) an option to purchase 3,500  shares of the Company’s common stock at an exercise price of $18.00 per  share.  Does not include an option to  purchase 66,500 shares of the Company’s common stock at an exercise price of  $18.00 per share, which is not currently exercisable.                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (15)   |   | Includes an  option to purchase 1,500 shares of the Company’s common stock at an exercise  price of $18.00 per share.  Does not  include an option to purchase 28,500 shares of the Company’s common stock at  an exercise price of $18.00 per share, which is not currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

80

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Except as otherwise noted, the Company believes thateach of the stockholders listed in the table above has sole voting anddispositive power over all shares beneficially owned.  Each of the stockholders of the Company in the table above isparty to a stockholders agreement which governs the transferability and votingof shares of the Company’s common stock held by them.  See “Item 13. Certain Relationships and Related Transactions—Stockholders Agreement.”

 

EQUITY COMPENSATION PLAN INFORMATION.  The following table provides information asof June 30, 2002, with respect to compensation plans under which the Company’scommon stock is authorized for issuance. These compensation plans include: (i) the 2001 Stock Option Plan; and (ii) stock options granted pursuantto stock option agreements.  Both ofthese plans were approved by the Company’s stockholders.

 
| **Plan Category**                                   |   | **Number of Shares to be  Issued Upon Exercise of  Outstanding Options** |   | **Weighted Average  Exercise Price of  Outstanding Options** |   | **Number of Shares  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding Shares  Reflected in Column (a)** |   |
|-----------------------------------------------------|--------|--------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                |   | **(a)**                                                                  |   | **(b)**                                                      |   | **(c)**                                                                                                                                     |   |
| Equity compensation plans  approved by stockholders |   | 772,990                                                                  |   | $                                                            | 15.81  |                                                                                                                                        | 29,000 |   |
|                                                     |        |                                                                          |        |                                                              |        |                                                                                                                                             |        |  |

 

81

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**ITEM 13**.** **      **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

MANAGEMENT AGREEMENT.  Upon thecompletion of the Acquisition, the Company entered into a management agreementwith J.W. Childs Advisors II, L.P., the general partner of J.W. Childs EquityPartners II, L.P., and Halifax Genpar, L.P., the general partner of HalifaxCapital Partners, L.P.  Under theagreement, InSight paid J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P.a transaction fee of $4,500,000 and $1,125,000, respectively, for servicesrendered in connection with the Acquisition. Additionally, J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P.will provide business, management and financial advisory services to theCompany in consideration of (i) an annual fee of $240,000 to be paid to J.W.Childs Advisors II, L.P. and (ii) an annual fee of $60,000 to be paid toHalifax Genpar, L.P.  The Company willalso reimburse such entities for all travel and other out-of-pocket expensesincurred by such entities in connection with their performance of the advisoryservices under the agreement.  Themanagement agreement has an initial term of five years, which term willautomatically renew for one year periods thereafter and is subject to earliertermination by the board of directors of the Company.  Furthermore, the Company and InSight have agreed to indemnify andhold harmless J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. and theiraffiliates, from and against any and all claims, losses, damages and expensesarising out of the Acquisition or the performance by J.W. Childs Advisors II,L.P. and Halifax Genpar, L.P. of their obligations under the managementagreement.

 

STOCKHOLDERS AGREEMENT.  TheCompany, J.W. Childs Equity Partners II, L.P., JWC-InSight Co-invest LLC,Halifax Capital Partners, L.P., Mr. Dupree, management of InSight and all otherholders of capital stock or stock options of the Company have entered into astockholders agreement.  Under thestockholders agreement, the Company and each stockholder have a right of firstrefusal to purchase any stock proposed to be sold by all other stockholders,except J.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC.  Additionally, the stockholders agreementaffords (i) stockholders, other than J.W. Childs Equity Partners II, L.P. andJWC-InSight Co-invest LLC, so-called “tag-along” rights with respect toproposed sales of capital stock of the Company by J.W. Childs Equity PartnersII, L.P. and JWC InSight Co-invest LLC; (ii) J.W. Childs Equity Partners II,L.P. and JWC-InSight Co-invest LLC so-called “drag-along” rights with respectto proposed sales of a majority of the capital stock of the Company and (iii)all stockholders certain registration rights with respect to the capital stockof the Company.  Furthermore, thestockholders agreement contains put and call features on capital stock andstock options held by InSight management which are triggered upon terminationof such individual’s employment with InSight. The stockholders agreement also obligates the Company and thestockholders to take all necessary action to appoint, as directors of theCompany, up to eight nominees designated by J.W. Childs Equity Partners II,L.P. (as would constitute a majority of the Company’s entire board ofdirectors) and two nominees designated by Halifax Capital Partners, L.P.

 

TREATMENT OF OPTIONS IN THE ACQUISITION.  Pursuant to the agreement and plan of merger, upon consummationof the Acquisition, holders of options to purchase InSight common stockreceived the difference between $18.00 and the exercise price of each share ofInSight common stock the holder could have acquired pursuant to the terms ofstock option agreements (less applicable tax withholding) and the options wereterminated.  In addition, Messrs.Plochocki, Croal, Boylan and Madler rolled a portion of their InSight commonstock options into stock options of the Company.  The following table sets forth, for each of the Named ExecutiveOfficers, the number of InSight options rolled over, the total value of InSightoptions rolled over, the number of InSight options cancelled and the totalcancelled option cash proceeds in connection with the Acquisition:

 
| **Name**                   |   | **Number  of Options  Rolled Over** |   | **Total  Rolled Over  Option Value** |    | **Number  of Options  Cancelled** |    | **Total  Cancelled  Option Proceeds** |   |
|----------------------------|--------|-------------------------------------|--------|--------------------------------------|---------|-----------------------------------|---------|---------------------------------------|--------|
| Edward D. Yun              |   | —                              |   | $                                    | —  |                              | —  |                                  | $      | — |   |
| Steven T.  Plochocki       |   | 52,500                              |   |                                 | 505,575 |                              | 122,500 |                                  |   | 1,179,675 |   |
| Marilyn U.  MacNiven-Young |   | —                              |   | —                               |    | 60,000                            |    | 527,300                               |   |
| Thomas V. Croal            |   | 52,500                              |   | 505,575                              |    | 142,500                           |    | 1,520,525                             |   |
| Michael A.  Boylan         |   | 46,990                              |   | 452,514                              |    | 71,880                            |    | 1,055,856                             |   |
| Michael S.  Madler         |   | 24,000                              |   | 231,120                              |    | 56,000                            |    | 539,289                               |   |

 

82

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**ITEM14.        CONTROLSAND PROCEDURES**

 

There were no significant changes in theCompany’s internal controls orother factors that could significantly affect these controls subsequent toSeptember 18, 2002, the date of the Company’s evaluation of them.

 

83

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**PARTIV**

 

**ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULESAND REPORTS ON FORM 8-K**

 

ITEM 15 (a) (1).   FINANCIAL STATEMENTS

 

Included in Part II of this report:

 

Report of IndependentAccountants

Report ofIndependent Public Accountants

ConsolidatedBalance Sheets

ConsolidatedStatements of Operations

ConsolidatedStatements of Stockholders’ Equity

ConsolidatedStatements of Cash Flows

Notes toConsolidated Financial Statements

 

ITEM 15 (a) (2).   FINANCIAL STATEMENT SCHEDULES

 

Report ofIndependent Accountants on Financial Statement Schedules

Report ofIndependent Public Accountants

Schedule II -Valuation and Qualifying Accounts

 

All other schedules have been omitted because they are either notrequired or not applicable, or the information is presented in the consolidatedfinancial statements or notes thereto.

 

84

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ITEM 15 (a) (3).    EXHIBITS

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *2.1                |   | Agreement and Plan of Merger dated as of June 29,  2001, by and among InSight Health Services Holdings Corp., JWCH Merger Corp.  and InSight Health Services Corp. (“InSight”), previously filed and  incorporated herein by reference from InSight’s Current Report on Form 8-K,  filed July 2, 2001.                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *2.2                |   | Amendment No. 1 to Agreement and Plan of Merger  dated as of June 29, 2001, by and among InSight Health Services Holdings  Corp., JWCH Merger Corp. and InSight, previously filed and incorporated by  reference from InSight’s Annual Report on Form 10-K, filed September 14,  2001.                                                                                                                                                                                  |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *2.3                |   | Amendment No. 2 to Agreement and Plan of Merger,  dated as of October 9, 2001, by and among InSight Health Services Holdings  Corp., InSight Health Services Acquisition Corp. and InSight, previously  filed and incorporated herein by reference from InSight’s Current Report on  Form 8-K, filed October 9, 2001.                                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *2.4                |   | Second Amended and Restated Stockholders Agreement,  dated as of February 8, 2002, among InSight Health Services Holdings Corp.,  the JWC Holders (as defined therein), the Halifax Holders (as defined  therein), the Management Holders (as defined therein) and the Additional  Holders (as defined therein), previously filed and incorporated herein by  reference from InSight’s Amendment No. 1 to Registration Statement on Form S-4,  filed on March 29, 2002. |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *2.5                |   | Management Agreement, dated as of October 17, 2001,  by and among J.W. Childs Advisors II, L.P., Halifax Genpar, L.P., InSight  Health Services Holdings Corp. and InSight, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                      |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *3.1                |   | Certificate of Incorporation of InSight Health  Services Holdings Corp., as amended, previously filed and incorporated herein  by reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *3.2                |   | Bylaws of InSight Health Services Holdings Corp.,  previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.1                |   | Indenture with respect to 9 7/8% Senior Subordinated  Notes due 2011 with State Street Bank and Trust Company, N.A., as Trustee,  dated October 30, 2002, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.2                |   | Supplemental Indenture with respect to Wilkes-Barre  Imaging, L.L.C. with State Street Bank and Trust Company, N.A., dated  February 25, 2002, previously filed and incorporated herein by reference from  InSight’s Amendment No. 1 to Registration Statement on Form S-4, filed on  March 25, 2002.                                                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.3                |   | Purchase Agreement, dated October 25, 2001 by and  among InSight, Banc of America Securities LLC and First Union Securities, LLC  with respect to the 9 7/8% Senior Subordinated Notes due 2011, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.4                |   | Registration Rights Agreement, dated October 30,  2001, by and among InSight, Banc of America Securities LLC and First Union  Securities, LLC with respect to the 9 7/8% Senior Subordinated Notes due  2011, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.1               |   | Credit Agreement, dated October 17, 2001, by and  among InSight, Banc of America Securities LLC and First Union Securities,  LLC, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.2               |   | Note Purchase Agreement, dated as of October 17,  2001, by and among InSight Health Services Acquisition Corp., InSight,  InSight Health Services Holdings Corp., the Subsidiary Guarantors (as defined  therein), Banc of America Bridge LLC, and Banc of America Securities LLC,  previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                               |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.3               |   | InSight Health Services Holdings Corp. 2001 Stock  Option Plan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.4               |   | InSight Health Services Holdings Corp. 2001 Stock  Option Plan Stock Option Agreement, dated June 29, 2001, by and between  InSight Health Services Holdings Corp. and Steven T. Plochocki, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                      |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.5               |   | InSight Health Services Holdings Corp. 2001 Stock  Option Plan Stock Option Agreement, dated June 29, 2001, by and between  InSight Health Services Holdings Corp. and Michael A. Boylan, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.6               |   | InSight Health Services Holdings Corp. 2001 Stock  Option Plan Stock Option Agreement, dated June 29, 2001, by and between  InSight Health Services Holdings Corp. and Thomas V. Croal, previously filed  and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.7               |   | InSight Health Services Holdings Corp. 2001 Stock  Option Plan Stock Option Agreement, dated June 29, 2001, by and between  InSight Health Services Holdings Corp. and Michael S. Madler, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.8               |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Steven T. Plochocki, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.9               |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Patricia R. Blank, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.10              |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Michael A. Boylan, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.11              |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Thomas V. Croal, previously filed and incorporated herein  by reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                                                                                                                       |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.12              |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Brian G. Drazba, previously filed and incorporated herein  by reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                                                                                                                       |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.13              |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Michael S. Madler, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.14              |   | Executive Employment Agreement, dated December 27,  2001, between InSight and Marilyn U. MacNiven-Young, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.15              |   | Executive Employment Agreement, dated June 29, 2001,  between InSight and Cecilia A. Guastaferro, previously filed and incorporated  herein by reference from InSight’s Amendment No. 1 to Registration Statement  on Form S-4, filed on March 25, 2002.                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.16              |   | Form of InSight Health Services Holdings Corp.  Performance Based Option Agreement, previously filed and incorporated herein  by reference from InSight’s Registration Statement on Form S-4, filed on December  27, 2001.                                                                                                                                                                                                                                              |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 21                  |   | Subsidiaries of the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

----

*              Previously filed.

 
| ITEM 15 (b). |   | REPORTS ON FORM 8-K. The Company filed a current  report on Form 8-K with the SEC on August 8, 2002, under Item 4 thereof,  reporting a change in the Company’s certifying accountant. |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                        |
| ITEM 15 (c). |   | The Exhibits described above in Item 15(a)(3) are  attached hereto or incorporated by reference herein, as noted.                                                                           |
|         |   |                                                                                                                                                                                        |
| ITEM 15 (d). |   | Not applicable.                                                                                                                                                                             |

 

85

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | INSIGHT HEALTH SERVICES HOLDINGS CORP. |
|--------|----------------------------------------|
|   |                                   |   |
|   | By                                     | /s/  Steven  T. Plochocki |   |
|   |                                   | Steven T. Plochocki,  President and  Chief Executive Officer |   |
|   |                                   |   |
|   | Date:   September 26, 2002        |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **Signature**             |   | **Title**                                                                   |                      | **Date** |
|---------------------------|--------|-----------------------------------------------------------------------------|---------------------------|----------|
|                      |   |                                                                        |                      |     |
| /s/ Steven T. Plochocki   |   |                                                                        | Director, President and   |     | September 26, 2002 |
| Steven T. Plochocki       |   | Chief Executive Officer  (Principal Executive Officer)                      |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ Thomas V. Croal       |   |                                                                        | Executive Vice  President |     | September 26, 2002 |
| Thomas V. Croal           |   | and Chief Financial  Officer  (Principal Financial and  Accounting Officer) |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ Michael N. Cannizzaro |   |                                                                        | Director                  |     | September 26, 2002 |
| Michael N. Cannizzaro     |   |                                                                        |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ Kenneth M. Doyle      |   |                                                                        | Director                  |     | September 26, 2002 |
| Kenneth M. Doyle          |   |                                                                        |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ David W. Dupree       |   |                                                                        | Director                  |     | September 26, 2002 |
| David W. Dupree           |   |                                                                        |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ Steven G. Segal       |   |                                                                        | Director                  |     | September 26, 2002 |
| Steven G. Segal           |   |                                                                        |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ Mark J. Tricolli      |   |                                                                        | Director                  |     | September 26, 2002 |
| Mark J. Tricolli          |   |                                                                        |                      |     |
|                      |   |                                                                        |                      |     |
| /s/ Edward D. Yun         |   |                                                                        | Director                  |     | September 26, 2002 |
| Edward D. Yun             |   |                                                                        |                      |     |

 

86

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**CERTIFICATIONS**

 

I, Steven T. Plochocki, Chief ExecutiveOfficer of InSight Health Services Holdings Corp., certify that:

 

1.               I have reviewed this annual****report on Form 10-K of InSight HealthServices Holdings Corp.;

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report; and

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Registrant as of, and for, the periods presentedin this annual report.

 

Date: September 26, 2002

 
|   | /s/ Steven T. Plochocki |   |
|--------|-------------------------|--------|
|   | Steven T. Plochocki     |   |
|   | Chief Executive Officer |   |

 

87

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**CERTIFICATIONS**

 

I, Thomas V. Croal, Chief Financial Officerof InSight Health Services Holdings Corp., certify that:

 

1.               I have reviewed this annual****report on Form 10-K of InSight HealthServices Holdings Corp.;

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report; and

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Registrant as of, and for, the periodspresented in this annual report.

 

Date: September 26, 2002

 
|   | /s/ Thomas V. Croal     |   |
|--------|-------------------------|--------|
|   | Thomas V. Croal         |   |
|   | Chief Financial Officer |   |

 

EXPLANATORY NOTE REGARDING CERTIFICATIONS:  Representations 4, 5 and 6 (as required byRule 15d-14 of the Securities Exchange Act) of the Certifications set forthabove in this annual report on Form 10-K have been omitted, consistent with thetransition provisions of SEC Exchange Act Release No. 34-46427, because thisannual report on Form 10-K covers a period ending before the effective date ofRule 15d-14.

 

**SUPPLEMENTALINFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TOSECTION 15(d) OF THE SECURITIES EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOTREGISTERED SECURITIES PURSUANT TO THE SECURITIES EXCHANGE ACT**

 

The Registrant has not sent any annual reports to its security holderscovering its last fiscal year, nor has the Registrant sent to its securityholders any proxy statement, form of proxy, or other proxy soliciting materialwith respect to any annual or other meeting of its security holders.

 

88

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**REPORT OF INDEPENDENT ACCOUNTANTS ONFINANCIAL STATEMENT SCHEDULES**

 

To the Board of Directors of InSight Health Services Holdings Corp.:

 

Our audits of the consolidated financial statements referred to in ourreport dated September 18, 2002, appearing in this Annual Report on Form 10-Kalso included an audit of the financial statement schedule listed in Item15(a)(2) of this Form 10-K.  In ouropinion, this financial statement schedule presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |
|--------------------------------|
| Orange County, California      |
| September 18, 2002             |

 

89

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**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

**Thefollowing report is a copy of a report previously issued by Arthur Andersen LLPand has not been reissued by Arthur Andersen LLP.**

 

To the Stockholders ofInSight Health Services Corp.:

 

We have audited in accordance with auditing standards generallyaccepted in the United States the consolidated financial statements of InSightHealth Services Corp. and subsidiaries included in this Form 10–K andhave issued our report thereon dated August 29, 2001.  Our audit was made for the purpose of forming an opinion on thebasic consolidated financial statements taken as a whole.  The schedule listed in the index toconsolidated financial statements is the responsibility of the Company’s managementand is presented for purposes of complying with the Securities and ExchangeCommission’s rules and is not part of the basic financial statements.  The schedule has been subjected to theauditing procedures applied in the audit of the basic financial statements and,in our opinion, fairly states in all material respects the financial datarequired to be set forth therein in relation to the basic financial statementstaken as a whole.

 

ARTHUR ANDERSEN LLP

Orange County,California

August 29, 2001

 

90

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**SCHEDULE II**

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**FOR THE YEARENDED JUNE 30, 2002, THE PERIOD FROM JULY 1, 2001 TO OCTOBER 17, 2001**

**AND FOR THEYEARS ENDED JUNE 30, 2001 AND 2000**

(amounts in thousands)

 
|                                                         |   | **Balance at  Beginning of  Period** |   | **Charges to  Cost and  Expenses** |   | **Charges to  Revenues** |   | **Other** |   | **Balance at  End of  Period** |   |
|--------------------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|--------------------------|--------|-----------|--------|--------------------------------|--------|
| Predecessor                                                  |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| June 30, 2000:                                               |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| Allowance for doubtful  accounts and contractual adjustments |   | $                                    | 17,822 |                               | $      | 2,907                    |   | $         | 57,715 |                           | $      | (56,153 | )(A) | $ | 22,291 |   |
|                                                         |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| June 30, 2001:                                               |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| Allowance for doubtful  accounts and contractual adjustments |   | $                                    | 22,291 |                               | $      | 3,594                    |   | $         | 83,133 |                           | $      | (82,407 | )(A) | $ | 26,611 |   |
|                                                         |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| October 17, 2001:                                            |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| Allowance for doubtful  accounts and contractual adjustments |   | $                                    | 26,611 |                               | $      | 1,110                    |   | $         | 26,740 |                           | $      | (27,963 | )(A) | $ | 26,498 |   |
|                                                         |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| Company                                                      |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| June 30, 2002:                                               |   |                                 |   |                               |   |                     |   |      |   |                           |   |
| Allowance for doubtful  accounts and contractual adjustments |   | $                                    | — |                               | $      | 2,785                    |   | $         | 71,185 |                           | $      | (47,480 | )(A)(B) | $ | 26,490 |   |

 

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(A)  Write-offs of uncollectible accounts.

(B)  In connection with the Acquisition, the Company acquired thevaluation and qualifying accounts related to InSight.

 

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