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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21343
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MEDICAL ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 73-1347577
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 GATEWAY DRIVE, SUITE 150
IRVING, TEXAS 75063
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: 972-580-8999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.002 par value Nasdaq National Market
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 26, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $10,388,213 based
upon the closing price of $2.50 per share on the Nasdaq National Market. As of
February 26, 1999, 6,117,079 shares of the registrant's Common Stock, $0.002 par
value, were issued and outstanding.
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MEDICAL ALLIANCE, INC.
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters To A Vote of Security Holders......... 11
PART II
Item 5. Market For Registrant's Common Stock and Related Stockholder
Matters..................................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 19
PART III
Item 10. Directors and Executives of Company......................... 20
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K.................................................... 26
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PART I
ITEM 1. BUSINESS
GENERAL
Medical Alliance, Inc. (the "Company or "Medical Alliance") provides a
complete range of services used to create temporary surgical environments in
hospitals, surgery centers and physician offices in 42 states. The Company
believes it is the leading provider of physician office based services in the
United States. The Company's services allow physicians to perform an increasing
number of established surgical procedures in the physician's office. These
services include:
- Providing on-site technical personnel and medical equipment on a
scheduled basis;
- Monitoring and documenting preoperative, intraoperative and postoperative
procedures;
- Returning the surgery site to its pre-procedure condition;
- Establishing procedural safety and quality assurance protocols for
procedures;
- Facilitating physician training and qualification; and
- Physician credentialing pursuant to contracts with managed care
organizations.
The Company's services benefit payors, physicians and patients by lowering
costs for surgical procedures, increasing physician productivity, broadening
access to advanced medical technologies and improving patient satisfaction.
The Company is a leader in facilitating the migration of established
surgical procedures and the latest advanced medical technologies from hospitals
and outpatient surgery centers to a lower-cost setting, the physician's office.
An increasing number of minimally invasive procedures are being performed with
local anesthesia in physicians' offices using technologically advanced medical
equipment. The Company currently maintains a network of approximately 3,000
physicians who have utilized the Company's services and has 164 managed care
contracts that in aggregate cover approximately 76 million lives. Currently,
physicians in the Company's network perform over 6,000 procedures monthly using
the Company's services.
The Company provides its services along two primary business lines: medical
surgical and aesthetic elective services. The Company's medical surgical
services allow physicians to perform approximately 25 different office-based
surgical procedures across numerous specialties, including gynecology, podiatry,
urology and otolaryngology. The Company's aesthetic elective services are
utilized primarily by plastic surgeons and dermatologists for laser procedures
such as skin resurfacing, vascular and pigmented lesion treatment, and tattoo
removal. The Company is generally reimbursed for providing its medical surgical
services by third-party payors, including through its contracts with managed
care organizations, and is paid directly by patients for any required copayments
and deductibles. For providing its aesthetic elective services, the Company is
generally paid directly by patients or physicians. None of the Company's net
revenues are derived from Medicare or Medicaid reimbursement.
On October 17, 1996, the Company consummated its initial public offering
(the "IPO") of 2,000,000 shares (and an additional 300,000 shares in connection
with the exercise of the underwriter over-allotment option on November 11, 1996)
of the common stock, par value $.002 per share (the "Common Stock") of the
Company.
RECENT DEVELOPMENTS
On February 18, 1999, the Company, Diagnostic Health Services, Inc. ("DHS")
and a wholly-owned subsidiary of DHS ("Sub") entered into an Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and
into the Company, resulting in the Company becoming a wholly-owned subsidiary of
DHS (the "Merger"). Under the terms of the Merger Agreement, holders of the
Company's Common Stock will receive 1.57 shares of DHS common stock for each
share of the Company's Common Stock held. In connection with the execution of
the Merger Agreement, members of the Boards of
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Directors of the Company and DHS, in their capacities as shareholders,
(individually and on behalf of their affiliates), entered into a Voting
Agreement pursuant to which they agreed to vote their shares of capital stock in
favor of this transaction.
The Merger, which is expected to be accounted for as a
pooling-of-interests, is subject to various conditions precedent, including
without limitation, approval by the shareholders of both companies and various
state and federal regulatory agencies. Closing of this transaction is expected
to occur by the end of the second quarter of 1999.
MARKET OVERVIEW
Medical Surgical. The continued increase in health care costs at a rate
significantly higher than that of overall inflation has caused managed care
companies, indemnity insurers, government agencies and other payors to employ a
variety of strategies designed to reduce the cost and control the utilization of
health care services. In particular, payors have created incentives for health
care providers to deliver high-quality health care services in lower cost
settings. Initially, numerous surgical, diagnostic and other medical procedures
that were traditionally performed in a hospital were transferred to an
outpatient setting, predominantly the outpatient section of a hospital or an
ambulatory surgery center. In continuation of this trend, many established
procedures that are performed in an outpatient setting can now be transferred to
the physician's office because such procedures can be performed at a lower cost
and without the risk of general anesthesia while maintaining the quality of
care. The transfer of such procedures to the physician's office has continued to
accelerate as a result of: (i) the introduction of advanced medical technology
that reduces anethesia requirements and allows physicians to perform a broader
array of office-based procedures, (ii) the development of training programs and
clinical protocols for office-based procedures, and (iii) the patient's desire
to undergo procedures in a more comfortable setting, with reduced risk, pain and
recovery time. The migration of such procedures to the physician's office
benefits payors, providers and patients through lower procedure costs (as
compared to similar procedures performed in a hospital or outpatient surgery
center), increased provider productivity, broader access by physicians and
patients to advanced technologies and treatments, and an increased level of
patient satisfaction.
Aesthetic Elective. The Company believes that the number of aesthetic
elective procedures performed annually in the United States will continue to
grow, primarily due to the development of new technologies for cosmetic
procedures, increased public awareness, shorter recovery times and the aging of
the "baby boom" generation. According to the American Academy of Cosmetic
Surgery Survey, approximately 2.7 million cosmetic procedures were performed in
the United States in 1994. The Company believes that a majority of such
procedures are or can be performed in a physician's office. According to the
American Society of Plastic and Reconstructive Surgeons Survey, patients between
the ages of 35 and 50 represented 41% of the cosmetic procedures performed in
the United States in 1994, and the number of people who say they approve of
cosmetic surgery, either for themselves or others, has increased 50% in the last
decade. According to the ASPRS Survey, approximately 36% of the cosmetic
procedures performed in 1994 were performed in a physician's office. The Company
believes that the vast majority of the aesthetic procedures are performed in an
outpatient setting and that such procedures will increasingly be transferred to
physician's offices. The benefits derived from performing aesthetic procedures
in an office-based setting are similar to those associated with medical surgical
procedures, and include lower procedure costs, increased provider productivity,
broader access by physicians and patients to advanced technologies and
treatments, and an increased level of patient satisfaction.
BUSINESS STRATEGY
The Company's goal is to enhance its position as a provider of services to
the emerging market for physician office-based procedures. The Company intends
to achieve its goal by employing four primary strategies:
Increasing Utilization of the Company's Services in Existing Markets. The
Company plans to expand by facilitating the transfer of an increasing percentage
of outpatient procedures to a physician's office where the
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Company's services may be utilized. The Company intends to achieve such
expansion through: (i) marketing efforts designed to cause existing network
physicians to transfer more outpatient procedures performed by them to their
offices, (ii) the expansion of the Company's physician network, either through
ongoing marketing efforts or the acquisition of mobile medical equipment
providers that maintain relationships with physicians, (iii) the provision of a
full range of applicable services to all physicians in its network and (iv) the
introduction of new services and technologies which will enable additional
procedures to be performed in a physician's office. In addition, the Company
plans to increase the services which are eligible for reimbursement under its
existing managed care contracts and to assist in the establishment of incentives
and/or mandates by payors for their network physicians to perform office-based
procedures using the Company's services.
Expanding the Company's Operations into New Markets. The Company employs a
two-phase strategy to enter new markets. In the initial phase, the Company
offers aesthetic elective services (which are paid for directly by patients or
physicians) while establishing a network of physicians who utilize such
aesthetic elective services and seeks to develop relationships with local
managed care organizations for the provision of medical surgical services. This
initial phase may include acquisitions. In the second phase, the Company
negotiates managed care contracts and introduces its medical surgical services
to such managed care payors' network physicians and seeks to expand the network
of physicians using its medical surgical services. In some cases, the Company
will also seek to capitalize on its managed care relationships in existing
markets by gaining access to such payors' covered lives in markets not currently
served by the Company. This two-phase expansion strategy allows the Company to
utilize a single infrastructure to support both business lines and use cash flow
generated from aesthetic elective services to offset the relatively higher costs
associated with establishing reimbursement of medical surgical services under
third-party payor contracts.
Continuing the Development of Managed Care Contracts. The Company is
designated as a preferred provider for medical surgical services in 164 payor
contracts, including contracts with health plans owned by United HealthCare
Corporation, Prudential Healthcare, CIGNA Healthcare and Blue Cross Blue Shield
entities in seven states, which contracts cover in aggregate approximately 76
million lives. The Company plans to establish additional contractual
relationships with managed care organizations and other third-party payors as a
preferred or mandated provider to physicians of office-based surgical services.
As a preferred provider, the Company negotiates a pre-determined fee schedule
for its services and obtains enhanced access to the payor's physician network in
order to market its services directly to such physicians. The Company believes
that payors contract with the Company because the Company's services provide a
turn-key solution that assists payors in transferring established surgical
procedures to a lower cost setting while maintaining the quality of care.
Establishing Strategic Alliances with Medical Equipment Manufacturers. The
Company has strategic alliances with manufacturers and distributors of medical
equipment that enable it to provide advanced medical technology to physicians
while reducing the risk of ownership to the Company. The Company believes
manufacturers often encounter significant challenges in selling sophisticated
medical equipment to physicians. Physicians are generally reluctant to purchase
such medical equipment because: (i) physicians generally are not able to ensure
sufficient procedure volume to recover the cost of acquiring, using and
maintaining the equipment, (ii) physicians generally do not want to assume the
risk of technological obsolescence, and (iii) such equipment is generally
available to them through hospitals, outpatient surgery centers and mobile
medical equipment providers. The manufacturers benefit from the Company's
ability to introduce new technology to a large number of physicians in a short
period of time thereby increasing the rate of acceptance for the technology.
SERVICES PROVIDED BY THE COMPANY
The Company offers a complete range of services used to create temporary
surgical environments in physicians' offices. The Company facilitates the
migration of established outpatient procedures and advanced
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medical technologies to physicians' offices by providing a broad array of
services which enables physicians to provide high quality, cost-effective
medical care in their offices. The Company's services include the following:
On-Site Technical Personnel. The Company provides on-site technical
personnel who create the temporary surgical environment in a physician's office,
assist the physician in the set-up and operation of medical equipment, and are
present during, and document relevant aspects of, the office-based procedure.
The Company provides training to its field technicians, including intensive
classroom instruction and hands-on training covering various technical and
clinical aspects of office-based procedures as well as the Company's surgical
services.
Provision of On-Site Medical Technology. The Company provides medical
technology and services that include all of the necessary medical equipment and
related instruments, accessories, disposable supplies and technical support for
the Company's network physicians to perform certain office-based procedures. The
Company has organized its field units into the four configurations listed below,
the first two of which are used to provide medical surgical services and the
third of which is used to provide aesthetic elective services while the fourth
is used to provide hospital based services.
Office Based Surgical Unit. The Office Based Surgical Unit may be
configured utilizing the following technologies: CO2 laser, flashlamp pulsed dye
laser, endometrial ablation controller unit, electrosurgical generator, hospital
grade smoke evacuator and related instruments and accessories. This equipment is
used to perform procedures in gynecology, podiatry, urology and otolaryngology.
As of December 31, 1998, the Company had 72 Office Based Surgical Units in
service.
Office Based Endoscopy Unit. The Office Based Endoscopy Unit may be
configured utilizing the following technologies: medical digital camera system,
video monitor, printer and recorder, CO2 and fluid insufflation, related
instruments and accessories, and one of the following endoscopes: hysteroscope,
laparascope or arthroscope. This equipment is used to perform procedures in
gynecology and podiatry. As of December 31, 1998, the Company had 16 Office
Based Endoscopy Units in service.
Office Based Aesthetic Unit. The Office Based Aesthetic Unit may be
configured utilizing the following technologies: KTP/532 laser, Q-Switched
Nd:YAG laser, flashlamp pulsed dye laser, UltraPulse CO2 laser, Erbium Yag laser
and Versapulse laser and related instrumentation and accessories. This equipment
is used to perform procedures in plastic surgery and dermatology. As of December
31, 1998, the Company had 126 Office Based Aesthetic Units in service.
Hospital Based Mobile Unit. The Hospital Based Mobile Unit may be
configured utilizing the following technologies: Laser Lithotripter, Holmium Yag
laser and Ultrasonic Surgical Aspirator and related accessories. This equipment
is used to perform procedures in urology, orthopedics and neurology. As of
December 31, 1998, the Company had 5 Hospital Based Mobile Units.
The physician's office simply contacts the Company to schedule the
procedure for a specific date and time. Then, the Company preregisters the
patient and, if necessary, begins verifying insurance coverage and obtaining any
necessary pre-certifications.
On the day of surgery, the Company sends either an Office Based Surgical
Unit (for gynecological, podiatric, urological, and otolaryngological
procedures), an Office Based Endoscopy Unit (for minimally invasive
gynecological and podiatric procedures), an Office Based Aesthetic Unit (for
cosmetic surgeries and dermatological and podiatric procedures), or a Hospital
Based Mobile Unit. Each Unit is staffed by an experienced technician who
converts a room in the physician's office into a temporary surgical setting
according to recognized clinical protocols. The physician is required to inspect
the set-up and to test and accept all equipment before using it. During the
procedure, the Company's technician remains with the physician to ensure that
the technology functions correctly and that all equipment protocols are
followed. Then, after the procedure, the technician again follows clinical
protocols to return the room to its previous condition or to prepare it for the
next procedure.
Procedure Monitoring and Documentation. The Company's on-site technical
personnel are present during, and document relevant aspects of, the office-based
procedures, including information regarding
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disposables consumed, sterilization procedures performed and adherence to the
Company's established guidelines and standards, including preoperative,
intraoperative and postoperative instructions.
Establishment of Procedural Safety and Quality Assurance Protocols. The
Company has established procedural safety and quality assurance protocols and
standards for the use of its surgical services in physicians' offices that are
set forth in its Quality Protocol, Standards and Guidelines. The Company
utilizes this manual to assist managed care organizations in documenting the
Company's operations to satisfy accrediting organizations' requirements. The
Company's standard field operating procedures include Occupational Safety and
Health Administration safety procedures incorporating the use of personal
protective equipment and sterilization of equipment and provide step-by-step
preoperative, intraoperative and postoperative instructions. The Company
recognizes that there is an absence of documented office-based procedures and
clinical protocols in the physician marketplace, as well as methods for
measuring and documenting compliance therewith. The standards established by the
Company from review of nationally recognized guidelines and standard of care for
hospitals and ambulatory surgery centers serve as guidelines to assist
physicians in satisfying quality requirements set by managed care organizations
and accrediting authorities, as well as in complying with applicable government
regulations and manufacturers' specifications. Accreditation from JCAHO or a
similar independent body has never been sought by the Company. No model for
review currently exists through any accreditation body. However, the Company
plans to develop such a model and seek approval in the future.
Physician Training Seminars. The Company conducts seminars to train
physicians and their staff in the use of medical equipment and related
technology provided by the Company through its services and receives a fee from
physicians for attending such seminars. Since 1993, approximately 4,000
physicians have participated in approximately 250 of the Company's seminars. The
Company developed and introduced its physician training seminars in response to
the high demand for physician training created by the introduction of new
medical technology. The Company retains highly qualified physician faculty to
conduct these seminars, which present such topics as medical laser physics and
safety, light and tissue interaction, clinical applications and treatment
parameters, and include procedure demonstrations, as well as hands-on laboratory
sessions. Physician participants in the Company's seminars generally receive a
peer reference manual, video tapes, patient awareness and marketing information,
and a certificate that documents completion of the Company's training seminar.
Physician Credentialing. The Company performs physician credentialing on
behalf of managed-care payors, utilizing standards established by its Medical
Director which are based upon standards generally recognized by the medical
profession. The Company's services are offered only to those practitioners who
have provided documentation of certified training and/or competence relevant to
the procedures to be performed, including use of the technology provided in
conjunction with such services. For certain procedures, the Company requires
physicians to maintain hospital or surgery privileges relative to such
procedures, including the use of any technology for performance thereof.
Physician credentialing information is maintained by the Company and reviewed
periodically by the Medical Director and other key personnel.
Aesthetic Surgery Network ("ASN"). The Company's objective of the Aesthetic
Surgery Network is to provide to subscribers of benefit plans access to a
credentialed quality network of plastic surgeons and dermatologists that will
offer the latest treatment options and a discount for covered cosmetic elective
procedures that are not typically covered by health insurance. The various
procedures performed by ASN physicians will include laser treatment involving
facial wrinkles, birthmarks, port wine stains, tattoos and skin lesions.
REIMBURSEMENT AND PAYMENT
For its services, the Company charges fees that are payable by either the
patient, the physician, a managed care organization or an indemnity insurance
company. For medical surgical services rendered by the Company pursuant to a
contract with a managed care organization, the Company bills the managed care
payor based upon a pre-determined fee schedule. For medical surgical services
that are reimbursed under an indemnity plan, the Company generally bills and
collects 20% of the Company's charges from the patient at
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the time services are rendered and bills the patient's insurance indemnity
carrier for the remaining balance. For aesthetic elective services, generally
the Company charges on a per-case basis and its fees are payable by the patient
or physician. None of the Company's net revenues is derived from Medicare or
Medicaid reimbursement.
SALES AND MARKETING
The Company currently operates in 42 states. The Company has divided its
service area into six regions ("Regions") encompassing an aggregate of 18
districts ("Districts"). The Company maintains an office in each District. Each
Region is managed by a Regional Vice President or Regional Manager who is
responsible for meeting the Company's sales and operational objectives within
his or her Region(s).
Within most Districts, the Company employs a District Manager, a District
Operations Manager, a District Sales Representative and one or more field
technicians. The District Manager is responsible for the overall development of
the market. The District Operations Manager is responsible for operations
management and daily operations within the field operations. District Sales
Representatives are designated to oversee the marketing and development of a
particular product line or specialty focus within their respective designated
geographic area. Field technicians specialize in a particular clinical and/or
technical area within their respective designated geographic area and are
assigned office based field units for use in their assigned specialties.
SUPPLIERS OF MEDICAL TECHNOLOGY
In conjunction with its other services, the Company offers a wide range of
medical technology for use in performing office-based procedures. Such medical
technology is obtained directly from manufacturers and distributors of medical
equipment. Prior to obtaining any medical equipment, the Company performs
extensive research on existing and developing medical technology in order to
determine the optimal equipment to acquire. In order to enhance its access to
medical technology, the Company seeks to establish strategic alliances with
manufacturers and distributors of medical equipment generally during the
development stage of a selected product. Such strategic alliances may include
agreements based upon per-procedure or other revenue sharing arrangements. In
certain circumstances, the Company may seek to become the exclusive mobile
provider for a certain technology.
INFORMATION SYSTEMS
In 1995 the Company began implementation of an information system that
includes a wide area network to link its Districts to its corporate office and
information databases. The system is decentralized and allows for data
acquisition by field personnel within each District and maintenance of all data
captured at a central corporate database that is accessible on a real-time
basis. The Company has completed the first five of six implementation phases
which included the installation of a network driven by multiple file servers, an
in-house voice mail system, software to link the Districts to the corporate
billing and collection system, the installation of portable computers to all
field personnel, and implementation that included the integration of the
Company's general ledger and financial reporting systems. The last phase is
related to the installation of an electronic data storage system which will be
completed after the Year 2000 issues and concerns are fully addressed. See Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation of physicians, other health care providers, managed care
organizations and other third-party payors. Health care regulation affects the
Company's operations both directly and indirectly. Many states require
regulatory approval, including certificates of need, before establishing or
expanding certain types of health care facilities or offering certain health
care services. Several states in which the Company operates prohibit the
corporate practice of medicine except by professional medical corporations or
associations. The Company provides only nonphysician services
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and does not exercise influence or control over the practice of medicine by the
physicians to whom it provides its services. In addition, the laws of many
states prohibit physicians from splitting fees with non-physicians, and some
states have promulgated statutes that prohibit the solicitation, payment,
receipt or offering of any direct or indirect remuneration for referral of
patients and that prohibit referrals by physicians for designated health
services to entities with which they have a financial relationship. The Company
believes that its current and planned activities are in material compliance with
applicable laws and regulation as currently interpreted. There can be no
assurance, however, that a review of the Company's business by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company. In addition, there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future, which change could adversely affect the Company's
operations, financial condition, business opportunities or future expansion.
The manufacturers of medical devices utilized by the Company are subject to
extensive regulation by the FDA. Failure of the manufacturer of such devices to
comply with FDA regulations could result in the loss of approval by the FDA of
such medical devices. In addition, physicians in the Company's network are
subject to significant federal and state regulation. The ability of the Company
to operate profitably will depend in part upon its network physicians, the
manufacturers of its medical devices and its third-party payors obtaining and
maintaining all necessary licenses, certificates of need and other approvals,
and operating in compliance with applicable health care regulations.
The Company's services involve the handling of chemical and biological
substances and regulated waste materials, some of which may be considered
contaminated, hazardous or toxic. The Company is subject to state and federal
laws that regulate labor and environmental matters such as the handling and
disposal of regulated medical wastes, the release of pollutants and contaminants
into the air and water, and the protection of employees who may be exposed to
blood or other potentially infectious materials including those which may
contain bloodborne pathogens such as hepatitis B virus. The Company is also
subject to federal and state laws relating to business conduct and general
employee matters. The Company believes that it is in material compliance with
applicable laws.
COMPETITION
The Company competes with companies that offer medical equipment to
physicians' offices on either a rental or a fee-for-service basis and with
hospitals and surgery centers that provide comparable surgical services. The
Company also competes with other providers in the health care industry for
access to technology, relationships with third-party payors and relationships
with physicians. The Company believes the trend toward managed care could
increase the competition to obtain contracts with third-party payors. The health
care industry is highly competitive and is subject to continuing changes in the
manner in which such services are provided and the manner in which providers are
selected and paid. Some of the Company's competitors have substantially greater
financial and other resources than the Company. In addition, competitors of the
Company could obtain exclusive rights to provide mobile surgical services for
products that the Company currently offers or expects to offer.
The market for aesthetic elective services is highly competitive. The
Company believes that the heightened interest in aesthetic procedures among
physicians and patients, the development of advanced medical technologies to
perform aesthetic procedures and the industry practice of requiring immediate
cash payment for such services will create increased competition in this
segment. Competition in the provision of medical surgical services may also
increase because these services are becoming more accepted by physicians,
patients and third-party payors and the medical equipment used in providing such
services is readily available from various sources.
The Company believes that competition in the provision of services to
create temporary office-based surgical environments is based on the price,
quality, breadth and availability of services. The Company considers its
comprehensive high quality services, trained on-site technical personnel, "per
case" billing for certain services and strategic relationships with payors and
medical device manufacturers to be important factors in enabling it to compete
effectively. The Company believes that it is the only national provider of
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medical surgical services for use in performing office-based procedures that has
developed contracts with managed care organizations.
INSURANCE
The Company maintains professional, general and product liability insurance
in amounts deemed appropriate by management. The Company carries an aggregate of
$10 million of general and public liability insurance coverage, which covers
premises, operations and product liability, and a $2 million professional
liability insurance policy.
EMPLOYEES
As of December 31, 1998, the Company had 149 employees, including 99
employees in field operations.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This Form 10-K contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in the
Company's most recently filed registration statement. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements.
Uncertainty of Market Acceptance. There can be no assurance that any of the
Company's existing or future services will gain or maintain market acceptance
among physicians, patients and third-party payors. The Company believes that
market acceptance of office-based procedures, including those performed using
the Company's services, depends upon various factors including: (i) the
Company's ability to provide evidence to the medical community of the safety and
efficacy of the office-based procedures and the corresponding benefits to
payors, physicians and patients, (ii) the willingness of physicians to perform
and patients to undergo procedures in the physician's office which have
traditionally been performed in a hospital or outpatient facility, (iii) the
willingness of physicians to perform and patients to undergo procedures under
local rather than under general anesthesia, (iv) the willingness of physicians
to utilize the Company's services rather than perform office-based procedures
utilizing their employees and medical equipment, and (v) the continued
availability of third-party reimbursement for certain procedures performed using
the Company's services.
Acquisition, Obsolescence and Regulation of Advanced Technology. The
Company's future success will depend in large part on the Company's ability to
provide advanced medical technology to physicians. The medical device industry
is characterized by rapid and significant technological change. The acquisition
of medical technology requires substantial expenditures, and there can be no
assurance that the Company will be successful in identifying, acquiring and
receiving timely delivery of technology for which sufficient demand will exist
and that such technology will not become obsolete during its anticipated product
life cycle. Currently, there are alternative technologies to those offered by
the Company. Such technologies may gain broader market acceptance, which could
have a material adverse effect on the Company's operating results or financial
condition. There can be no assurance that the company's strategy to obtain
medical technology through relationships with medical equipment manufacturers
and distributors will be successful or, if successful, that such relationships
can be maintained. In addition, the medical equipment utilized by the Company
requires approval by the Food and Drug Administration (the "FDA"), and there can
be no assurance that such medical equipment will receive or retain FDA approval
for desired current and future applications. The loss of any FDA approval for
such equipment could have a material adverse effect on the Company's operating
results or financial condition, as the Company would be unable to utilize such
equipment
8
<PAGE> 11
in the provision of its services. Furthermore, the medical equipment industry
has been characterized by extensive litigation regarding patents and other
intellectual property rights. There can be no assurance that manufacturers or
distributors of medical equipment utilized by the Company will obtain or retain
patents or other intellectual property rights related to the equipment used by
the Company. See "-- Regulation of and Change in the Health Care Industry" and
"Business -- Business Strategy -- Establishing Strategic Alliances with Medical
Equipment Manufacturers."
Uncertainty of Acquisitions. The Company's strategy has included and will
continue to include growth through acquisitions. There can be no assurance that
the Company will be able to successfully identify, complete or integrate any
acquisition. In addition, there can be no assurance that any future acquisition
will not have a material adverse effect upon the Company's operating results or
financial condition, particularly during the period in which the operations of
the acquired business are being integrated into the Company. Furthermore, the
Company's ability to make acquisitions may depend upon its ability to obtain
financing, and there can be no assurance that financing will be available to the
Company on acceptable terms, or at all.
Competition. The market for aesthetic elective services is highly
competitive due to: (i) low barriers to entry, (ii) low capital requirements,
and (iii) high profitability. Currently, the Company believes its competition is
primarily comprised of small, locally based equipment rental companies.
Competition in the provision of medical surgical services may also increase
because these services are becoming more accepted by physicians, patients and
third-party payors and because the medical equipment used in providing such
services is readily available from various sources. The Company competes with
companies that offer medical equipment to physicians' offices on either a rental
or a fee-for-services basis, and with hospitals and surgery centers that provide
comparable surgical services. The Company also competes with other providers in
the health care industry for access to technology, relationships with
third-party payors and relationships with physicians. Any of these competitors
may have greater financial and other resources than the Company. The health care
industry is highly competitive and is subject to continuing changes in the
manner in which health care services are provided and the manner in which
providers are selected and paid. There can be no assurance that competition will
not adversely affect the Company's operating results or its ability to maintain
or increase net revenues.
Reimbursement Risk. The Company generally receives payment directly from
the patient or physician for its aesthetic elective services. In those instances
where payment is not received at the time of the service, the Company will
invoice the responsible party. If the invoice is not paid, the account is
subject to write-off as an uncollectible account. The Company relies almost
exclusively on third party payors for payment for its medical surgical services.
If the claim is invoiced to a noncontracted payor, (i.e., a noncontracted
managed care plan or an indemnity plan), the claim is subject to denial by the
payor. Denial of reimbursement may occur, among other reasons, because of the
claim examiner's lack of understanding regarding the Company's services or the
lack of a contractual arrangement with a managed care company. To the extent any
third party payor ultimately fails to recognize or accept Company's services as
being reimbursable, the Company may not be able to collect fees for its
services. In addition, the health care industry is experiencing a trend toward
cost containment, and third-party payors are seeking to reduce the cost and
control the utilization of health care services and to negotiate reduced payment
schedules with service providers. Reduced payment schedules could result in
lower revenues for the Company. There can be no assurance that the Company will
be able to negotiate satisfactory arrangements with managed care organizations
or other third-party payors under such conditions, or at all. See
"Business -- Business Strategy -- Continuing the Development of Managed Care
Contracts."
Dependence on Key Personnel. The Company's future performance is
substantially dependent upon the continued services of its senior management and
other key personnel. Because the Company has a relatively small number of
employees, its dependence on retaining its employees is particularly
significant. The Company's success will depend, in part, on its ability to
attract and retain qualified management and professional personnel. In addition,
there can be no assurance that the Company's current employees will continue to
work for the Company. The loss of the services of one or more of the Company's
key employees could adversely affect the Company's operating results or
financial condition. Further, the Company's growth in revenue has resulted, to a
significant degree, from the hiring and training of new field personnel. The
9
<PAGE> 12
Company's continued growth will depend, in part, on its ability to attract and
retain high quality field and other personnel. The Company may need to grant
additional stock options to key employees and to provide similar or other forms
of incentive compensation to attract and retain key personnel.
Fluctuations in Quarterly Results; Volatility of Stock Price. The Company's
quarterly revenues and operating results have varied significantly in the past
and may continue to do so in the future. As a result, the Company's stock price
may by subject to significant volatility, particularly on a quarterly basis.
Quarterly revenues and operating results will depend upon, among other factors:
(i) seasonal demand for the Company's services, (ii) the timing of new service
introductions by the Company, (iii) the timing of regulatory and third-party
reimbursement approvals, (iv) the timing of acquisitions or entry into new
markets, and (v) the timing of expenditures for medical equipment. A shortfall
in revenues from anticipated levels, changes in general conditions in the
economy or the health care industry, or other developments affecting the Company
or its competitors, could cause the market of the Common Stock to fluctuate
substantially.
Regulation of and Change in Health Care Industry. The health care industry
is subject to extensive federal and state regulation. The Company's services
generally are not directly subject to health care rules or regulations, although
such rules and regulations apply to the equipment provided to physicians by the
Company and to the medical personnel utilizing the Company's services and
products and therefore may indirectly affect the Company's business. In
addition, promulgation of new laws and regulations, or changes in or
reinterpretations of existing laws or regulations, may directly or indirectly
affect the Company's business, operating results or financial condition.
Further, the Company's services involve the handling of chemical and biological
substances, thereby subjecting the Company to certain labor and environmental
regulations. See "-- Hazardous Materials." There can be no assurance that a
review of the Company's operations by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company.
The manufacturers of medical equipment utilized by the Company are subject
to extensive regulation by the FDA. Failure of such manufacturers to obtain FDA
approval for new technologies which the Company wishes to offer may adversely
affect the Company's plans for future expansion. In addition, failure of medical
equipment manufacturers to comply with FDA regulations could result in the loss
of approval by the FDA of medical equipment utilized by the Company, which could
adversely affect the Company's operating results or financial condition.
Subject to certain statutory exceptions, physicians who have a financial
relationship with an entity providing health services are prohibited by federal
law (the "Stark II Legislation") from referring or admitting patients to that
entity for the furnishing of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state health
care programs. Possible sanctions for violations for the Stark II Legislation
include civil monetary penalties, exclusion from the Medicare and Medicaid
programs, and forfeiture of all amounts collected in violation of such
prohibition. Federal law generally prohibits certain activities under Medicare
and Medicaid programs (the "Fraud and Abuse Statutes"). Violations of
anti-kickback legislation are felonies punishable by monetary fines, civil and
criminal penalties and exclusion from participation in Medicare or Medicaid
programs. Several states in which the Company operates prohibit the corporate
practice of medicine except by professional medical corporations or
associations. Several states in which the Company operates also prohibit
physicians from splitting fees with non-physicians. Although the Company has
attempted to structure its business relations with physician groups to comply
with the Stark II Legislation, the Fraud and Abuse Statutes, and the state
corporate-practice-of-medicine and fee-splitting laws, there can be no assurance
that such laws will ultimately be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future which could have a material adverse effect on the Company's operating
results or financial condition.
While the Company does not currently derive any of its net revenues from
Medicare or Medicaid programs, and therefore it is not subject to such federal
legislation, there can be no assurance in the future that: (i) future
legislation may not be expanded to include health care services other than those
subject to Medicare or Medicaid reimbursement, (ii) the Company will not derive
net revenues from Medicare or
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<PAGE> 13
Medicaid reimbursements, or (iii) managed care providers with which the Company
has contracts will not contract with Medicare or Medicaid.
Certain of the states in which the Company currently operates or may
operate in the future have laws which prohibit physicians who have financial
relationships with an entity that provides health care services from referring
patients to that entity and that prohibit arrangements which provide
remuneration to physicians in order to induce the referral of business. Possible
sanctions for violation of these laws include civil monetary penalties,
forfeiture of amounts collected in violation of such laws and the requirement
that the Company discontinue the prohibited activity. Although the Company
believes it has structured its existing business relations with physician groups
to comply with these laws, there can be no assurance that such laws will be
interpreted in a manner consistent with the Company's practices. Such laws in
states where the Company may conduct operations in the future could prohibit the
Company from structuring its business relations with physician groups in the
same manner in which it conducts its current operations. Accordingly, such
prohibitions could adversely affect the future growth of the Company.
In addition, there can be no assurance that the regulatory environment in
which the Company operates will not change significantly in the future, which
change could adversely affect the Company's operations, financial condition,
business opportunities or future expansion. As consolidation among physician
provider groups continues and provider networks continue to be created,
purchasing decisions may shift to persons with whom the Company has not had
prior contact. There can be no assurance that the Company will be able to
maintain its physician, payor or manufacturer relationships under such
circumstances. See "Risk of Acquiring Advanced Technology," "-- Competition" and
"Business -- Government Regulation."
ITEM 2. PROPERTIES
The Company leases 18 offices within its service area that range in size
from approximately 200 to 10,000 square feet under agreements with varying terms
and renewal options, and annual rents ranging from $2,700 to $134,487. The
Company currently leases approximately 10,000 square feet for its corporate
executive offices located in Irving, Texas. The lease agreement for its
corporate headquarters stipulates annual rental payments that increase from
$124,525 to $134,487 during the term of the lease, which expires in 2002.
ITEM 3. LEGAL PROCEEDINGS
As of date hereof, there are no legal proceedings pending against or
involving the Company that, in the opinion of management, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock began trading on the Nasdaq National Market on October 11,
1996 under the symbol "MAII". The initial public offering price was $11.00 per
share. The high and low closing sales prices (excluding retail markup, markdowns
and commissions) for the period October 11, 1996 to December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fourth Quarter
October 11, 1996 to December 31, 1996..................... $12.50 $10.75
Fiscal year ended December 31, 1997
First Quarter............................................. $16.25 $11.00
Second Quarter............................................ 10.00 3.38
Third Quarter............................................. 4.00 3.38
Fourth Quarter............................................ 5.00 3.43
Fiscal year ended December 31, 1998
First Quarter............................................. $ 4.13 $ 3.25
Second Quarter............................................ 4.25 3.12
Third Quarter............................................. 3.87 2.00
Fourth Quarter............................................ 2.56 1.50
</TABLE>
As of February 26, 1999, approximately 6,117,079 shares of Common Stock
were outstanding and held by approximately 104 holders of record.
The Company did not pay cash dividends on its Common Stock during 1996,
1997 and 1998. The current policy of the Company's Board of Directors is to
retain any future earnings to provide funds for the operation and expansion of
the Company's business. Consequently, the Company does not anticipate that cash
dividends will be paid on the Company's Common Stock in the foreseeable future.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated. The Company's statement of
operations data for each of the years in the five year period ended December 31,
1998 and its balance sheet data as of December 31, 1994, 1995, 1996, 1997, and
1998 are derived from the Company's financial statements which have been audited
by PricewaterhouseCoopers LLP, independent certified public accountants. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues.................................. $5,262 $11,177 $17,350 $18,821 $16,132
Costs and Expenses:
Salaries and benefits....................... 2,005 3,721 5,137 8,353 7,328
Selling, general, and administrative........ 1,817 3,620 5,510 7,857 6,306
Depreciation and amortization............... 293 719 1,595 3,152 2,337
Provision for uncollectible accounts........ 781 1,885 3,408 3,871 1,690
------ ------- ------- ------- -------
Total costs and expenses............ 4,896 9,945 15,650 23,233 17,661
------ ------- ------- ------- -------
Operating income (loss)............. 365 1,232 1,700 (4,412) (1,529)
Other (income) expense:
Interest income and other, net.............. (6) 12 (172) (778) (814)
Interest expense............................ 179 247 270 111 59
------ ------- ------- ------- -------
Income (loss) before income taxes... 192 973 1,602 (3,745) (774)
Income tax expense (benefit).................. -- 395 683 (848) --
------ ------- ------- ------- -------
Net income (loss)................... $ 192 $ 578 $ 919 $(2,897) $ (774)
====== ======= ======= ======= =======
Net income (loss) applicable to common
stock....................................... $ 117 $ 311 $ 832 $(2,897) $ (774)
====== ======= ======= ======= =======
Earnings (loss) per share (basic)............. $ .06 $ .15 $ .26 $ (.48) $ (.12)
====== ======= ======= ======= =======
Earnings (loss) per share (diluted)........... $ .06 $ .11 $ .26 $ (.48) $ (.12)
====== ======= ======= ======= =======
Weighted average number of common shares
outstanding (basic)......................... 1,844 2,117 3,215 6,061 6,214
Weighted average number of common shares
outstanding (diluted)....................... 3,290 3,690 3,559 6,061 6,214
Dividends declared on convertible preferred
stock....................................... $ 75 $ 87 $ 87 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 109 $1,409 $20,537 $14,903 $14,378
Working capital............................... 126 1,913 22,094 17,575 16,434
Total assets.................................. 2,698 6,443 30,708 26,505 24,521
Total debt and capital lease obligations...... 1,566 2,354 355 489 240
Retained earnings (accumulated deficit)....... (1,105) (562) 393 (2,504) (3,278)
Total shareholders' equity.................... 123 2,431 26,085 23,678 22,554
</TABLE>
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company commenced operations in Oklahoma in August 1989 by providing
medical surgical services to gynecologists in their offices. The Company's
initial focus was to develop contracts with managed care organizations and other
third-party payors and to expand into new markets. By the end of 1991, the
Company had operations in 14 states. The Company continued to expand its range
of services, and introduced during 1993 its second business line by offering
aesthetic elective services. During 1997, the Company started to offer hospital
based services when the Stone Treatment Center of New England acquisition was
completed. Currently, the Company provides medical surgical, aesthetic elective
and hospital based services in 42 states to a network of approximately 3,000
physicians.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries and benefits expense.......................... 38.1 33.3 29.6 44.4 45.4
Selling, general and administrative expense............ 34.5 32.4 31.8 41.7 39.1
Depreciation and amortization.......................... 5.6 6.4 9.2 16.7 14.5
Provision for uncollectible accounts................... 14.8 16.9 19.6 20.6 10.5
Operating income (loss)................................ 6.9 11.0 9.8 (23.4) (9.5)
Income tax expense (benefit)........................... -- 3.5 3.9 (4.5) --
Net income (loss)...................................... 3.7 5.2 5.3 (15.4) (4.8)
</TABLE>
Years Ended December 31, 1998 and 1997
Net Revenues. Net revenues decreased from $18.8 million for the year ended
December 31, 1997, to $16.1 million for the year ended December 31, 1998, a
decrease of $2.7 million or 14%. Total net patient service revenue per case
decreased from $213 for the year ended December 31, 1997, to $208 for the year
ended December 31, 1998, a decrease of $5 per case or 2%.
Medical surgical net revenues decreased from $9.9 million for the year
ended December 31, 1997, to $7.7 million for the year ended December 31, 1998, a
decrease of $2.2 million or 22%. This decrease was attributable to the medical
surgical net revenue per case decreasing from $274 for the year ended December
31, 1997, to $236 for the year ended December 31, 1998, a decrease of $38 or
14%. The lower net revenue per case is a result of a shift from noncontracted to
contracted payors related to the insurance billable business. Revenues related
to contracted payors typically yield a lower reimbursement per case, but also
provide a revenue dollar that is of a higher quality and is more collectible.
Contracted revenues as a percentage of insurance billable revenues increased
from 51% for the year ended December 31, 1997, to 70% for the year ended
December 31, 1998, an increase of 19%. The remainder of the medical surgical net
revenue decrease of $1 million is related to a case volume decrease. Medical
surgical procedures decreased from 36,088 for the year ended December 31, 1997,
to 32,478 for the year ended December 31, 1998, a decrease of 3,610 or 10%.
Aesthetic elective net revenues remained flat at $8.4 million for the year
ended December 31, 1997 and 1998. Procedure volume decreased from 49,731 for the
year ended December 31, 1997, to 44,490 for the year ended December 31, 1998, a
decrease of 5,241 or 11%. The procedure volume decrease was mainly attributable
to the Company performing 3,460 hair removal procedures during the year ended
December 31, 1997. The hair removal product line was discontinued during the
fourth quarter of 1997 due to the ineffectiveness of the product, and the
significant amount of infrastructure cost associated with it. The procedure
volume decrease was offset by an increase in the aesthetic elective net revenue
per case which increased from $169 for the year ended December 31, 1997, to $188
for the year ended December 31, 1998, an
14
<PAGE> 17
increase of $19 or 11% which is due to a change in the product line mix within
the aesthetic elective line of business.
The remainder of the net revenue decrease was attributable to a decrease in
revenues related to Company sponsored seminars, which decreased from $525,000
for the year ended December 31, 1997, to $117,000 for the year ended December
31, 1998, a decrease of $408,000 or 78%. During the year ended December 31,
1997, the Company derived seminar revenues related to the hair removal product
line which was discontinued in the fourth quarter of 1997.
Salaries and Benefits Expense. Salaries and benefits expense decreased from
$8.4 million for the year ended December 31, 1997, to $7.3 million for the year
ended December 31, 1998, a decrease of $1.1 million or 13%. This decrease was
primarily attributable to a decrease in the total number of employees from 171
as of December 31, 1997, to 149 as of December 31, 1998, a decrease of 22 or
13%. Twenty-five (25) account representatives were added in the first quarter of
1997 to accommodate growth anticipated, but not realized, from the national
rollout of the Softlight laser for hair removal. Furthermore, the Company
incurred a $250,000 charge during the second quarter of 1997 for a restructuring
of its field operations. This charge included expenses related to severance
packages, relocation allowances, and recruitment fees as a result of the
restructuring and realignment of personnel.
Selling, General and Administration. Selling, general and administrative
expense decreased from $7.9 million for the year ended December 31, 1997, to
$6.3 million for the year ended December 31, 1998, a decrease of $1.6 million or
20%. The following items were attributable to the decrease in selling, general,
and administrative expenses:
Vehicle expense decreased from $1.7 million for the year ended December 31,
1997, to $1.2 million for the year ended December 31, 1998, a decrease of
$500,000 or 29%. This decrease is due mainly to the Company having a reduced
fleet of vehicles of 97 at December 31, 1998 compared to 125 at December 31,
1997 along with a vehicle lease buyout of the entire fleet which occurred during
the third quarter of 1998.
Professional fees decreased from $956,000 for the year ended December 31,
1997, to $443,000 for the year ended December 31, 1998, a decrease of $513,000
or 54%. The Company incurred a $250,000 charge during the second quarter of 1997
for a restructuring of its field operations. This charge included expenses
related to the divestiture of certain delivery vans and certain medical
equipment currently under operating leases and legal/professional fees related
to accounts receivable and managed care initiatives.
Leasing expense decreased from $707,000 for the year ended December 31,
1997, to $507,000 for the year ended December 31, 1998, a decrease of $200,000
or 28%. During 1997 there was $133,000 in leasing of video conferencing
equipment which was used for the Company sponsored seminars related to the hair
removal product line.
The remainder of the decrease is related to the downsizing of the Company's
infrastructure and the Company's overall effort in reducing various costs on the
corporate and field operation levels.
Selling, general and administrative expense as a percentage of net revenues
decreased slightly from 41.7% for the year ended December 31, 1997, to 39.1% for
the year ended December 31, 1998. Without the $250,000 nonrecurring charge,
selling, general and administrative expense as a percentage of net revenues
would have been 40.4% for the year ended December 31, 1997.
Depreciation and Amortization. Depreciation and amortization decreased from
$3.2 million for the year ended December 31, 1997, to $2.3 million for the year
ended December 31, 1998, a decrease of $900,000 or 28%. This decrease was due
mainly to a change in useful lives on certain medical equipment from three to
five years as well as the establishment of residual values on such equipment
based on historical experience which was effective January 1, 1998 and a
nonrecurring charge of $150,000 for the second quarter of 1997, related to the
redeployment and or disposition of certain medical equipment in selected
markets. The change in useful lives had an effect of reducing depreciation
expense and decreasing the net loss by approximately $803,000 for the year ended
December 31, 1998.
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<PAGE> 18
Provision for Uncollectible Accounts. Provision for uncollectible accounts
decreased from $3.9 million for the year ended December 31, 1997, to $1.7
million for the year ended December 31, 1998, a decrease of $2.2 million or 56%.
As a percentage of net patient service revenue, provision for uncollectible
accounts decreased from 21.2% for the year ended December 31,1997 to 10.6% for
the year ended December 31, 1998. During the second quarter of 1997, the Company
recorded a $1.2 million charge to increase reserves for uncollectible accounts.
These additional reserves were necessary to offset a significant shift in the
payment trends experienced from certain third party payors during the second
quarter of 1997. Without the charge of $1.2 million, provision for uncollectible
accounts as a percentage of net patient service revenue would have been 14.6%
for the year ended December 31, 1997. This 4% improvement is primarily
attributable to the Company's new processes including scheduling,
preregistration, and preverification.
Operating Loss. As a result of the items discussed above, operating loss
decreased from $4.4 million for the year ended December 31, 1997, to a loss of
$1.5 million for the year ended December 31, 1998, a decrease of $2.9 million.
Interest Income & Other, Net. Interest income and other, net increased
slightly from $778,000 for the year ended December 31, 1997 to $815,000 for the
year ended December 31, 1998, an increase of $37,000.
Income Tax Benefit. For the year ended December 31, 1997, the Company
recorded a tax benefit of $848,000. For the year ended December 31, 1998, the
Company did not record a current or deferred tax benefit due to the Company's
continuing operating loss trend and the uncertainty of utilization of net
operating loss carryforwards in future periods.
Net Loss. As a result of the items discussed above, the Company's net loss
decreased from $2.9 million for the year ended December 31, 1997, to a loss of
$774,000 for the year ended December 31, 1998, a decrease of $2.1 million.
Years Ended December 31, 1997 and 1996
Net Revenues. Net revenues increased from $17.4 million for the year ended
December 31, 1996, to $18.8 million for the year ended December 31, 1997, an
increase of $1.4 million or 8%. This increase was primarily attributable to
growth in procedure volume, which increased from 68,585 for the year ended
December 31, 1996, to 85,819 for the year ended December 31, 1997, an increase
of 17,234 or 25%. Medical surgical procedures increased from 26,769 for the year
ended December 31, 1996, to 36,088 for the year ended December 31, 1997, an
increase of 9,319 or 35%. Aesthetic elective procedures increased from 41,816
for the year ended December 31, 1996, to 49,731 for the year ended December 31,
1997, an increase of 7,915 or 19%.
The net patient service revenue per case decreased from $248 for the year
ended December 31, 1996, to $213 per case for the year ended December 31, 1997,
a decrease of $35 or 14%. This decrease was attributable to a change in case mix
to include a larger percentage of aesthetic elective procedures. The net revenue
per case for aesthetic elective procedures was $169 during 1997, compared to net
revenue per case for medical surgical procedures of $274 during 1997.
Salaries and Benefits Expense. Salaries and benefits expense increased from
$5.1 million for the year ended December 31, 1996, to $8.4 million for the year
ended December 31, 1997, an increase of $3.3 million or 65%. This increase was
primarily attributable to an increase in the total number of employees from 118
as of December 31, 1996, to 171 as of December 31, 1997, an increase of 45%. The
Company added scheduling coordinators and preverification personnel during the
first quarter of 1997 as a continuation of its efforts to reduce provisions for
uncollectible accounts. In addition, each medical surgical district added a
district operations manager to relieve the district manager of operational
responsibility. Furthermore, the Company incurred a $250,000 nonrecurring charge
during the second quarter of 1997 for a restructuring of its field operations.
This charge included expenses related to severance packages, relocation
allowances, and recruitment fees as a result of the restructuring and
realignment of personnel. Finally, (25) twenty five technicians were added in
the first quarter to accommodate growth anticipated, but not realized, from the
national rollout of the Softlight laser for hair removal. Salaries and benefits
expense as a percentage of net revenues increased from 29.6% to 44.4% due to the
reasons discussed above.
16
<PAGE> 19
Selling, General and Administration. Selling, general and administrative
expense increased from $5.5 million for the year ended December 31, 1996, to
$7.9 million for the year ended December 31, 1997, an increase of $2.4 million
or 44%. The following items were attributable to the increase in selling,
general, and administrative expenses:
Vehicle expense increased from $1.1 million for the year ended December 31,
1996 to $1.7 million for the year ended December 31, 1997, an increase of
$600,000 or 55%. This increase was primarily due to an increase in field
personnel from 77 as of December 31, 1996 to 109 as of December 31, 1997, an
increase of 32 or 42%.
Repair and maintenance expense increased from $610,000 for the year ended
December 31, 1996 to $966,000 for the year ended December 31, 1997, an increase
of $356,000 or 58%. This increase was due primarily to the addition of annual
service contracts on medical equipment that was previously covered under
manufacturers warranty.
Communications expense increased from $584,000 for the year ended December
31, 1996 to $944,000 for the year ended December 31, 1997, an increase of
$360,000 or 62%. This increase was primarily due to an increase in field
personnel and communication costs related to the Company's wide area network
linking its district's offices to its corporate office and information database.
Professional fees increased from $288,000 for the year ended December 31,
1996, to $956,000 for the year ended December 31, 1997, an increase of $668,000
or 232%. This increase was primarily due to the additional costs related to
being a publicly held company. Furthermore, the Company incurred a $250,000
nonrecurring charge during the second quarter of 1997 which included
professional fees related to accounts receivable and managed care initiatives.
Occupancy costs increased from $156,000 for the year ended December 31,
1996, to $327,000 for the year ended December 31, 1997, an increase of $171,000
or 110%. This increase was primarily attributable to field offices added in
January of 1997.
Depreciation and Amortization. Depreciation and amortization increased from
$1.6 million for the year ended December 31, 1996, to $3.2 million for the year
ended December 31, 1997, an increase of $1.6 million or 100%, resulting from the
addition of approximately $3.3 million in new medical equipment during the year
ended December 31, 1997.
Provision for Uncollectible Accounts. Provision for uncollectible accounts
increased from $3.4 million for the year ended December 31, 1996, to $3.9
million for the year ended December 31, 1997, an increase of $500,000 or 15%. As
a percentage of net patient service revenue, provision for uncollectible
accounts increased from 20.0% for the year ended December 31,1996 to 21.2% for
the year ended December 31, 1997. During the second quarter of 1997, the Company
recorded a $1.2 million charge to increase reserves for uncollectible accounts.
These additional reserves were necessary to offset a significant shift in the
payment trends experienced from certain third party payors during the second
quarter of 1997. Without the charge of $1.2 million, provision for uncollectible
accounts as a percentage of net patient service revenue would have been 14.6%
for the year ended December 31, 1997. This decrease is primarily attributable to
the Company's new processes including scheduling, preregistration, and
preverification.
Operating Income (Loss). As a result of the items discussed above,
including but not limited to the additional infrastructure added for
anticipated, but not realized, growth, operating income decreased from $1.7
million for the year ended December 31, 1996, to a loss of $4.4 million for the
year ended December 31, 1997, a decrease of $6.1 million.
Interest Income & Other, Net. Interest income and other, net increased from
$172,000 for the year ended December 31, 1996, to $778,000 for the year ended
December 31, 1997, an increase of $606,000 or 352%. This increase was due mainly
to interest being earned on the initial public offering proceeds for the full
calendar year of 1997.
Income Tax Provision. Income tax provision decreased from $683,000 for the
year ended December 31, 1996 to a benefit of $848,000 for the year ended
December 31, 1997, a decrease of $1.5 million. The
17
<PAGE> 20
Company's effective tax rate decreased from 42.6% for the year ended December
31, 1996, to a benefit of 22.6% for the year ended December 31, 1997 (See Note 9
to the Notes to Consolidated Financial Statements)
Net Income(Loss). As a result of the items discussed above, the Company's
net income decreased from $919,000 for the year ended December 31, 1996, to a
loss of $2.9 million for the year ended December 31, 1997, a decrease of $3.8
million. As a percentage of net revenues, net income decreased from 5.3% for the
year ended December 31, 1996, to a loss of 15.4% for the year ended December 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through 1993, the Company's operating expenses
significantly exceeded its net revenues, resulting in an accumulated retained
deficit of approximately $1.3 million as of December 31, 1993. From 1994 until
March 31, 1997, the Company recorded positive earnings, which resulted in
retained earnings of $431,290 as of March 31, 1997. As of December 31, 1998, the
Company has an accumulated retained deficit of $3.3 million, due to losses
incurred during 1997 and 1998. Until October 1996, the Company funded its
operations primarily through the private placement of equity securities, bank
borrowings and cash provided by operations. Prior to its initial public
offering, which was completed on October 11, 1996, the majority of the capital
raised by the Company had been raised from the private placement of $2.2 million
of equity securities, including $750,000 raised in July 1992 and approximately
$1.5 million raised in November 1995. The Company obtained a $2.0 million credit
facility from Nations Bank of Texas, N.A. ("NationsBank") in June 1995. This
facility was composed of several tranches bearing interest rates ranging from
prime plus 0.5% to prime plus 1.5%. The net proceeds from such facility were
used to retire outstanding debt and to purchase medical equipment. The Company's
facility with NationsBank was increased to $4.3 million in March 1996. The
NationsBank debt was paid off in full during October 1996 with a portion of the
net proceeds from the Company's initial public offering.
Net cash provided by (used in) operating activities were $2.5 million,
($1.6 million), and $2.6 million for the years ended December 31, 1996, 1997 and
1998, respectively. For its investing activities, the Company consumed $3.8
million, $3.8 million, and $2.5 million for the years ended December 31, 1996,
1997 and 1998, respectively, primarily for the purchase of medical equipment and
acquisitions of other companies. Capital expenditures were $3.2 million, $3.3
million, and $2.6 million for the years ended December 31, 1996, 1997 and 1998,
respectively. Net cash provided by (used in) financing activities were $20.4
million, ($197,000), and ($599,000) for the years ended December 31, 1996, 1997
and 1998, respectively. The cash provided from financing activities in 1996 is
primarily from the net proceeds from the Company's initial public offering of
2.3 million shares of Common Stock in October 1996.
The Company estimates that its total capital expenditures will be
approximately $1.8 million in 1999. The Company believes that the current cash
reserves and cash provided by operating activities will be sufficient to fund
its operations through 2000. However, there can be no assurance that the Company
will not require additional financing in the near future, and that if needed, it
will be available on terms satisfactory to the Company, or at all.
YEAR 2000 COMPLIANCE
The Company is in the process of evaluating its Year 2000 ("Y2K")
compliance status. The Company is testing its information technology, such as
software regarding Y2K compliance and is seeking certification of Y2K compliance
from its third party vendors. Because its software and information technology
come from third party vendors, who would be called on to replace or upgrade
non-compliant software, the Company does not expect that its Y2K-related
expenditures with respect to information technology will be significant. Based
upon the Company's current evaluation of the Y2K compliance of its information
technology, its polling of third party vendors, and its intention to replace or
upgrade any non-compliant information technology, the Company does not
anticipate that there will be a material Y2K problem with respect thereto.
In addition, certain of the Company's medical equipment contains embedded
technology that could have Y2K-related problems. The Company has polled the
manufacturers and vendors of such equipment regarding Y2K compliance and, based
on such polling, all equipment known to the Company to be non-Y2K compliant
18
<PAGE> 21
has been replaced or upgraded. The Company does not expect to conduct
independent tests of all its medical equipment to assess Y2K compliance. Based
upon the Company's actions in preparation for Y2K, and responses received from
its third-party vendors, the Company does not anticipate that there will be a
material Y2K problem with respect to its equipment. Furthermore, because its
equipment comes from third party vendors, which are being requested to replace
or upgrade all non-compliant equipment, the Company does not expect that its
Y2K-related expenditures with respect to embedded technology will be
significant.
Notwithstanding the foregoing, there can be no assurances (a) that the
representations provided by third party vendors with respect to Y2K compliance
will be accurate, or (b) that the Company will have any recourse against such
vendors if the representations prove to be inaccurate. A Y2K-related failure of
the Company's medical equipment and/or information technology could have a
material adverse effect on the Company and its results of operations.
Furthermore, there can be no assurances that Y2K-related failure caused by third
parties, such as utility providers, transportation companies or others, will not
have a material adverse effect on the Company. The Company is currently in the
process of preparing contingency plans related to possible Y2K-related failure
caused by third parties.
Based on the Company's process of evaluating its Y2K compliance status, the
Company has currently expended an estimated $10,000 related to addressing Y2K
issues. The Company expects the total costs in regard to addressing Y2K issues
to be an estimated $50,000. The Company also anticipates the project to be
substantially completed by the third quarter of 1999. Furthermore, there can be
no assurance that all Y2K issues will be addressed which could result in
additional costs for the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is listed under Item 14(a) and begins
at page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 22
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF COMPANY
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul R. Herchman.......................... 42 Chairman of the Board and Chief Executive
Officer
Gary B. Hill.............................. 50 President, Chief Operating Officer and
Director
David A. Kallenberger, M.D................ 49 Medical Director and Director
Tony J. LeVecchio......................... 52 Director
Thomas A. Montgomery...................... 42 Director
Leon Pritzker............................. 76 Director
Jim Silcock............................... 48 Director
</TABLE>
PAUL R. HERCHMAN is a co-founder of the Company and has served as Chairman
of the Board, Chief Executive Officer since its inception in 1989. Mr. Herchman
served as President from 1989 until December 1997. From 1986 to 1989, Mr.
Herchman was a sales representative for Sun Medical, Inc., a distributor of
medical equipment. Prior thereto, Mr. Herchman served in sales positions with
Chesebrough-Ponds USA Co. in its Hospital Products Division, from 1984 to 1986,
and with Johnson & Johnson in its Ortho Pharmaceutical Division, from 1982 to
1984. Mr. Herchman received a Bachelor of Science degree from Texas Tech
University.
GARY B. HILL has served as President and Chief Operating Officer of the
Company since December 1997. Mr. Hill has served as a director of the Company
since February 1998. From January 1994 to April 1996, Mr. Hill served as
President of the North Texas Division of Columbia/HCA. Prior thereto, Mr. Hill
was Senior Vice President of Region II for Galen Health Care Inc. and Columbia
from 1992 to 1994. From 1976 to 1992, Mr. Hill served in various capacities with
Humana Inc., most recently as Vice President for its hospital and insurance
operations in central Kentucky and Cincinnati. Mr. Hill received a Bachelor of
Science degree from the University of North Alabama.
DAVID A. KALLENBERGER, M.D. is a co-founder of the Company and has served
as a director and as the Medical Director since its inception in 1989. Dr.
Kallenberger is a practicing physician specializing in obstetrics and
gynecology, and has been practicing at Integris Baptist Medical Center in
Oklahoma City, Oklahoma since 1981. Dr. Kallenberger serves as a Clinical
Professor in the Department of Obstetrics/ Gynecology at the University of the
Oklahoma Health Science Center and as a Program Director of the Henry G. Bennett
Fertility Institute at Integris Baptist Medical Center. Dr. Kallenberger
received his Medical Doctorate degree from The University of Oklahoma.
TONY J. LEVECCHIO has been a director of the Company since 1997 and an
advisor to the Company since 1990. Mr. Levecchio is a member of the Audit
Committee, the Compensation Committee, and the Incentive Plan Committee. Mr.
LeVecchio is President of The James Group, a business advisor firm, where he has
been a principal since 1989. Prior to The James Group, Mr. LeVecchio was Senior
Vice President and Chief Financial Officer for VHA Southwest Inc., a regional
health care division of Voluntary Hospitals of America, Inc. Mr. LeVecchio
received a Bachelor of Economics degree and a Master of Business Administration
degree from Rollins College in 1968 and 1969, respectively.
THOMAS A. MONTGOMERY is a co-founder of the Company and has served as a
director of the Company since 1989. In addition, Mr. Montgomery is a member of
the Audit Committee, the Compensation Committee, and the Incentive Plan
Committee. Mr. Montgomery is a partner of Montgomery, Baggett & Drews, L.L.P.,
an accounting firm. From December 1982 to December 1990, Mr. Montgomery served
in various capacities with Arthur Andersen & Co., and as the Senior Tax Manager
of the Enterprise Group from
20
<PAGE> 23
1985 to 1990. Mr. Montgomery received a Bachelor of Business Administration
degree from Texas Tech University and a Master of Science degree from Texas Tech
University.
LEON PRITZKER has been a director of the Company since 1989. Since 1990 Mr.
Pritzker has been self-employed as a management consultant. From 1985 to 1990,
Mr. Pritzker served as the Executive Vice President of Campbell Taggart, Inc.
From 1967 to 1984, Mr. Pritzker served in various capacities with Anheuser-Busch
Companies, Inc., most recently as Director, Management Systems Group. Mr.
Pritzker is a fellow of the American Statistical Association and received a
Bachelor of Science degree from College of the City of New York and a Master of
Arts degree from the University of Pennsylvania.
JIM SILCOCK has been a director of the Company since February 1996 and is a
member of the Audit, Compensation and Incentive Plan Committees. Mr. Silcock has
served as a general partner of Mapleleaf Capital Ltd., a general partner of
Sunwestern Associates III, a general partner of Sunwestern Investment Fund III,
a venture capital fund, since 1988 and as a general partner of T.V.P. Associates
Limited, the general partner of Texas Venture Partners, a venture capital fund,
since 1984. Mr. Silcock received a Bachelor of Arts from Dartmouth College and a
Master of Business Administration from the Amos Tuck School of Business
Administration at Dartmouth College.
Section 16(a) Beneficial Ownership Reporting Compliances
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the "SEC").
Such persons are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to fiscal year 1998, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
officers, directors and persons who own more than 10% of a registered class of
the Company's equity securities have been complied with.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Board of
Directors. The Board meets on a regularly scheduled basis to review significant
developments affecting the Company and to act on matters requiring approval of
the Board. It also holds special meetings when an important matter requires
action by the Board between scheduled meetings. The Board met seven (7) times
and acted by unanimous written consent six (6) times during 1998. During 1998,
each member of the Board participated in at least 75% of all Board and
applicable committee meetings held during the period for which he was a
director.
The Board has three standing committees: the Audit Committee, the
Compensation Committee and the Incentive Plan Committee. The functions of these
committees, their current members, and the number of meetings held during the
fiscal year ending December 31, 1998, are described below.
Audit Committee. The Audit Committee makes recommendations to the Board
regarding the appointment of independent auditors, reviews the plan and scope of
any audit to the Company's financial statements and reviews the Company's
significant accounting policies and related matters. The Audit Committee is
comprised of Messrs. Montgomery, LeVecchio and Silcock. The Audit Committee met
one (1) time during 1998.
Compensation Committee. The Compensation Committee makes recommendations to
the Board regarding the compensation of executive officers. The Compensation
Committee is comprised of Messrs. LeVecchio, Montgomery, and Silcock. The
Compensation Committee did not meet during 1998.
Incentive Plan Committee. The Incentive Plan Committee was established in
1997 and administers the Company's 1994 Amended and Restated Long-Term Incentive
Plan (the "Incentive Plan"). The Incentive Plan Committee is comprised of
Messrs. Montgomery, LeVecchio and Silcock. The Incentive Plan Committee met four
(4) times and acted by unanimous written consent three (3) times during 1998.
21
<PAGE> 24
The Company does not have a nominating committee. The functions customarily
performed by a nominating committee are performed by the Board as a whole.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and the Company's only other executive officer earning at
least $100,000, (the "Named Executive Officers") based on salary and bonus
earned during 1996, 1997 and 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------------
------------------------------------------ SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------ ------ -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Herchman................... 1998 $200,000 0 0 0 $5,240(1)
Chairman of the Board and Chief 1997 155,510 0 0 1,000 5,700
Executive Officer 1996 145,000 $36,000 0 11,708 5,700
Gary Hill(3)....................... 1998 200,000 0 0 151,540 5,420(2)
President & Chief Operating
Officer....................... 1997 16,667 0 0 98,460 350
</TABLE>
- ---------------
(1) Represents a $350 per month automobile allowance paid to Mr. Herchman, and
$1,040 of annual premiums on a life insurance policy, of which Mr.
Herchman's spouse is the beneficiary, paid by the Company on Mr. Herchman's
behalf.
(2) Represents a $350 per month automobile allowance paid to Mr. Hill and $1,220
of annual premiums on a life insurance policy, of which Mr. Hill's spouse is
the beneficiary, paid by the Company on Mr. Hill's behalf.
(3) Mr. Hill's employment term with the Company began in December 1997.
OPTION GRANTS IN 1998
The following table provides information related to options granted to the
Named Executive Officers during 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
POTENTIAL REALIZED VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM (1)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------------
GRANTED IN 1998 SHARE DATE 5% 10%
---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gary B. Hill................... 151,540 54% $4.06 12/02/03 $209,245 $474,705
</TABLE>
- ---------------
(1) The dollar amounts in these columns represent potential value that might be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming that the market price of the Common Stock appreciates
in value from the date of grant at the 5% and 10% annual rates prescribed by
regulation, and therefore are not intended to forecast possible future
appreciation, if any, of the price of the Common Stock.
(2) The exercise price of each option was equal to the fair market value of the
Common Stock on the date of the grant.
22
<PAGE> 25
AGGREGATE OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul R. Herchman.............................. 77,710 1,000 12,344 0
Gary B. Hill.................................. 62,500 187,500 0 0
</TABLE>
- ---------------
(1) These values assume a valuation of $2.00 per share at December 31, 1998.
Value is calculated based on the difference between the option price and
$2.00 multiplied by the number of shares of Common Stock underlying the
options.
Compensation of Directors
It is the policy of the Company that directors who are not employees of the
Company ("Independent Directors") receive $500 for each Board meeting attended.
All directors of the Company are reimbursed for travel, lodging and other
out-of-pocket expenses in connection with their attendance at Board and
committee meetings. Under the terms of the Incentive Plan, so long as the
Company is a reporting company subject to the terms of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), Independent Directors will receive
an option to purchase 2,500 shares of Common Stock upon his or her initial
election to the Board and an option to purchase 5,000 shares of Common Stock at
each annual meeting of the shareholders thereafter while he or she continues to
serve as a director of the Company. Such options will be non-qualified stock
options, will have an exercise price equal to the fair market value of the
Common Stock at the date of grant, will become exercisable one-third on each of
the first, second and third anniversaries thereof, and will expire ten years
from the date of grant.
Employment Contracts and Termination of Employment and Change of Control
Agreements
The Company entered into an Employment Agreement with Paul Herchman, dated
as of January 1, 1998, (the "Herchman Agreement"). The Herchman Agreement may be
terminated by the Company upon (12) twelve months prior notice and may be
terminated by Mr. Herchman upon (3) three months prior notice. The Herchman
Agreement provides that Mr. Herchman receive a base salary of $200,000 per year
and is eligible to receive bonuses based upon the Company's financial
performance. The Herchman Agreement requires Mr. Herchman to maintain the
confidentiality of the Company's proprietary information during his employment
and thereafter and prohibits Mr. Herchman from competing with the Company during
his employment and for a period of one year thereafter.
On February 17, 1999, the Company entered into a Severance Agreement with
Paul Herchman (the"Severance Agreement") that takes effect only upon the
consummation of the Merger with DHS or Sub as described under Part I, Item 1.
Business -- Recent Developments. Pursuant to the Severance Agreement, Mr.
Herchman will resign as Chief Executive Officer of the Company and act as the
President of the Company's Office Division for a period of six months following
the closing of the Merger. In addition to the current employee benefits he
currently receives under the Herchman Agreement, Mr. Herchman will receive a
salary during his employment as President of the Office Division and,
thereafter, will receive severance payments over a two-year period. Mr.
Herchman, to the extent he has available time, will assist the Company, as
reasonably requested by the Chief Executive Officer of DHS, during that two year
period.
The Company has entered into an Employment Agreement with Gary Hill, dated
as of December 2, 1997, (the "Hill Agreement"). The Hill Agreement may be
terminated by the Company upon (12) twelve months prior notice and may be
terminated by Mr. Hill upon (3) three months prior notice. The Hill Agreement
provides that Mr. Hill receive a base salary of $200,000 per year and is
eligible to receive bonuses based upon the Company's financial performance. The
Hill Agreement requires Mr. Hill to maintain the confidentiality of the
Company's proprietary information during his employment and thereafter and
prohibits Mr. Hill from competing with the Company during his employment and for
a period of one year thereafter.
23
<PAGE> 26
Compensation Committee Interlocks and Insider Participation
During 1998, the Compensation Committee made recommendations to the Board
regarding compensation of the Company's executive officers and the Board
approved all of such recommendations. The Compensation Committee was comprised
of Tom Montgomery, Tony LeVecchio and Jim Silcock during 1998. No executive
officer of the Company served as a member of the Compensation Committee or
similar committee or board of directors of any other entity which an executive
officer thereof served on the Compensation Committee or Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of Common Stock as of February 26, 1999, by (i) all persons known to
the Company to be the beneficial owner of 5% or more of the Common Stock, (ii)
each director of the Company, (iii) the chief executive officer and each of the
Company's other most highly compensated executive officers whose total annual
compensation for 1998 based on salary and bonus earned during 1998 exceeded
$100,000 (the "Named Executive Officers") and (iv) all the Company directors and
executive officers as a group. This table does not include shares of Common
Stock that may be purchased pursuant to options not exercisable within 60 days
of February 26, 1999. All persons listed have sole voting and investment power
with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF SHARES
AND DIRECTORS BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1)
- ------------------------ --------------------- ---------------------
<S> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Paul R. Herchman(2).................................... 563,966 9.1%
Gary B. Hill(3)........................................ 77,500 1.3%
David A. Kallenberger, M.D.(4)......................... 197,942 3.2%
Tony J. LeVecchio(5)................................... 42,648 0.7%
Thomas A. Montgomery(6)................................ 244,626 4.0%
Leon Pritzker(7)....................................... 82,954 1.4%
Jim Silcock(8)......................................... 1,001,693 16.4%
All named executive officers and directors as a group
(7 persons)(9)....................................... 2,214,329 35.1%
OTHER 5% SHAREHOLDERS
Peter K. Hilal, M.D.(10)............................... 769,662 12.6%
Mapleleaf Capital, Ltd(11)............................. 740,830 12.1%
Patrick Rivelli(12).................................... 1,010,593 16.5%
Satana Corporation(13)................................. 494,645 8.1%
Dimensional Fund Advisors, Inc.(14).................... 364,100 6.0%
</TABLE>
- ---------------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options or warrants that are currently
exercisable or exercisable within 60 days are deemed to be outstanding and
to be beneficially owned by the person or entity holding such options.
(2) Includes 77,710 shares underlying currently exercisable options to purchase
Common Stock and 15,610 shares underlying currently exercisable warrants to
purchase Common Stock. The business address of Mr. Herchman is 2445 Gateway
Drive, Suite 150, Irving, Texas 75063.
(3) Includes 62,500 shares underlying currently exercisable options to purchase
Common Stock.
(4) Includes 30,915 shares underlying currently exercisable options to purchase
Common Stock.
(5) Includes 833 shares underlying currently exercisable options to purchase
Common Stock and 1,100 shares owned by Mr. LeVecchio's spouse.
(6) Includes 2,500 shares underlying currently exercisable options to purchase
Common Stock, 7,805 shares of Common Stock held by Mr. Montgomery's
spouse's profit sharing plan and 46,610 shares of
24
<PAGE> 27
Common Stock held by the profit sharing plan of Montgomery/Jessup L.L.P.,
of which Mr. Montgomery is a partner. As a partner of Montgomery/Jessup
L.L.P., Mr. Montgomery may be deemed to be the indirect owner of the shares
beneficially owned by Montgomery/Jessup L.L.P.'s profit sharing plan by
virtue of his authority to make investment decisions regarding the voting
and disposition of such shares.
(7) Includes 2,500 shares underlying currently exercisable options to purchase
Common Stock.
(8) Includes 740,830 shares beneficially owned by Mapleleaf Capital, Ltd.,
which includes 2,500 shares underlying currently exercisable options to
purchase Common Stock; 135,649 shares beneficially owned by Sunwestern
Cayman 1988 Partners, and 125,214 shares beneficially owned by Sunwestern
Investment Fund III, all of which are affiliates of Mr. Silcock. Mr.
Silcock may be deemed to be the indirect beneficial owner of shares
beneficially owned by such entities by virtue of his authority to make
investment decisions regarding the voting and disposition of such shares.
Mr. Silcock disclaims beneficial ownership of the shares owned by Mapleleaf
Capital, Ltd., Sunwestern Cayman 1988 Partners and Sunwestern Investment
Fund III. Mr. Silcock's business address is 12221 Merit Drive, Suite 935,
Dallas, Texas 75251.
(9) Includes the shares referenced in footnotes(2)-(8).
(10) Includes 24,826 shares beneficially owned by Hilal Capital, LP, 332,900
shares beneficially owned by Peter K. Hilal, M.D., 79,036 shares
beneficially owned by Hilal Capital QP, LP, 103,862 shares beneficially
owned by Hilal Capital Partners LLC and 229,038 shares beneficially owned
by Hilal Capital Management LLC both of which are affiliates of Mr. Hilal.
Mr. Hilal may be deemed to be the indirect beneficial owner of shares
beneficially owned by such entities by virtue of his authority to make
investment decisions regarding the voting and disposition of such shares.
The business address of Mr. Hilal is 60 East 42nd Street, Suite 1946, New
York, New York 10165.
(11) Includes 2,500 shares underlying currently exercisable options to purchase
Common Stock. The business address for Mapleleaf Capital, Ltd is 12221
Merit Drive, Suite 935, Dallas, Texas 75251.
(12) Includes 740,830 shares beneficially owned by Mapleleaf Capital, Ltd.,
which includes 2,500 shares underlying currently exercisable options to
purchase Common Stock; 135,649 shares beneficially owned by Sunwestern
Cayman 1988 Partners; and 125,214 shares beneficially owned by Sunwestern
Investment Fund III, all of which are affiliates of Mr. Rivelli. Mr.
Rivelli may be deemed to be the indirect beneficial owner of shares
beneficially owned by such entities by virtue of his authority to make
investment decisions regarding the voting and disposition of such shares.
Mr. Rivelli disclaims beneficial ownership of the shares owned by Mapleleaf
Capital, Ltd., Sunwestern Cayman 1988 Partners and Sunwestern Investment
Fund III. The business address for Mr. Rivelli is 12221 Merit Drive, Suite
935, Dallas, Texas 75251.
(13) The business address of Satana Corporation is National Plaza 2, Suite 102,
Amarillo, Texas 79101.
(14) The business address of Dimensional Fund Advisors, Inc. is 1299 Ocean
Avenue, 11th Floor, Santa Monica, California 90401.
Change in Control
Pursuant to the Voting Agreement entered into by the members of the Board
of Directors of the Company in connection with the Merger, which is described
under Part 1, Item 1. Business-Recent Developments, the members of the Board
have agreed, in their capacities as Shareholders (individually and on behalf of
their affiliates), to vote their Common Stock in favor of the Merger. The
consummation of the Merger will result in the Company becoming a wholly owned
subsidiary of DHS and will, therefore, result in a change in control of the
Company.
25
<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective September 11, 1998, the Company entered into an arrangement
whereby the Company would agree to repurchase 242,000 shares of Common Stock
pledged by Paul Herchman to a banking institution. The stock was pledged to the
bank to collaterize payment on a $170,000 loan between Paul Herchman and the
bank. The pledged stock would be repurchased by the Company upon request from
the bank if the loan is in default.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
(1) Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Consolidated Notes to Financial Statements.................. F-7
</TABLE>
(2) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts.
(3) Exhibits
The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item 14.
(b) Reports on Form 8-K:
No report on Form 8-K was filed on behalf of the Registrant during the last
quarter of the Company's 1998 fiscal year.
26
<PAGE> 29
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Asset Purchase Agreement, dated March 18, 1996 between
the Company and Maasai Inc.(1)(5)
2.2 -- Asset Purchase Agreement, dated June 10, 1996 between the
Company and Mobile Laser Services, Inc.(1)(5)
2.3 -- Asset Purchase Agreement, dated as of January 21, 1997
among Stone Treatment Center of New England, Inc.,
Gregory A. Mercurio, Vincent A. Catallozzi, M.D.,
Alexander Calenda, M.D., Gerald Marsocci, M.D., Joseph C.
Cambio, M.D. and the Company.(6)(5)
2.4 -- Agreement and Plan of Merger, dated as of February 18,
1999 between Diagnostic Health Services, Inc. and the
Company.(3)
3.1 -- Amended and Restated Articles of Incorporation of the
Company.(1)
3.2 -- Amended and Restated Bylaws of the Company.(1)
4.1 -- Specimen of Company Common Stock Certificate.(1)
4.2 -- Warrant to Purchase 15,651 shares of Common Stock of the
Company dated July 27, 1995 between the Company and Paul
R. Herchman.(1)
4.3 -- Warrant to Purchase 23,416 shares of Common Stock of the
Company dated August 15, 1993 between the Company and
Columbia General Corporation.(1)
4.4 -- Warrant to Purchase 2,810 shares of Common Stock of the
Company dated October 17, 1993 between the Company and
Robert J. Matthews, M.D.(1)
4.5 -- Warrant to Purchase 2,342 shares of Common Stock of the
Company dated May 31, 1994 between the Company and Shelly
Burks.(1)
4.6 -- Warrant to Purchase 1,873 shares of Common Stock of the
Company dated May 31, 1994 between the Company and Thomas
A. Montgomery.(1)
4.7 -- Warrant to Purchase 6,556 shares of Common Stock of the
Company dated May 31, 1994 between the Company and Thomas
A. Montgomery.(1)
10.1 -- Agreement between the Company and Coherent Medical
Group.(1)
10.2 -- Master Lease Agreement dated July 20, 1995 between the
Company and Cabot Medical Corporation.(1)
10.3 -- Master services Agreement dated June 3, 1996 between the
Company and Cosmetic Technologies International.(1)
10.4 -- Joint Venture Agreement dated March 25, 1996 between the
Company and Coherent-AMT Inc.(1)
10.5 -- Medical Alliance, Inc. 1994 Amended and Restated
Long-Term Incentive Plan.(2)(4)
10.6 -- Employment Agreement between the Company and Paul
Herchman.(1)(4)
10.7 -- Employment Agreement between the Company and Gary
Hill.(7)(4)
10.8 -- Employment Agreement between the Company and Kevin
O'Brien.(1)(4)
10.9 -- Employment Agreement between the Company and Michael G.
Wallace.(1)(4)
10.10 -- Lease Agreement.(1)
10.11 -- Strategic Alliance Agreement, dated as of December 19,
1996, by and between Laserscope and the Company.(6)
10.12 -- Exclusive Provider Agreement, dated as of January 21,
1997, by and between Thermolase Corporation and the
Company.(6)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 -- Strategic Alliance Agreement, dated as of January 1,
1997, by and between Valleylab, Inc. and the Company.(6)
10.14 -- Exclusive Provider Agreement, dated as of February 9,
1997, by and between Imagyn Medical, Inc. and the
Company.(6)
10.15 -- Paul Herchman Severance Agreement.(3)
10.16 -- Voting Agreement, dated as of February 18, 1999, by and
between Diagnostic Health Services, Inc., MAI Acquisition
Corp., and Medical Alliance, Inc.(3)
12.1 -- Subsidiaries of the Company.(1)
23.1 -- Consent of PricewaterhouseCoopers LLP.(3)
27.1 -- Financial Data Schedule.(3)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-09815) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
form S-8 (No. 333-18545) and incorporated herein by reference.
(3) Filed herewith.
(4) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(5) Schedules and similar attachments to this Exhibit have not been filed
herewith. The Company agrees to furnish a copy of any such omitted schedules
and attachments to the Commission upon request.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, and incorporated herein by
reference.
28
<PAGE> 31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Consolidated Notes to Financial Statements.................. F-7
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1997 and 1998.............. F-16
</TABLE>
All other schedules are not submitted because they are not applicable or
not required or because the information is included in the consolidated
financial statements.
F-1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Medical Alliance, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Medical Alliance, Inc. and Subsidiaries ("the Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 18, 1999
F-2
<PAGE> 33
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $14,902,578 $14,377,781
Accounts receivable, less allowance for doubtful accounts
of $2,554,705 and $1,001,851, respectively............. 2,715,446 1,711,558
Prepaid expenses and other current assets................. 1,290,038 1,090,736
Refundable federal and state income taxes................. 1,253,910 205,297
Deferred taxes............................................ -- 488,918
----------- -----------
Total current assets.............................. 20,161,972 17,874,290
Property and equipment, net................................. 5,473,485 5,868,543
Intangible assets, net of amortization of approximately
$159,346, and $265,934, respectively...................... 869,080 778,232
----------- -----------
Total assets...................................... $26,504,537 $24,521,065
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 976,150 $ 356,509
Accrued expenses.......................................... 1,197,785 789,238
Capital lease obligations................................. 248,650 202,593
Deferred revenue.......................................... 163,976 92,139
----------- -----------
Total current liabilities......................... 2,586,561 1,440,479
Capital lease obligations, net of current maturities...... 239,929 37,336
Deferred taxes............................................ -- 488,918
----------- -----------
Total liabilities................................. 2,826,490 1,966,733
----------- -----------
Commitments (Note 9)
Stockholders' equity:
Common stock, $0.002 par value, 30,000,000 shares
authorized and 6,157,300 and 6,117,079 shares issued
and outstanding, respectively.......................... 12,331 12,753
Capital in excess of par value............................ 26,236,053 26,664,309
Accumulated deficit....................................... (2,504,393) (3,277,976)
Treasury stock at cost, 25,703 and 277,203 shares,
respectively........................................... (65,944) (844,754)
----------- -----------
Total stockholders' equity........................ 23,678,047 22,554,332
----------- -----------
Total liabilities and stockholders' equity........ $26,504,537 $24,521,065
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 34
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue........................................... $17,350,384 $18,821,125 $16,132,206
----------- ----------- -----------
Costs and expenses:
Salaries and benefits............................... 5,136,732 8,352,623 7,327,343
Selling, general and administrative................. 5,510,614 7,857,136 6,306,234
Depreciation and amortization....................... 1,595,101 3,152,491 2,337,183
Provision for uncollectible accounts................ 3,408,360 3,870,925 1,690,293
----------- ----------- -----------
Total costs and expenses.................... 15,650,807 23,233,175 17,661,053
----------- ----------- -----------
Operating income (loss)............................... 1,699,577 (4,412,050) (1,528,847)
----------- ----------- -----------
Other (income) expense:
Interest income and other, net...................... (172,195) (778,351) (814,570)
Interest expense.................................... 269,532 111,578 59,306
----------- ----------- -----------
Total other (income) expense................ 97,337 (666,773) (755,264)
----------- ----------- -----------
Income (loss) before income taxes..................... 1,602,240 (3,745,277) (773,583)
Provision (benefit) for income taxes.................. 683,240 (848,267) --
----------- ----------- -----------
Net income (loss)..................................... 919,000 (2,897,010) (773,583)
Less preferred stock dividend......................... (87,000) -- --
----------- ----------- -----------
Net income (loss) applicable to common stock.......... $ 832,000 $(2,897,010) $ (773,583)
=========== =========== ===========
Net income (loss) per share (basic)................... $ 0.26 $ (0.48) $ (0.12)
=========== =========== ===========
Net income (loss) per share (diluted)................. $ 0.26 $ (0.48) $ (0.12)
=========== =========== ===========
Weighted average number of common shares outstanding
(in thousands) (basic).............................. 3,215 6,061 6,214
Weighted average number of common shares outstanding
(in thousands) (diluted)............................ 3,559 6,061 6,214
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 35
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
SERIES A SERIES B RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK CAPITAL IN EARNINGS
----------------- ----------------- ------------------- EXCESS OF (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT)
-------- ------ -------- ------ --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995........................ 435,000 $ 870 362,500 $ 725 2,339,421 $ 4,678 $ 2,959,586 $ (526,383)
Issuance of common stock.... 4,293 9 10,991
Options exercised........... 85,605 171 90,370
Series A preferred stock
dividend.................. (87,000)
Treasury stock purchase..... (8,473)
Series A and Series B
preferred stock converted
into common stock......... (435,000) (870) (362,500) (725) 1,244,898 2,490 (895)
Initial Public Offering of
common stock, net......... 2,300,000 4,600 22,773,240
Net income.................. 919,000
-------- ----- -------- ----- --------- ------- ----------- -----------
Balance at December 31,
1996........................ 0 0 0 0 5,965,744 11,948 25,746,292 392,617
Issuance of common stock.... 22,174 44 252,183
Options and warrants
exercised................. 169,382 339 237,578
Net loss.................... (2,897,010)
-------- ----- -------- ----- --------- ------- ----------- -----------
Balance at December 31,
1997........................ 0 0 0 0 6,157,300 12,331 26,236,053 (2,504,393)
Options exercised........... 211,279 422 428,256
Treasury stock purchases.... (251,500)
Net loss.................... (773,583)
-------- ----- -------- ----- --------- ------- ----------- -----------
Balance at December 31,
1998........................ 0 $ 0 0 $ 0 6,117,079 $12,753 $26,664,309 $(3,277,976)
======== ===== ======== ===== ========= ======= =========== ===========
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
--------- -------------
<S> <C> <C>
Balance at December 31,
1995........................ $ (8,950) $ 2,430,526
Issuance of common stock.... 11,000
Options exercised........... 90,541
Series A preferred stock
dividend.................. (87,000)
Treasury stock purchase..... (56,994) (56,994)
Series A and Series B
preferred stock converted
into common stock......... 0
Initial Public Offering of
common stock, net......... 22,777,840
Net income.................. 919,000
--------- -----------
Balance at December 31,
1996........................ (65,944) 26,084,913
Issuance of common stock.... 252,227
Options and warrants
exercised................. 237,917
Net loss.................... (2,897,010)
--------- -----------
Balance at December 31,
1997........................ (65,944) 23,678,047
Options exercised........... 428,678
Treasury stock purchases.... (778,810) (778,810)
Net loss.................... (773,583)
--------- -----------
Balance at December 31,
1998........................ $(844,754) $22,554,332
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 36
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 919,000 $(2,897,010) $ (773,583)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on joint venture................................... 38,776 56,540 --
Gain from disposal of equipment......................... -- -- (18,513)
Provision for uncollectible accounts.................... 3,408,360 3,870,925 1,690,293
Depreciation and amortization........................... 1,595,101 3,152,491 2,337,183
Deferred income taxes................................... (317,521) (64,642) --
Changes in assets and liabilities net of effects from
acquisitions:
Accounts receivable..................................... (5,254,534) (2,171,511) (686,405)
Prepaid expenses and other current assets............... (231,421) (2,021,322) 1,247,915
Accounts payable and accrued expenses................... 2,274,315 (1,518,457) (1,120,869)
Deferred revenue........................................ 22,325 (17,686) (71,837)
Other................................................... 6,102 (2,773) --
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ 2,460,503 (1,613,445) 2,604,184
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (3,236,750) (3,301,515) (2,566,243)
Net proceeds from sale of equipment....................... -- 83,753 51,784
Payment for acquisitions.................................. (518,840) (605,978) --
Change in restricted cash................................. (8,146) 31,000 --
Other..................................................... -- -- (15,740)
----------- ----------- -----------
Net cash used in investing activities............... (3,763,736) (3,792,740) (2,530,199)
----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends on preferred stock................... (87,000) -- --
Repayment of capital lease obligations.................... (317,989) (444,542) (248,650)
Repayment of long-term debt............................... (3,901,521) -- --
Purchase of treasury shares............................... -- -- (778,810)
Proceeds from issuance of common stock.................... 22,822,387 237,917 428,678
Proceeds from issuance of long-term debt.................. 2,091,035 -- --
Other..................................................... (183,546) 9,601 --
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 20,423,366 (197,024) (598,782)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 19,120,133 (5,603,209) (524,797)
Cash and cash equivalents at beginning of year.............. 1,385,654 20,505,787 14,902,578
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $20,505,787 $14,902,578 $14,377,781
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 276,090 $ 111,578 $ 63,906
Income taxes paid......................................... 216,571 1,256,854 --
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations incurred........................ 130,554 -- --
The Company has acquired businesses, as follows:
Fair value of assets acquired............................. 351,198 831,082 --
Goodwill recorded......................................... 167,642 812,362 --
Less:
Fair value of common stock.............................. -- (255,000) --
Cash paid............................................... (518,840) (605,978) --
----------- ----------- -----------
Liabilities assumed....................................... $ -- $ 782,466 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 37
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Medical Alliance, Inc. ("Medical Alliance") provides office based surgical
services which allow certain minimally invasive operative and diagnostic
procedures to be performed in the physician's office. Medical Alliance was
incorporated in Texas in 1989 and is headquartered in Irving, Texas. Medical
Alliance provides its services throughout the United States. Medical Alliance
entered into two new lines of business in 1993 through wholly-owned
subsidiaries. MAI Safety Compliance Services, Inc. provided assistance to
physician offices and other alternate site healthcare facilities to comply with
O.S.H.A. standards. Physicians Marketing Services, Inc. provided group
advertising services to physicians who utilize Medical Alliance's office based
medical services.
The accompanying consolidated financial statements include the accounts of
Medical Alliance and its wholly-owned subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents. The Company considers all investments with
maturities of 90 days or less at the time of purchase to be cash equivalents.
The Company maintains a significant portion of its cash balances with one
financial institution. These deposit accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to a limit of $100,000 per account. At
December 31, 1997 and December 31, 1998, the Company had approximately
$14,000,000 and $13,000,000 invested in high quality and high investment grade
instruments which mainly consist of commercial paper. As a result of the
foregoing, the Company believes that credit and market risk in such instruments
is minimal.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided by the straight-line method over existing useful lives
ranging from three to five years. Repairs and maintenance are charged directly
to expense as incurred. Maintenance contracts are amortized over their
respective contracted period. Upon sale or retirement of equipment the cost and
related accumulated depreciation are eliminated and the resulting gain or (loss)
is included in the consolidated statement of operations as other income
(expense).
Intangibles. Goodwill is the excess of the purchase price over the fair
value of net assets acquired and is being amortized on a straight-line basis
over three to thirty years. The carrying value of goodwill is continually
reviewed for recoverability. If the review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows, the carrying value
of the goodwill is reduced by the estimated shortfall of discounted cash flows.
Income Taxes. The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances, if any, are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not to be realized. Income tax expense is the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Revenue Recognition. The Company recognizes revenue in most instances upon
completion of the surgical procedures performed with the Company's equipment.
Revenue for procedures that require two or more treatments and is collected as a
global fee, is recognized in equal amounts over the course of the treatments.
Revenue is presented net of negotiated contractual discounts and field
discounts.
Deferred Revenue. The Company organizes certain training seminars for
physician utilizers. Revenues are recognized when the seminars are held.
Additionally, certain procedures require multiple treatments and revenues
received in advance are deferred until subsequent procedures are performed.
F-7
<PAGE> 38
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation. The Company has elected to account for employee
stock-based compensation as prescribed in Accounting Principles Board (APB) No.
25 as opposed to the fair value method prescribed by (SFAS) No. 123 "Accounting
for Stock-Based Compensation." However, pro forma disclosure as prescribed by
SFAS No. 123 for all such equity awards is included in these annual financial
statements.
Earnings Per Share. Basic earnings per share have been computed by dividing
net income applicable to common stock by the weighted average of shares of
common stock outstanding. Diluted earnings per share have been computed by
dividing net income by the weighted average number of common shares and
equivalents outstanding.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets,
particularly accounts receivable, and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
may, in some instances, differ from previously estimated amounts.
Recently Issued Accounting Standards. Recently issued Statements of
Financial Accounting Standards (SFAS), effective for the Company for 1998 are
summarized below. These accounting standards have no current effect on the
Company's financial statements as the Company currently has no transactions or
operations that are subject to these standards.
SFAS No. 130 "Reporting Comprehensive Income" -- generally requires that
changes in the balances of items that previously were reported directly in a
separate component of equity in a statement of financial position be reported in
a financial statement that is displayed as prominently as other financial
statements.
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" -- requires enterprises to provide information about the different
types of business activities in which an enterprise engages and the different
economic environments in which it operates.
SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement
Benefits -- an amendment to FASB Statements no. 87, 88 and 106" -- revises
employers' disclosures about pension and other postretirement benefit plans,
however, it does not change the measurement or recognition of those plans.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Medical equipment.......................................... $ 8,231,052 $ 9,155,481
Furniture and fixtures..................................... 1,763,602 2,140,049
Vehicles................................................... 117,778 1,255,940
Leasehold improvements..................................... 52,961 53,361
Equipment under capital leases............................. 1,493,533 1,493,533
----------- -----------
11,658,926 14,098,364
Less accumulated depreciation and amortization............. (6,185,441) (8,229,821)
----------- -----------
Net property and equipment................................. $ 5,473,485 $ 5,868,543
=========== ===========
</TABLE>
F-8
<PAGE> 39
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense related to property and equipment was $1,522,000,
$3,065,000 and $2,231,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Accumulated amortization related to equipment under capital leases
was approximately $1,028,000 and $1,195,000 at December 31, 1997 and December
31, 1998, respectively.
Property and equipment are recorded at cost. Depreciation is provided by
the straight-line method over existing useful lives from three to five years.
Effective January 1, 1998, the Company extended the estimated useful lives on
certain medical equipment and established residual values on such equipment
based on historical experience. The change in accounting estimate had the effect
of reducing depreciation expense and the net loss by approximately $803,000 for
the year ended December 31, 1998.
4. SERIES A PREFERRED STOCK AND PREFERRED STOCK WARRANTS:
On July 10, 1992 the Company entered into a Preferred Stock Purchase
Agreement (the "Series A Agreement") with Mapleleaf Capital, Ltd. The Company
issued an aggregate of 375,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") in exchange for cash of $2.00 per share. In
connection with this transaction, the Company converted subordinated debt of
certain shareholders into shares of common stock at a conversion rate of one
share of common stock for every $2.00 of subordinated debt as described above.
The shares of Series A Preferred Stock were issued with warrants attached to
purchase up to 60,000 shares of Series A Preferred Stock. The warrants were
exercisable at $2.00 per share and expired in 1995. The warrants were exercised
on July 1, 1994 at $1.67 per share which approximated the fair value for other
trades in the Company's common stock. The Series A Preferred Stock was
convertible into common stock at a ratio of 1 to 1 initially. However, upon
issuance of common stock or common stock equivalents, the conversion ratio was
subject to an anti-dilution adjustment pursuant to the Series A Agreement for
all convertible preferred stock. Effective with the stock dividend discussed in
Note 6, the conversion ratio for the Series A Preferred Stock was 1.561 to 1 as
approved by the Board of Directors. The Series A Preferred Stock was convertible
at the election of the holder at any time, or automatically with the closing of
an underwritten qualified public offering (as defined in the Series A
Agreement). If the Company had not completed a qualified public offering on or
prior to December 31, 1997, the Company had the right, but not the obligation to
repurchase all remaining shares of Series A Preferred Stock.
The Series A Preferred Stock required a $.20 per share annual dividend
commencing on June 30, 1993 which was cumulative if unpaid. Dividends paid for
the years ended December 31,1994, 1995, and 1996 were $115,000, $122,000, and
$87,000, respectively. During 1995, the Company was not in compliance with
certain covenants of the Series A Agreement, including the timely issuance of
its year-end audited consolidated financial statements, the timely issuance of a
budgeted operating forecast and a loan to an employee which exceeded the
designated limit. The Company obtained appropriate waivers from the Series A
Preferred Stock shareholder effective until January 1, 1997.
In connection with the Initial Public Offering on October 11, 1996, the
Series A Preferred Stock was converted into common stock on a 1.561 to one
basis, which was effected through a stock dividend declared on September 9,
1996.
5. SERIES B PREFERRED STOCK:
On November 17, 1995 the Company entered into a Preferred Stock Purchase
Agreement (the "Series B Agreement") with various investors. The Company issued
an aggregate of 362,500 shares of Series B Convertible Preferred Stock ("Series
B Preferred Stock") in exchange for cash of $4.00 per share.
The Series B Preferred Stock was convertible into common stock at a ratio
of 1 to 1 initially. However, upon issuance of common stock or common stock
equivalents, the conversion ratio was subject to an anti-dilution adjustment
pursuant to the Series B Agreement for all convertible preferred stock.
Effective with the
F-9
<PAGE> 40
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock dividend discussed in Note 6, the conversion ratio for the Series B
Preferred Stock was 1.561 to 1 as approved by the Board of Directors. The Series
B Preferred Stock was convertible at the election of the holders at any time, or
automatically with the closing of an underwritten qualified public offering (as
defined in the Series B Agreement). There was no annual dividend requirement in
the Series B Agreement. During 1995, the Company was not in compliance with
certain covenants of the Series B Agreement including, the timely issuance of
its year-end audited consolidated financial statements, the timely issuance of a
budgeted operating forecast, and a loan to an employee which exceeded the
designated limit. The Company obtained appropriate waivers from all Series B
Preferred Stock shareholders effective until January 1, 1997.
In connection with the Initial Public Offering on October 11, 1996, the
Series B Preferred Stock was converted into common stock on a 1.561 to one
basis, which was effected through a stock dividend declared on September 9,
1996.
6. COMMON STOCK AND COMMON STOCK WARRANTS:
On September 9, 1996, the Board of Directors approved and paid a 1.561 to 1
stock split, effected through a stock dividend, whereby each common stock
shareholder received an additional .561 shares for each share owned. In
connection with the split, effected through a stock dividend, common stock was
credited and capital in excess of par value was charged for the aggregate par
value of the shares that were issued. In accordance with SAB Topic 4-C, the
accompanying consolidated financial statements and related footnotes have been
retroactively adjusted to give effect for this stock split effected through a
stock dividend.
Furthermore, during the fourth quarter of 1996, the Company completed an
Initial Public Offering of its common stock in which 2,300,000 shares of common
stock were sold raising net proceeds of approximately $23 million.
A warrant to purchase up to 374,640 shares of common stock was granted to
Satana Corporation ("Satana") on January 17, 1991 as part of a subordinated note
to Satana. This warrant included a put feature, whereby the holder of the shares
acquired via the exercise of the warrant could have required the Company to
redeem the shares based on a formula price. The Satana subordinated note payable
was modified in July 1992, at which time Satana was granted a warrant to
purchase an additional 93,660 shares of the Company's common stock. During the
year ended December 31, 1994, the holder exercised the $.64 per share warrant to
purchase 93,660 shares of common stock at a price of $0.53 per share. The
Company recorded interest expense of approximately $10,000 as a result of this
transaction. During the year ended December 31, 1995, the holder exercised the
warrant to acquire 374,640 shares of common stock in exchange for the
outstanding debt owed to Satana and cancellation of the put feature. The
difference between the carrying value of the debt instrument, which approximated
fair value, and the exercise price of the warrants has been accounted for as a
reduction of capital in excess of par value and has been deducted from net
income for purposes of computing net income applicable to common stock in the
accompanying statement of operations.
A warrant to purchase up to 23,415 shares of common stock at $1.28 per
share was granted to Columbia General Corporation on August 15, 1993 as part of
the restructured note payable to MJ Capital Partners note. The warrant was
exercised in March of 1997.
A warrant to purchase 2,810 shares of common stock was granted in 1993 as
part of the restructured MJ Capital Partners note. The warrant was exercised in
March of 1997. Warrants to purchase up to 10,771 shares of common stock at $1.28
per share were granted in 1994 in connection with advances under the MJ Capital
Partners note. Warrants to purchase 3,278 shares of common stock at $1.28 per
share were canceled in 1995 as part of the early retirement of the MJ Capital
Partners note. These remaining warrants were exercised in March of 1997. A
warrant to purchase up to 15,610 shares of common stock at $2.56 per share was
granted in 1995 to a major stockholder in return for a personal guarantee of the
debt with NationsBank. This warrant vested immediately and expires in September
of 1999.
F-10
<PAGE> 41
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company had previously reserved 49,328 shares of common stock for the
conversion of all outstanding common stock warrants. As of December 31, 1998,
33,718 of the warrants have been exercised and 15,610 shares of common stock are
reserved for the conversion of all remaining outstanding common stock warrants.
7. SHARE REPURCHASE PROGRAM:
On May 14, 1998, the Company commenced a share repurchase program of up to
one million shares of the Company's Common Stock. The purchases were to be made
from time to time over the next 12 months at prices then prevailing on the
Nasdaq National Market System or in privately negotiated transactions. From May
14, 1998 thru October 31, 1998, the Company repurchased 251,500 shares of the
Company's stock at a total cost of $778,810. The share repurchase program was
terminated by the Company's Board of Directors in November 1998.
8. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the "Medical Alliance, Inc. Amended and Restated 1994
Long-Term Incentive Plan"(the "1994 Plan"), a stock-based incentive compensation
plan which is described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for the 1994 Plan. In 1995, the FASB issued FASB
Statement No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") which,
if fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the 1994 Plan. Adoption of the cost recognition
provisions of SFAS 123 is optional and the Company has decided not to elect
these provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in 1995 are required by SFAS
123 and are presented below.
Under the Amended and Restated Long-Term Incentive Plan of 1994, the
Company is authorized to issue up to 1,624,290 shares of common stock pursuant
to awards granted in the form of incentive stock options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended), non-
qualified stock options, shares of restricted stock, stock appreciation rights,
performance shares, and/or stock units. Awards may be granted to selected
employees, directors, consultants or advisors of the Company or any subsidiary.
However, incentive stock options may be granted only to employees, and
non-employee directors may be granted awards only in the manner and on the terms
and conditions set forth in Section 4.2 of the 1994 Plan.
EMPLOYEE STOCK OPTIONS
The 1994 Plan provides that the exercise price of any incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The stock options granted in 1996, 1997, and 1998 have varying
contractual terms, ranging from approximately two to five years, and varying
vesting dates, which range from the day immediately following the date of grant
to three years following the date of grant. In accordance with APB 25, the
Company has not recognized compensation cost for stock options granted in 1996,
1997 and 1998.
F-11
<PAGE> 42
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock options as of December 31, 1996, 1997 and
1998 and the changes during the years then ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the
year............................ 798,983 $1.89 837,478 $2.41 971,086 $3.35
Granted........................... 219,321 3.79 508,760 7.54 282,040 3.71
Exercised......................... 85,605 1.09 135,661 1.44 211,279 2.03
Forfeited......................... 95,221 2.48 239,491 8.62 132,305 5.03
Outstanding at the end of year.... 837,478 2.41 971,086 3.35 909,542 3.60
Exercisable at end of year........ 344,990 1.44 559,201 2.14 429,125 2.82
Weighted-average fair value of
options granted during the
year............................ $1.00 $4.78 $1.90
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the "minimum value" option-pricing model with the following
weighted-average assumptions for grants in 1996, 1997 and 1998, respectively:
dividend yield of 0.00% for all years; risk-free interest rates are different
for each grant and range from 7.80%, 6.15% and 5.41%; and the expected lives of
options are different for each grant and range from 4.71 years, 3.94 years, and
5.0 years.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ---------------------------------------------
NUMBER WGTD. AVG. NUMBER
OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE WGTD. AVG.
RANGE OF EXERCISE PRICES AT 12/31/98 CONTR. LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- ------------------------ ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.28 to $5.00....................... 867,542 3.43 $3.17 414,292 $ 2.53
$5.01 to $13.50...................... 42,000 3.81 $8.83 14,833 $10.92
------- ---- ----- ------- ------
Total...................... 909,542 3.46 $3.60 429,125 $ 2.82
======= ==== ===== ======= ======
</TABLE>
PRO FORMA NET INCOME
AND
NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996, 1997, and 1998 would approximate the pro forma
amounts below.
<TABLE>
<CAPTION>
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
12/31/96 12/31/96 12/31/97 12/31/97 12/31/98 12/31/98
-------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 charge............ $ 0.00 $ 49,773 $ 0.00 $ 204,567 $ 0.00 $ 42,731
APB25 charge............... 0.00 0.00 0.00 0.00 0.00 0.00
Net income (loss)
applicable to common
stock.................... 832,000 782,227 (2,897,010) (3,101,577) (773,583) (816,314)
Net income (loss) per
common share............. $ 0.26 $ 0.24 $ (0.48) $ (0.51) $ (0.12) $ (0.13)
</TABLE>
F-12
<PAGE> 43
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans.
9. INCOME TAXES:
The income tax provisions consisted of the following:
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- --------- --------
<S> <C> <C> <C>
Current provisions:
Federal.......................................... $ 816,931 $(820,952) $ --
State............................................ 183,830 37,327 --
---------- --------- --------
Total current............................ 1,000,761 (783,625) --
---------- --------- --------
Deferred provisions:
Federal.......................................... (261,859) (51,477) (26,570)
State............................................ (55,662) (13,165) 26,570
---------- --------- --------
Total deferred........................... (317,521) (64,642) --
---------- --------- --------
Total provisions (benefit)............... $ 683,240 $(848,267) $ --
========== ========= ========
</TABLE>
For the years ended December 31, 1997 and 1998 the Company generated tax
operating losses. To the extent allowed, the losses generated in 1997 were
carried back to the year ended December 31, 1996. The remaining net operating
loss carryforward at December 31, 1997 is $662,728. The net operating loss
carryforward at December 31, 1998 approximates $1,785,000 and, if not utilized,
will expire in 2013.
The components of the net deferred tax asset (liability) as of December 31,
1997 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Deferred revenue......................... $ 61,163 $ -- $ 34,368 $ --
Depreciation............................. 236,198 -- -- 28,270
Doubtful accounts........................ 128,685 -- 373,690 --
Compensation............................. 41,575 -- 48,645 --
State and sales tax...................... 47,965 -- 47,990 --
Section 481(a) adjustment................ -- 647,312 -- 777,133
Net operating loss carryforward.......... 413,104 -- 832,508
Other.................................... 139,795 -- 110,568 --
Valuation allowance...................... (421,173) -- (642,366) --
--------- -------- --------- --------
Total.......................... $ 647,312 $647,312 $ 805,403 $805,403
========= ======== ========= ========
</TABLE>
Deferred income taxes totaling $0 and $488,918 at December 31, 1997 and
1998, are included in current assets, respectively. Noncurrent deferred income
tax liabilities totaled $0 and $488,918 at December 31, 1997 and 1998,
respectively. Due to uncertainty regarding the realization of the Company's net
deferred tax asset, the Company has booked a valuation allowance of $642,366 in
the current year. The valuation allowance will be reduced in future years as the
Company realizes the deferred tax assets or it is determined the deferred tax
asset is more likely than not to be realized.
F-13
<PAGE> 44
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate varies from the federal statutory rate for
the years ended December 31, 1996, 1997 and 1998 as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997 1998
---- ----- ------
<S> <C> <C> <C>
Federal statutory rate.................................... 34.0% 34.0% 34.0%
Disallowance of meals and entertainment................... 1.5 (0.8) (3.17)
Addition to valuation allowance........................... -- (11.3) (28.59)
State taxes (net of federal benefit)...................... 5.3 (0.5) (2.27)
Other..................................................... 1.8 1.2 .41
Officers life insurance................................... -- -- (.38)
---- ----- ------
Effective income tax rate................................. 42.6% 22.6% 0%
==== ===== ======
</TABLE>
10. LEASE COMMITMENTS:
The Company leases office space and vans under operating leases and certain
medical equipment under both capital and operating leases. The Company currently
leases office space under noncancellable operating leases which expire on
various dates through July 2002. Future minimum rental payments under these
capital and operating leases subsequent to December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
Year ending December 31
1999...................................................... 229,400 284,820
2000...................................................... 38,630 181,840
2001...................................................... -- 135,954
2002...................................................... -- 67,244
2003...................................................... -- --
--------- --------
Total future minimum lease payments....................... $ 268,030 $669,858
========
Less amounts representing interest........................ (28,101)
---------
Present value of future minimum lease payments............ 239,929
Less current maturities................................... (202,593)
---------
Long-term capital lease obligations....................... $ 37,336
=========
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 under
operating leases was approximately $1,637,000, $1,960,000, and $1,308,000,
respectively.
F-14
<PAGE> 45
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER SHARE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------- ----------- ----------
<S> <C> <C> <C>
BASIC:
Weighted average of common shares outstanding
(basic).............................................. 3,215,318 6,060,950 6,213,747
Net income (loss)...................................... $ 919,000 $(2,897,010) $ (773,583)
Less: Series A Preferred dividends..................... 87,000 -- --
Net income (loss) applicable to common stock........... 832,000 $(2,897,010) $ (773,583)
Net income (loss) per share (basic).................... $ 0.26 $ (0.48) $ (0.12)
========= =========== ==========
DILUTED:
Weighted average of common shares outstanding
(basic).............................................. 3,215,318 6,060,950 6,213,747
SAB Topic 4-D computation:
Incremental common shares outstanding applicable to
"In the Money" options and warrants based on the
estimated year end fair market value of the
stock............................................. 344,138 (a) (a)
--------- ----------- ----------
Weighted average of common shares outstanding
(diluted)............................................ 3,559,456 6,060,950 6,213,747
========= =========== ==========
Net income (loss) applicable to common stock........... $ 832,000 $(2,897,010) $ (773,583)
Add: Series A Preferred dividends...................... 87,000 -- --
--------- ----------- ----------
Net income (loss) assuming dilution.................... $ 919,000 $(2,897,010) $ (773,583)
Net income (loss) per share (diluted).................. $ 0.26 $ (0.48) $ (0.12)
========= =========== ==========
</TABLE>
- ---------------
(a) Incremental common shares outstanding applicable to "in the money" options
and warrants were not included in the computation of diluted earnings per
share for the years ended December 31, 1997 and 1998 as their inclusion
would be antidilutive for the respective periods. The shares not included
totaled 231,653 for the year ended December 31, 1997 and 32,059 for the year
ended December 31, 1998.
12. CONCENTRATION OF SUPPLIERS:
The Company currently buys its laser equipment, the main component of its
services, from four suppliers. Although there are a limited number of
manufacturers of this equipment, management believes that other suppliers could
provide similar laser equipment on comparable terms.
13. RELATED PARTIES:
The Company paid Montgomery, Baggett and Drews, L.L.P. ("MBD"), certified
public accountants, and affiliates of MJ Capital Partners, L.P. and MJ Capital
Corporation, approximately $44,000 in 1996, $58,000 in 1997, and $55,000 in 1998
for professional fees. MJ and its affiliates own 244,626 shares of the Company's
common stock.
Approximately $347,000 in medical supplies and equipment were purchased
from a company owned by the relative of a shareholder of the Company during
1997.
Effective September 11, 1998, the Company entered into an arrangement
whereby the Company would agree to repurchase 242,000 shares of common stock
pledged by an officer of the Company to a banking institution. The stock was
pledged to the bank to collateralize payment on a $170,000 loan between the
officer of the Company and the bank. The pledged stock would be repurchased by
the Company upon request from the bank if the loan is in default.
F-15
<PAGE> 46
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. EMPLOYEE BENEFITS:
Effective January 1, 1993, a tax deferred savings plan under Section 401(k)
of the Internal Revenue Code was established. The plan covers all full-time
employees who are twenty-one years of age with one year of service. Employees
may contribute to the plan up to a maximum of 20% of their salary with a maximum
contribution of $10,000 in 1998. Employees are immediately vested in their
contributions. The Company may contribute an amount as determined by the Board
of Directors. Effective January 1, 1996, the Company began matching 15% of
employee contributions totaling approximately $25,000 in 1996, $28,000 in 1997,
and $35,000 in 1998.
15. ACQUISITIONS:
During 1996, the Company completed the acquisitions of Maasai, Inc. in Salt
Lake City, Utah and Mobile Laser Services, Inc. in Chicago, Illinois for a total
purchase price of approximately $494,000. These asset purchases were accounted
for under the purchase method of accounting resulting in the recording of
approximately $143,000 in goodwill and approximately $351,000 in property and
equipment. The pro forma effect of the acquisitions was not material to the
results of operations or financial position of the Company.
On January 21, 1997, the Company completed the acquisition of substantially
all of the assets of Stone Treatment Center of New England, Inc., a Rhode Island
corporation. For cash paid of $238,280 and 22,174 shares of common stock valued
at $11.50 per share, the Company recorded assets and assumed liabilities as
follows:
<TABLE>
<S> <C>
Property, equipment, and other assets....................... $ 583,676
Goodwill.................................................... 619,571
Accounts payable............................................ (709,966)
---------
$ 493,281
=========
</TABLE>
The purchase agreement contained a contingent consideration clause whereby
the Company would pay between $250,000 and $1,250,000 if specific EBITDA
(earnings before interest, taxes, depreciation, and amortization) levels ranging
from $445,835 and $778,000 were attained during calendar year 1997. During the
calendar year 1997, the minimum EBITDA level was not achieved; therefore, the
contingent earnout related to the purchase agreement was not paid. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the operating results of Stone Treatment Center of New England,
Inc. is included in the consolidated operating results from the date of
acquisition. The pro forma effect of the acquisition was not material to the
results of operations or financial position of the Company.
Additionally, the Company completed the acquisitions of Continuum
Biomedical, Inc., Southeast Medical Distributors of Louisiana, Inc., and Mobile
Laser Services in California during the calendar year of 1997. The total
purchase price was $367,699. These asset purchases were accounted for under the
purchase method of accounting resulting in the recording of $192,791 in
goodwill, $247,408 in property and equipment, and a contingent payable of
$72,500 if certain revenue levels were achieved. The revenue levels were not
achieved during 1997; therefore, the contingent payable of $72,500 was not paid.
The pro forma effect of the acquisitions was not material to the results of
operations or financial position of the Company.
F-16
<PAGE> 47
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used in estimating fair values:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses
The carrying value in the balance sheet approximates fair value.
17. SUBSEQUENT EVENT:
On February 18, 1999, the Company, Diagnostic Health Services, Inc. ("DHS")
and a wholly-owned subsidiary of DHS ("Sub") entered into an Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and
into the Company, resulting in the Company becoming a wholly-owned subsidiary of
DHS. Under the terms of the Merger Agreement, holders of the Company's Common
Stock will receive 1.57 shares of DHS common stock for each share of the
Company's Common Stock held. In connection with the execution of the Merger
Agreement, members of the Boards of Directors of the Company and DHS, in their
capacities as shareholders, (individually and on behalf of their affiliates),
entered into a Voting Agreement pursuant to which they agreed to vote their
shares of capital stock in favor of this transaction.
The Merger, which is expected to be accounted for as a
pooling-of-interests, is subject to various conditions precedent, including
without limitation, approval by the shareholders of both companies and various
state and federal regulatory agencies. Closing of this transaction is expected
to occur by the end of the second quarter of 1999.
F-17
<PAGE> 48
SCHEDULE II
MEDICAL ALLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ------------ ---------- ---------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Allowance for doubtful accounts.......... $2,554,705 $1,690,293 $3,243,147(A) $1,001,851
Year Ended December 31, 1997
Allowance for doubtful accounts.......... 1,859,621 3,870,925 3,175,841(A) 2,554,705
Year Ended December 31, 1996
Allowance for doubtful accounts.......... 1,113,314 3,408,360 2,662,053(A) 1,859,621
</TABLE>
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
F-18
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
MEDICAL ALLIANCE, INC.
By /s/ MARK NOVY
-----------------------------------
Mark Novy
Vice President of Finance
Date: March 15, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PAUL HERCHMAN Chairman of the Board and March 15, 1999
- ----------------------------------------------------- Chief Executive Officer
Paul Herchman
/s/ GARY HILL President, Chief Operating March 15, 1999
- ----------------------------------------------------- Officer, and Director
Gary Hill
/s/ DAVID KALLENBERGER Director March 15, 1999
- -----------------------------------------------------
David Kallenberger
/s/ TONY LEVECCHIO Director March 15, 1999
- -----------------------------------------------------
Tony LeVecchio
/s/ TOM MONTGOMERY Director March 15, 1999
- -----------------------------------------------------
Tom Montgomery
/s/ LEON PRITZKER Director March 15, 1999
- -----------------------------------------------------
Leon Pritzker
/s/ JIM SILCOCK Director March 15, 1999
- -----------------------------------------------------
Jim Silcock
</TABLE>
S-1
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Asset Purchase Agreement, dated March 18, 1996 between
the Company and Maasai Inc.(1)(5)
2.2 -- Asset Purchase Agreement, dated June 10, 1996 between the
Company and Mobile Laser Services, Inc.(1)(5)
2.3 -- Asset Purchase Agreement, dated as of January 21, 1997
among Stone Treatment Center of New England, Inc.,
Gregory A. Mercurio, Vincent A. Catallozzi, M.D.,
Alexander Calenda, M.D., Gerald Marsocci, M.D., Joseph C.
Cambio, M.D. and the Company.(6)(5)
2.4 -- Agreement and Plan of Merger, dated as of February 18,
1999 between Diagnostic Health Services, Inc. and the
Company.(3)
3.1 -- Amended and Restated Articles of Incorporation of the
Company.(1)
3.2 -- Amended and Restated Bylaws of the Company.(1)
4.1 -- Specimen of Company Common Stock Certificate.(1)
4.2 -- Warrant to Purchase 15,651 shares of Common Stock of the
Company dated July 27, 1995 between the Company and Paul
R. Herchman.(1)
4.3 -- Warrant to Purchase 23,416 shares of Common Stock of the
Company dated August 15, 1993 between the Company and
Columbia General Corporation.(1)
4.4 -- Warrant to Purchase 2,810 shares of Common Stock of the
Company dated October 17, 1993 between the Company and
Robert J. Matthews, M.D.(1)
4.5 -- Warrant to Purchase 2,342 shares of Common Stock of the
Company dated May 31, 1994 between the Company and Shelly
Burks.(1)
4.6 -- Warrant to Purchase 1,873 shares of Common Stock of the
Company dated May 31, 1994 between the Company and Thomas
A. Montgomery.(1)
4.7 -- Warrant to Purchase 6,556 shares of Common Stock of the
Company dated May 31, 1994 between the Company and Thomas
A. Montgomery.(1)
10.1 -- Agreement between the Company and Coherent Medical
Group.(1)
10.2 -- Master Lease Agreement dated July 20, 1995 between the
Company and Cabot Medical Corporation.(1)
10.3 -- Master services Agreement dated June 3, 1996 between the
Company and Cosmetic Technologies International.(1)
10.4 -- Joint Venture Agreement dated March 25, 1996 between the
Company and Coherent-AMT Inc.(1)
10.5 -- Medical Alliance, Inc. 1994 Amended and Restated
Long-Term Incentive Plan.(2)(4)
10.6 -- Employment Agreement between the Company and Paul
Herchman.(1)(4)
10.7 -- Employment Agreement between the Company and Gary
Hill.(7)(4)
10.8 -- Employment Agreement between the Company and Kevin
O'Brien.(1)(4)
10.9 -- Employment Agreement between the Company and Michael G.
Wallace.(1)(4)
10.10 -- Lease Agreement.(1)
10.11 -- Strategic Alliance Agreement, dated as of December 19,
1996, by and between Laserscope and the Company.(6)
10.12 -- Exclusive Provider Agreement, dated as of January 21,
1997, by and between Thermolase Corporation and the
Company.(6)
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 -- Strategic Alliance Agreement, dated as of January 1,
1997, by and between Valleylab, Inc. and the Company.(6)
10.14 -- Exclusive Provider Agreement, dated as of February 9,
1997, by and between Imagyn Medical, Inc. and the
Company.(6)
10.15 -- Paul Herchman Severance Agreement.(3)
10.16 -- Voting Agreement, dated as of February 18, 1999, by and
between Diagnostic Health Services, Inc., MAI Acquisition
Corp., and Medical Alliance, Inc.(3)
12.1 -- Subsidiaries of the Company.(1)
23.1 -- Consent of PricewaterhouseCoopers LLP.(3)
27.1 -- Financial Data Schedule.(3)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-09815) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
form S-8 (No. 333-18545) and incorporated herein by reference.
(3) Filed herewith.
(4) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(5) Schedules and similar attachments to this Exhibit have not been filed
herewith. The Company agrees to furnish a copy of any such omitted schedules
and attachments to the Commission upon request.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, and incorporated hereby
reference.
<PAGE> 1
EXHIBIT 2.4
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 18, 1999
AMONG
DIAGNOSTIC HEALTH SERVICES, INC.,
MAI ACQUISITION CORP.,
AND
MEDICAL ALLIANCE, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
TABLE OF DEFINITIONS .............................................................................................v
ARTICLE I THE MERGER...................................................................................2
Section 1.01 The Merger...........................................................................2
Section 1.02 Conversion of Shares.................................................................2
Section 1.03 Surrender and Payment................................................................4
Section 1.04 Stock Option Plans...................................................................6
Section 1.05 MAI Warrants.........................................................................7
Section 1.06 Fractional Shares....................................................................7
ARTICLE II THE SURVIVING CORPORATION....................................................................8
Section 2.01 Article of Incorporation.............................................................8
Section 2.02 By-Laws..............................................................................8
ARTICLE III REPRESENTATIONS AND WARRANTEES OF MAI........................................................8
Section 3.01 Organization and Power...............................................................8
Section 3.02 Corporate Authorization..............................................................9
Section 3.03 Governmental Authorization...........................................................9
Section 3.04 Non-Contravention....................................................................9
Section 3.05 Capitalization of MAI...............................................................10
Section 3.06 Capitalization of Subsidiaries......................................................11
Section 3.07 SEC Filings.........................................................................11
Section 3.08 Financial Statements................................................................12
Section 3.09 Information Supplied................................................................12
Section 3.10 Absence of Certain Changes..........................................................13
Section 3.11 No Undisclosed Liabilities..........................................................14
Section 3.12 Litigation..........................................................................14
Section 3.13 Taxes...............................................................................15
Section 3.14 Employee Benefit Plans; ERISA.......................................................17
Section 3.15 Certain Agreements; Compliance with Agreements......................................18
Section 3.16 Compliance with Laws and-Orders.....................................................20
Section 3.17 Environmental Matters...............................................................20
Section 3.18 Assets..............................................................................21
Section 3.19 Intellectual Property Rights........................................................21
Section 3.20 Labor Matters.......................................................................22
Section 3.21 Transactions with Affiliates........................................................22
Section 3.22 Insurance...........................................................................23
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 3.23 Takeover Statutes...................................................................23
Section 3.24 Finders' Fees.......................................................................23
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DHS.......................................................23
Section 4.01 Organization and Power..............................................................24
Section 4.02 Corporate Authorization.............................................................24
Section 4.03 Governmental Authorization..........................................................24
Section 4.04 Non-Contravention...................................................................24
Section 4.05 Capitalization of DHS...............................................................25
Section 4.06 Capitalization of Subsidiaries......................................................26
Section 4.07 SEC Filings.........................................................................26
Section 4.08 Financial Statements................................................................27
Section 4.09 Information Supplied................................................................27
Section 4.10 Absence of Certain Changes..........................................................27
Section 4.11 No Undisclosed Liabilities..........................................................29
Section 4.12 Litigation..........................................................................29
Section 4.13 Taxes...............................................................................29
Section 4.14 Employee Benefits; ERISA............................................................31
Section 4.15 Certain Agreements; Compliance with Agreements......................................32
Section 4.16 Compliance with Laws and Orders.....................................................34
Section 4.17 Environmental Matters...............................................................34
Section 4.18 Assets..............................................................................35
Section 4.19 Intellectual Property Rights........................................................35
Section 4.20 Labor Matters.......................................................................36
Section 4.21 Transactions with Affiliates........................................................36
Section 4.22 Insurance...........................................................................36
Section 4.23 Takeover Statutes...................................................................37
Section 4.24 Finders' Fees.......................................................................37
ARTICLE V COVENANTS...................................................................................37
Section 5.01 Conduct of MAI......................................................................37
Section 5.02 Conduct of DHS......................................................................39
Section 5.03 No Solicitation.....................................................................42
Section 5.04 Approval of Stockholders............................................................43
Section 5.05 Preparation of Form S-4 and Proxy Statement.........................................44
Section 5.06 Access to Information...............................................................45
Section 5.07 Notices of Certain Events...........................................................46
Section 5.08 Regulatory and Other Approvals......................................................46
Section 5.09 Public Announcements................................................................47
Section 5.10 Further Assurances..................................................................47
Section 5.11 MAI Affiliates......................................................................47
Section 5.12 Obligations of Merger Subsidiary....................................................48
Section 5.13 Listing of Stock....................................................................48
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 5.14 Antitakeover Statutes...............................................................48
Section 5.15 Tax Treatment.......................................................................48
Section 5.16 Appointment of Directors............................................................48
Section 5.17 Director and Officer Indemnification................................................49
Section 5.18 Employee Benefits...................................................................49
Section 5.19 Good Faith Efforts..................................................................49
ARTICLE VI GENERAL CONDITIONS PRECEDENT TO THE MERGER..................................................49
Section 6.01 Stockholder Approval................................................................49
Section 6.02 HSR Act.............................................................................50
Section 6.03 Registration Statements; State Securities Laws......................................50
Section 6.04 Listing.............................................................................50
Section 6.05 Suits or Other Proceedings..........................................................50
Section 6.06 Employment Agreements...............................................................50
Section 6.07 Pooling Letters.....................................................................50
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF DHS AND MERGER SUBSIDIARY........................51
Section 7.01 Representations and Warranties......................................................51
Section 7.02 Performance of Obligations..........................................................51
Section 7.03 No Material Adverse Change..........................................................51
Section 7.04 Consents............................................................................51
Section 7.05 Opinion of MAI Counsel..............................................................51
Section 7.06 Proceedings.........................................................................51
Section 7.07 Fairness Opinion....................................................................52
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MAI..............................................52
Section 8.01 Representations and Warranties......................................................52
Section 8.02 Performance of Obligations..........................................................52
Section 8.03 No Material Adverse Change..........................................................52
Section 8.04 Consents............................................................................52
Section 8.05 Opinion of DHS Counsel..............................................................52
Section 8.06 Proceedings.........................................................................53
Section 8.07 Tax Opinion.........................................................................53
Section 8.08 Fairness Opinion at or prior to the Closing.........................................53
Section 8.09 Accounting Matters..................................................................53
Section 8.10 DHS First QuarterResults............................................................53
Section 8.11 Waivers from Lenders................................................................53
ARTICLE IX TERMINATION.................................................................................54
Section 9.01 Termination.........................................................................54
Section 9.02 Effect of Termination...............................................................55
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
ARTICLE X MISCELLANEOUS...............................................................................56
Section 10.01 Notices.............................................................................56
Section 10.02 Entire Agreement Non-Survival of Representations and Warranties:
Third Party Beneficiaries...........................................................57
Section 10.03 Amendment...........................................................................57
Section 10.04 Waiver..............................................................................58
Section 10.05 Expenses............................................................................58
Section 10.06 Successors and Assigns..............................................................58
Section 10.07 Governing Law.......................................................................58
Section 10.08 Jurisdiction........................................................................58
Section 10.09 Counterparts: Effectiveness.........................................................58
Section 10.10 Interpretation......................................................................59
Section 10.11 Severability........................................................................59
Section 10.12 Specific Performance................................................................59
Section 10.13 Performance by Merger Subsidiary....................................................59
</TABLE>
EXHIBITS
Voting Agreement...............................................................A
Affiliate Letter...............................................................B
Registration Rights Agreement..................................................C
Opinion of MAI Counsel.........................................................D
Opinion of DHS Counsel.........................................................E
iv
<PAGE> 6
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
1933 Act 3.03
1934 Act 3.03
Adjusted Option 1.04(a)
Affiliate Letter 5.11
Alternative Proposal 5.03(a)
Antitrust Division 5.08
Closing 1.01(b)
Closing Date 1.01(b)
Code recitals
Confidentiality Agreement 5.06(a)
Delaware Law 4.23
DHS preamble
DHS 10-K 4.08
DHS Agreement 4.04
DHS Balance Sheet 4.08
DHS Balance Sheet Date 4.08
DHS Benefit Plans 4.14(a)
DHS Common Stock 1.02(a)
DHS Disclosure Letter 2.03
DHS ERISA Affiliate 4.14(a)
DHS Financial Statements 4.08
DHS Group 4.13(1)
DHS Holders recitals
DHS Options 4.05(a)
DHS Permits 4.16
DHS Plans 4.05(a)
DHS Preferred Stock 4.05(a)
DHS Proposal 5.03(b)
DHS SEC Documents 4.07(a)
DHS Securities 4.05(a)
DHS Stockholders' Approval 5.03(b)
DHS Stockholders' Meeting(s) 5.03(b)
DHS Subsidiary Securities 4.06
DHS Tax Returns 4.13
Effective Time 1.01(c)
Environmental Laws 3.17(b)
Environmental Liabilities 3.17(b)
ERISA 3.14(a)
Exchange Agent 1.03(a)
Form S-4 3.09
FTC 5.08
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
GAAP 3.08
Governmental Authorities 3.03
Hazardous Substance 3.17(b)
HSR Act 3.03
Indemnified Persons 5.17
Intellectual Property 3.19(a)
Laws 3.04
Lien 3.04
MAI preamble
MAI 10-K 3.08
MAI Affiliates 5.11
MAI Agreement 3.04
MAI Balance Sheet Date 3.08
MAI Balance Sheet 3.08
MAI Benefit Plans 3.14(a)
MAI Common Stock 1.02(a)
MAI Disclosure Letter 3.01
MAI ERISA Affiliate 3.14(a)
MAI Financial Statements 3.08
MAI Group 3.13(i)
MAI Holders recitals
MAI Option Plan 1.04(a)
MAI Permits 3.16
MAI SEC Documents 3.07(a)
MAI Securities 3.05(a)
MAI Stock Option 1.04(a)
MAI Stockholders' Approval 5.03(a)
MAI Stockholders' Meeting 5.04(a)
MAI Subsidiary Securities 3.06
MAI Tax Returns 3.13(a)
Material Adverse Effect 3.01
Merger 1.01(a)
Merger Consideration 1.02(c)
Merger Subsidiary preamble
Most Recent DHS Balance Sheet 4.08(b)
Most Recent MAI Balance Sheet 3.08(b)
Name Change 5.04(b)
Notice of Superior Proposal 5.04(a)
Orders 3.04
Person 1.02(d)
Proxy Statement 3.09
Qualified Stock Options 1.04(a)
SEC 3.07(a)
</TABLE>
vi
<PAGE> 8
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Service 3.13(h)
Share(s) 1.02(a)
Stockholders recitals
Stockholders' Meetings 5.04(b)
Subsidiary 1.02(d)
Subsidiary of MAI 3.17(b)
Superior Proposal 5.03(a)
Surviving Corporation 1.01(a)
Takeover Statute 3.23
Tax Return 3.13(1)
Taxes 3.13(1)
Taxing Authority 3.13(1)
Texas Law 1.01(a)
Voting Agreement recitals
</TABLE>
vii
<PAGE> 9
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of February 18, 1999 among
DIAGNOSTIC HEALTH SERVICES, INC., a Delaware corporation ("DHS"), MAI
ACQUISITION CORP., a Texas corporation and a wholly-owned Subsidiary of DHS
("Merger Subsidiary"), and MEDICAL ALLIANCE, INC., a Texas corporation ("MAI")
W I T N E S S E T H:
WHEREAS, DHS and its Subsidiaries are engaged primarily in the
provision of outsourced medical support services and equipment to hospitals,
physician offices and other health care facilities, and MAI and its
Subsidiaries are engaged primarily in the provision of services used to create
temporary surgical environments in physician offices; and
WHEREAS, the respective Boards of Directors of DHS and MAI have
approved, and deem it advisable and in the best interests of their respective
stockholders to consummate, the acquisition of MAI by DHS by means of a merger
of Merger Subsidiary into MAI, as a result of which MAI will become a
wholly-owned subsidiary of DHS, all on the terms and conditions set forth
herein; and
WHEREAS, for United States federal income tax purposes, it is intended
that the Merger contemplated by this Agreement qualify as a "reorganization"
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "CODE"); and
WHEREAS, as a condition and inducement to DHS entering into this
Agreement and incurring the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, DHS is entering into a Voting
Agreement with Mapleleaf Capital, Ltd., Sunwestern Cayman 1998 Partners,
Sunwestern Investment Fund III, Paul R. Herchman, Gary B. Hill, David A.
Kallenberger, Thomas A. Montgomery, Leon Pritzker and Tony LeVecchio
(collectively, the "MAI HOLDERS") and Max W. Batzer, Brad A. Hummel, James R.
Angelica, Thomas M. Sestak, Bo W. Lycke and Bonnie G. Lankford (collectively,
the "DHS HOLDERS," and collectively with the MAI Holders, the "STOCKHOLDERS"),
in the form of Exhibit A hereto (the "VOTING AGREEMENT") pursuant to which,
among other things, the MAI Holders have agreed to vote the shares of MAI
Common Stock owned by them in favor of this Agreement and the Merger, the Name
Change and other transactions provided for herein, and the DHS Holders have
agreed to vote the shares of DHS Common Stock owned by them in favor of the
issuance of shares of DHS Common Stock pursuant to the Merger, the Name Change
and the other transactions contemplated by the Merger.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants and agreements set forth herein and in
the Voting Agreement, the parties hereto, intending to be legally bound hereby,
agree as follows:
<PAGE> 10
ARTICLE I
THE MERGER
Section 1.01 The Merger.
(a) Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time, Merger Subsidiary shall be merged (the
"MERGER") with and into MAI in accordance with the Texas Business Corporation
Act (the "TEXAS LAW"), whereupon the separate existence of Merger Subsidiary
shall cease, and MAI shall continue as the surviving corporation (the
"SURVIVING CORPORATION").
(b) Upon the terms and subject to the conditions of this
Agreement, the closing of the Merger (the "CLOSING") shall take place at 10:00
a.m. on a date to be specified by the parties (the "CLOSING Date"), which shall
be no later than the fifth business day after satisfaction of the conditions
set forth in Article VI, at the offices of Jackson Walker L.L.P. in Dallas,
Texas, unless another time, date or place is agreed to in writing by the
parties hereto.
(c) Upon the Closing, MAI and Merger Subsidiary will file
articles of merger with the Secretary of State of the State of Texas and make
all other filings or recordings required by Texas Law in connection with the
Merger. The Merger shall become effective at such time as the articles of
merger are duly filed with the Secretary of State of the State of Texas or at
such later time as is agreed by DHS and MAI and specified in the articles of
merger (the "EFFECTIVE TIME").
(d) The Merger shall have the effects set forth in Section
5.04 of the Texas Law.
(e) Each party hereto will, either prior to or after the
Effective Time, execute such further documents, instruments, deeds, bills of
sale, assignments and assurances and take such further actions as may
reasonably be requested by one or more of the other parties to consummate the
Merger, to vest the Surviving Corporation with full title to all assets,
properties, privileges, rights, approvals, immunities and franchises of Merger
Subsidiary or MAI, or to effect the other purposes of this Agreement.
Section 1.02 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any common stock of MAI or
Merger Subsidiary:
(i) each share of Common Stock, par value $0.002 per share,
of MAI (the "MAI COMMON Stock") held by MAI as treasury stock or owned
by DHS or any Subsidiary of DHS immediately prior to the Effective
Time shall automatically be canceled and retired without any
conversion thereof, and no DHS Common Stock or other consideration
shall be delivered in exchange therefor;
2
<PAGE> 11
(ii) each share of common stock, par value $0.01 per share,
of Merger Subsidiary outstanding immediately prior to the Effective
Time shall automatically be converted into and become one share of
common stock of the Surviving Corporation and shall constitute the
only outstanding shares of capital stock of the Surviving Corporation;
and
(iii) each share (each, a "SHARE" and collectively, the
"SHARES") of MAI Common Stock outstanding immediately prior to the
Effective Time shall, except as otherwise provided in Section
1.02(a)(i), automatically be converted into the right to receive 1.57
shares of fully paid and non-assessable Common Stock, par value $0.001
per share of DHS (the "DHS COMMON STOCK"); provided, however, that the
foregoing conversion ratio shall be (A) appropriately adjusted in the
event that there shall occur any stock dividend, stock split,
combination of shares, recapitalization or other such event relating
to the DHS Common Stock or the MAI Common Stock between the date
hereof and the Effective Time, (B) proportionately increased or
decreased (as the case may be) in the event and to the extent that the
number of outstanding shares of DHS Common Stock shall, at the
Effective Time, be greater than or less than the number of outstanding
shares of DHS Common Stock on the date hereof, other than increases
resulting from the exercise of options or warrants that are
outstanding on the date hereof or hereafter issued in accordance with
Section 5.02(f) and from the conversion of any DHS Preferred Stock
(including additional shares of DHS Preferred Stock which may
hereafter accrue as in-kind dividends), such that the MAI stockholders
receive in the Merger the same percentage of the total outstanding DHS
Common Stock (immediately after giving effect to the Merger) as they
would have received had the Merger been consummated on the date of
this Agreement, and (C) shall be increased or decreased (as the case
may be) in the event and to the extent that the number of outstanding
shares of MAI Common Stock shall, at the Effective Time, be less than
or greater than the number of outstanding shares of MAI Common Stock
on the date hereof, other than increases resulting from exercises of
options or warrants outstanding on the date hereof or hereafter issued
in accordance with Section 5.01(f) and any issuance of MAI Common
Stock pursuant to the outstanding Asset Purchase Agreement between MAI
and Jayson Jonsson, such that the MAI stockholders receive in the
Merger the same percentage of the total outstanding DHS Common Stock
(immediately after giving effect to the Merger) as they would have
received had the Merger been consummated on the date of this
Agreement.
(b) From and after the Effective Time, all Shares converted
in accordance with Section 1.02(a)(iii) shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such Shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration. From and after the Effective Time, all certificates representing
the common stock of Merger Subsidiary shall be deemed for all purposes to
represent the number of shares of Common Stock of the Surviving Corporation
into which they were converted in accordance with Section 1.02(a)(ii).
3
<PAGE> 12
(c) The DHS Common Stock to be received as consideration
pursuant to the Merger by each holder of Shares (together with any cash which
may be paid in lieu of fractional shares of DHS Common Stock in accordance with
Section 1.06) is referred to herein as the "MERGER CONSIDERATION."
(d) For purposes of this Agreement, the word "SUBSIDIARY"
when used with respect to any Person means any other Person, whether
incorporated or unincorporated, of which at least a majority of the securities
or other interests having by their terms ordinary voting power to elect at
least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or by any one or more of its
Subsidiaries. For purposes of this Agreement, "PERSON" means an individual, a
corporation, a limited liability company, a partnership, an association, a
trust or any other entity or organization, including a Governmental Authority.
Section 1.03 Surrender and Payment.
(a) Prior to the Effective Time, DHS shall appoint American
Stock Transfer & Trust Company as agent (the "EXCHANGE AGENT") for the purpose
of exchanging certificates representing Shares for the Merger Consideration.
Promptly after the Effective Time (but in any event within five (5) business
days thereafter), DHS will send, or will cause the Exchange Agent to send, to
each holder of Shares at the Effective Time (i) a letter of transmittal for use
in such exchange (which shall specify that delivery of the Merger Consideration
shall be effected, and risk of loss and title to the certificates representing
MAI Common Stock shall pass, only upon proper delivery of the certificates
representing Shares to the Exchange Agent), and (ii) instructions for use in
effecting the surrender of the certificates representing Shares in exchange for
the certificates representing DHS Common Stock constituting Merger
Consideration. Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to a holder of certificates theretofore
representing Shares for any amount which may be required to be paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
(b) Each holder of Shares that have been converted into a
right to receive the Merger Consideration, upon surrender to the Exchange Agent
of a certificate or certificates representing such Shares, together with a
properly completed letter of transmittal covering such Shares, will be entitled
to receive the Merger Consideration payable in respect of such Shares and any
dividends payable pursuant to Section 1.03(f). Until so surrendered, each such
certificate shall, after the Effective Time, represent for all purposes only
the right to receive the Merger Consideration and any dividends payable
pursuant to Section 1.03(f).
(c) If any certificate representing Merger Consideration is
to be delivered to a Person other than the registered holder of the Shares
represented by the certificate or certificates surrendered in exchange
therefor, it shall be a condition to the issuance of such certificate
evidencing DHS Common Stock that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the Person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required by reason of the
4
<PAGE> 13
issuance of shares of DHS Common Stock to a Person other than the registered
holder of such Shares represented by the certificate or certificates so
surrendered or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not applicable.
(d) After the Effective Time, there shall be no further
registration of transfers of Shares on the stock transfer book of MAI. If,
after the Effective Time, certificates representing Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for the
consideration provided for, and in accordance with the procedures set forth, in
this Article I.
(e) Any portion of the Merger Consideration that remains
unclaimed by the holders of Shares one (1) year after the Effective Time shall
be returned to DHS, upon demand, and any such holder who has not exchanged his
Shares for the Merger Consideration in accordance with this Section 1.03 prior
to that time shall thereafter look only to DHS for payment of the Merger
Consideration. Notwithstanding the foregoing, DHS shall not be liable to any
holder of Shares for any amount paid to a public official pursuant to
applicable abandoned property laws. Any amounts remaining unclaimed by holders
of Shares seven (7) years after the Effective Time (or such earlier date
immediately prior to such time as such amounts would otherwise escheat to or
become property of any Governmental Authority) shall, to the extent permitted
by applicable law, become the property of DHS free and clear of any claims or
interest of any Person previously entitled thereto.
(f) No dividends or other distributions with respect to DHS
Common Stock issued in the Merger shall be paid to the holder of any
unsurrendered certificates representing Shares until such certificates are
surrendered as provided in this Section 1.03. Subject to the effect of
applicable laws, following the surrender of such certificates, there shall be
paid, without interest, to the record holder of the DHS Common Stock issued in
exchange therefor at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time payable prior
to or on the date of such surrender with respect to such whole shares of DHS
Common Stock and not previously paid, less the amount of any withholding taxes
which may be required thereon.
(g) In the event that any certificate representing Shares
shall have been lost, stolen or destroyed, upon the making of an affidavit
(containing a standard form of indemnity) of the fact by the person claiming
such certificate to be lost, stolen or destroyed, DHS will, after the Effective
Time, issue in exchange for such lost, stolen or destroyed certificate the
certificate evidencing shares of DHS Common Stock deliverable in respect
thereof, as determined in accordance with this Article I. When authorizing such
issue of the certificate of shares of DHS Common Stock in exchange therefor,
DHS may, in its discretion and as a condition precedent to the issuance
thereof, require (unless such requirement is waived by Gary Hill or Brad
Hummel) the owner of such lost, stolen or destroyed certificate (unless such
owner is an institutional investor) to give DHS a bond in such sum as it may
direct as indemnity against any claim that may be made against DHS with respect
to the certificate alleged to have been lost, stolen or destroyed.
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(h) Approval and adoption of this Agreement by the
stockholders of MAI shall constitute, as an integral part of the Merger,
ratification of the appointment of, and the reappointment of, said Exchange
Agent.
Section 1.04 Stock Option Plans.
(a) At the Effective Time, the terms of each outstanding
option granted by MAI to purchase shares of MAI Common Stock (a "MAI STOCK
OPTION") under the 1994 Amended and Restated Long Term Incentive Plan of MAI
(the "MAI OPTION PLAN"), whether vested or unvested, shall be adjusted as
necessary to provide that at the Effective Time, each MAI Stock Option
outstanding immediately prior to the Effective Time shall be fully vested
pursuant to the terms of the MAI Option Plan and shall be deemed to constitute
and shall become an option to acquire, on the same terms and conditions as were
applicable under such MAI Stock Option, the same number of shares of DHS Common
Stock as the holder of such MAI Stock Option would have been entitled to
receive pursuant to the Merger (including, if applicable, after giving effect
to the adjustments contemplated by the proviso to Section 1.02(a)(iii)) had
such holder exercised such MAI Stock Option in full immediately prior to the
Effective Time, at a price per share of DHS Common Stock equal to (i) the
aggregate exercise price for the shares of MAI Common Stock otherwise
purchasable pursuant to such MAI Stock Option, divided by (ii) the aggregate
number of shares of DHS Common Stock deemed purchasable pursuant to such MAI
Stock Option (each, as so adjusted, an "ADJUSTED OPTION"); provided that, after
aggregating all the Shares of a holder subject to MAI Stock Options, any
fractional share of DHS Common Stock resulting from such calculation for such
holder shall be rounded up to the nearest whole share and provided, further,
that in the case of any option to which Section 421 of the Code applies by
reason of its qualification under any of Sections 422 through 424 of the Code
("QUALIFIED STOCK options"), the option price, the number of shares purchasable
pursuant to such option, and the terms and conditions of exercise of such
option shall be determined in order to comply with Section 424 of the Code.
(b) As soon as practicable after the Effective Time, DHS
shall deliver to the holders of MAI Stock Options appropriate notices setting
forth such holders' rights pursuant to the MAI Option Plan and the agreements
evidencing the grants of such MAI Stock Options and that such MAI Stock Options
and agreements shall be assumed by DHS and shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section 1.04
after giving effect to the Merger).
(c) DHS shall take such actions as are reasonably necessary
for the assumption of the MAI Option Plan pursuant to this Section 1.04,
including the reservation, issuance and listing of DHS Common Stock as is
necessary to effectuate the transactions contemplated by this Section 1.04. DHS
shall prepare and file with the SEC a registration statement on Form S-8 or
other appropriate form with respect to shares of DHS Common Stock subject to
MAI Stock Options issued under the MAI Option Plan (as well as shares of DHS
Common Stock which become subject to the MAI Warrants as provided in Section
1.05) and shall use its reasonable efforts to have such registration statement
declared effective as soon as practicable following the Effective Time and to
maintain the effectiveness of such registration
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statement or registration statements covering such MAI Stock Options (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as such MAI Stock Options remain outstanding.
Section 1.05 MAI Warrants. At the Effective Time, by virtue of the
Merger and without requirement of any action on the part of the holder(s)
thereof (but subject to the consent of such holder(s) with respect to the
adjustments hereunder), the outstanding common stock purchase warrants of MAI
(the "MAI WARRANTS") immediately prior to the Effective Time shall
automatically be converted into and shall become warrants of DHS to acquire, on
the same terms and conditions as were applicable under such MAI Warrant, the
same number of shares of DHS Common Stock as the holder of such MAI Warrant
would have been entitled to receive pursuant to the Merger (including, if
applicable, after giving effect to the adjustments contemplated by the proviso
to Section 1.02(a)(iii)) had such holder exercised such MAI Warrant in full
immediately prior to the Effective Time, at a price per share of DHS Common
Stock equal to (a) the aggregate exercise price for the shares of MAI Common
Stock otherwise purchasable pursuant to such MAI Warrant, divided by (b) the
aggregate number of shares of DHS Common Stock deemed purchasable pursuant to
such MAI Warrant (each, as so adjusted, an "ADJUSTED WARRANT"); provided that,
after aggregating all of the Shares of a holder subject to MAI Warrants, any
fractional share of DHS Common Stock resulting from such calculation for such
holder shall be rounded up to the nearest whole share.
Section 1.06 Fractional Shares. Neither certificates nor scrip for
fractional shares of DHS Common Stock will be issued in the Merger, but in lieu
thereof each holder of MAI Common Stock otherwise entitled to a fraction of a
share of DHS Common Stock (after aggregating all fractional shares of MAI
Common Stock that would otherwise be received by such holder) will be entitled
hereunder to (a) if permitted by the senior and subordinated lenders to DHS, a
cash payment calculated as hereinafter provided, or (b) if such cash payment is
not permitted by DHS' lenders, an additional fractional share in an amount
sufficient to round such stockholder's aggregate holdings of DHS Common Stock
to the next nearest whole share. The amount of any such cash payment shall
equal, in the case of each fractional share, an amount (rounded to the nearest
whole cent), without interest, calculated as the product of (i) such fraction,
multiplied by (ii) the arithmetic mean of the closing sales prices for the DHS
Common Stock reported on the NASDAQ National Market System for each of the five
(5) consecutive trading days on which DHS Common Stock was traded immediately
preceding the Effective Time as quoted in the Wall Street Journal, or other
reliable financial newspaper or publication. For the purposes of the preceding
sentence, a "trading day" means a day on which trading generally takes place on
the NASDAQ National Market System. No such fractional share interest shall
entitle the owner thereof to vote or to any rights of a stockholder of DHS.
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ARTICLE II
THE SURVIVING CORPORATION
Section 2.01 Articles of Incorporation. Subject to the provisions of
Section 5.17, the articles of incorporation of Merger Subsidiary shall be the
articles of incorporation of the Surviving Corporation, except that, at the
Effective Time, the name of the Surviving Corporation shall be changed to "MAI,
Inc." or such other name as DHS may designate on or before the Effective Time,
until thereafter amended in accordance with applicable law and such articles of
incorporation.
Section 2.02 By-Laws. Subject to the provisions of Section 5.17, the
by-laws of Merger Subsidiary in effect at the Effective Time shall be the
by-laws of the Surviving Corporation, until thereafter amended in accordance
with applicable law, the articles of incorporation of the Surviving Corporation
and such by-laws.
Section 2.03 Directors and Officers. From and after the Effective
Time, until successors are duly elected or appointed and qualified in
accordance with the Texas Law and the articles of incorporation and by-laws of
the Surviving Corporation, the directors and the officers of the Surviving
Corporation shall be those persons set forth on Schedule 2.03 to the disclosure
letter delivered by DHS to MAI concurrently with the execution and delivery of
this Agreement (the "DHS DISCLOSURE LETTER").
ARTICLE III
REPRESENTATIONS AND WARRANTEES OF MAI
MAI represents and warrants to DHS that:
Section 3.01 Organization and Power. Each of MAI and its Subsidiaries
is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, and has the requisite
corporate power and authority and governmental approvals to own, lease and
operate its properties and to carry on its business as now being conducted.
Each of MAI and its Subsidiaries is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except where the failure to be so
duly qualified or licensed and in good standing would not, individually or in
the aggregate, have a Material Adverse Effect on MAI. For purposes of this
Agreement, a "MATERIAL ADVERSE Effect" with respect to any Person means a
material adverse effect (a) on the condition (financial or otherwise),
business, liabilities, properties, assets, results of operations or prospects
of such Person and its Subsidiaries, taken as a whole, or (b) on the ability of
such Person to perform its obligations under or to consummate the transactions
contemplated by this Agreement. Schedule 3.01 to the disclosure letter
delivered by MAI to DHS concurrently with the execution and delivery of this
Agreement (the "MAI DISCLOSURE LETTER") sets forth (i) the name and
jurisdiction of incorporation of each Subsidiary of MAI, (ii) its authorized
capital stock, (iii) the number of issued and outstanding shares of its capital
stock, and (iv) the record and beneficial owners of such shares. Except as set
forth on Schedule 3.01 to the MAI Disclosure Letter, MAI does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity
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or similar interest in, any Person. MAI has heretofore delivered to DHS true
and complete copies of the certificate or articles of incorporation and by-laws
as currently in effect of MAI and its Subsidiaries.
Section 3.02 Corporate Authorization. The execution, delivery and
performance by MAI of this Agreement and the consummation by MAI of the
transactions contemplated hereby are within MAI's corporate powers and, except
as set forth in the second succeeding sentence of this Section 3.02, have been
duly authorized by all necessary corporate action, including, without
limitation, authorization and approval of its Board of Directors. As of the
date of this Agreement, the Board of Directors of MAI has recommended approval
and adoption of this Agreement by the shareholders of MAI and directed that
this Agreement be submitted to the stockholders of MAI for their approval. The
affirmative vote of the holders of at least two-thirds of the outstanding
Shares is the only vote of any class or series of MAI's capital stock necessary
to approve and adopt this Agreement, the Merger and the transactions
contemplated by this Agreement. This Agreement has been duly executed and
delivered by MAI and, subject to the receipt of the approval described in the
immediately preceding sentence, constitutes a legal, valid and binding
agreement of MAI, enforceable against MAI in accordance with its terms (subject
to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, regardless of whether in
a proceeding in equity or at law).
Section 3.03 Governmental Authorization. The execution, delivery and
performance by MAI of this Agreement, and the consummation by MAI of the
transactions contemplated hereby, require no action by or in respect of, or
filing with or notice to, any United States federal, state or local government,
any foreign country, any foreign state or local government or any court,
administrative agency or commission or other governmental or regulatory agency
or authority of any of the foregoing (collectively "GOVERNMENTAL AUTHORITIES"
and individually a "GOVERNMENTAL AUTHORITY"), other than (a) the filing of
articles of merger with respect to the Merger with the Texas Secretary of State
and appropriate documents with the relevant authorities of other states in
which MAI is qualified to do business; (b) compliance with any applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR ACT"), provided that nothing contained in this Agreement
shall be deemed to constitute an acknowledgement that any requirements under
the HSR Act are applicable to the transactions contemplated by this Agreement;
(c) compliance with any applicable requirements of the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder (the "1933
ACT"); (d) compliance with any applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "1934 ACT"); and (e) compliance with any other applicable
securities laws.
Section 3.04 Non-Contravention. Except as set forth on Schedule 3.04
to the MAI Disclosure Letter, the execution, delivery and performance by MAI of
this Agreement do not, and the consummation by MAI of the transactions
contemplated hereby will not, require the consent of any other Person, or
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give to any
Person any right
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of payment or reimbursement, termination, cancellation, modification or
acceleration of, or result in the creation or imposition of any Lien on any of
the assets or properties of MAI or any of its Subsidiaries under, any of the
terms, conditions or provisions of (a) the certificate or articles of
incorporation, by-laws or similar organizational documents of MAI or any of its
Subsidiaries, (b) assuming receipt of the approval of stockholders referred to
in Section 3.02, and compliance with the matters referred to in Section 3.03,
any United States or foreign statute, law, regulation, rule or ordinance
(together "LAWS") or any judgment, injunction, order, writ, license, permit or
decree of any Governmental Authority (together "Orders") binding upon or
applicable to MAI, any Subsidiary of MAI or any of their respective assets or
properties, or (c) any note, bond, mortgage, security agreement, indenture,
lease, contract, instrument or other agreement of any kind to which MAI or any
Subsidiary of MAI is a party or by which MAI or any Subsidiary of MAI or any of
their respective assets or properties is bound (a "MAI AGREEMENT") or any
license, franchise, permit or other similar authorization held by MAI or any
Subsidiary of MAI. For purposes of this Agreement, "LIEN" means, with respect
to any asset, any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset, and, in addition, with
respect to real property, any easement, right of way or other restriction,
limitation or burden of any kind in respect of such real property.
Section 3.05 Capitalization of MAI.
(a) The authorized capital stock of MAI consists solely of
30,000,000 shares of MAI Common Stock and 5,000,000 shares of preferred stock,
par value $.002 per share (the "MAI PREFERRED STOCK"). As of the close of
business on December 31, 1998, (i) 6,117,079 shares of MAI Common Stock were
issued and outstanding, 277,203 shares of MAI Common Stock were issued and held
in the treasury of MAI, and 1,107,607 shares of MAI Common Stock were reserved
for issuance under the MAI Option Plan and the MAI Warrants, (ii) options to
purchase 917,541 shares of MAI Common Stock were outstanding under the MAI
Option Plan and warrants to purchase 15,610 shares of MAI Common Stock were
outstanding under the MAI Warrants, and (iii) no shares of MAI Preferred Stock
are issued, outstanding or held in the treasury of MAI. All of the outstanding
shares of MAI Common Stock are, and all shares reserved for issuance will be,
when issued in accordance with the terms specified in the instruments or
agreements pursuant to which they are issuable, duly authorized, validly
issued, fully paid and non-assessable. Except (A) as set forth in this Section
3.05 or in Schedule 3.05 to the MAI Disclosure Letter, and (B) for Shares that
may be issued as provided in Section 5.01(f), there are outstanding (w) no
shares of capital stock or other voting securities of MAI, (x) no securities of
MAI convertible into or exchangeable for shares of capital stock or voting
securities of MAI, (y) no options, warrants or other rights to acquire from
MAI, and no preemptive or similar rights, subscriptions or other rights,
convertible securities, agreements, arrangements or commitments of any
character, obligating MAI to issue, transfer or sell, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of MAI or obligating MAI to grant, extend or enter into any
such option, warrant, subscription or other right, convertible security,
agreement, arrangement or commitment, and (z) no restricted stock awards, stock
appreciation rights, performance share agreements or stock unit awards of MAI
(the items in clauses (w), (x), (y) and (z) being referred to collectively as
the "MAI SECURITIES").
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(b) Except as set forth on Schedule 3.05 to the MAI
Disclosure Letter, (i) there are no voting trusts or other agreements or
understandings to which MAI or any Subsidiary of MAI is a party with respect to
the voting of the capital stock of MAI or any Subsidiary of MAI, (ii) no Person
has or is entitled to any registration rights in respect of any MAI Securities,
and (iii) none of MAI or its Subsidiaries has any contractual obligation to
redeem, repurchase or otherwise acquire any MAI Securities or any capital stock
of any Subsidiary of MAI, including as a result of the transactions
contemplated by this Agreement, or to provide funds to, or make any investment
in, any Subsidiary of MAI or any other Person. Except as permitted by this
Agreement, following the Merger, neither MAI nor any of its Subsidiaries will
have any obligation to issue, transfer or sell any shares of its capital stock
pursuant to any employee benefit plan or otherwise.
Section 3.06 Capitalization of Subsidiaries. Except as set forth on
Schedule 3.06 to the MAI Disclosure Letter, all of the outstanding shares of
capital stock of, or other ownership interests in, each Subsidiary of MAI, are
duly authorized, validly issued, fully paid and non-assessable and are owned,
beneficially and of record, by MAI, directly or indirectly, free and clear of
any consensual Lien (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There
are no (a) outstanding securities of MAI or any Subsidiary of MAI convertible
into or exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary of MAI, or (b) options, warrants or other
rights to acquire from MAI or any Subsidiary of MAI, and no other obligation of
MAI or any Subsidiary of MAI to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or
exchangeable for, any capital stock, voting securities or ownership interests
in, any Subsidiary of MAI (the items in clauses (a) and (b) being referred to
collectively as the "MAI SUBSIDIARY SECURITIES").
Section 3.07 SEC Filings.
(a) MAI has filed all reports, schedules, forms, statements
and other documents with the Securities and Exchange Commission (the "SEC')
required to be filed by MAI since October 11, 1996 (the "MAI SEC DOCUMENTS").
(b) As of its filing date, each MAI SEC Document filed
pursuant to the 1934 Act complied as to form in all material respects with the
requirements of the 1934 Act and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(c) Each MAI SEC Document that is a registration statement,
as amended or supplemented, if applicable, filed pursuant to the 1933 Act as of
the date such registration statement or amendment became effective complied as
to form in all material respects with the requirements of the 1933 Act and did
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
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Section 3.08 Financial Statements.
(a) The audited consolidated financial statements included in
MAI's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(the "MAI 10-K") and the unaudited consolidated interim financial statements of
MAI included in the MAI SEC Documents filed after such date (collectively, the
"MAI FINANCIAL STATEMENTS") complied, or will comply, as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly present
the consolidated financial position of MAI and its consolidated Subsidiaries as
of the dates thereof and their consolidated results of operations and cash
flows for the periods then ended (subject to footnote disclosures and normal
year-end adjustments in the case of any unaudited interim financial
statements). The MAI Financial Statements have been prepared from and are
consistent with the books and records of MAI, which reflect all material
transactions of MAI and its Subsidiaries. For purposes of this Agreement, "MAI
BALANCE SHEET" means the consolidated balance sheet of MAI as of December 31,
1997 set forth in the MAI 10-K and "MAI BALANCE SHEET DATE" means December 31,
1997. Each Subsidiary of MAI is treated as a consolidated subsidiary of MAI in
the MAI Financial Statements for all periods covered thereby.
(b) Without limitation of Section 3.08(a), (i) MAI or its
Subsidiaries has good and marketable title to all of the assets reflected in
the balance sheet of MAI included in it quarterly report on form 10-Q for the
quarter ended September 30, 1998 (the "MOST RECENT MAI BALANCE SHEET") free and
clear of all liens, security interests, encumbrances or other adverse claims
other than liens of secured lenders disclosed in the footnotes to the Most
Recent MAI Balance Sheet and interests of lessors in respect of capitalized
leases, (ii) the reserve for doubtful accounts reflected in the Most Recent MAI
Balance Sheet is adequate and in accordance with GAAP, (iii) the inventories
reflected in the Most Recent MAI Balance Sheet have been valued at the lower of
cost or market, and are not materially in excess of the normal requirement of
MAI's business, and (iv) all equipment and other fixed assets reflected in the
Most Recent MAI Balance Sheet are in good operating condition (reasonable wear
and tear excepted); all of the representations in this Section 3.08(b) being
subject to the collection of accounts receivable, sale and use of inventory,
and disposition of obsolete equipment, in the ordinary course of business.
Section 3.09 Information Supplied. None of the information supplied or
to be supplied by MAI for inclusion or incorporation by reference in and none
of the statements based on such information contained in (a) the joint proxy
statement to be filed with the SEC relating to the stockholders' meetings of
MAI and DHS to be held in connection with the Merger, as amended or
supplemented from time to time (as so amended or supplemented, the "PROXY
STATEMENT"), will, at the date the Proxy Statement is first mailed to
stockholders and at the time of the meetings of such stockholders in connection
with the Merger, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, or (b)
the registration statement on Form S-4 of DHS to be filed under the 1933 Act
relating to the issuance of DHS Common Stock in the Merger, as amended or
supplemented from time to time (as so amended or supplemented, the "FORM S-4"),
will, at the time the Form S-4 becomes effective under the 1933 Act and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any
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material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Section 3.10 Absence of Certain Changes. Except as disclosed in the
MAI SEC Documents filed prior to the date of this Agreement or as disclosed on
Schedule 3.10 to the MAI Disclosure Letter, since September 30, 1998, MAI and
its Subsidiaries have conducted their respective businesses in the ordinary
course consistent with past practice and there has not been:
(a) Any material transaction of MAI or any of its
Subsidiaries outside of the normal course of business, any damage or
destruction (whether or not covered by insurance) of any material assets of MAI
or any of its Subsidiaries, or any event, occurrence or development which,
individually or in the aggregate, has had or would be reasonably likely to have
a Material Adverse Effect on MAI;
(b) any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of MAI, any
issuance of MAI Common Stock other than upon exercise of MAI Warrants or MAI
Options outstanding on December 31, 1997, or any repurchase, redemption or
other acquisition by MAI or any Subsidiary of MAI of any amount of outstanding
shares of capital stock or other equity securities of, or other ownership
interests in, MAI or any Subsidiary of MAI;
(c) any amendment of any term of any MAI Securities or MAI
Subsidiary Securities;
(d) (i) any incurrence or assumption by MAI or any Subsidiary
of MAI of any indebtedness for borrowed money other than under existing credit
facilities in the ordinary course of business consistent with past practices,
or (ii) any guarantee, endorsement or other incurrence or assumption of
liability (whether directly, contingently or otherwise) by MAI or any
Subsidiary of MAI for the obligations of any other Person (other than any
wholly-owned Subsidiary of MAI);
(e) any creation or assumption by MAI or any Subsidiary of
MAI of any consensual Lien on any material asset of MAI or any Subsidiary of
MAI;
(f) any making of any loan, advance or capital contribution
to or investment in any Person by MAI or any Subsidiary of MAI other than (i)
loans, advances or capital contributions to or investments in wholly-owned
Subsidiaries of MAI, or (ii) loans or advances to employees of MAI or any
Subsidiary of MAI made in the ordinary course of business consistent with past
practice;
(g) (i) any contract or agreement entered into by MAI or any
Subsidiary of MAI on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business, or (ii) any modification,
amendment, assignment, termination or relinquishment by MAI or any Subsidiary
of MAI of any contract, license, or other right (including any insurance policy
naming it as a beneficiary or a loss payable payee) that would be reasonably
likely to have a Material Adverse Effect on MAI, other than those contemplated
by this Agreement;
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(h) any change in any method of accounting or accounting
principles or practices by MAI or any Subsidiary of MAI, except for any such
change required by reason of a change in GAAP; or
(i) any (i) grant of any severance or termination pay to any
director, officer or employee of MAI or any of its Subsidiaries, (ii) entering
into of any employment, deferred compensation or other similar agreement (or
any amendment to any such existing agreement) with any director, officer or
employee of MAI or any of its Subsidiaries, (iii) increase in benefits payable
under any existing severance or termination pay policies or employment
agreements, or (iv) increase in rates of compensation or bonus in excess of
five (5%) percent or increase in other benefits payable to officers or
employees of MAI or any of its Subsidiaries or increase in compensation, bonus
or other benefits payable to directors of MAI or any of its Subsidiaries.
Section 3.11 No Undisclosed Liabilities. Neither MAI nor any
Subsidiary of MAI has any material liabilities or obligations (whether pursuant
to contracts or otherwise) of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, except:
(a) those liabilities and obligations set forth on the MAI
Balance Sheet and not heretofore paid or discharged;
(b) those liabilities and obligations incurred since
September 30, 1998 in the ordinary course of business consistent with past
practice; and
(c) those liabilities or obligations under this Agreement or
incurred in connection with the transactions contemplated hereby.
Section 3.12 Litigation. Except as disclosed on Schedule 3.12 to the
MAI Disclosure Letter, (a) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of MAI, threatened against, relating
to or affecting, nor are there are any Governmental Authority investigations or
audits pending or, to the knowledge of MAI, threatened against, relating to or
affecting, MAI or any of its Subsidiaries or any of their respective assets or
properties nor, to the knowledge of MAI, is there any valid basis for any such
action, suit, arbitration, proceeding, investigation or audit which, if
adversely determined, would have a Material Adverse Effect on MAI, and (b)
neither MAI nor any of its Subsidiaries is subject to any order of any
Governmental Authority which adversely affects the ability of MAI to consummate
the transactions contemplated by this Agreement.
Section 3.13 Taxes.
(a) All Tax Returns required to be filed by MAI, any of its
Subsidiaries, or any corporation that was included in the filing of a return
with MAI or its Subsidiaries on a consolidated, combined or unitary basis have
been filed (the "MAI TAX RETURNS") and all Taxes required to be shown on the
MAI Tax Returns, or a subsequent assessment with respect thereto, or otherwise
due or payable (to the extent in excess of $50,000 in the
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aggregate) have been paid and any penalties and interest relating to such Taxes
(to the extent in excess of $50,000 in the aggregate) have been paid. No other
Taxes (to the extent in excess of $50,000 in the aggregate) are payable by the
MAI Group with respect to items or periods covered by such Tax Returns or with
respect to Tax periods prior to the date of this Agreement. None of the MAI Tax
Returns contain, or are required to contain, a disclosure statement under
Section 6662 of the Code, or any similar provision of state, local or foreign
law, with respect to any items that relate to MAI or its Subsidiaries in order
to avoid a penalty for any taxable year. All MAI Tax Returns are true, correct
and complete in all material respects. MAI has made available to DHS correct
and complete copies of all MAI Tax Returns for all periods which are not closed
by the statute of limitations.
(b) No adjustment relating to any MAI Tax Return has been
proposed formally or, to MAI's knowledge, informally by any Governmental
Authority (to the extent in excess of $50,000 in the aggregate), and no basis
exists for any such adjustment that would have a Material Adverse Effect on
MAI. There are no outstanding subpoenas or requests for information with
respect to any MAI Tax Returns or portions thereof. There are no pending or, to
MAI's knowledge, threatened actions or proceedings for the assessment or
collection of Taxes for which MAI or its Subsidiaries may be liable (to the
extent in excess of $50,000 in the aggregate). There are no Tax liens on any
assets of MAI or its Subsidiaries, except with respect to Taxes which are not
yet due and payable.
(c) No consent under Section 341(f) of the Code has been
filed with respect to MAI or any of its Subsidiaries. Neither MAI nor any of
its Subsidiaries is or has been subject to the dual consolidated loss
provisions of Section 1503 of the Code.
(d) MAI and its Subsidiaries are members of an affiliated
group (within the meaning of Section 1504 of the Code) that is eligible to file
a consolidated return. No other entity is or has been eligible to file a
consolidated or combined return with MAI and its Subsidiaries, and neither MAI
nor its Subsidiaries have filed or consented to the filing of any Federal or
state consolidated or combined return with any entity not a member of the MAI
Group. Neither MAI nor any of its Subsidiaries has been at any time a member of
any partnership or joint venture or the holder of a beneficial interest in any
trust for any Person for which the statute of limitations for any Tax
potentially applicable as a result of such membership or holding has not
expired.
(e) MAI and its Subsidiaries have properly accrued all
current or contested Taxes (to the extent in excess of $50,000 in the
aggregate) on their books and records, and their books and records reflect
reserves that are adequate for the payment of all Taxes (to the extent in
excess of $50,000 in the aggregate) not yet due and payable that are properly
accruable thereon through the date of this Agreement (including Taxes being
contested). Neither MAI nor any of its Subsidiaries have any liability for any
Taxes which, in the aggregate, are more than $50,000 in excess of amounts
accrued or the reserves established. All Taxes (to the extent in excess of
$50,000 in the aggregate) required to be withheld, collected or deposited in
connection with the operations and activities of MAI or its Subsidiaries have
been timely withheld, collected or deposited and, to the extent required, have
been paid to the relevant taxing authority.
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(f) MAI does not own nor has it owned during the past five
(5) years any capital stock of DHS. At the Effective Time, the fair market
value of the assets of MAI will exceed the sum of its liabilities, plus the
amount of other liabilities, if any, to which the assets are subject.
(g) There are no requests for rulings, determinations or
information currently outstanding with any Taxing Authority that could
reasonably be expected to affect the Taxes of MAI or any of its Subsidiaries.
(h) The MAI Tax Returns have been audited by the Internal
Revenue Service ("SERVICE") or other governmental agency (or closed by
applicable statutes of limitations) and all Tax liabilities in respect thereof
have been finally determined for all taxable years ending on or before December
31, 1996. There are no outstanding waivers or agreements extending the statute
of limitations for any period with respect to any Tax to which MAI or any of
its Subsidiaries may be liable.
(i) "TAXES" shall mean any and all taxes, charges, fees,
levies or other assessments, including income, gross receipts, excise, real or
personal property, sales, withholding, social security, retirement,
unemployment, occupation, use, goods and services, service use, license, value
added, capital, net worth, payroll, profits, withholding, franchise, transfer
and recording taxes, fees and charges, and any other taxes, assessment or
similar charges imposed by the Service or any taxing authority (whether
domestic or foreign including any state, county, local or foreign government or
any subdivision or taxing agency thereof (including a United States
possession)) (a "TAXING AUTHORITY"), whether computed on a separate,
consolidated, unitary, combined or any other basis, and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies or other assessments. "TAX RETURN" shall mean any report, return,
document, declaration or other information or filing required to be supplied to
any taxing authority or jurisdiction (foreign or domestic) with respect to
Taxes, including information returns, any documents with respect to or
accompanying payments of estimated Taxes, or with respect to or accompanying
requests for the extension of time in which to file any such report, return,
document, declaration or other information. The term "MAI GROUP" shall mean,
individually and collectively, (i) MAI, (ii) its Subsidiaries, and (iii) any
trust, corporation, partnership or any other entity as to which MAI or its
Subsidiaries is liable for Taxes incurred by such entity either as a
transferee, or pursuant to Treasury Regulations Section 1.1502-6, or pursuant
to any other provision of federal, state, local or foreign law or regulations.
(j) MAI has made available to DHS a true and complete copy of
any (i) elections, letter rulings and determination letters relating to Taxes
with respect to MAI or its Subsidiaries which were in effect or affected Taxes
for any periods which are not closed by the statute of limitations, and (ii)
examination reports, closing agreements and statements of deficiencies for
Taxes assessed against or agreed to by MAI or any of its Subsidiaries which
were in effect or affected Taxes for any periods which are not closed by the
statute of limitations.
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Section 3.14 Employee Benefit Plans; ERISA.
(a) Except as set forth on Schedule 3.14 to the MAI
Disclosure Letter, there are no employee benefit plans (including any plans for
the benefit of directors or former directors), contracts or agreements
(including employment agreements and severance agreements, incentive
compensation, bonus, stock option, stock appreciation rights and stock purchase
plans) of any type (including plans described in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), maintained by
MAI, any of its Subsidiaries or any trade or business, whether or not
incorporated (a "MAI ERISA AFFILIATE"), that together with MAI would be deemed
a "controlled group" within the meaning of Section 4001(a)(14) of ERISA, or
with respect to which MAI, any of its Subsidiaries, or any MAI ERISA Affiliate,
has or may have a liability (the "MAI BENEFIT PLANS"). Except as disclosed on
Schedule 3.14 to the MAI Disclosure Letter (or as otherwise permitted by this
Agreement), (i) neither MAI nor any ERISA Affiliate has any plan or commitment,
whether legally binding or not, to create any additional MAI Benefit Plan or
modify or change any existing MAI Benefit Plan that would affect any employee
or terminated employee of MAI or any ERISA Affiliate, and (ii) since December
31, 1997, there has been no change, amendment, modification to, or adoption of,
any MAI Benefit Plan.
(b) With respect to each MAI Benefit Plan: (i) if intended to
qualify under Section 401(a), 401(k) or 403(a) of the Code, such plan so
qualifies, and its trust is exempt from taxation under Section 501(a) of the
Code; (ii) no failures to administer such plan in accordance with its terms and
applicable law have occurred that have had or would reasonably be expected to
have a Material Adverse Effect on MAI; (iii) no breaches of fiduciary duty have
occurred; (iv) no prohibited transaction within the meaning of Section 406 of
ERISA has occurred; (v) as of the date of this Agreement, no lien imposed under
the Code or ERISA exists; and (vi) all contributions and premiums due
(including any extensions for such contributions and premiums) have been made
in full or adequate provision has been made therefor in the MAI Financial
Statements.
(c) None of the MAI Benefit Plans has incurred any
"accumulated funding deficiency," as such term is defined in Section 412 of the
Code, whether or not waived.
(d) Neither MAI nor any MAI ERISA Affiliate has incurred any
liability under Title IV of ERISA (including Sections 4063-4064 and 4069 of
ERISA) since the effective date of ERISA that has not been satisfied in full.
(e) With respect to each MAI Benefit Plan that is a "welfare
plan" (as defined in Section 3(l) of ERISA), no such plan provides medical or
death benefits with respect to current or former employees of MAI or any of its
Subsidiaries beyond their termination of employment, other than as required by
law or on an employee-pay-all basis.
(f) Except as set forth on Schedule 3.14 to the MAI
Disclosure Letter, the consummation of the Merger pursuant to this Agreement
will not (i) entitle any individual to severance pay or any tax "gross-up"
payments with respect to the imposition of any tax pursuant to Section 4999 of
the Code or accelerate the time of payment or vesting, or increase the amount,
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of compensation or benefits due to any individual with respect to any MAI
Benefit Plan, or (ii) constitute or result in a prohibited transaction under
Section 4975 of the Code or Section 406 or 407 of ERISA with respect to any MAI
Benefit Plan.
(g) There is no MAI Benefit Plan that is a "multiemployer
plan," as such term is defined in Section 3(37) of ERISA, or which is covered
by Section 4063 or 4064 of ERISA.
Section 3.15 Certain Agreements; Compliance with Agreements.
(a) Except as disclosed on Schedule 3.15 to the MAI
Disclosure Letter or as provided for in this Agreement, neither MAI nor any of
its Subsidiaries is a party to or bound by any oral or written:
(i) consulting agreement not terminable on thirty (30) days'
or less notice;
(ii) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of the transactions contemplated by this
Agreement;
(iii) agreement with respect to any officer providing any
term of employment or compensation guarantee;
(iv) agreement or plan, including any stock option plan,
stock appreciation rights plan, employee stock ownership plan,
restricted stock plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will
be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of
which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(v) agreement containing covenants that limit the ability of
MAI or any of its Subsidiaries to compete in any line of business or
with any Person, or that involve any restriction on the geographic
area in which, or method by which, MAI or any of its Subsidiaries may
carry on its business (other than as may be required by law or any
regulatory agency);
(vi) agreement, contract or understanding, other than this
Agreement and the articles of incorporation and by-laws of MAI,
regarding the capital stock of MAI or committing to dispose of some or
all of the capital stock or all or substantially all of the assets of
MAI;
(vii) partnership, joint venture or profit sharing agreement
of MAI or any of its Subsidiaries with any Person;
(viii) agreement, contract, commitment, indenture or other
instrument of MAI or any of its Subsidiaries relating to the borrowing
of money, or the direct or indirect guarantee of any obligation for,
or an agreement to service the repayment of, borrowed
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money, or any other contingent obligation in respect to indebtedness
of any other Person, including without limitation any agreement or
arrangement relating to the maintenance of compensating balances, any
agreement or arrangement with respect to lines of credit, any
agreement or arrangement to purchase or repurchase obligations of any
other Person, any agreement or arrangement to advance or supply funds
to or to invest in any other Person, any agreement or arrangement to
pay for property, products or services of any other Person even if
such property, products or services are not conveyed, delivered or
rendered, or any guarantee with respect to any lease or other similar
periodic payment to be made by any other Person;
(ix) lease of MAI or any of its Subsidiaries with annual
rental payments aggregating $50,000 or more;
(x) agreement, contract or commitment of MAI or any of its
Subsidiaries relating to the disposition or acquisition of any
investment in any Person if such investment has a book value of, or
the disposition or acquisition price of such investment or interest
is, $50,000 or more;
(xi) agreement, contract or commitment which involves payment
or potential payment, pursuant to the terms of such agreement,
contract or commitment, by or to MAI or any of its Subsidiaries of
$50,000 or more within any twelve (12) month period commencing after
the date hereof;
(xii) severance or similar agreement with any employee which
has been entered into or modified at any time since June 30, 1998; or
(xiii) agreement, contract, commitment or arrangement between
MAI or any of its Subsidiaries and any Affiliate of MAI or any of its
Subsidiaries that is not described in or filed as an exhibit to a MAI
SEC Document.
(b) Neither MAI nor any of its Subsidiaries nor, to the
knowledge of MAI, any other party thereto is in breach or violation of or in
default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or both, is reasonably
expected to result in a default under, (i) the certificates or articles of
incorporation, by-laws or similar organizational documents of MAI or any of its
Subsidiaries, or (ii) any contract, agreement, plan or instrument listed or
required to be listed on Schedule 3.15 to the MAI Disclosure Letter, except in
the case of clause (ii) for breaches, violations or defaults which,
individually or in the aggregate, are not having and are not reasonably
expected to have a Material Adverse Effect on MAI. Except as set forth on
Schedule 3.04 to the MAI Disclosure Letter, no party to any such contract,
agreement, plan or instrument will have the right to terminate any or all of
the provisions of any such contract, agreement, plan or instrument as a result
of the transactions contemplated by this Agreement.
(c) No outstanding purchase commitments of MAI or any of its
Subsidiaries is materially in excess of the reasonable requirements of their
respective business.
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(d) Neither MAI or any of its Subsidiaries has received
written notice of any existing, announced or anticipated changes in the
policies of any material clients, customers, referral sources or suppliers
which could reasonably be expected to have a Material Adverse Effect on MAI.
Section 3.16 Compliance with Laws and-Orders.
(a) MAI and its Subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Authorities
necessary for the lawful conduct of their respective businesses (the "MAI
PERMITS"), except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which, individually or in the aggregate, are
not having and are not reasonably expected to have a Material Adverse Effect on
MAI. MAI and its Subsidiaries are in compliance with. the terms of the MAI
Permits, except failures so to comply which, individually or in the aggregate,
are not having and are not reasonably expected to have a Material Adverse
Effect on MAI. MAI and its Subsidiaries are not in violation of or default
under any Laws or Orders, except for such violations or defaults which,
individually or in the aggregate, are not having and are not reasonably
expected to have a Material Adverse Effect on MAI.
(b) Without limitation of Section 3.16(a), MAI and its
Subsidiaries have at all times operated their businesses in compliance with all
applicable federal, state and other fraud and abuse, anti-kickback ("Stark
laws") and other statutes, rules and regulations governing the provision of
medical or related services and/or payments or reimbursements for such
services.
Section 3.17 Environmental Matters.
(a) No notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been filed
against, no penalty has been assessed against, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of MAI or any
Subsidiary of MAI, is threatened by any Person against, MAI or any Subsidiary
of MAI with respect to any matters relating to or arising out of any
Environmental Law;
(b) No Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released, in
violation of any Environmental Law, at, on, under or adjacent to any property
now or, to the knowledge of MAI, previously owned, leased or operated by MAI or
any Subsidiary of MAI; and
(c) There are no Environmental Liabilities.
(d) For purposes of this Section 3.17, the following terms
shall have the meanings set forth below:
(i) "MAI" and "SUBSIDIARY OF MAI" shall include any entity
which is, in whole or in part, a predecessor of MAI or any of its
Subsidiaries.
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(ii) "ENVIRONMENTAL LAWS" means any and all federal, state,
local and foreign law (including common law), treaty, judicial
decision, regulation, rule, judgment, order, decree, injunction,
permit, or governmental restrictions or any agreement with any
governmental authority or other third party, relating to human health
and safety, the physical condition of any real property now or
formerly owned, leased or operated by MAI of any of its Subsidiaries
or of any improvements thereon, the environment or to pollutants,
contaminants, wastes or chemicals or toxic, radioactive, ignitable,
corrosive, reactive or otherwise hazardous substances, wastes or
materials, including without limitation Hazardous Substances as
defined herein.
(iii) "ENVIRONMENTAL LIABILITIES" means any and all
liabilities of or relating to MAI or any Subsidiary of MAI of any kind
whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, which (A) arise under or relate to matters
covered by Environmental Laws, and (B) arise from actions occurring or
conditions existing on or prior to the Effective Time.
(iv) "HAZARDOUS SUBSTANCES" means any pollutant, contaminant,
waste or chemical or any toxic, radioactive, corrosive, reactive or
otherwise hazardous substance, waste or material, or any substance
having any constituent elements displaying any of the foregoing
characteristics, including, without limitation, petroleum, its
derivatives, by-products and other hydrocarbons, or any substance,
waste or material regulated under any Environmental Laws.
Section 3.18 Assets. The assets, properties, rights and contracts,
including (as applicable) title or leaseholds thereto, of MAI and its
Subsidiaries, taken as a whole, are sufficient to permit MAI and its
Subsidiaries to conduct their respective businesses as currently being
conducted. Neither MAI nor any of its Subsidiaries owns any real property.
Section 3.19 Intellectual Property Rights.
(a) Except as disclosed in Schedule 3.19 to the MAI
Disclosure Letter, MAI and its Subsidiaries own or have the right to use all
Intellectual Property individually or in the aggregate material to the conduct
of the businesses of MAI and its Subsidiaries. To the knowledge of MAI, (i)
neither MAI nor any Subsidiary of MAI is in default (or with the giving of
notice or lapse of time or both would be in default) under any license to use
such Intellectual Property, (ii) such Intellectual Property (other than
patents) is not being infringed by any third party, and (iii) neither MAI nor
any Subsidiary of MAI is infringing any intellectual property of any third
party. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means patents
and patent rights, trademarks and trademark rights, service marks and service
mark rights, trade names and trade name rights, copyrights and copyright rights
and other proprietary intellectual property rights and all pending applications
for and registrations of any of the foregoing that MAI or its Subsidiaries own,
license or otherwise have the right to use. An accurate schedule of all
Intellectual Property of MAI or its Subsidiaries consisting of patents,
registered trademarks, registered service marks, registered trade names and
registered copyrights and all pending applications therefor is set forth on
Schedule 3.19 to the MAI Disclosure Letter.
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(b) Either MAI or one of its Subsidiaries is listed in the
records of the appropriate United States, state or foreign agency as the sole
owner of record for each application and registration included in the
Intellectual Property, other than Intellectual Property of which MAI or its
Subsidiaries is a licensee.
(c) MAI and its Subsidiaries, with respect to all
Intellectual Property owned thereby, have taken or caused to be taken all
reasonable steps in the exercise of reasonable business judgment to obtain and
retain valid and enforceable Intellectual Property rights therein, including
the submission of all necessary filings in accordance with the legal and
administrative requirements of the appropriate jurisdictions. No application or
registration listed on Schedule 3.19 to the MAI Disclosure Letter is the
subject of any pending, existing or, to MAI's knowledge, threatened,
opposition, interference, cancellation proceeding or other legal or
governmental proceeding before any registration authority in any jurisdiction.
(d) The consummation of the transactions contemplated hereby
will not result in the loss or impairment of MAI's or any of its Subsidiaries'
right to own or use any of the Intellectual Property nor will it require the
consent of any Governmental Authority or third party.
Section 3.20 Labor Matters. MAI has previously furnished to DHS true
and complete copies of all labor and collective bargaining agreements (if any)
to which MAI or any of its Subsidiaries is a party and that are currently in
effect, together with all amendments thereto (if any). Since January 1, 1996,
there have been no strikes, slowdowns or other work stoppages or lockouts
involving any employees of MAI or any of its Subsidiaries and there are no
disputes by any labor organization in progress or pending or, to the knowledge
of MAI, threatened against MAI or any of its Subsidiaries that would have a
Material Adverse Effect on MAI. Except as disclosed in Schedule 3.20 to the MAI
Disclosure Letter, MAI and its Subsidiaries are in compliance in all material
respects with all applicable laws and regulations in respect of employment and
employment practices, terms and conditions of employment, wages and hours,
occupational safety, health or welfare conditions relating to premises
occupied, and civil rights. There are no charges of unfair labor practices
pending before any Governmental Authority involving or affecting MAI or any of
its Subsidiaries. As of the date of this Agreement, there is no representation
claim or petition pending before the National Labor Relations Board and, to the
knowledge of MAI, no question concerning representation exists with respect to
the employees of MAI or any of its Subsidiaries. MAI has not received notice
that any customer or supplier of MAI or any or its Subsidiaries is involved in
or threatened with or affected by any strike or other labor disturbance or
dispute, litigation or administrative proceeding or judgment, order,
injunction, decree or award, the consequences of which would have a Material
Adverse Effect on MAI.
Section 3.21 Transactions with Affiliates. Except to the extent
disclosed in the MAI SEC Documents filed prior to the date of this Agreement,
none of the officers or directors of MAI or any of its Subsidiaries nor any of
its Affiliates, and, to MAI's knowledge, none of its key employees or the key
employees of any of its Subsidiaries, is a party to any transaction with MAI or
any of its Subsidiaries (other than for services as an employee, officer or
director and other than transactions between MAI and one or more of its direct
or indirect wholly-owned
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Subsidiaries or between such Subsidiaries), including, without limitation, any
contract, agreement or other arrangement (a) providing for the furnishing of
services to or by, (b) providing for rental of real or personal property to or
from, or (c) otherwise requiring payments to or from, any such officer,
director, Affiliate or key employee, any member of the family of any such
officer, director or key employee or any corporation, partnership, trust or
other entity in which any such officer, director or key employee has
substantial interest (excluding the ownership of not more than two percent (2%)
of the capital stock of a publicly traded corporation) or which is an Affiliate
of such officer, director or key employee.
Section 3.22 Insurance. Schedule 3.22 to the MAI Disclosure Letter
sets forth a complete and accurate list of all primary, excess and umbrella
policies, bonds and other forms of insurance currently owned or held by or on
behalf of or providing insurance coverage to MAI or any of its Subsidiaries and
their respective businesses, properties and assets (or its directors, officers,
agents or employees). All such policies are in full force and effect. Neither
MAI nor any of its Subsidiaries has received notice of default under any such
policy, or has received written notice of any pending or threatened termination
or cancellation, coverage limitation or reduction, or material premium increase
with respect to any such policy, the failure of which to maintain has a
Material Adverse Effect on MAI. Schedule 3.22 to the MAI Disclosure Letter sets
forth a complete and accurate summary of all of the self-insurance coverage
provided by MAI or any of its Subsidiaries and no letters of credit have been
posted in respect thereof.
Section 3.23 Takeover Statutes. Except for the Business Combination
Act set forth in Article 13 of the Texas Business Corporation Act, no "fair
price", "moratorium", "control share acquisition" or other similar antitakeover
statute or regulation enacted under state or federal laws in the United States
(each, a "TAKEOVER STATUTE") applicable to MAI or any of its Subsidiaries is
applicable to the Merger or the other transactions contemplated hereby.
Section 3.24 Finders' Fees. Except as disclosed in Schedule 3.24 to
the MAI Disclosure Letter, no investment banker, broker, finder, other
intermediary or other Person is entitled to any fee or commission from MAI or
any Subsidiary of MAI upon consummation of the transactions contemplated by
this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DHS
DHS represents and warrants to MAI that:
Section 4.01 Organization and Power. Each of DHS and its Subsidiaries
is a corporation, partnership or other entity duly organized, validly existing
and, except as disclosed on Schedule 4.01 to the DHS Disclosure Letter, in good
standing under the laws of the jurisdiction of its incorporation or
organization, and has the requisite corporate or other power and authority and
governmental approvals to own, lease and operate its properties and to carry on
its business as now being conducted. Each of DHS and its Subsidiaries is duly
qualified or licensed to do business and, except as disclosed on Schedule 4.01
to the DHS Disclosure Letter, is in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the
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failure to be so duly qualified or licensed and in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on DHS.
Schedule 4.01 to the DHS Disclosure Letter sets forth (a) the name and
jurisdiction of incorporation of each Subsidiary of DHS, (b) its authorized
capital stock, (c) the number of issued and outstanding shares of its capital
stock, and (d) the record and beneficial owners of such shares. Except as set
forth on Schedule 4.01 to the DHS Disclosure Letter, DHS does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity or similar interest in, any
Person. DHS has heretofore delivered to MAI true and complete copies of the
certificate or articles of incorporation and by-laws as currently in effect of
DHS and its Subsidiaries.
Section 4.02 Corporate Authorization. The execution, delivery and
performance by DHS and Merger Subsidiary of this Agreement and the consummation
by DHS and Merger Subsidiary of the transactions contemplated hereby are within
the corporate power of DHS and Merger Subsidiary and, except for the required
approval by the stockholders of DHS of the issuance of shares of DHS Common
Stock in connection with the Merger, have been duly authorized by all necessary
corporate action, including, without limitation, authorization and approval of
the Board of Directors of Merger Subsidiary and the Board of Directors of DHS,
in its capacity as the Board of Directors of DHS and in its capacity as the
sole stockholder of Merger Subsidiary. This Agreement has been duly executed
and delivered by each of DHS and Merger Subsidiary and, subject to the approval
of the holders of DHS Common Stock with respect to the issuance of shares of
DHS Common Stock in connection with the Merger (including any shares
contemplated by Sections 1.04 and 1.05), constitutes a legal, valid and binding
agreement of each of DHS and Merger Subsidiary, enforceable against DHS or
Merger Subsidiary, as applicable, in accordance with its terms (subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, regardless of whether in
a proceeding in equity or at law). The shares of DHS Common Stock issued in
connection with the Merger, when issued in accordance with the terms hereof,
will be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights.
Section 4.03 Governmental Authorization. The execution, delivery and
performance by DHS and Merger Subsidiary of this Agreement, and the
consummation by DHS and Merger Subsidiary of the transactions contemplated
hereby, require no action by or in respect of, or filing with or notice to, any
Governmental Authority, other than (a) the filing of articles of merger with
respect to the Merger with the Texas Secretary of State; (b) compliance with
any applicable requirements of the HSR Act, provided that nothing contained in
this Agreement shall be deemed to constitute an acknowledgment that any
requirements under the HSR Act are applicable to the transactions contemplated
by this Agreement; (c) compliance with any applicable requirements of the 1933
Act; (d) compliance with any applicable requirements of the 1934 Act; and (e)
compliance with any other applicable securities laws.
Section 4.04 Non-Contravention. Except as set forth on Schedule 4.04
to the DHS Disclosure Letter, the execution, delivery and performance by DHS
and Merger Subsidiary of this Agreement do not, and the consummation by DHS and
Merger Subsidiary of the transactions
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contemplated hereby will not, require the consent of any other Person, or
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give to any
Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
Lien on any of the assets or properties of DHS or any of its Subsidiaries
under, any of the terms, conditions or provisions of (a) the certificate or
articles of incorporation, by-laws or similar organizational documents of DHS
or any of its Subsidiaries, (b) assuming receipt of the approval of
stockholders referred to in Section 4.02, and compliance with the matters
referred to in Section 4.03, any Laws or Orders binding upon or applicable to
DHS or any Subsidiary of DHS or any of their respective assets or properties,
or (c) any note, bond, mortgage, security agreement, indenture, lease,
contract, instrument or other agreement of any kind to which DHS or any
Subsidiary of DHS is a party or by which DHS or any Subsidiary of DHS or any of
their respective assets or properties is bound (a "DHS AGREEMENT") or any
license, franchise, permit or other similar authorization held by DHS or any
Subsidiary of DHS.
Section 4.05 Capitalization of DHS.
(a) The authorized capital stock of DHS consists of
50,000,000 shares of DHS Common Stock, par value $0.001 per share, and
10,000,000 share of preferred stock, par value $0.001 per share (the "DHS
PREFERRED STOCK"). As of the close of business on December 31, 1998, (i)
11,480,636 shares of DHS Common Stock were issued and outstanding, 233,259
shares of DHS Common Stock were issued and held in the treasury of DHS, and an
aggregate of 2,321,975 shares of DHS Common Stock were reserved for issuance
under DHS' 1992 Stock Option Plan, 1995 Non-Qualified Stock Option Plan, 1995
Incentive Stock Option Plan and 1997 Non-Qualified Stock Option Plan
(collectively, the "DHS PLANS"); (ii) options to purchase 1,821,051 shares of
DHS Common Stock under the DHS Plans ("DHS OPTIONS") were outstanding; and
(iii) 746,500 shares of DHS Preferred Stock were outstanding. All of the
outstanding shares of DHS Common Stock are, and all shares reserved for
issuance will be, when issued in accordance with the terms specified in the
instruments or agreements pursuant to which they are issuable, duly authorized,
validly issued, fully paid and non-assessable. Except (A) as set forth in this
Section 4.05 or in Schedule 4.05 to the DHS Disclosure Letter, (B) for DHS
Common Stock that may be issued as provided in Section 5.02(f), and (C) for the
transactions contemplated by this Agreement (including those permitted in
Article II), there are outstanding (w) no shares of capital stock or other
voting securities of DHS, (x) no securities of DHS convertible into or
exchangeable for shares of capital stock or voting securities of DHS, (y) no
options, warrants or other rights to acquire from DHS, and no preemptive or
similar rights, subscriptions or other rights, convertible securities,
agreements, arrangements or commitments of any character, obligating DHS to
issue, transfer or sell, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of DHS
or obligating DHS to grant, extend or enter into any such option, warrant,
subscription or other right, convertible security, agreement, arrangement or
commitment, and (z) no restricted stock awards, stock appreciation rights,
performance share agreements or stock unit awards of DHS (the items in clauses
(w), (x), (y) and (z) being referred to collectively as the "DHS SECURITIES").
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(b) Except as set forth on Schedule 4.05 to the DHS
Disclosure Letter, (i) there are no voting trusts or other agreements or
understandings to which DHS or any Subsidiary of DHS is a party with respect to
the voting of the capital stock of DHS or any Subsidiary of DHS, (ii) no Person
has or is entitled to any registration rights in respect of any DHS Securities,
and (iii) none of DHS or its Subsidiaries has any contractual obligation to
redeem, repurchase or otherwise acquire any DHS Securities or any capital stock
of any Subsidiary of DHS, including as a result of the transactions
contemplated by this Agreement, or to provide funds to, or to make any
investment in, any Subsidiary of DHS or any other Person. Except as permitted
by this Agreement, following the Merger, DHS will not have any obligation to
issue, transfer or sell any shares of its capital stock pursuant to any
employee benefit plan or otherwise.
Section 4.06 Capitalization of Subsidiaries. Except as set forth on
Schedule 4.06 to the DHS Disclosure Letter, all of the outstanding shares of
capital stock of, or other ownership interests in, each Subsidiary of DHS, are
duly authorized, validly issued, fully paid and non-assessable and are owned
beneficially, and of record, by DHS, directly or indirectly, free and clear of
any consensual Lien (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There
are no (a) outstanding securities of DHS or any Subsidiary of DHS convertible
into or exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary of DHS, or (b) options, warrants or other
rights to acquire from DHS or any Subsidiary of DHS, and no other obligation of
DHS or any Subsidiary of DHS to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or
exchangeable for, any capital stock, voting securities or ownership interests
in, any Subsidiary of DHS (the items in clauses (a) and (b) being referred to
collectively as the "DHS SUBSIDIARY SECURITIES").
Section 4.07 SEC Filings.
(a) DHS has filed all reports, schedules, forms, statements
and other documents with the SEC required to be filed by DHS since January 1,
1996 (the "DHS SEC DOCUMENTS").
(b) As of its filing date, each DHS SEC Document filed
pursuant to the 1934 Act complied as to form in all material respects with the
1934 Act and did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(c) Each DHS SEC Document that is a registration statement,
as amended or supplemented, if applicable, filed pursuant to the 1933 Act as of
the date such registration statement or amendment became effective complied as
to form in all material respects with the requirements of the 1933 Act and did
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
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Section 4.08 Financial Statements.
(a) The audited consolidated financial statements included in
DHS' Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(the "DHS 10-K") and the unaudited consolidated interim financial statements of
DHS included in the DHS SEC Documents filed after such date (collectively, the
"DHS FINANCIAL STATEMENTS") complied, or will comply, as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of DHS
and its consolidated Subsidiaries as of the dates thereof and their
consolidated results of operations and cash flows for the periods then ended
(subject to footnote disclosures and normal year-end adjustments in the case of
any unaudited interim financial statements). The DHS Financial Statements have
been prepared from and are consistent with the books and records of DHS, which
reflect all material transactions of DHS and its Subsidiaries. For purposes of
this Agreement, "DHS BALANCE SHEET" means the consolidated balance sheet of DHS
as of December 31, 1997 set forth in the DHS 10-K and "DHS BALANCE SHEET DATE"
means December 31, 1997.
(b) Without limitation of Section 4.08(a), (i) DHS or its
Subsidiaries has good and marketable title to all of the assets reflected in
the balance sheet of DHS included in it quarterly report on form 10-Q for the
quarter ended September 30, 1998 (the "MOST RECENT DHS BALANCE SHEET") free and
clear of all liens, security interests, encumbrances or other adverse claims
other than liens of secured lenders disclosed in the footnotes to the Most
Recent DHS Balance Sheet and interests of lessors in respect of capitalized
leases, (ii) the reserve for doubtful accounts reflected in the Most Recent DHS
Balance Sheet is adequate and in accordance with GAAP, (iii) the inventories
reflected in the Most Recent DHS Balance Sheet have been valued at the lower of
cost or market, and are not materially in excess of the normal requirement of
DHS' business, and (iv) all equipment and other fixed assets reflected in the
Most Recent DHS Balance Sheet are in good operating condition (reasonable wear
and tear excepted); all of the representations in this Section 4.08(b) being
subject to the collection of accounts receivable, sale and use of inventory,
and disposition of obsolete equipment, in the ordinary course of business.
Section 4.09 Information Supplied. None of the information supplied or
to be supplied by DHS for inclusion or incorporation by reference in and none
of the statements based on such information contained in (a) the Proxy
Statement will, at the date the Proxy Statement is first mailed to stockholders
and at the time of the meetings of such stockholders in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, or (b) the Form
S-4 will, at the time the Form S-4 becomes effective under the 1933 Act or at
the Effective Time, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
Section 4.10 Absence of Certain Changes. Except as disclosed in the
DHS SEC Documents filed prior to the date of this Agreement or as disclosed on
Schedule 4.10 to the DHS Disclosure Letter, since September 30, 1998, DHS and
its Subsidiaries have conducted their respective businesses in the ordinary
course consistent with past practice and there has not been:
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(a) Any material transaction of DHS or any of its
Subsidiaries outside of the normal course of business, any damage or
destruction (whether or not covered by insurance) of any material assets of DHS
or any of its Subsidiaries, or any event, occurrence or development which,
individually or in the aggregate, has had or would be reasonably likely to have
a Material Adverse Effect on DHS;
(b) any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of DHS, any
issuance of DHS Common Stock other than upon exercise of DHS Options, or any
repurchase, redemption or other acquisition by DHS or any Subsidiary of DHS of
any amount of outstanding shares of capital stock or other equity securities
of, or other ownership interests in, DHS or any Subsidiary of DHS;
(c) any amendment of any term of any DHS Securities or any
DHS Subsidiary Securities;
(d) (i) any incurrence or assumption by DHS or any Subsidiary
of DHS of any indebtedness for borrowed money other than under existing credit
facilities in the ordinary course of business consistent with past practices,
or (ii) any guarantee, endorsement or other incurrence or assumption of
liability (whether directly, contingently or otherwise) by DHS or any
Subsidiary of DHS for the obligations of any other Person (other than any
wholly-owned Subsidiary of DHS);
(e) any creation or assumption by DHS or any Subsidiary of
DHS of any consensual Lien on any material asset of DHS or any Subsidiary of
DHS;
(f) any making of any loan, advance or capital contribution
to or investment in any Person by DHS or any Subsidiary of DHS other than (i)
loans, advances or capital contributions to or investments in wholly-owned
Subsidiaries of DHS, or (ii) loans or advances to employees of DHS or any
Subsidiary of DHS made in the ordinary course of business consistent with past
practice;
(g) (i) any contract or agreement entered into by DHS or any
Subsidiary of DHS on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business, or (ii) any modification,
amendment, assignment, termination or relinquishment by DHS or any Subsidiary
of DHS of any contract, license or other right (including any insurance policy
naming it as a beneficiary or a loss payable payee) that would be reasonably
likely to have a Material Adverse Effect on DHS, other than those contemplated
by this Agreement;
(h) any change in any method of accounting or accounting
principles or practices by DHS or any Subsidiary of DHS, except for any such
change required by reason of a change in GAAP; or
(i) any (i) grant of any severance or termination pay to any
director, officer or employee of DHS or any of its Subsidiaries, (ii) entering
into of any employment, deferred compensation or other similar agreement (or
any amendment to any such existing agreement)
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with any director, officer or employee of DHS or any of its Subsidiaries, (iii)
increase in benefits payable under any existing severance or termination pay
policies or employment agreements, or (iv) increase in rates of compensation or
bonus in excess of five (5%) percent or increase in other benefits payable to
officers or employees of DHS or any of its Subsidiaries or increase in
compensation, bonus or other benefits payable to directors of DHS or any of its
Subsidiaries.
Section 4.11 No Undisclosed Liabilities. Neither DHS nor any
Subsidiary of DHS has any material liabilities or obligations (whether pursuant
to contracts or otherwise) of any kind whatsoever whether, accrued, contingent,
absolute, determined, determinable or otherwise, except:
(a) those liabilities and obligations set forth on the DHS
Balance Sheet and not heretofore paid or discharged;
(b) those liabilities and obligations incurred since
September 30, 1998 in the ordinary course of business consistent with past
practice; and
(c) those liabilities or obligations under this Agreement or
incurred in connection with the transactions contemplated hereby.
Section 4.12 Litigation. Except as disclosed on Schedule 4.12 to the
DHS Disclosure Letter, (a) there are no actions, suits, arbitrations, or
proceedings pending or, to the knowledge of DHS, threatened against, relating
to or affecting, nor are there any Governmental Authority investigations or
audits pending or, to the knowledge of DHS, threatened against, relating to or
affecting, DHS or any of its Subsidiaries or any of their respective assets or
properties nor, to the knowledge of DHS, is there any valid basis for any such
action, suit, arbitration, proceeding, investigation or audit, which if
adversely determined, would have a Material Adverse Effect on DHS, and (b)
neither DHS nor any of its Subsidiaries is subject to any order of any
Governmental Authority which adversely affects the ability of DHS to consummate
the transactions contemplated by this Agreement.
Section 4.13 Taxes.
(a) All Tax Returns required to be filed by DHS, any of its
Subsidiaries, or any corporation that was included in the filing of a return
with DHS or its Subsidiaries on a consolidated, combined or unitary basis have
been filed (the "DHS TAX RETURNS") and all Taxes required to be shown on the
DHS Tax Returns, or a subsequent assessment with respect thereto, or otherwise
due or payable (to the extent in excess of $50,000 in the aggregate) have been
paid and any penalties and interest relating to such Taxes have been paid. No
other Taxes (to the extent in excess of $50,000 in the aggregate) are payable
by the DHS Group with respect to items or periods covered by such Tax Returns
or with respect to Tax periods prior to the date of this Agreement. None of the
DHS Tax Returns contain, or are required to contain, a disclosure statement
under Section 6662 of the Code, or any similar provision of state, local or
foreign law, with respect to any items that relate to DHS or its Subsidiaries
in order to avoid a penalty for any taxable year. All DHS Tax Returns are true,
correct and complete in all material respects. DHS
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has made available to MAI correct and complete copies of all DHS Tax Returns
for all periods which are not closed by the statute of limitations.
(b) No adjustment relating to any DHS Tax Return has been
proposed formally or, to DHS' knowledge, informally by any Governmental
Authority (to the extent in excess of $50,000 in the aggregate), and no basis
exists for any such adjustment that would have a Material Adverse Effect on
DHS. There are no outstanding subpoenas or requests for information with
respect to any DHS Tax Returns or portions thereof. There are no pending or, to
DHS' knowledge, threatened actions or proceedings for the assessment or
collection of Taxes for which DHS or its Subsidiaries may be liable (to the
extent in excess of $50,000 in the aggregate). There are no Tax liens on any
assets of DHS or its Subsidiaries, except with respect to Taxes which are not
yet due and payable.
(c) No consent under Section 341(f) of the Code has been
filed with respect to DHS or any of its Subsidiaries. Neither DHS nor any of
its Subsidiaries is or has been subject to the dual consolidated loss
provisions of Section 1503 of the Code.
(d) DHS and its Subsidiaries are members of an affiliated
group (within the meaning of Section 1504 of the Code) that is eligible to file
a consolidated return. No other entity is or has been eligible to file a
consolidated or combined return with DHS and its Subsidiaries, and neither DHS
nor its Subsidiaries have filed or consented to the filing of any Federal or
state consolidated or combined return with any entity not a member of the DHS
Group. Neither DHS nor any of its Subsidiaries has been at any time a member of
any partnership or joint venture or the holder of a beneficial interest in any
trust for any Person for which the statute of limitations for any Tax
potentially applicable as a result of such membership or holding has not
expired.
(e) DHS and its Subsidiaries have properly accrued all
current or contested Taxes (to the extent in excess of $50,000 in the
aggregate) on their books and records, and their books and records reflect
reserves that are adequate for the payment of all Taxes (to the extent in
excess of $50,000 in the aggregate) not yet due and payable that are properly
accruable thereon through the date of this Agreement (including Taxes being
contested). Neither DHS nor any of its Subsidiaries have any liability for any
Taxes which, in the aggregate, are more than $50,000 in excess of amounts
accrued or the reserves established. All Taxes (to the extent in excess of
$50,000 in the aggregate) required to be withheld, collected or deposited in
connection with the operations and activities of DHS or its Subsidiaries have
been timely withheld, collected or deposited and, to the extent required, have
been paid to the relevant taxing authority.
(f) DHS does not own, nor has it owned during the past five
(5) years, any capital stock of MAI. At the Effective Time, the fair market
value of the assets of DHS will exceed the sum of its liabilities, plus the
amount of other liabilities, if any, to which the assets are subject.
(g) There are no requests for rulings, determinations or
information currently outstanding with any Taxing Authority that could
reasonably be expected to affect the Taxes of DHS or any of its Subsidiaries.
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(h) The DHS Tax Returns have not been audited by the Service.
There are no outstanding waivers or agreements extending the statute of
limitations for any period with respect to any Tax to which DHS or any of its
Subsidiaries may be liable.
(i) The term "DHS GROUP" shall mean, individually and
collectively, (i) DHS, (ii) its Subsidiaries, and (iii) any trust, corporation,
partnership or any other entity as to which DHS or its Subsidiaries is liable
for Taxes incurred by such entity either as a transferee, or pursuant to
Treasury Regulations Section 1.1502-6, or pursuant to any other provision of
federal, state, local or foreign law or regulations.
(j) DHS has made available to MAI a true and complete copy of
any (i) elections, letter rulings and determination letters relating to Taxes
with respect to DHS or its Subsidiaries which were in effect or affected Taxes
for any periods which are not closed by the statute of limitations, and (ii)
examination reports, closing agreements and statements of deficiencies for
Taxes assessed against or agreed to by DHS or any of its Subsidiaries which
were in effect or affected Taxes for any periods which are not closed by the
statute of limitations.
Section 4.14 Employee Benefits; ERISA.
(a) Except as set forth on Schedule 4.14 to the DHS
Disclosure Letter, there are no employee benefit plans (including any plans for
the benefit of directors or former directors), contracts or agreements
(including employment agreements and severance agreements, incentive
compensation, bonus, stock option, stock appreciation rights and stock purchase
plans) of any type (including plans described in Section 3(3) of ERISA),
maintained by DHS, any of its Subsidiaries or any trade or business, whether or
not incorporated (an "DHS ERISA AFFILIATE"), that together with DHS would be
deemed a "controlled group" within the meaning of Section 4001(a)(14) of ERISA,
or with respect to which DHS or any of its Subsidiaries has or may have a
liability (the "DHS BENEFIT PLANS"). Except as disclosed on Schedule 4.14 to
the DHS Disclosure Letter (or as otherwise permitted by this Agreement), (i)
neither DHS nor any ERISA Affiliate has any plan or commitment, whether legally
binding or not, to create any additional DHS Benefit Plan or modify or change
any existing DHS Benefit Plan that would affect any employee or terminated
employee of DHS or any ERISA Affiliate, and (ii) since December 31, 1997, there
has been no change, amendment, modification to, or adoption of, any DHS Benefit
Plan.
(b) With respect to each DHS Benefit Plan: (i) if intended to
qualify under Section 401(a), 401(k) or 403(a) of the Code, each such plan so
qualifies, and its trust is exempt from taxation under Section 501(a) of the
Code; (ii) no failures to administer such plan in accordance with its terms and
applicable law have occurred that have had or would reasonably be expected to
have a Material Adverse Effect on DHS; (iii) no breaches of fiduciary duty have
occurred; (iv) no prohibited transaction within the meaning of Section 406 of
ERISA has occurred; (v) as of the date of this Agreement, no lien imposed under
the Code or ERISA exists; and (vi) all contributions and premiums due
(including any extensions for such contributions and premiums) have been made
in full or adequate provision has been made therefor in the DHS Financial
Statements.
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(c) None of the DHS Benefit Plans has incurred any
"accumulated funding deficiency," as such term is defined in Section 412 of the
Code, whether or not waived.
(d) Neither DHS nor any ERISA Affiliate has incurred any
liability under Title IV of ERISA (including Sections 4063-4064 and 4069 of
ERISA) since the effective date of ERISA that has not been satisfied in full.
(e) With respect to each DHS Benefit Plan that is a "welfare
plan" (as defined in Section 3(l) of ERISA), no such plan provides medical or
death benefits with respect to current or former employees of DHS or any of its
Subsidiaries beyond their termination of employment, other than as required by
law or on an employee-pay-all basis.
(f) The consummation of the Merger pursuant to this Agreement
will not (i) entitle any individual to severance pay or any tax "gross-up"
payments with respect to the imposition of any tax pursuant to Section 4999 of
the Code or accelerate the time of payment or vesting, or increase the amount,
of compensation or benefits due to any individual with respect to any DHS
Benefit Plan, or (ii) constitute or result in a prohibited transaction under
Section 4975 of the Code or Section 406 or 407 of ERISA with respect to any DHS
Benefit Plan.
(g) There is no DHS Benefit Plan that is a "multiemployer
plan," as such term is defined in Section 3(37) of ERISA, or which is covered
by Section 4063 or 4064 of ERISA.
Section 4.15 Certain Agreements; Compliance with Agreements.
(a) Except as disclosed on Schedule 4.15 to the DHS
Disclosure Letter or as provided for in this Agreement, neither DHS nor any of
its Subsidiaries is a party to or bound by any oral or written:
(i) consulting agreement not terminable on thirty (30) days'
or less notice;
(ii) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of the transactions contemplated by this
Agreement;
(iii) agreement with respect to any officer providing any
term of employment or compensation guarantee;
(iv) agreement or plan, including any stock option plan,
stock appreciation rights plan, employee stock ownership plan,
restricted stock plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will
be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of
which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(v) agreement containing covenants that limit the ability of
DHS or any of its Subsidiaries to compete in any line of business or
with any Person, or that involve any
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restriction on the geographic area in which, or method by which, DHS
or any of its Subsidiaries may carry on its business (other than as
may be required by law or any regulatory agency);
(vi) agreement, contract or understanding, other than this
Agreement and the certificate of incorporation and by-laws of DHS,
regarding the capital stock of DHS or committing to dispose of some or
all of the capital stock or all or substantially all of the assets of
DHS;
(vii) partnership, joint venture or profit sharing agreement
of DHS or any of its Subsidiaries with any Person;
(viii) agreement, contract, commitment, indenture or other
instrument of DHS or any of its Subsidiaries relating to the borrowing
of money, or the direct or indirect guarantee of any obligation for,
or an agreement to service the repayment of, borrowed money, or any
other contingent obligation in respect to indebtedness of any other
Person, including without limitation any agreement or arrangement
relating to the maintenance of compensating balances, any agreement or
arrangement with respect to lines of credit, any agreement or
arrangement to purchase or repurchase obligations of any other Person,
any agreement or arrangement to advance or supply funds to or to
invest in any other Person, any agreement or arrangement to pay for
property, products or services of any other Person even if such
property, products or services are not conveyed, delivered or
rendered, or any guarantee with respect to any lease or other similar
periodic payment to be made by any other Person;
(ix) lease of DHS or any of its Subsidiaries with annual
rental payments aggregating $50,000 or more;
(x) agreement, contract or commitment of DHS or any of its
Subsidiaries relating to the disposition or acquisition of any
investment in any Person if such investment has a book value of, or
the disposition or acquisition price of such investment or interest
is, $50,000 or more;
(xi) agreement, contract or commitment which involves payment
or potential payment, pursuant to the terms of such agreement,
contract or commitment, by or to DHS or any of its Subsidiaries of
$50,000 or more within any twelve (12) month period commencing after
the date hereof;
(xii) severance or similar agreement entered into or amended
at any time since June 30, 1998; or
(xiii) agreement, contract, commitment or arrangement between
DHS or any of its Subsidiaries and any Affiliate of DHS or any of its
Subsidiaries that is not described in or filed as an exhibit to a DHS
SEC Document.
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(b) Neither DHS nor any of its Subsidiaries nor, to the
knowledge of DHS, any other party thereto is in breach or violation of or in
default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or both, is reasonably
expected to result in a default under, (i) the certificates or articles of
incorporation, by-laws or similar organizational documents of DHS or any of its
Subsidiaries, or (ii) any contract, agreement, plan or instrument listed or
required to be listed on Schedule 4.15 to the DHS Disclosure Letter, except in
the case of clause (ii) for breaches, violations or defaults which,
individually or in the aggregate, are not having and are not reasonably
expected to have a Material Adverse Effect on DHS. No party to any such
contract, agreement, plan or instrument will have the right to terminate any or
all of the provisions of any such contract, plan or instrument as a result of
the transactions contemplated by this Agreement.
(c) No outstanding purchase commitments of DHS or any of its
Subsidiaries is materially in excess of the reasonable requirements of their
respective business.
(d) Neither DHS or any of its Subsidiaries has received
written notice of any existing, announced or anticipated changes in the
policies of any material clients, customers, referral sources or suppliers
which could reasonably be expected to have a Material Adverse Effect on DHS.
Section 4.16 Compliance with Laws and Orders.
(a) DHS and its Subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Authorities
necessary for the lawful conduct of their respective businesses (the "DHS
PERMITS"), except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which, individually or in the aggregate, are
not having and are not reasonably expected to have a Material Adverse Effect on
DHS. DHS and its Subsidiaries are in compliance with the terms of the DHS
Permits, except failures so to comply which, individually or in the aggregate,
are not having and are not reasonably expected to have a Material Adverse
Effect on DHS. DHS and its Subsidiaries are not in violation of or default
under any Laws or Orders, except for such violations or defaults which,
individually or in the aggregate, are not having and are not reasonably
expected to have a Material Adverse Effect on DHS.
(b) Without limitation of Section 4.16(a), DHS and its
Subsidiaries have at all times operated their businesses in compliance with all
applicable federal, state and other fraud and abuse, anti-kickback ("Stark
laws") and other statutes, rules and regulations governing the provision of
medical or related services and/or payments or reimbursements for such
services.
Section 4.17 Environmental Matters.
(a) No notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been filed
against, no penalty has been assessed against, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of DHS or any
Subsidiary of DHS, is threatened by any Person, against DHS or
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any Subsidiary of DHS with respect to any matters relating to or arising out of
any Environmental Law;
(b) No Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released, in
violation of any Environmental Law, at, on, under or adjacent to any property
now or, to the knowledge of DHS, previously owned, leased or operated by DHS or
any Subsidiary of DHS; and
(c) There are no Environmental Liabilities.
(d) For purposes of this Section 4.17, capitalized terms used
shall have the meanings assigned to them in Section 3.17(b), except that in all
cases the word "DHS" shall be substituted for the word "MAI".
Section 4.18 Assets. The assets, properties, rights and contracts,
including (as applicable) title or leaseholds thereto, of DHS and its
Subsidiaries, taken as a whole, are sufficient to permit DHS and its
Subsidiaries to conduct their respective businesses as currently being
conducted. Neither DHS nor any of its Subsidiaries owns any real property.
Section 4.19 Intellectual Property Rights.
(a) DHS and its Subsidiaries own or have the right to use all
Intellectual Property individually or in the aggregate material to the conduct
of the businesses of DHS and its Subsidiaries. To the knowledge of DHS, (i)
neither DHS nor any Subsidiary of DHS is in default (or with the giving of
notice or lapse of time or both would be in default) under any license to use
such Intellectual Property, (ii) such Intellectual Property (other than
patents) is not being infringed by any third party, and (iii) neither DHS nor
any Subsidiary of DHS is infringing any intellectual property of any third
party. An accurate schedule of all Intellectual Property of DHS or its
Subsidiaries consisting of patents, registered trademarks, registered service
marks, registered trade names and registered copyrights and all pending
applications therefor is set forth on Schedule 4.19 to the DHS Disclosure
Letter.
(b) Either DHS or one of its Subsidiaries is listed in the
records of the appropriate United States, state or foreign agency as the sole
owner of record for each application and registration included in the
Intellectual Property, other than Intellectual Property of which DHS or its
Subsidiaries is a licensee.
(c) DHS and its Subsidiaries, with respect to all
Intellectual Property owned thereby, have taken or caused to be taken all
reasonable steps in the exercise of reasonable business judgement to obtain and
retain valid and enforceable Intellectual Property rights therein, including
the submission of all necessary filings in accordance with the legal and
administrative requirements of the appropriate jurisdictions. No application or
registration listed on Schedule 4.19 to the DHS Disclosure Letter is the
subject of any pending, existing or, to DHS' knowledge, threatened, opposition,
interference, cancellation proceeding or other legal or governmental proceeding
before any registration authority in any jurisdiction.
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(d) The consummation of the transactions contemplated hereby
will not result in the loss or impairment of DHS' or any of its Subsidiaries'
right to own or use any of the Intellectual Property nor will it require the
consent of any Governmental Authority or third party.
Section 4.20 Labor Matters. DHS has previously furnished to MAI true
and complete copies of all labor and collective bargaining agreements (if any)
to which DHS or any of its Subsidiaries is a party and that are currently in
effect, together with all amendments thereto (if any). Since January 1, 1996,
there have been no strikes, slowdowns or other work stoppages or lockouts
involving any employees of DHS or any of its Subsidiaries and there are no
disputes by any labor organization in progress or pending or, to the knowledge
of DHS, threatened against DHS or any of its Subsidiaries that would have a
Material Adverse Effect on DHS. DHS and its Subsidiaries are in compliance in
all material respects with all applicable laws and regulations in respect of
employment and employment practices, terms and conditions of employment, wages
and hours, occupational safety, health or welfare conditions relating to
premises occupied, and civil rights. There are no charges of unfair labor
practices pending before any Governmental Authority involving or affecting DHS
or any of its Subsidiaries. As of the date of this Agreement, there is no
representation claim or petition pending before the National Labor Relations
Board and, to the knowledge of DHS, no question concerning representation
exists with respect to the employees of DHS or any of its Subsidiaries. DHS has
not received notice that any customer or supplier of DHS or any or its
Subsidiaries is involved in or threatened with or affected by any strike or
other labor disturbance or dispute, litigation or administrative proceeding or
judgment, order, injunction, decree or award, the consequences of which would
have a Material Adverse Effect on DHS.
Section 4.21 Transactions with Affiliates. Except to the extent
disclosed in the DHS SEC Documents filed prior to the date of this Agreement,
none of the officers or directors of DHS or any of its Subsidiaries nor any of
its Affiliates, and, to DHS' knowledge, none of its key employees or the key
employees of any of its Subsidiaries, is a party to any transaction with DHS or
any of its Subsidiaries (other than for services as an employee, officer or
director and other than transactions between DHS and one or more of its direct
or indirect wholly owned Subsidiaries or between such Subsidiaries), including,
without limitation, any contract, agreement or other arrangement (a) providing
for the furnishing of services to or by, (b) providing for rental of real or
personal property to or from, or (c) otherwise requiring payments to or from,
any such officer, director, Affiliate or key employee, any member of the family
of any such officer, director or key employee or any corporation, partnership,
trust or other entity in which any such officer, director or key employee has
substantial interest (excluding the ownership of not more than two percent (2%)
of the capital stock of a publicly traded corporation) or which is an Affiliate
of such officer, director or key employee.
Section 4.22 Insurance. Schedule 4.22 to the DHS Disclosure Letter
sets forth a complete and accurate list of all primary, excess and umbrella
policies, bonds and other forms of insurance currently owned or held by or on
behalf of or providing insurance coverage to DHS or any of its Subsidiaries and
their respective businesses, properties and assets (or its directors, officers,
agents or employees). All such policies are in full force and effect. Neither
DHS nor any of its Subsidiaries has received notice of default under any such
policy, or has received
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written notice of any pending or threatened termination or cancellation,
coverage limitation or reduction, or material premium increase with respect to
any such policy, the failure of which to maintain has a Material Adverse Effect
on DHS. Schedule 4.22 to the DHS Disclosure Letter sets forth a complete and
accurate summary of all of the self-insurance coverage provided by DHS or any
of its Subsidiaries and no letters of credit have been posted in respect
thereof.
Section 4.23 Takeover Statutes. The Boards of Directors of DHS and
Merger Subsidiary have duly and validly approved the Merger, this Agreement and
the transactions contemplated by this Agreement and such approval is sufficient
to render inapplicable to the Merger, this Agreement, and the transactions
contemplated by this Agreement and the Voting Agreement, the provisions of
Section 203 of the Delaware General Corporation Law (the "Delaware Law"). No
other Takeover Statute applicable to DHS or any of its Subsidiaries is
applicable to the Merger or the other transactions contemplated hereby.
Section 4.24 Finders' Fees. Except for a fee payable to Prudential
Securities Incorporated, a copy of whose engagement agreement has been provided
to MAI, no investment banker, broker, finder, other intermediary or other
Person is entitled to any fee or commission from DHS or any Subsidiary of DHS
upon consummation of the transactions contemplated by this Agreement.
ARTICLE V
COVENANTS
Section 5.01 Conduct of MAI. From the date hereof until the Effective
Time, except as otherwise expressly required by this Agreement or with the
prior written consent of DHS, MAI shall conduct, and shall cause its
Subsidiaries to conduct, their respective businesses in the ordinary course
consistent with past practice and shall use commercially reasonable efforts to
preserve intact commercially reasonable organizations and relationships with
customers, suppliers, creditors and business partners and shall use their
reasonable efforts to keep available the services of their present officers and
employees. Without limiting the generality of the foregoing, from the date
hereof until the Effective Time, except as described in Schedule 5.01 to the
MAI Disclosure Letter, without the prior written approval of DHS (which
approval will not be unreasonably withheld or delayed with respect to (c), (d),
(h), (i), (j), (n) or (o), or (k) as it applies to filing any amended Tax
Return):
(a) MAI will not adopt or propose any change in its articles
of incorporation or any change in its by-laws;
(b) MAI will not, and will not permit any Subsidiary of MAI
to, adopt a plan or agreement of complete or partial liquidation, or
resolutions providing for or authorizing such liquidation or a dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of MAI or any of its Subsidiaries (other than a liquidation or dissolution of
any Subsidiary or a merger or consolidation between wholly-owned Subsidiaries);
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(c) MAI will not, and will not permit any Subsidiary of MAI
to, make any investment in or any acquisition of the business of any Person or
any material amount of assets (other than inventory);
(d) MAI will not, and will not permit any Subsidiary of MAI
to, sell or otherwise dispose of any assets (other than inventory) in an amount
that would be material to MAI and its Subsidiaries, taken as a whole, except in
the ordinary course of business consistent with past practice;
(e) MAI will not, and will not permit any Subsidiary of MAI
to, declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock other than dividends
paid by any Subsidiary of MAI to MAI or any other Subsidiary of MAI, or split,
combine, reclassify or take similar action with respect to any of its capital
stock or MAI Securities or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock or MAI Securities;
(f) MAI will not, and will not permit any Subsidiary of MAI
to, issue, deliver, sell, transfer, pledge, dispose of or encumber any shares
of, or securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of any class or series of MAI or its Subsidiaries, or issue or grant any
restricted stock awards, stock appreciation rights, performance share
agreements or stock unit awards, other than (i) the issuance of options with an
exercise price at least equal to the fair market value of the MAI Common Stock
on the date of grant for up to 75,000 shares of MAI Common Stock under the MAI
Option Plan as in effect on the date hereof, and (ii) issuances of MAI Common
Stock pursuant to the exercise of options granted pursuant to the MAI Option
Plan and the exercise of MAI Warrants described in Section 3.05(a) which are
outstanding on the date hereof or are hereafter issued pursuant to the
foregoing clause (i); and MAI will not amend the terms of any option, warrant,
right or other security outstanding on the date hereof;
(g) MAI will not, and will not permit any Subsidiary of MAI
to, redeem, purchase or otherwise acquire directly or indirectly any of MAI's
capital stock or any MAI Securities;
(h) MAI will not, and will not permit any Subsidiary of MAI
to, enter into or amend in any material respect any employment contract with
any of its officers, directors or employees earning annual compensation of more
than $50,000, adopt or amend any MAI Benefit Plan in any material respect or
make any payments, awards or distributions under any MAI Benefit Plan or
otherwise not consistent with past practice or custom except (i) as required by
a contract in existence on the date hereof and listed on Schedule 3.15 to the
MAI Disclosure Letter, or (ii) as necessary to make any MAI Benefit Plan listed
on Schedule 3.14 to the MAI Disclosure Letter meet the requirements of ERISA to
the extent such amendment is described in such Schedule or is approved by DHS;
(i) MAI will not, and will not permit any Subsidiary of MAI
to, (i) enter into (or commit to enter into) any new lease or renew any
existing lease of real property (except
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pursuant to commitments for such lease or lease renewal entered into prior to
the date hereof), or (ii) purchase or acquire or enter into any agreement to
purchase or acquire any real estate;
(j) MAI will not, and will not permit any Subsidiary of MAI
to, make or commit to make any capital expenditures in excess of $500,000 in
the aggregate;
(k) MAI will not, and will not permit any Subsidiary of MAI
to, change any tax election, change any annual tax accounting period, change
any method of tax accounting, file any amended Tax Return, enter into any
closing agreement relating to any Tax, settle any Tax claim or assessment,
surrender any right to claim a Tax refund or consent to any extension or waiver
(other than a reasonable extension or waiver) of the limitations period
applicable to any Tax claim or assessment, if any such action would have the
effect of increasing the aggregate Tax liability or reducing the aggregate tax
assets of MAI and its Subsidiaries, taken as a whole;
(l) MAI will not, and will not permit any Subsidiary of MAI
to, (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of its business consistent with
past practice, or (ii) voluntarily purchase, cancel, prepay or otherwise
provide for a complete or partial discharge in advance of a scheduled repayment
date with respect to, or waive any right under, any indebtedness for borrowed
money;
(m) MAI will not, and will not permit any Subsidiary of MAI
to, enter into any contract or amend or modify any existing contract, or engage
in any new transaction outside the ordinary course of business consistent with
past practice or not on an arm's length basis, with any Affiliate of such party
or any of its Subsidiaries;
(n) MAI will not, and will not permit any Subsidiary of MAI
to, agree or commit to do any of the foregoing; and
(o) MAI will not, and will not permit any Subsidiary of MAI
to, take or agree or commit to take any action that would make any
representation or warranty of MAI in this Agreement inaccurate at, or as of any
time prior to, the Effective Time.
Section 5.02 Conduct of DHS. From the date hereof until the Effective
Time, except as otherwise expressly required by this Agreement or with the
prior written consent of MAI, DHS shall conduct, and shall cause its
Subsidiaries to conduct, their respective businesses in the ordinary course
consistent with past practice and shall use commercially reasonable efforts to
preserve intact their business organizations and relationships with customers,
suppliers, creditors and business partners and shall use their reasonable
efforts to keep available the services of their present officers and employees.
Without limiting the generality of the foregoing, from the date hereof until
the Effective Time, without the prior written approval of MAI (which approval
will not be unreasonably withheld or delayed with respect to (c), (d), (h),
(i), (j), (n) or (o), or (k) as it applies to filing any amended Tax Return):
(a) DHS will not adopt or propose any change in its
certificate of incorporation or any change in its by-laws, except (i) as and to
the extent required to consummate the Merger, and (ii) for the proposed change
of the corporate name of DHS to "Medical Alliance, Inc." at the Effective Time;
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(b) DHS will not, and will not permit any Subsidiary of DHS
to, adopt a plan or agreement of complete or partial liquidation, or
resolutions providing for or authorizing such liquidation or a dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of DHS or any of its Subsidiaries (other dm a liquidation or dissolution of any
Subsidiary or a merger or consolidation between wholly-owned Subsidiaries);
(c) DHS will not, and will not permit any Subsidiary of DHS
to, make any investment in or any acquisition of the business of any Person or
any material amount of assets (other than inventory);
(d) DHS will not, and will not permit any Subsidiary of DHS
to, sell or otherwise dispose of any assets (other than inventory) in an amount
that would be material to DHS and its Subsidiaries, taken as a whole, except in
the ordinary course of business consistent with past practice;
(e) DHS will not, and will not permit any Subsidiary of DHS
to, declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock, other than dividends
paid by any Subsidiary of DHS to DHS or any other Subsidiary of DHS, or split,
combine, reclassify or take similar action with respect to any of its capital
stock or DHS Securities or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock of DHS Securities;
(f) DHS will not, and will not permit any Subsidiary of DHS
to, issue, deliver, sell, transfer, pledge, dispose of or encumber any shares
of, or securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of any class or series of DHS or its Subsidiaries, or issue or grant any
restricted stock awards, stock appreciation rights, performance share
agreements or stock unit awards, other than (i) the issuance of options with an
exercise price at least equal to the fair market value of the DHS Common Stock
on the date of grant for up to 75,000 shares of DHS Common Stock under the DHS
Plans as in effect on the date hereof, and (ii) issuances pursuant to the
exercise of options granted pursuant to the DHS Plans described in Section
4.05(a) which are outstanding on the date hereof or are hereafter issued
pursuant to the foregoing clause (i); and DHS will not amend the terms of any
option, warrant, right or other security outstanding on the date hereof, except
for the extension of stock options held by outgoing directors of DHS (provided
that such extensions shall not cause the expiration dates of such options to
extend beyond the later of the third anniversary of the Effective Time or the
tenth (10th) anniversary of the date of issuance of the subject options);
(g) DHS will not, and will not permit any Subsidiary of DHS
to, redeem, purchase or otherwise acquire directly or indirectly any of DHS'
capital stock or any DHS Securities;
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(h) DHS will not, and will not permit any Subsidiary of DHS
to, enter into or amend in any material respect any employment contract with
any of its officers, directors or employees earning annual compensation of more
than $50,000 (other than as contemplated by Section 6.06), adopt or amend any
DHS Benefit Plan in any material respect or make any payments, awards or
distributions under any DHS Benefit Plan or otherwise not consistent with past
practice or custom except (i) as required by a contract in existence on the
date hereof and listed on Schedule 4.15 to the DHS Disclosure Letter, or (ii)
as necessary to make any DHS Benefit Plan listed on Schedule 4.14 to the DHS
Disclosure Letter meet the requirements of the Code or ERISA to the extent such
amendment is described in such Schedule or is approved by MAI;
(i) DHS will not, and will not permit any Subsidiary of DHS
to, (i) enter into (or commit to enter into) any new lease or renew any
existing lease of real property (except pursuant to commitments for such lease
or lease renewal entered into prior to the date hereof), or (ii) purchase or
acquire or enter into any agreement to purchase or acquire any real estate;
(j) DHS will not, and will not permit any Subsidiary of DHS
to, make or commit to make any capital expenditures in excess of $750,000 in
the aggregate;
(k) DHS will not, and will not permit any Subsidiary of DHS
to, change any tax election, change any annual tax accounting period, change
any method of tax accounting, file any amended Tax Return, enter into any
closing agreement relating to any Tax, settle any Tax claim or assessment,
surrender any right to claim a Tax refund or consent to any extension or waiver
(other than a reasonable extension or waiver) of the limitations period
applicable to any Tax claim or assessment, if any such action would have the
effect of increasing the aggregate Tax liability or reducing the aggregate tax
assets of MAI and its Subsidiaries, taken as a whole;
(l) DHS will not, and will not permit any Subsidiary of DHS
to, (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness other than in the ordinary course of its business consistent with
past practice or other than in connection with the transactions contemplated by
this Agreement, or (ii) voluntarily purchase, cancel, prepay or otherwise
provide for a complete or partial discharge in advance of a scheduled repayment
date with respect to, or waive any right under, any indebtedness for borrowed
money;
(m) DHS will not, and will not permit any Subsidiary of DHS
to, enter into any contract or amend or modify any existing contract, or engage
in any new transaction outside the ordinary course of business consistent with
past practice or not on an arm's length basis, with any Affiliate of such party
or any of its Subsidiaries;
(n) DHS will not, and will not permit any Subsidiary of DHS
to, agree or commit to do any of the foregoing; and
(o) DHS will not, and will not permit any Subsidiary of DHS
to, take or agree or commit to take any action that would make any
representation or warranty of DHS in this Agreement inaccurate at, or as of any
time prior to, the Effective Time.
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Section 5.03 No Solicitation.
(a) From the date hereof until the earlier of the Effective
Time or the termination of this Agreement, MAI agrees that: (i) it will not,
and will use its best efforts to cause its Subsidiaries and the officers,
directors, employees, investment bankers, consultants and other agents of MAI
and its Subsidiaries and the Affiliates of MAI not to, directly or indirectly,
initiate, solicit, encourage or facilitate or take any action to initiate,
solicit, encourage or facilitate any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its stockholders) with respect to a merger, consolidation or other business
combination including MAI or any of its Subsidiaries or any acquisition or
similar transaction (including, without limitation, a tender or exchange offer)
involving the purchase of (A) all or any significant portion of the assets of
MAI and its Subsidiaries taken as a whole, (B) 20% or more of the outstanding
shares of MAI Common Stock, or (C) 20% of the outstanding shares of the capital
stock of any Subsidiary of MAI (any such proposal or offer being hereinafter
referred to as an "ALTERNATIVE PROPOSAL"), or engage in any discussions or
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any Person or group relating to an Alternative
Proposal (excluding the transactions contemplated by this Agreement) or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (ii) it will immediately cease and cause to be terminated and will
cause its Subsidiaries and the officers, directors, employees, investment
bankers, consultants and other agents of MAI and its Subsidiaries and the
Affiliates of MAI to immediately cease and terminate, any existing activities,
discussions or negotiations with any parties with respect to any of the
foregoing, and it will take the necessary steps to inform such parties of its
obligations under this Section 5.03(a); and (iii) it will notify DHS
immediately (and in no event later than 24 hours after receipt of any
Alternative Proposal) if any such inquiries, proposals or offers are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, it or any of such
Persons; provided, however, that nothing contained in this Section 5.03 shall
prohibit the Board of Directors of MAI from (x) furnishing information to (but
only pursuant to a confidentiality agreement in customary form and having terms
and conditions substantially comparable to the Confidentiality Agreement) or
entering into discussions or negotiations with any Person or group that makes
an unsolicited bona fide Alternative Proposal, if, and only to the extent that,
(i) the Board of Directors of MAI, based upon the written opinion of outside
counsel, determines in good faith that such action is required for the Board of
Directors to comply with its fiduciary duties to stockholders imposed by
applicable law, (ii) prior to furnishing such information to, or entering into
discussions or negotiations with, such Person or group, MAI provides written
notice to DHS to the effect that it is furnishing information to, or entering
into discussions or negotiations with such Person or group (without being
required to identify such Person or group), and (iii) MAI keeps DHS informed
(which notice shall be provided orally and in writing) of the status of such
discussions or negotiations (provided that MAI will not be required to inform
DHS of the substantive terms of such discussions or negotiations, other than
the aggregate consideration being offered to MAI and/or its stockholders), and
(y) to the extent required, complying with Rule 14e-2 promulgated under the
1934 Act with regard to an Alternative Proposal. Except for DHS' termination
rights pursuant to Section 9.01, DHS will not utilize any of the information
provided to it by MAI pursuant to this Section 5.03(a) in any manner which
could reasonably be expected to undermine MAI's discussions or negotiations
with any Person or group identified to DHS by MAI hereunder.
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(b) From the date hereof until the earlier of the Effective
Time or the termination of this Agreement, DHS agrees that: (i) it will not,
and will use its best efforts to cause its Subsidiaries and the officers,
directors, employees, investment bankers, consultants and other agents of DHS
and its Subsidiaries and Affiliates of DHS not to, directly or indirectly,
initiate, solicit, encourage or facilitate or take any action to initiate,
solicit, encourage or facilitate any inquiries or the making or implementation
of any proposal or offer with respect to any transaction such as would cause
ownership or voting control of DHS to be vested in any Person or group, or with
respect to a material acquisition in any line of business not substantially
related to the existing line of business of DHS and its Subsidiaries (a "DHS
PROPOSAL"); (ii) it will immediately cease and cause to be terminated and will
cause its Subsidiaries and the officers, directors, employees, investment
bankers, consultants and other agents of DHS and its Subsidiaries and the
Affiliates of DHS to immediately cease and terminate, any existing activities,
discussions or negotiations with any parties with respect to any of the
foregoing, and it will take the necessary steps to inform such parties of its
obligations under this Section 5.03(b); and (iii) it will notify MAI
immediately (and in no event later than 24 hours after receipt of any proposal
with respect to any such transaction) if any inquiries, proposals, or offers
are received by, or any information is requested in respect of, any transaction
of the type described in this Section 5.03(b). DHS shall be permitted to
conduct unsolicited negotiations and discussions with respect to any such
transaction, and shall be required to report thereon to MAI, in the same manner
and to the same extent as is applicable under Section 5.03(a) with respect to
any Alternative Proposal as described therein. Except for MAI's termination
rights pursuant to Section 9.01, MAI will not utilize any information provided
to it by DHS pursuant to this Section 5.03(b) in any manner which could
reasonably be expected to undermine DHS' discussions or negotiations with any
Person or group identified to MAI by DHS hereunder.
Section 5.04 Approval of Stockholders.
(a) MAI shall, through its Board of Directors, duly call,
give notice of, convene and hold a meeting of its stockholders (the "MAI
STOCKHOLDERS' MEETING") for the purpose of voting on the approval and adoption
of this Agreement and the Merger (the "MAI STOCKHOLDERS' APPROVAL") as soon as
reasonably practicable after the date hereof. Except as provided in the next
sentence, the Board of Directors of MAI shall recommend approval and adoption
of this Agreement and the Merger by the holders of MAI Common Stock and shall
use all commercially reasonable efforts to obtain such approval and adoption.
The Board of Directors of MAI shall be permitted to (i) not recommend to the
holders of MAI Common Stock that they give the MAI Stockholders' Approval, or
(ii) withdraw or modify in a manner adverse to DHS its recommendation to the
holders of MAI Common Stock that they give the MAI Stockholders' Approval, but
in each of cases (i) and (ii) only if and to the extent that a Superior
Proposal is pending at the time the MAI Board of Directors determines to take
any such action or inaction; provided, however, that no such failure to
recommend, withdrawal or modification shall be made unless MAI shall have
delivered to DHS a written notice (a "NOTICE OF SUPERIOR PROPOSAL") advising
DHS that the Board of Directors of MAI has received a Superior Proposal and
identifying the Person or group making such Superior Proposal; and further
provided, that
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nothing contained in this Agreement shall prevent the Board of Directors of MAI
from complying with Rule 14e-2 under the 1934 Act with regard to an Alternative
Proposal. For purposes of this Agreement, "SUPERIOR PROPOSAL" means any bona
fide Alternative Proposal for at least a majority of the outstanding Shares on
terms that the Board of Directors of MAI determines in its good faith judgment
(based on the advice of an independent reputable financial advisor, taking into
account all the terms and conditions of the Alternative Proposal, including any
break-up fees, expense reimbursement provisions and conditions to consummation)
are more favorable and provide greater value to all holders of MAI Common Stock
than this Agreement and the Merger taken as a whole.
(b) DHS shall, through its Board of Directors, duly call,
give notice of, convene and hold a meeting of its stockholders (the "DHS
STOCKHOLDERS' MEETING" and, together with the MAI Stockholders' Meeting, the
"STOCKHOLDERS' MEETINGS") for the purpose of voting on (i) the issuance of DHS
Common Stock in the Merger (the "DHS STOCKHOLDERS' APPROVAL"), and (ii) the
name change of DHS described in Section 5.02(a) (the "Name Change") as soon as
reasonably practicable after the date hereof. The Board of Directors of DHS
shall recommend that the stockholders of DHS approve such issuances of DHS
Common Stock, and the Name Change, and shall use its best efforts to obtain
such approval.
(c) DHS and MAI shall coordinate and cooperate with respect
to the timing of the Stockholders' Meetings and shall use their best efforts to
cause the Stockholders' Meetings to be held on the same day and as soon as
practicable after the date hereof.
Section 5.05 Preparation of Form S-4 and Proxy Statement.
(a) MAI and DHS shall prepare and file with the SEC as soon
as reasonably practicable after the date hereof, the Proxy Statement, and DHS
shall prepare and file with the SEC as soon as reasonably practicable after
such date, a registration statement on Form S-4 with respect to the DHS Common
Stock issuable in the Merger, and in which the Proxy Statement will be included
within the prospectus. DHS and MAI shall use all reasonable efforts to have the
Form S-4 declared effective by the SEC as promptly as practicable after such
filing. Prior to the Effective Date, DHS shall also take any action (other than
qualifying as a foreign corporation or taking any action which would subject it
to service of process in any jurisdiction where DHS is not now so qualified or
subject) required to be taken under applicable state blue sky or securities
laws in connection with the issuance of DHS Common Stock in connection with the
Merger and will pay all expenses incident thereto. If at any time prior to the
Effective Time any event shall occur that should be set forth in an amendment
of or a supplement to the Form S-4, DHS shall prepare and file with the SEC
such amendment or supplement as soon thereafter as is reasonably practicable.
DHS, Merger Subsidiary and MAI shall cooperate with each other in the
preparation of the Form S-4 and the Proxy Statement and any amendment or
supplement thereto, and each shall notify the other of the receipt of any
comments of the SEC with respect to the Form S-4 and any amendment or
supplement thereto or for additional information, and shall provide to the
other promptly copies of all correspondence between DHS or MAI, as the case may
be, and the SEC with respect to the Form S-4 or the Proxy Statement. DHS shall
give MAI and its counsel the opportunity to review and comment on the Form S-4
and all responses to requests for
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additional information by and replies to comments of the SEC before their being
filed with, or sent to, the SEC. Each of MAI, DHS, and Merger Subsidiary agrees
to use its best efforts, after consultation with the other parties hereto, to
respond promptly to all such comments of and requests by the SEC and to cause
(i) the Form S-4 to be declared effective by the SEC at the earliest
practicable time and to be kept effective as long as is necessary to consummate
the Merger, and (ii) the Proxy Statement to be mailed to the holders of DHS
Common Stock and MAI Common Stock entitled to vote at the meetings of the
stockholders of DHS and MAI at the earliest practicable time.
(b) DHS agrees that the Form S-4, when declared effective by
the SEC, will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by DHS in reliance upon and in conformity with written
information concerning MAI or any of its Affiliates furnished to DHS by MAI or
any of its Affiliates. MAI agrees that the information provided by it for
inclusion in the Proxy Statement, when the Proxy Statement is mailed to
stockholders, will not include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. No amendment or supplement to the Form S-4 will be made by DHS
until it has consulted with MAI and its counsel. DHS will advise MAI, promptly
after it receives notice thereof, of the time when the Form S-4 has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order, or the suspension of the qualification of DHS Common Stock issuable
in connection with the Merger for offering or sale in any jurisdiction or any
request by the SEC for amendment of the Proxy Statement or the Form S-4 or
comments thereon and responses thereto or requests for additional information.
Section 5.06 Access to Information.
(a) To the extent permitted by applicable law, from the date
hereof until the Effective Time, MAI will give DHS, its counsel, financial
advisors, auditors and other authorized representatives reasonable access
during normal business hours to the offices, properties, books and records of
MAI and its Subsidiaries, will furnish to DHS, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such Persons may reasonably request and will instruct
MAI's employees, auditors, counsel and financial advisors to cooperate with DHS
in its investigation of the business of MAI and its Subsidiaries; provided,
however, that no investigation pursuant to this Section 5.06(a) shall affect
any representation or warranty made by MAI to DHS hereunder. The foregoing
information shall be held in confidence to the extent required by, and in
accordance with, the provisions of the confidentiality agreement between DHS
and MAI (the "CONFIDENTIALITY AGREEMENT").
(b) To the extent permitted by applicable law, from the date
hereof until the Effective Time, DHS will give MAI, its counsel, financial
advisors, auditors and other authorized
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representatives reasonable access during normal business hours to the offices,
properties, books and records of DHS and its Subsidiaries, will furnish to MAI,
its counsel, financial advisors, auditors and other authorized representatives
such financial and operating data and other information as such Persons may
reasonably request and will instruct DHS' employees, auditors, counsel and
financial advisors to cooperate with MAI in its investigation of the business
of DHS and its Subsidiaries; provided, however, that no investigation pursuant
to this Section 5.06(b) shall affect any representation or warranty made by DHS
to MAI hereunder. Such information shall be held in confidence to the extent
required by, and in accordance with, the Confidentiality Agreement.
Section 5.07 Notices of Certain Events.
(a) MAI and DHS shall promptly notify each other of:
(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement; and
(ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this
Agreement.
(b) MAI shall promptly notify DHS of any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge,
threatened against, relating to or involving or otherwise affecting MAI or any
Subsidiary of MAI which, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.12 or Section 3.17
or which relate to the consummation of the transactions contemplated by this
Agreement.
(c) DHS shall promptly notify MAI of any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge,
threatened against, relating to or involving or otherwise affecting DHS or any
Subsidiary of DHS which, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 4.12 or Section 4.17
or which relate to the consummation of the transactions contemplated by this
Agreement.
Section 5.08 Regulatory and Other Approvals. Subject to the terms and
conditions of this Agreement, each of MAI and DHS will proceed diligently and
in good faith to, as promptly as practicable, (a) obtain all consents,
approvals or actions of, make all filings with and give all notices to
Governmental Authorities or any other public or private third parties required
of DHS, MAI or any of their Subsidiaries to consummate the Merger and the other
transactions contemplated hereby, and (b) provide such other information and
communications to such Governmental Authorities or other public or private
third parties as the other party or such Governmental Authorities or other
public or private third parties may reasonably request in connection therewith.
In addition to and not in limitation of the foregoing, each of the parties will
(i) take promptly all actions necessary to make any filings (if any) legally
required of DHS and MAI or their respective Affiliates under the HSR Act as
soon as practicable but in no event
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later than thirty (30) days after the date hereof, (ii) comply at the earliest
practicable date with any request for additional information received by such
party or its Affiliates from the Federal Trade Commission (the "FTC") or the
Antitrust Division of the Department of Justice (the "ANTITRUST DIVISION")
pursuant to the HSR Act, and (iii) cooperate with the other party in connection
with such party's filings (if any) under the HSR Act and in connection with
resolving any investigation or other inquiry concerning the Merger or the other
transactions contemplated by this Agreement commenced by either the FTC or the
Antitrust Division or state attorneys general. Without limiting the generality
of the foregoing, DHS and MAI shall together, or pursuant to an allocation of
responsibility to be agreed between them, coordinate and cooperate in
determining whether any action by or in respect of, or filing with, any
Governmental Authorities is required, or any actions, consents, approvals or
waivers are required to be obtained from parties to any contracts, in
connection with the consummation of the transactions contemplated by this
Agreement, and in seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection
therewith and seeking timely to obtain any such actions, consents, approvals or
waivers.
Section 5.09 Public Announcements. So long as this Agreement is in
effect, DHS and MAI will consult with each other before issuing any press
release or making any SEC filing or other public statement with respect to this
Agreement or the Voting Agreement or the transactions contemplated hereby or
thereby and, except as may be required by applicable law, court process or any
listing agreement with any national securities exchange or with NASDAQ, will
not issue any such press release or make any such SEC filing or other public
statement prior to such consultation and providing the other party with a
reasonable opportunity to comment thereon and approve the same (such approval
not to be unreasonably withheld or delayed). Simultaneously with the
announcement regarding the execution and delivery of this Agreement, DHS shall
announce its fourth quarter 1998 earnings results and its change in contract
accounting methods and its proposed write-offs for impairment of goodwill and
other assets, which announcement shall be substantially in the form of Schedule
5.09 to the DHS Disclosure Letter.
Section 5.10 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of MAI or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of MAI or Merger Subsidiary, any other actions and things to
vest, perfect or confirm of record or otherwise in the Surviving Corporation
any and all right, title and interest in, to and under any of the rights,
properties or assets of MAI acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger.
Section 5.11 MAI Affiliates. At least thirty (30) days prior to the
Effective Time, MAI shall deliver a letter to DHS identifying all persons who,
at the time of the MAI Stockholders' Meeting, may, in MAI's reasonable
judgment, be deemed to be "affiliates" (as such term is used in Rule 145 under
the 1933 Act) of MAI ("MAI AFFILIATES"). MAI shall use its reasonable efforts
to cause each MAI Affiliate to deliver to DHS at or prior to the Effective Time
a letter substantially in the form and to the effect of Exhibit B hereto (an
"AFFILIATE LETTER"). DHS shall be entitled to issue appropriate stop transfer
instructions to the transfer agent for the DHS Common Stock to be issued to MAI
Affiliates pursuant to the Merger, consistent with the terms
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of such Affiliate Letters. At the Closing, unless the shares of DHS Common
Stock issuable to the MAI Affiliates are included for resale in the Form S-4
registration statement contemplated by Section 5.05 and are freely tradeable
upon the effectiveness of such Form S-4, DHS and the MAI Affiliates will enter
into a Registration Rights Agreement in substantially the form attached hereto
as Exhibit C; and, in the event that the shares of DHS Common Stock issuable to
the MAI Affiliates are included for resale in the Form S-4 and are freely
tradeable upon the effectiveness of such Form S-4, DHS shall file such
amendments to such Form S-4 as may be required to keep such registration
statement and the resale prospectus therein current and effective for a period
of two years following the effective date thereof (or, if sooner, until such
date as all such DHS Common Stock has been disposed of by the MAI Affiliates).
Section 5.12 Obligations of Merger Subsidiary. DHS will take all
action necessary to cause Merger Subsidiary to perform its obligations under
this Agreement and to consummate the Merger on the terms and conditions set
forth in this Agreement.
Section 5.13 Listing of Stock. DHS shall use its best efforts to cause
the shares of DHS Common Stock to be issued in connection with the Merger to be
approved for listing on the NASDAQ National Market System at or prior to the
Effective Time, subject to official notice of issuance.
Section 5.14 Antitakeover Statutes. If any Takeover Statute is or may
become applicable to the Merger, each of DHS and MAI shall take such actions as
are necessary so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of any Takeover Statute on
the Merger.
Section 5.15 Tax Treatment. Each of DHS and MAI shall not take any
action and shall not fail to take any action which action or failure to act
would cause, or would be reasonably likely to cause, DHS, MAI or their
respective stockholders to recognize gain or loss for federal income tax
purposes (other than in respect of any cash paid in lieu of fractional shares)
as a result of the issuance of DHS Common Stock in the Merger, and MAI shall
use its reasonable efforts to obtain the opinion of counsel referred to in
Section 8.07.
Section 5.16 Appointment of Directors. Immediately following the
Closing, DHS shall cause Paul Herchman, Tom Montgomery and Jim Silcock to
become members of the Board of Directors of DHS immediately following the
Effective Time, and shall increase the size of the Board of Directors of DHS to
seven (7) members consisting of the aforesaid three (3) persons, and Brad A.
Hummel, Max W. Batzer and two independent directors selected by the existing
Board of Directors of DHS. To the extent that any of such individuals is not
already designated within a class of directors of DHS, such individuals shall
be allocated as nearly equally as possible among the three classes of DHS
directors. DHS covenants that any existing directors of DHS who do not continue
as directors from and after the Closing will resign at the time of Closing so
as to avoid any optional reductions of exercise price under outstanding DHS
Options. If, from and after the Effective Time, any director shall die, resign
or agree not to be nominated
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for reelection to the Board of Directors of DHS, then DHS shall invite Gary
Hill to become a member of the Board of Directors of DHS to fill the vacancy
thereby created.
Section 5.17 Director and Officer Indemnification. DHS agrees that all
rights to indemnification and advancement of expenses existing in favor of the
current and former directors and officers of MAI (the "Indemnified Persons")
under the provisions existing on the date hereof of the articles of
incorporation and by-laws of MAI shall survive the Effective Time for six (6)
years thereafter, and DHS agrees to indemnify and advance expenses to the
Indemnified Persons to the same extent as would be required or permitted by MAI
under the provisions existing on the date hereof of the articles of
incorporation, by-laws and indemnification agreements of MAI. Until the sixth
(6th) anniversary of the Effective Time, DHS shall cause the Surviving
Corporation to maintain in effect with respect to matters occurring prior to
the Effective Time, to the extent available, the policies of directors' and
officers' liability insurance currently maintained by MAI (or may cause similar
coverage to be included in DHS' directors' and officers' liability coverage).
Section 5.18 Employee Benefits.
(a) DHS hereby agrees to cause the Surviving Corporation to
(i) pay, in accordance with their terms as in effect on the date hereof, all
amounts due and payable under the terms of all written employment, severance
and termination contracts, agreements, plans, policies and commitments of MAI
and its Subsidiaries with or with respect to its current or former employees,
officers and directors as set forth in the MAI Disclosure Letter to the extent
vested on or prior to the date of this Agreement or which become vested as a
result of the transactions contemplated hereby, and (ii) assume and continue to
honor the terms of such agreements and commitments.
(b) DHS hereby acknowledges that the consummation of the
Merger will constitute a "friendly" change of control of MAI (to the extent
relevant) for all benefit plans, employee agreements, stock option plans and
other compensation arrangements of MAI.
Section 5.19 Good Faith Efforts. Each party will use its good faith
efforts to satisfy or cause to be satisfied the conditions precedent to the
parties' performance hereunder as set forth in Articles VI, VII and VIII,
subject to applicable legal requirements and limitations.
ARTICLE VI
GENERAL CONDITIONS PRECEDENT TO THE MERGER
The obligations of MAI, DHS and Merger Subsidiary to consummate the
Merger pursuant to this Agreement and the other transactions required to be
consummated by such date by this Agreement are subject to the satisfaction (or
waiver by the party for whose benefit the applicable condition exists) of each
of the following conditions:
Section 6.01 Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the stockholders of
MAI in accordance with Texas Law. The stockholders of DHS shall have approved
the issuance of DHS Common Stock
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in the Merger by the requisite vote under applicable law and under the
applicable rules of the NASDAQ National Market System, as the case may be.
Approval of the Name Change shall not constitute a condition precedent
hereunder.
Section 6.02 HSR Act. Any applicable waiting period under the HSR Act
relating to the transactions contemplated by this Agreement shall have expired
or been terminated.
Section 6.03 Registration Statements; State Securities Laws. The Form
S-4 shall have become effective in accordance with the provisions of the 1933
Act, and no stop order suspending such effectiveness shall have been issued and
remain in effect and no proceeding seeking such an order shall be pending or
threatened. DHS shall have received all state securities or blue sky permits
and other authorizations necessary to issue the DHS Common Stock pursuant to
this Agreement.
Section 6.04 Listing. The shares of DHS Common Stock to be issued in
the Merger shall have been approved for listing on the NASDAQ National Market
System, subject to official notice of issuance.
Section 6.05 Suits or Other Proceedings. There shall not be pending or
threatened in writing (on any basis which DHS or MAI may reasonably deem
credible and not of mere nuisance value) any suit, action or proceeding by any
Governmental Authority or other Person, (a) seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by
this Agreement, or seeking to obtain from DHS or MAI any damages the amount of
which would be reasonably likely to have a Material Adverse Effect on MAI or
DHS, or (b) seeking to prohibit or limit the ownership or operation by DHS, MAI
or any of their respective Subsidiaries of, or to compel DHS, MAI or any of
their respective Subsidiaries to dispose of or hold separate, any material
portion of the business or assets of DHS, MAI or any of their respective
Subsidiaries, as a result of the Merger or any of the other transactions
contemplated by this Agreement.
Section 6.06 Employment Agreements. DHS shall have assumed the current
employment agreement between MAI and Gary Hill, or entered into a new
employment agreement with Gary Hill on terms and conditions mutually agreeable
to DHS and Gary Hill.
Section 6.07 Pooling Letters. To the extent required by either of the
investment bankers rendering the fairness opinions contemplated by Sections
7.07 and 8.08 in order to confirm, or avert the withdrawal of, such fairness
opinions, MAI's independent public accountants shall have delivered to DHS and
MAI an opinion letter confirming that MAI is an entity which does not preclude
the Merger from being treated as a pooling of interests for accounting
purposes, and DHS' independent public accountants shall have delivered to DHS
and MAI an opinion letter confirming that the Merger will qualify for a pooling
of interest accounting treatment; and if requested by either of such investment
bankers, such opinion letters shall be confirmed on and as of the date of
mailing of the Proxy Statement to stockholders.
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ARTICLE VII
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF DHS AND MERGER SUBSIDIARY
The obligations of DHS and Merger Subsidiary to consummate the
Merger pursuant to this Agreement and the other transactions required to be
consummated by such date by this Agreement are further subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions (all or any of which may be waived in whole or in part by DHS and
Merger Subsidiary in their sole discretion):
Section 7.01 Representations and Warranties. The representations and
warranties made by MAI in this Agreement shall be true and correct in all
material respects correct as of the Closing Date as though made on and as of
the Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date,
and MAI shall have delivered to DHS a certificate, dated the Closing Date and
executed by its President to such effect.
Section 7.02 Performance of Obligations. MAI shall have performed and
complied with each agreement, covenant and obligation required by this
Agreement to be so performed or complied with by MAI at or prior to the
Closing, and MAI shall have delivered to DHS a certificate, dated the Closing
Date and executed by its President to such effect.
Section 7.03 No Material Adverse Change. Except as otherwise disclosed
in this Agreement or the MAI Disclosure Letter, there shall not have been any
change in the consolidated business, results of operations, financial condition
or prospects of MAI and its Subsidiaries, taken as a whole, between September
30, 1998 and the Closing Date which would have a Material Adverse Effect on
MAI.
Section 7.04 Consents. DHS shall have received consents or waivers
from such Persons as are necessary for DHS to consummate the transactions
contemplated by this Agreement, and from the holder(s) of the MAI Warrants with
respect to the adjustments pursuant to Section 1.05. In connection with the
foregoing, if and to the extent required by any of DHS' lenders, MAI shall have
caused Thomas Montgomery and/or his Affiliates to provide to Chase Bank of
Texas, National Association, a replacement undertaking for the agreement of MAI
described in Item 1 of Schedule 3.05 to the MAI Disclosure Letter.
Section 7.05 Opinion of MAI Counsel. At the Closing, DHS shall have
received from Jackson Walker L.L.P., counsel to MAI, a written opinion
reasonably satisfactory to DHS, dated as of the Closing Date, substantially to
the effect as set forth in Exhibit D hereto.
Section 7.06 Proceedings. All proceedings to be taken on the part of
MAI in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to DHS, and DHS shall have received copies of all such documents and
other evidences as DHS may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
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Section 7.07 Fairness Opinion.DHS shall have received a written
opinion of Prudential Securities Incorporated, dated as of a date reasonably
prior to the date of mailing of the Proxy Statement to DHS' stockholders, to
the effect that the exchange ratio set forth in Section 1.02(a)(iii) is fair to
DHS from a financial point of view, such fairness opinion to be in form and
substance reasonably acceptable to DHS and its Board of Directors; and, at the
date of such mailing of the Proxy Statement, no event or circumstance shall
exist such as has caused Prudential Securities Incorporated to withdraw or
materially adversely modify such fairness opinion.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MAI
The obligations of MAI to consummate the Merger pursuant to
this Agreement and the other transactions required to be consummated by such
date by this Agreement are further subject to the satisfaction, at or prior to
the Effective Time, of each of the following conditions (all or any of which
may be waived in whole or in part by MAI in its sole discretion):
Section 8.01 Representations and Warranties. The representations and
warranties made by DHS and Merger Subsidiary in this Agreement shall be true
and correct in all material respects as of the Closing Date as though made on
and as of the Closing Date or, in the case of representations and warranties
made as of a specified date earlier than the Closing Date, on and as of such
earlier date, and DHS and Merger Subsidiary shall each have delivered to MAI a
certificate, dated the Closing Date and executed by DHS' President and by
Merger Subsidiary's President to such effect.
Section 8.02 Performance of Obligations. DHS and Merger Subsidiary
shall each have performed and complied with each agreement, covenant and
obligation required by this Agreement to be so performed or complied with by
DHS or Merger Subsidiary at or prior to Closing, and DHS and Merger Subsidiary
shall each have delivered to MAI a certificate, dated the Closing Date and
executed by DHS' President and by Merger Subsidiary's President to such effect.
Section 8.03 No Material Adverse Change. Except as otherwise disclosed
in this Agreement or the DHS Disclosure Letter, there shall not have been any
change in the consolidated business, results of operations, financial condition
or prospects of DHS and its Subsidiaries, taken as a whole, between September
30, 1998 and the Closing Date which would have a Material Adverse Effect on
DHS.
Section 8.04 Consents. MAI shall have received consents or waivers
from such Persons as are necessary for MAI to consummate the transactions
contemplated by this Agreement.
Section 8.05 Opinion of DHS Counsel. At the Closing, MAI shall have
received from Greenberg Traurig, counsel to DHS, a written opinion reasonably
satisfactory to MAI, dated as of the Closing Date, substantially to the effect
as set forth in Exhibit E hereto.
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Section 8.06 Proceedings. All proceedings to be taken on the part of
DHS in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to MAI, and MAI shall have received copies of all such documents and
other evidences as MAI may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
Section 8.07 Tax Opinion. MAI shall have received an opinion of
Jackson Walker L.L.P., in form and substance reasonably satisfactory to MAI, on
the basis of certain facts, representations and assumptions set forth in such
opinion which are consistent with the state of facts existing at the Effective
Time, to the effect that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and that neither MAI nor any of its stockholders shall recognize gain or loss
for U.S. federal income tax purposes as a result of the Merger (other than in
respect of any cash paid in lieu of fractional shares). In rendering the
opinions described in the preceding sentence, such counsel may rely upon the
opinions described in Sections 7.07 and 8.08 and may require and rely upon
representations contained in this Agreement and in certificates of officers and
principal stockholders of MAI, DHS and their respective Subsidiaries.
Section 8.08 Fairness Opinion at or prior to the Closing. MAI shall
have received a written opinion of Needham & Company, Inc., dated as of a date
reasonably prior to the date of mailing of the Proxy Statement to MAI's
stockholders, to the effect that the Merger Consideration to be received by the
holders of Shares in the Merger is fair to MAI from a financial point of view,
such fairness opinion to be in form and substance reasonably acceptable to MAI
and its Board of Directors; and, at the date of such mailing of the Proxy
Statement, no event or circumstance shall exist such as has caused Needham &
Company, Inc. to withdraw or materially adversely modify such fairness opinion.
Section 8.09 Accounting Matters. There shall not be pending any
unresolved dispute or objection by the SEC with respect to the implementation
of the accounting changes and write-offs described in the last sentence of
Section 5.09; and to the extent that the SEC shall have requested any material
modification to such changes or write-offs, such changes or modifications shall
be reasonably satisfactory to MAI.
Section 8.10 DHS First Quarter Results. The results of operations of
DHS and its Subsidiaries for the quarter ending March 31, 1999 shall not, taken
as a whole, be materially adversely different than the most recent projections
of such results of operations provided by DHS to MAI.
Section 8.11 Waivers from Lenders. DHS shall have received from Chase
Bank of Texas, National Association ("CHASE") and The Prudential Insurance
Company of America ("PRUDENTIAL") the consents of such lenders to, or waivers
by such lenders of any defaults with respect to, (a) the charges and write-offs
taken by DHS pertaining to the change in contract accounting and write-offs for
impairment of goodwill and other assets (as described in Section 5.09), and (b)
charges (to the extent identifiable and quantifiable) resulting from the
consummation of the Merger, such consents or waivers to be in form and
substance reasonably satisfactory to MAI.
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ARTICLE IX
TERMINATION
Section 9.01 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Effective Time whether prior to or after Stockholders' Approval:
(a) By mutual written agreement of MAI and DHS duly
authorized by action taken by or on behalf of their respective Boards of
Directors;
(b) By either MAI or DHS upon notification to the
non-terminating party by the terminating party;
(i) at any time after May 31, 1999 if the Merger shall not
have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by or substantially attributable
to a breach of this Agreement by the terminating party;
(ii) if (A) MAI Stockholders' Approval (under Texas Law), or
(B) DHS Stockholders' Approval (under Delaware Law and under the
applicable regulations of NASDAQ National Market System), as the case
may be, shall not be obtained by reason of the failure to obtain the
requisite vote upon a vote held at a meeting of stockholders, or any
adjournment thereof, called therefor;
(iii) if (A) there has been a material breach of any
representation, warranty, covenant or agreement on the part of the
non-terminating party set forth in this Agreement, which breach is not
curable or, if curable, has not been cured within thirty (30) days
following receipt by the non-terminating party of notice of such
breach from the terminating party (or, if sooner and the terminating
party has not delayed giving notice of such breach, May 31, 1999), or
(B) any condition precedent to the terminating party's obligations set
forth in Article VII, with respect to DHS, or Article VIII, with
respect to MAI, of this Agreement has not been met or waived by such
party by May 31, 1999; or
(iv) if any court of competent jurisdiction or other
competent Governmental Authority shall have issued an order making
illegal or otherwise restricting, preventing or prohibiting the Merger
and such order shall have become final and nonappealable;
(c) By MAI if: (i) the Board of Directors of MAI determines
in good faith to accept a Superior Proposal; or (ii) the Board of Directors of
DHS shall have withdrawn or modified in a manner materially adverse to MAI its
approval or recommendation of this Agreement or the Merger;
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(d) By DHS if the Board of Directors of MAI (i) shall have
withdrawn or modified in a manner materially adverse to DHS its approval or
recommendation of this Agreement or the Merger, or (ii) shall have recommended
a Superior Proposal to the stockholders of MAI or shall have entered into a
definitive agreement providing for a Superior Proposal with a Person other than
DHS; or
(e) By MAI if DHS is engaged in ongoing active negotiations
for, or has accepted and there remains in effect, a DHS Proposal.
Section 9.02 Effect of Termination.
(a) If this Agreement is validly terminated by either MAI or
DHS pursuant to Section 9.01, this Agreement will forthwith become null and
void and there will be no liability or obligation on the part of either MAI or
DHS (or any of their respective representatives or Affiliates), except that (i)
the provisions of Sections 10.05 and 10.08, this Section 9.02 and the
Confidentiality Agreement will continue to apply following any such
termination, and (ii) nothing contained herein shall relieve any party hereto
from liability for willful breach of its representations, warranties, covenants
or agreements contained in this Agreement.
(b) (i) If this Agreement is terminated by (A) MAI pursuant
to Section 9.01(c)(i), or (B) by DHS pursuant to Section 9.01(d)(i) (unless any
of the conditions precedent set forth in Articles VI and/or VIII above (other
than Sections 6.01, 8.05, 8.07 or 8.08, or Section 8.04 to the extent that any
consent is contingent only upon stockholder approval or the Closing, or Section
8.06 to the extent that the DHS Stockholders' Meeting is held subsequent to the
MAI Stockholders' Meeting) shall not have been satisfied, after due notice and
opportunity to cure, at the time of the MAI Stockholders' Meeting held to
consider approval of the transactions contemplated herein) or Section
9.01(d)(ii), then MAI shall pay or cause to be paid to DHS, by wire transfer of
same day funds on the day of such termination, a termination fee of $1,000,000.
(ii) If this Agreement is terminated by MAI pursuant to
Section 9.01(e), then DHS shall pay or cause to be paid to MAI, by
wire transfer of same day funds on the day of such termination, a
termination fee of $1,000,000.
(iii) In the event that either DHS or MAI shall fail or
refuse to consummate the transactions contemplated by this Agreement
for no reason, or for any reason which would not give such party the
right to terminate this Agreement in accordance with this Article IX,
then the party which is prepared to consummate the transactions
hereunder may, so long as it is not in material breach of any
representation, warranty, covenant or agreement on its part hereunder,
terminate this Agreement by written notice to the non-performing
party, whereupon the non-performing party shall pay or cause to be
paid to the terminating party, by wire transfer of same day funds on
the day of such termination, a termination fee of $375,000; and the
payment of such termination fee shall relieve the party making payment
from any liability under Section 9.02(a)(ii) above.
(c) The parties acknowledge that the agreements contained in
this Section 9.02 are an integral part of the transactions contemplated by this
Agreement, and that, without
55
<PAGE> 64
these agreements, the parties hereto would not enter into this Agreement;
accordingly, if either party fails promptly to pay any amount due pursuant to
this Section 9.02, and in order to obtain such payment, either party commences
a suit which results in a judgment against the non-paying party for any fee or
expense reimbursement set forth in this Section 9.02, the non-paying party
shall pay to the other party its costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amount of the fee at the publicly announced prime rate of
Citibank, N.A. in effect on the date such payment was required to be made.
ARTICLE X
MISCELLANEOUS
Section 10.01 Notices. All notices, requests and other communications
to any party hereunder shall be in writing and will be deemed to have been duly
given only if delivered personally or by facsimile transmission or mailed
(first class mail postage prepaid), or by overnight express courier (charges
prepaid or billed to the account of the sender) to the parties at the following
addresses or facsimile numbers:
If to DHS or Merger Subsidiary, to:
Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, Texas 75207
Fax: (214) 631-8537
Attention: Brad A. Hummel
with a copy to:
Greenberg Traurig
200 Park Avenue
New York, New York 10166
Fax: (212) 801-6400
Attention: Shahe Sinanian, Esq.
56
<PAGE> 65
If to MAI, to:
Medical Alliance, Inc.
2445 Gateway Drive, Suite 150
Irving, Texas 75063
Fax: (214) 756-6005
Attention: Paul Herchman
with a copy to:
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Fax: (214) 953-5822
Attention: Richard F. Dahlson, Esq.
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (a) if delivered personally,
upon delivery, (b) if given by facsimile, when such facsimile is transmitted to
the facsimile number specified in this Section 10.01 and the appropriate
facsimile confirmation is received, (c) if given by mail in the manner
described above, on the third business day after mailing, or (d) if delivered
by overnight express courier, on the next business day.
Section 10.02 Entire Agreement Non-Survival of Representations and
Warranties: Third Party Beneficiaries.
(a) This Agreement (including any exhibits hereto), the other
agreements referred to in this Agreement and the Confidentiality Agreement
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings
and negotiations, both written and oral, between the parties with respect to
such subject matter. None of this Agreement, the Confidentiality Agreement or
any other agreement contemplated hereby or thereby (or any provision hereof or
thereof) is intended to confer on any Person other than the parties hereto or
thereto any rights or remedies (except that Article I is intended to confer
rights and remedies on the Persons specified therein).
(b) The MAI Disclosure Letter, the DHS Disclosure Letter and
any Exhibits attached to this Agreement and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
(c) The representations and warranties contained herein or in
any schedule, instrument or other writing delivered pursuant hereto shall not
survive the Effective Time.
Section 10.03 Amendment. This Agreement may be amended, supplemented
or modified by action taken by or on behalf of the respective Boards of
Directors of the parties hereto at any time prior to the Effective Time,
whether prior to or after the Stockholders'
57
<PAGE> 66
Approvals shall have been obtained, but after such adoption and approval only
to the extent permitted by applicable law. No such amendment, supplement or
modification shall be effective unless set forth in a written instrument duly
executed by or on behalf of each party hereto.
Section 10.04 Waiver. At any time prior to the Effective Time, any
party hereto may, to the extent permitted by applicable law (i) extend the time
for the performance of any of the obligations or other acts of the other
parties hereto, (ii) waive any inaccuracies in the representations and
warranties of the other parties hereto contained herein or in any document
delivered pursuant hereto, or (iii) waive compliance with any of the covenants,
agreements or conditions of the other parties hereto contained herein. No such
extension or waiver shall be effective unless set forth in a written instrument
duly executed by or on behalf of the party extending the time of performance or
waiving any such inaccuracy or non-compliance. No waiver by any party of any
term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any fixture occasion.
Section 10.05 Expenses. Except as otherwise specified in Section 9.02
or agreed in writing by the parties, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement, whether or not the Merger is consummated, shall be paid by the party
incurring such cost or expense.
Section 10.06 Successors and Assigns. The provisions of this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns; provided, however,
that no party may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the written consent of the other
parties hereto except that Merger Subsidiary may (subject to Section 5.15)
assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to any direct or indirect wholly-owned Subsidiary of DHS,
it being understood that no such assignment shall relieve Merger Subsidiary
from any of its obligations hereunder.
Section 10.07 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Texas (without regard
to principles of conflict of laws).
Section 10.08 Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated by this
Agreement may be brought against any of the parties in any state or federal
court sitting in Dallas County, Texas, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such courts (and of the appropriate
appellate courts therefrom) in any such suit, action or proceeding and waives
any objection to venue laid therein. Each party hereto agrees that service of
process upon such party at the address referred to in Section 10.01, together
with written notice of such service to such party, shall be deemed effective
service of process upon such party.
Section 10.09 Counterparts: Effectiveness. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become
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effective when each party hereto shall have received counterparts hereof signed
by all of the other parties hereto.
Section 10.10 Interpretation When a reference is made in this
Agreement to a Section or Schedule, such reference shall be to a Section of
this Agreement or a Schedule to the subject Disclosure Letter unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement they shall be deemed to be followed by
the words "without limitation." The phrases "the date of this Agreement," "the
date hereof," and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to February 18, 1999.
Section 10.11 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against public policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. Upon such determination that any term,
provision, covenant or restriction of this Agreement is invalid, void,
unenforceable or against public policy, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
Section 10.12 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement, in
addition to any other remedy to which they are entitled at law or in equity.
Section 10.13 Performance by Merger Subsidiary. DHS shall cause Merger
Subsidiary to perform each of Merger Subsidiary's duties and obligations under
this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
date first set forth above.
DIAGNOSTIC HEALTH SERVICES, INC.
By: /s/ BRAD A. HUMMEL
---------------------------------
Name: Brad A. Hummel
Title: President
MAI ACQUISITION CORP.
By: /s/ BRAD A. HUMMEL
---------------------------------
Name: Brad A. Hummel
Title: President
MEDICAL ALLIANCE, INC.
By: /s/ PAUL HERCHMAN
---------------------------------
Name: Paul Herchman
Title: Chief Executive Officer
60
<PAGE> 1
EXHIBIT 10.15
February 17, 1999
Mr. Paul Herchman
201 Oakmont
Trophy Club, TX 76262
Dear Paul:
This letter sets forth the terms and conditions of the agreement (this
"Agreement") made as of the date hereof, by and between you and Medical
Alliance, Inc., a Texas corporation, its predecessors, affiliates, subsidiaries,
successor and assigns (collectively referred to hereinafter as "MAI").
Notwithstanding anything herein to the contrary, this Agreement shall only
become effective upon the consummation of a merger (the "Merger") of MAI with
and into Diagnostic Health Services, Inc., or any of its subsidiaries
(collectively, "DHS").
In consideration of the promises, covenants and obligations set forth
herein, and for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged and agreed, you and MAI agree as follows:
1. Effective as of the closing of the Merger (the "Closing"), you
hereby agree that you will be deemed to have resigned as the
Chief Executive Officer of MAI, and you shall be deemed to have
accepted the position of President of the Office Division of MAI.
You shall remain employed as the President of the Office Division
of MAI for a six (6) month period immediately following the
Closing (the "Employment Term"). In addition, during the
Employment Term, you shall receive your current monthly salary of
$16,666.67 and all employee benefits (including, without
limitation, health, life and disability benefits, auto allowance
and expenses reimbursement) you currently receive under your
Employment Agreement with the Company, dated as of January 1,
1994, as amended (the "Employment Agreement"), and you will also
be entitled to receive two-weeks paid vacation.
2. For a two year period commencing immediately upon the expiration
of the Employment Term (the Severance Term"), you will receive
monthly payments, payable on the first day of each month, equal
to $16,666.67 for an aggregate of $400,000 (the "Severance
Payments"), subject to Item 9 below. During the Severance Term,
you agree that, to the extent you have time available, you will,
at MAI's request, assist MAI in such capacity as the Chief
Executive Officer of DHS may from time to time reasonably
request, and as mutually agreed to by you. In addition, during
the Severance Term, you shall receive all employee benefits
(including, without limitation) health, life and disability
benefits) you currently receive under the Employment
<PAGE> 2
Agreement, as if you continued to be employed by MAI (provided,
however, that if any employee benefit plan providing such
coverage excludes the continued participation of you or any of
your dependents or beneficiaries, then MAI shall arrange to
provide to you or such eligible dependents or beneficiaries
substantially similar benefits, at MAI's cost). In addition,
during the Severance Term, you shall be entitled to be reimbursed
for all expenses incurred by you on behalf of MAI, as requested
by MAI.
3. At the Closing, you will receive a bill of sale whereby MAI shall
transfer to you your current office couch, chairs, bookshelf,
coffee table, desk table, computer and facsimile machine at no
charge to you.
4. After the Closing, upon receipt of invoices from your counsel,
MAI shall pay to you up to $2,700 in legal fees you incur with
regard to the transactions contemplated by this Agreement.
5. You, for yourself, and for your heirs and assigns, do hereby
fully and finally release and covenant not to sue MAI, its
officers, directors, employees, shareholders, agents, affiliates,
successors, predecessors and assigns (collectively referred to
hereinafter as the "Releasees"), from all claims, damages,
actions, liabilities, responsibilities, causes of action based on
or arising out of your employment relationship with MAI prior to
the date hereof. Notwithstanding the foregoing covenant not to
sue, you shall be entitled to sue MAI to enforce your rights and
benefits under this Agreement, and this Agreement shall not waive
or release any rights you may have to (i) non-forfeitable
benefits under any MAI benefit plans; (ii) convert any group
benefits under any MAI sponsored employee benefit plans to
individual coverage, to the extent any such plan allows such
conversion; or (iii) continue coverage under any MAI medical plan
pursuant to Part 6 of Title I of the Employee Retirement Income
Security of 1974, as amended. You covenant and warrant that you
are the holder of any such claim(s) and have not assigned to
transferred any such claim(s) or interest therein to any person
or entity.
6. MAI and you agree to submit to final and binding arbitration any
and all disputes, claims (whether in tort, contract, statutory,
or otherwise) and/or disagreements arising between them,
concerning the interpretation or application of this Agreement.
Such arbitration shall take place in Dallas, Texas, in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA"). MAI and you agree that a judgment of the
United States District Court for the Northern District of Texas,
Dallas Division may be entered upon the award made pursuant to
any such arbitration. MAI and you agree that this arbitration
provision has been included to rapidly and inexpensively resolve
any disputes between you and MAI, and that, this arbitration
provision shall be grounds for dismissal of any
2
<PAGE> 3
court action commenced by either party, other than
post-arbitration actions seeking to enforcement an arbitration
award.
7. MAI, on its behalf and on behalf of its affiliates, subsidiaries,
successors and assigns hereby release you from any and all claims
arising out of your employment with MAI prior to the date hereof,
and the performance of (or a failure to perform) your duties as
an employee of MAI prior to the date hereof.
8. If MAI issues a press release regarding any of the matters
described therein, MAI shall submit the form thereof to you for
comments, although no approval shall be required (it being the
intent of MAI to accommodate your comments to the extent
possible).
9. Reference is hereby made to the Agreement to Purchase Stock,
dated September 11, 1998 (the "Purchase Agreement"), by and among
you, MAI and Chase Bank of Texas, National Association ("Bank").
If, at the time of payment of any Severance Payment, the amount
owing under the Note (as defined in the Purchase Agreement) is
greater than the amount of the remaining Severance Payments
(including the Severance Payment which then is to be made), then
MAI shall pay such Severance Payment to Bank on behalf of you in
order to pay-down the Note, with such payment constituting a
payment to you of such Severance Payment. MAI agrees not to
voluntarily purchase any of the Pledged Stock (as defined in the
Purchase Agreement), as permitted in the last sentence of Section
1 of the Purchase Agreement, on or prior to March 1, 2000.
It is the desire and intent of you and MAI that the provisions of this
Agreement shall be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is sought. If
any one or more of the provisions contained in this Agreement is held to be
excessively broad as to duration, scope, activity or subject matter, to the
extent allowable by law such provisions will be construed by limiting and
reducing them as to be enforceable to the maximum extent compatible with
applicable law.
You further acknowledge and reaffirm that you are bound by the terms
and conditions of the nondisclosure of confidential information and
noncompetition provisions contained in the Employment Agreement (the
"Noncompetition and Confidentiality Provisions").
This Agreement is not to be construed as an admission of liability by
either you or MAI. Both you and MAI expressly deny any liability whatsoever to
the other, and this Agreement will not be offered or received in evidence in any
action or proceeding as an admission of liability or wrongdoing of any kind by
one of us against the other.
3
<PAGE> 4
You covenant and warrant that you have read and understand all of the
terms and conditions of the Agreement and that you are voluntarily entering into
this Agreement of your own free will. You also represent and acknowledge that
you have been advised by MAI, in writing through this Agreement, to consult with
an attorney of your choice prior to signing this Agreement.
This Agreement will be construed, interpreted and enforced in
accordance with the laws of the State of Texas.
This Agreement is the final and complete agreement between you and MAI
with respect to the subject matter hereof, and supersedes and replaces all other
agreements, arrangements or understandings between the parties whether oral or
written with respect to the subject matter hereof (including, without
limitation, the Employment Agreement), with the sole exception of the
Noncompetition and Confidentiality Provisions. No modifications, alterations or
amendments to this Agreement will be valid unless made in writing and signed by
you and MAI.
If you are in agreement with the terms and conditions set forth above,
please sign in the space provided below and return this letter to me. A copy of
this letter has been provided for your files. Once this Agreement has been
signed by both parties, you will have seven (7) days from the date of signature
to rescind this Agreement by written notice to MAI (if so rescinded, this
Agreement will become null and void).
MEDICAL ALLIANCE, INC.
By: /s/ G. HILL
--------------------------------------
Its: President and COO
-------------------------------------
AGREED TO AND ACCEPTED
as of the date first set forth above
/s/ PAUL HERCHMAN
- -----------------------------------
Paul Herchman
4
<PAGE> 1
EXHIBIT 10.16
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of February 18,
1999, is entered into by and among DIAGNOSTIC HEALTH SERVICES, INC., a Delaware
corporation ("DHS"), MAI ACQUISITION CORP., a Texas corporation ("Merger
Subsidiary"), those stockholders of DHS whose signatures appear on the
signature pages hereof (each a "DHS Holder" and collectively the "DHS
Holders"), and those shareholders of MEDICAL ALLIANCE, Inc., a Texas
corporation ("MAI"), whose signatures appear on the signature pages hereof
(each a "MAI Holder" and collectively the "MAI Holders");
W I T N E S S E T H :
WHEREAS, contemporaneous with the execution and delivery of
this Agreement, DHS, Merger Subsidiary and MAI have entered into an Agreement
and Plan of Merger of even date herewith (the "Merger Agreement"; all
capitalized terms used herein without definition having the respective meanings
ascribed to them in the Merger Agreement); and
WHEREAS, as a condition and inducement to DHS and Merger
Subsidiary entering into the Merger Agreement and incurring the obligations set
forth therein and the DHS Holders entering into this Agreement and incurring
the obligations set forth herein, the MAI Holders have agreed to vote and to
cause to be voted all of the shares of common stock of MAI, $.002 par value per
share (the "MAI Common Stock"), now owned or hereafter acquired by them, for
and in favor of the merger of Merger Subsidiary with and into MAI (the
"Merger") and (to the extent they are entitled to vote thereon) the Name
Change, and the other transactions provided for in the Merger Agreement; and
WHEREAS, as a condition and inducement to the MAI Holders
entering into this Agreement and incurring the obligations set forth herein,
the DHS Holders have agreed to vote and to cause to be voted all of the shares
of common stock of DHS, $.001 par value per share (the "DHS Common Stock"), now
owned or hereafter acquired by them, for and in favor of (a) the issuance of
DHS Common Stock in the Merger, and (b) the Name Change;
NOW, THEREFORE, in consideration of the premises and the
respective covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto, intending to be legally bound hereby, agree as
follows:
SECTION 1. VOTING OF MAI COMMON STOCK. Each of the MAI
Holders hereby agrees that, during the period commencing on the date hereof and
continuing until the first to occur of (a) the Effective Time of the Merger, or
(b) the termination of this Agreement in accordance with its terms, (i) such
MAI Holder will not sell or transfer any MAI Common Stock now owned or
hereafter acquired by such MAI Holder (the "MAI Shares") or any interest
therein to any person, other than an Affiliate of such MAI Holder who shall
agree to be bound by the terms of this Agreement to the same extent as such MAI
Holder, and (ii) at any meeting (whether annual or special and whether or not
an adjourned or postponed meeting) of the holders of MAI
<PAGE> 2
Common Stock, however called, or in connection with any written consent of the
holders of MAI Common Stock, such MAI Holder will appear at the meeting or
otherwise cause the MAI Shares to be counted as present thereat for purposes of
establishing a quorum and vote or consent (or cause to be voted or consented)
the MAI Shares (A) in favor of the adoption of the Merger Agreement and the
approval of all other actions contemplated by the Merger Agreement and this
Agreement and any actions required in furtherance thereof and hereof, and (B)
against any action or agreement that would result in a breach in any respect of
any covenant, representation or warranty or any other obligation or agreement
of MAI under the Merger Agreement. Each MAI Holder further agrees not to enter
into any agreement or understanding with any Person the effect of which would
be inconsistent with or violative of any provision contained in this Section 1.
SECTION 2. VOTING OF DHS COMMON STOCK. Each DHS Holder hereby
agrees that, during the period commencing on the date hereof and continuing
until the first to occur of (a) the Effective Time of the Merger, or (b) the
termination of this Agreement in accordance with its terms, (i) such DHS Holder
will not sell or transfer any DHS Common Stock now owned or hereafter acquired
by such DHS Holder (the "DHS Shares") or any interest therein to any person,
other than an Affiliate of such DHS Holder who shall agree to be bound by the
terms of this Agreement to the same extent as such DHS Holder, and (ii) at any
meeting (whether annual or special and whether or not an adjourned or postponed
meeting) of the holders of DHS Common Stock, however called, or in connection
with any written consent of the holders of DHS Common Stock, such DHS Holder
will appear at the meeting or otherwise cause the DHS Shares to be counted as
present thereat for purposes of establishing a quorum and vote or consent (or
cause to be voted or consented) the DHS Shares (A) in favor of the issuance of
DHS Common Stock in the Merger and any actions required in furtherance thereof
or in furtherance of the Merger, (B) in favor of the Name Change, and (C)
against any action or agreement that would result in a breach in any respect of
any covenant, representation or warranty or any other obligation or agreement
of DHS under the Merger Agreement. Each DHS Holder hereby further agrees not to
enter into any agreement or understanding with any Person the effect of which
would be inconsistent with or violative of any provision contained in this
Section 2.
SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF MAI
HOLDERS. Each MAI Holder (severally, and not jointly and severally) hereby
represents and warrants to, and agrees with, DHS as follows:
(a) Ownership of Shares. Such MAI Holder is the sole record
and beneficial owner of that number of shares of MAI Common Stock set forth
next to such MAI Holder's name on Schedule 1 annexed hereto. On the date
hereof, such MAI Shares constitute all of the shares of MAI Common Stock owned
of record or beneficially owned by such MAI Holder. Such MAI Holder has sole
voting power and sole power to issue instructions with respect to the matters
set forth in Section 1 hereof, sole power of disposition, and sole power to
agree to all of the matters set forth in this Agreement, in each case with
respect to all of such MAI Shares with no limitations, qualifications or
restrictions on such rights, subject to applicable securities laws and the
terms of this Agreement.
2
<PAGE> 3
(b) Authorization. This Agreement has been duly and validly
executed and delivered by such MAI Holder and constitutes a valid and binding
agreement enforceable against such MAI Holder in accordance with its terms
except (i) as may be limited by applicable bankruptcy, insolvency or similar
laws affecting creditors' rights, and (ii) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations,
consents and approvals as may be required under the HSR Act, the 1933 Act and
the 1934 Act, (i) no filing with, and no permit, authorization, consent or
approval of, any state or federal Governmental Authority is necessary for the
execution of this Agreement by such MAI Holder and the consummation by such MAI
Holder of the transactions contemplated hereby, and (ii) none of the execution
and delivery of this Agreement by such MAI Holder, the consummation by such MAI
Holder of the transactions contemplated hereby or compliance by such MAI Holder
with any of the provisions hereof will (A) conflict with or result in any
breach of the organizational documents of such MAI Holder, (B) result in a
violation or breach of, or constitute (with or without notice or lapse of time
or both) a default (or give rise to any third party right of termination,
cancellation, material modification or acceleration) under any of the terms,
conditions or provisions of any note, loan agreement, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which such MAI Holder is a
party or by which such MAI Holder or any of its properties or assets may be
bound, or (C) violate any order, writ, injunction, decree, judgment, statute,
rule or regulation applicable to such MAI Holder or any of his or its
properties or assets.
(d) No Encumbrances. Except as applicable in connection with
the transactions contemplated by Section 1 hereof, the MAI Shares, at all times
during the term hereof, will be beneficially owned by such MAI Holder and
Affiliates thereof referred to in Section 1 of this Agreement, free and clear
of all proxies or voting trusts or other such agreements, except for any such
matters arising hereunder.
(e) Restriction on Transfer, Proxies and Non-Interference.
Such MAI Holder will not, directly or indirectly, from the date hereof through
the termination of this Agreement, (i) except as permitted by Section l above,
offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, sale, transfer,
tender, pledge, encumbrance, assignment or other disposition of, any or all of
the MAI Shares or any interest therein; (ii) grant any proxies or powers or
attorney, deposit the MAI Shares into a voting trust or enter into a voting
agreement with respect to the MAI Shares (other than this Agreement); or (iii)
take any action that would make any representation or warranty of such MAI
Holder contained herein untrue or incorrect or would result in a breach by such
MAI Holder of its obligations under this Agreement.
3
<PAGE> 4
SECTION 4. COVENANTS, REPRESENTATIONS AND WARRANTIES OF DHS
HOLDERS. Each DHS Holder (severally, and not jointly and severally) hereby
represents and warrants to, and agrees with, the MAI Holders as follows:
(a) Ownership of Shares. Such DHS Holder is the sole record
and beneficial owner of that number of shares of DHS Common Stock set forth
next to such DHS Holder's name on Schedule 1 annexed hereto. On the date
hereof, such DHS Shares constitute all of the shares of DHS Common Stock owned
of record or beneficially owned by such DHS Holder. Such DHS Holder has sole
voting power and sole power to issue instructions with respect to the matters
set forth in Section 2 hereof, sole power of disposition, and sole power to
agree to all of the matters set forth in this Agreement, in each case with
respect to all of such DHS Shares with no limitations, qualifications or
restrictions on such rights, subject to applicable securities laws and the
terms of this Agreement.
(b) Corporate Authorization. This Agreement has been duly and
validly executed and delivered by such DHS Holder and constitutes a valid and
binding agreement enforceable against such DHS Holder in accordance with its
terms except (i) as may be limited by applicable bankruptcy, insolvency or
similar laws affecting creditors' rights, and (ii) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations,
consents and approvals as may be required under the HSR Act, the 1933 Act and
the 1934 Act, (i) no filing with, and no permit, authorization, consent or
approval of, any state or federal Governmental Authority is necessary for the
execution of this Agreement by such DHS Holder and the consummation by such DHS
Holder of the transactions contemplated hereby, and (ii) none of the execution
and delivery of this Agreement by such DHS Holder, the consummation by such DHS
Holder of the transactions contemplated hereby or compliance by such DHS Holder
with any of the provisions hereof will (A) conflict with or result in any
breach of the organizational documents of such DHS Holder, (B) result in a
violation or breach of, or constitute (with or without notice or lapse of time
or both) a default (or give rise to any third party right of termination,
cancellation, material modification or acceleration) under any of the terms,
conditions or provisions of any note, loan agreement, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which such DHS Holder is a
party or by which such DHS Holder or any of its properties or assets may be
bound, or (C) violate any order, writ, injunction, decree, judgment, statute,
rule or regulation applicable to such DHS Holder or any of its properties or
assets.
(d) No Encumbrances. Except as applicable in connection with
the transactions contemplated by Section 2 hereof, the DHS Shares, at all times
during the term hereof, will be beneficially owned by such DHS Holder and
Affiliates thereof referred to in Section 2 of this Agreement, free and clear
of all liens, claims, security interests, proxies, voting trusts or agreements,
understandings or arrangements or any other encumbrances whatsoever, except for
any such matters arising hereunder.
4
<PAGE> 5
(e) No Finder's Fees. Except as set forth in the Merger
Agreement, no broker, investment banker, financial advisor or other person is
entitled to any broker's, finder's, financial adviser's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of such DHS Holder.
(f) Restriction on Transfer, Proxies and Non-Interference.
Such DHS Holder will not, directly or indirectly, at any time prior to the
termination of this Agreement, (i) except as permitted by Section 2(i) above,
offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, sale, transfer,
tender, pledge, encumbrance, assignment or other disposition of, any or all of
the DHS Shares or any interest therein; (ii) grant any proxies or powers of
attorney, deposit the DHS Shares into a voting trust or enter into a voting
agreement with respect to the DHS Shares (other than this Agreement); or (iii)
take any action that would make any representation or warranty of such DHS
Holder contained herein untrue or incorrect or would result in a breach by such
DHS Holder of his, her or its obligations under this Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF DHS. DHS hereby
represents and warrants to the MAI Holders as follows:
(a) Organization. DHS is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to execute and deliver this
Agreement and perform its obligations hereunder. The execution and delivery by
DHS of this Agreement and the performance by DHS of its obligations hereunder
have been duly and validly authorized by the Board of Directors of DHS and no
other corporate proceedings on the part of DHS are necessary to authorize the
execution, delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby by DHS.
(b) Corporate Authorization. This Agreement has been duly and
validly executed and delivered by DHS and constitutes a valid and binding
agreement of DHS enforceable against DHS in accordance with its terms, except
(i) as may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights, and (ii) that the remedy of specific performance
and injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought.
(c) No Conflicts. Except for filings, authorizations,
consents and approvals as may be required under the HSR Act, the 1933 Act and
the 1934 Act, (i) no filing with, and no permit, authorization, consent or
approval of, any state or federal Governmental Authority is necessary for the
execution of this Agreement by DHS and the consummation by DHS of the
transactions contemplated hereby, and (ii) none of the execution and delivery
of this Agreement by DHS, the consummation by DHS of the transactions
contemplated hereby, or compliance by DHS with any of the provisions hereof
will (A) conflict with or result in any breach of the certificate of
incorporation or by-laws of DHS, (B) result in a violation or breach of, or
constitute
5
<PAGE> 6
(with or without notice or lapse of time or both) a default (or give rise to
any third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of any
kind to which DHS is a party or by which DHS or any of its properties or assets
may be bound, or (C) violate any order, writ, injunction, decree, judgment,
statute, rule or regulation applicable to DHS or any of its properties or
assets.
SECTION 6. TERMINATION. This Agreement will terminate upon
the earlier of (i) the consummation of the Merger, or (ii) the termination of
the Merger Agreement in accordance with its terms.
SECTION 7. MISCELLANEOUS.
(a) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
(b) Assignments: Rights of Assignees: Third Party
Beneficiaries. This Agreement shall not be assignable by any party hereto
without the consent of the other parties. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by, the parties hereto and their
respective heirs, executors, administrators, legal representatives, successors
and permitted assigns. Nothing expressed or referred to in this Agreement is
intended or shall be construed to give any person other than the parties to
this Agreement or their respective heirs, executors, administrators, legal
representatives, successors or permitted assigns any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision
contained herein.
(c) Specific Performance. The parties hereto acknowledge that
money damages are an inadequate remedy for breach of this Agreement because of
the difficulty of ascertaining the amount of damage that will be suffered by
the non-breaching party or parties in the event that this Agreement is
breached. Therefore, each of the parties agrees that the non-breaching party or
parties may obtain specific performance of this Agreement and injunctive relief
against any breach hereof without the necessity of establishing irreparable
harm.
(d) Waiver. No waiver of any provision of this Agreement
shall be effective unless it is in writing signed by the party granting the
waiver, and a waiver by any party hereto of any one or more defaults shall not
operate as a waiver of any future default or defaults, whether of a like or of
a different character. No waiver of any of the provisions of this Agreement
shall constitute a waiver of any other provisions (whether or not similar), nor
shall such a waiver constitute a continuing waiver, unless otherwise expressly
provided.
(e) Section Headings. Headings contained in this Agreement
are inserted only as a matter of convenience and in no way define, limit, or
extend the scope or intent of this Agreement or any provisions thereof.
6
<PAGE> 7
(f) Choice of Law. This Agreement will be governed by and
construed and enforced in accordance with the laws of the State of Texas
(without regard to the principles of conflicts of law) applicable to a contract
executed and to be performed in such State. Each party hereto (i) agrees to
submit to personal jurisdiction and to waive any objection as to venue in the
state or federal courts located in Dallas County, Texas, (ii) agrees that any
action or proceeding shall be brought exclusively in such courts, unless
subject matter jurisdiction or personal jurisdiction cannot be obtained, and
(iii) agrees that service of process on any party in any such action shall be
effective if made by registered or certified mail addressed to such party at
the address specified herein, or to any parties hereto at such other addresses
as he, she or it may from time to time specify to the other parties in writing
for such purpose. The exclusive choice of forum set forth in this Section 7(g)
shall not be deemed to preclude the enforcement of any judgment obtained in
such forum or the taking of any action under this Agreement to enforce such
judgment in any appropriate jurisdiction.
(g) Notices. All notices, requests and other communications
to any party hereunder shall be in writing and will be deemed to have been duly
given only if delivered personally or by facsimile transmission or mailed
(first class mail postage prepaid), or by overnight express courier (charges
prepaid or billed to the account of the sender) to the parties at the following
addresses or facsimile numbers:
If to DHS, to: Diagnostic Health Services, Inc.
2777 Stemmons Freeway
Suite 1525
Dallas, Texas 75207
Fax: (214) 631-8537
Attention: Brad A. Hummel
If to any of the of
MAI Holders or
DHS Holders: At his, her or its address set forth
on Schedule 1 annexed hereto
with a copy to
in each case to: Greenberg Traurig
200 Park Avenue
New York, New York 10166
Fax: (212) 801-6400
Attention: Shahe Sinanian, Esq.
- and -
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Fax: (214) 953-5822
Attention: Richard F. Dahlson, Esq.
7
<PAGE> 8
or to such other address or fax number as any party may have furnished to the
others in writing in accordance herewith.
(h) Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one and the same document.
(i) Severability of Provisions. If any term, provision,
covenant or restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall not in any way be affected, impaired or invalidated.
SECTION 8. EFFECTIVENESS. This Agreement shall become
effective simultaneously with the execution and delivery of the Merger
Agreement.
SECTION 9. THE INDIVIDUAL STOCKHOLDERS. The individuals
executing this Agreement are executing this Agreement solely so that this
Agreement will constitute a "stockholders' agreement" within the meaning of
Section 218(c) of the Delaware General Corporation Law and will not have any
rights or obligations hereunder except to vote in accordance with Section 1 and
Section 2, as applicable.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first set forth above.
DIAGNOSTIC HEALTH SERVICES, INC.
By: /s/ BRAD HUMMEL
-----------------------------------
MAI ACQUISITION CORP.
By: /s/ BRAD HUMMEL
-----------------------------------
MAI Holders:
MAPLELEAF CAPITAL, LTD.
By: /s/ JIM SILCOCK
-----------------------------------
SUNWESTERN CAYMAN 1998 PARTNERS
By: /s/ JIM SILCOCK
-----------------------------------
SUNWESTERN INVESTMENT FUND III
By: /s/ JIM SILCOCK
--------------------------------------
/s/ PAUL R. HERCHMAN
--------------------------------------
Paul R. Herchman
/s/ GARY B. HILL
--------------------------------------
Gary B. Hill
/s/ DAVID A. KALLENBERGER
--------------------------------------
David A. Kallenberger
/s/ THOMAS A. MONTGOMERY
--------------------------------------
Thomas A. Montgomery
9
<PAGE> 10
/s/ LEON PRITZKER
-----------------------------------
Leon Pritzker
/s/ TONY LEVECCHIO
-----------------------------------
Tony LeVecchio
DHS Holders:
/s/ MAX W. BATZER
-----------------------------------
Max W. Batzer
/s/ BRAD A. HUMMEL
-----------------------------------
Brad A. Hummel
/s/ JAMES R. ANGELICA
-----------------------------------
James R. Angelica
/s/ THOMAS M. SESTAK
-----------------------------------
Thomas M. Sestak
/s/ BO W. LYCKE
-----------------------------------
Bo W. Lycke
/s/ BONNIE G. LANKFORD
-----------------------------------
Bonnie G. Lankford
10
<PAGE> 11
Schedule 1 to Voting Agreement
------------------------------
<TABLE>
<CAPTION>
MAI Holders MAI Shares
- ----------- ----------
<S> <C>
Mapleleaf Capital, Ltd. 738,330
Sunwestern Cayman 1998 Partners 135,649
Sunwestern Investment Fund III 125,214
Paul R. Herchman 470,646
Gary B. Hill 5,000
David A. Kallenberger 167,027
Thomas A. Montgomery 187,711
Leon Pritzker 80,454
Tony LeVecchio 18,815
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
DHS Holders DHS Shares
- ----------- ----------
<S> <C>
Max W. Batzer 154,750
c/o Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, TX 75207
Brad A. Hummel 8,593
c/o Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, TX 75207
James R. Angelica 315,052
Diagnostic Health Services, Inc.
9717 Landmark Parkway Drive
Suite 102
St. Louis, MO 63127
Thomas M. Sestak 126,421
Standard Construction of San Francisco
1226 Ninth Avenue
San Francisco, CA 94122
Bo W. Lycke 1,000
ClaimsNet.Com
12801 North Central Expressway
Suite 1515
Dallas, TX 75243
Bonnie G. Lankford 32,911
c/o Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, TX 75207
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Medical Alliance, Inc. and Subsidiaries on Form S-8 (Files No. 333-59558 and
333-18545) of our report dated February 18, 1999, on our audits of the
consolidated financial statements of Medical Alliance, Inc. and Subsidiaries as
of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997,
and 1996, which report is included in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 14,902,578 14,377,781
<SECURITIES> 0 0
<RECEIVABLES> 5,270,151 2,713,409
<ALLOWANCES> 2,554,705 1,001,851
<INVENTORY> 0 0
<CURRENT-ASSETS> 20,161,972 17,874,290
<PP&E> 11,658,926 14,098,364
<DEPRECIATION> 6,185,441 8,229,821
<TOTAL-ASSETS> 26,504,537 24,521,065
<CURRENT-LIABILITIES> 2,586,561 1,440,479
<BONDS> 488,579 239,929
12,331 12,753
0 0
<COMMON> 0 0
<OTHER-SE> 23,665,716 22,541,579
<TOTAL-LIABILITY-AND-EQUITY> 26,504,537 24,521,065
<SALES> 0 0
<TOTAL-REVENUES> 18,821,125 16,132,206
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,870,925 1,690,293
<INTEREST-EXPENSE> 111,578 59,306
<INCOME-PRETAX> (3,745,277) (773,583)
<INCOME-TAX> (848,267) 0
<INCOME-CONTINUING> (2,897,010) (773,583)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,897,010) (773,583)
<EPS-PRIMARY> (.48) (.12)
<EPS-DILUTED> (.48) (.12)
</TABLE>
